Indonesia's terrible road conditions have caused dozens of fatal accidents. (Antara Photo/Oky Lukmansyah)
Eight Key Actions for Economic Development in Asia
BY :TAKEHIKO NAKAO
JANUARY 19, 2015
Asia is making remarkable progress in development and poverty reduction. But, why have some countries developed more rapidly than others? It’s a question that has engaged my thoughts during visits to many of the Asian Development Bank’s developing member countries.
In the 1950s the Philippines was second only to Japan in per capita gross domestic product (GDP), but it slipped to among the lowest in per capita GDP terms of the major ASEAN countries, although it has been growing more rapidly in recent years. The People’s Republic of China lifted its per capita GDP from just over $300 in 1990 to nearly $7,000 today.
My first-hand experience of developing Asia tells me that good government policies comprising eight key actions provide the answer to this question. The right policies in these eight areas can lift low-income countries at least to upper-middle income status.
The first key to success is high quality infrastructure. Without adequate power, roads, and ports, investment from both domestic and foreign sources is difficult and industry cannot develop.
Infrastructure also gives people access to basic services like healthcare and education. Every time I go to China I’m struck by the new urban and rural infrastructure. China’s public investment to GDP ratio is 22 percent, while much of developing Asia’s doesn’t even reach 5 percent. Better mobilization of domestic resources, especially through tax revenues, is essential. Countries can also attract private funds by increasing the use of public-private partnerships.
2. Human capital
Second, investments in human capital — education and health — are vital. While many countries across Asia now have high primary school enrollment rates, the quality of teaching at secondary and tertiary levels often disappoints. Countries also need to improve their technical and vocational education and training to match the needs of industry with the skills of the next generation. In Indonesia, for example, ADB supports 300 vocational schools to help improve labor market opportunities for high school graduates.
3. Macro economy
The third condition is good macro-economic policies. Double-digit inflation, excessive government spending and high interest rates deter savings and investment. Since the 1997-98 Asian financial crisis, many countries in the region have reinforced their fiscal, monetary, and financial sector policies. Fiscal deficits are now smaller and inflation more manageable, while banks are better capitalized and regulated. We should not lose our hard-won gains in macroeconomic stability.
4. Investment & trade
Openness to investment and trade is the fourth ingredient. Countries that hide behind closed doors will not advance. In the past, many countries suffered from socialist or inward-looking economic policies such as import substitution, price controls, and the nationalization of major industries. Those days are gone, and there is now consensus in Asia about the importance of market-oriented policies.
By improving the investment climate, countries can exploit their comparative advantages, gaining access to global markets, foreign capital and advanced technologies. Red-tape and complicated regulations — though created with good intentions for certain policy purposes — impede investment. There are encouraging signs in streamlining regulations. India’s new government has pledged that it will offer foreign investors “the red carpet” rather than red tape. Countries such as Vietnam are also making serious efforts in reforming state-owned enterprises and nurturing their financial sector to better allocate resources through market mechanisms.
Fifth is governance. Corruption is fundamentally unfair. It also diverts the energies of the people from productive endeavors, thereby damaging growth. It’s pleasing to see a number of Asian countries step up the fight against corruption. Transparency and accountability are indispensable not only for government but for state-owned enterprises as well. Governance is also about the administrative capacity of governments to deliver on their commitments. To do this, enhancing the capacity of the civil service is imperative.
Equality of access to incomes and other opportunities is the sixth condition. A wide gap between the rich and poor prevents shared efforts for development. It also erodes the quality of a country’s workforce, as the poor are deprived of incentives and opportunities to acquire the necessary education and skills. To make growth more inclusive and sustainable, countries need to create quality jobs and plug gaps in access to education, health, and financial services. Sustainable growth also requires policies to tackle climate change and manage disaster risks.
7. Vision for the future
The seventh point is the importance of a clear vision for the future. The successes of Singapore and South Korea are testament to this. Governments have a responsibility to plan for their country’s future based on careful analysis of its comparative advantages and the evolving global economic landscape. This doesn’t mean that the economy should be state-driven, but it does mean the government should prioritize its spending and public works and provide appropriate guidance to the private sector. The strategy should be shared with the people and be flexible to respond to changing environments, but also consistent beyond changes in government.
8. Security & stability
Finally, growth is underpinned by security and political stability. Conflict disrupts development, and ending it can yield tremendous benefits. Myanmar’s emergence from isolation has allowed it to attract private investment and assistance from multilateral and bilateral donors. In the Philippines, a comprehensive peace agreement with Islamic groups in Mindanao could unleash the rich potential of the region. Peace and geopolitical stability should continue to support robust growth in Asia.
I’ve been impressed by the strong commitment of developing Asia’s leaders to market-oriented reform and other elements of the eight actions. Still, fully implementing them will require sustained, firm leadership and continued public support.
Takehiko Nakao is president of the Asian Development Bank.