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Developing Asia: A New Growth Pole Emerges

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1994
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THE EAST ASIAN “miracle” may be spreading to South Asia. Though major challenges remain, developing Asia is poised to become a major catalyst for global economic growth over the next decade.

Developing Asia may emerge as the new locomotive for world economic growth over the next five to ten years, as the traditional engine—growth in the Group of 7 industrial countries—slows down. East and South Asia’s share of global output has been climbing steadily, and it is projected to be the fastest growing region in the world for the rest of the decade. On current projections, developing Asia will account for almost one half of the increase in global output through the year 2000 (Chart 1).

Chart 1.Global output stvadity increasing

(1992-2000)

Source: World Bank.

Developing Asia is a region diverse in culture, growth performance, economic management record, and legal and regulatory systems. Yet the region as a whole exhibits an important trend: all of the major countries have moved toward a stronger reliance on the market. Some, like those in East Asia, did so early; others, like China, India, and Indonesia, are now undergoing major economic transformations. Many uncertainties remain, particularly about political transitions. By working with the international community, the countries in the region can deepen and broaden the reform process and mobilize resources—particularly foreign private investment—to assist restructuring. Developing Asia could become a major growth center of the world economy.

Developing Asia pulls ahead

Over the past quarter century, per capita income in East Asia has nearly quadrupled (an annual rate of 5 percent), and this has been coupled with a sharp reduction in poverty. East Asia’s growth was impressive in the 1970s and accelerated further in the 1980s (Chart 2). Its solid economic performance has been based on a strong outward orientation, an emphasis on human resource development, and a very effective institutional framework. Exports grew by around 10 percent per year during the 1970s and 1980s, and exports from the United States, Japan, and the European Union—formerly the European Community—to this region expanded by 35 percent between 1988 and 1991. Of equal significance is the fact that intraregional trade grew at twice that rate—72 percent. More recently, China’s phenomenal economic performance has set new records. This internal dynamic—buoyed by China’s very rapid growth—is what has made East Asia so resilient to global slowdown.

Chart 2.Promising prospects for growth In South, Asia

(1970-92 & 1982-92)

What is less well known is that growth has been relatively dynamic in South Asia as well. Although pale in comparison with that of East Asia, South Asian growth was well above the rest of the developing world, and per capita income grew at a 3 percent annual rate in the 1980s—three times the rate in the previous two decades. Similarly, the growth of private consumption and domestic investment in the 1980s exceeded that in other developing regions with the exception of East Asia. Although a traditionally inward-looking region, South Asia has also begun to explore outside markets. Exports grew by 7 percent per year in the 1980s—twice the rate of the preceding decade—allowing their share in domestic output to double.

Developing Asia is diverse

There are important differences within and between East and South Asia. Both regions, for example, display widely differing growth rates among their respective countries—more so in East than in South Asia (Chart 3). In East Asia, the attack on poverty has been very effective—demonstrating again that rapid growth and poverty alleviation are not contradictory—indeed, they are mutually reinforcing (Chart 4). In South Asia, progress in reducing poverty has been much less impressive. In 1990, about half of the region’s population was still below the poverty line.

Chart 3.A wide spectrum of growth In the 1980s … wider in East than In South Asia

Chart 4.Progress In reducing poverty less impressive in South Asia (1865-90)

The two areas also differ in their ability to absorb foreign direct investment (FDI) (Chart 5). In East Asia, foreign direct investment has been attracted by expanding domestic markets; in turn, this dynamic contributed to the rapid growth of exports. East Asia’s share of total FDI to developing countries doubled—to 33 percent—in the 1980s. As a result of its less hospitable environment, South Asia’s share of FDI remains very small, less than 2 percent in the 1980s.

Chart 5.East Asia leads in foreign direct investment to developing countries

(70-79 & 1980-90)

Growing intraregional trade has been an important stimulus to growth, particularly in the East Asian economies. Even more striking is the emerging nexus of trade and investment, with foreign direct investment and exports forming a virtuous circle. In China, for example, the southern provinces of Guandong and Fujian are becoming major centers for FDI and exports. In 1992, China was the recipient of almost 20 percent of all net FDI in the developing world.

East Asian approach spreading

The reasons for East Asia’s phenomenal success are its policies, which have focused on a high level of savings; quality of the labor force; support for entrepreneurial efforts in a competitive setting; emphasis on exports; the willingness to import knowledge and technology; and—perhaps above all—flexibility in adjusting to global conditions while maintaining relative macroeconomic stability. These were the main findings of a recent World Bank report, “The East Asian Miracle.” (See articles in Finance and Development, March 1994.)

There are encouraging signs that the East Asian approach to economic management is spreading from the original rapidly growing countries to Indonesia, Malaysia, Thailand, and Viet Nam, and, not least, China. Although a late starter, South Asia too is beginning to reform its investment and trade policies. Bangladesh, India, Pakistan, and Sri Lanka have initiated reforms that are dismantling restrictions on domestic and foreign private investment, removing quantitative trade restrictions, and reducing the level and dispersion of tariffs. The response to these steps has been very encouraging; in the 1990s, FDI in Pakistan and Sri Lanka doubled in dollar terms and rose by 20 percent in India compared with the second half of the 1980s.

India has in the past two years initiated an expanded reform program, as have Pakistan and Sri Lanka. By providing momentum, India’s trade and investment reforms are likely to be contagious as its neighbors accelerate reform to keep pace. Pakistan and Sri Lanka, for example, have shown progress in improving the incentive framework, mainly through deregulation in areas such as industrial licensing, lowering restrictions on direct foreign investment, and waiving entry barriers in most sectors. The improved climate for reform doubtless owes something to the positive experiences of the East Asian countries and to the negative ones in the states of the former Soviet Union and Eastern Europe. Whatever the origin, there is now some consensus on certain broad directions of change.

But there is no doubt that these programs are still far from those of the East Asian countries—particularly in their attention to education and health, physical infrastructure (transport and telecommunications), and the financial system. The respective roles of the government and the private sectors are not yet fully redefined, nor is the political consensus in support of reform in place. Much remains to be done to improve competition and lower the transactions costs of doing business and to build up the human and physical capital needed for private sector expansion.

An unfinished reform agenda

Developing Asia’s heterogeneity implies different reform agendas for East and South Asia. East Asia will have to address its infrastructure bottlenecks; give priority to public enterprise reform and to fostering private sector development and competition; and pursue a large and unfinished agenda of financial sector reforms. It will also need to improve its poor environmental performance (see “Reversing Pollution Trends in Asia” in this issue). Among the developing regions, it has the highest rate of deforestation, the highest intensity of energy use per unit of GDP, and the highest emission rate of carbon dioxide per unit of GDP (Chart 6). It faces serious problems of sanitation in urban areas and of soil degradation in rural areas.

Chart 6.East Asia needs to Improve its poor environmental performance

In South Asia, the agenda is driven by the need to achieve sustainable growth and reduce poverty. This will require public sector reform, including tax reform and expenditure restructuring, and an improvement in the performance of public enterprises through more competition, privatization, a wider distribution of share ownership, and removal of entry barriers that still impede participation of the private sector. Tax reform is still in the early phase, except in Bangladesh, which has successfully imposed a value-added tax. Financial reform remains an elusive objective although some important steps have been taken in Pakistan, and India has placed it at the top of the policy agenda. Little progress has been made in reforming land and labor markets.

Developing South Asia’s human resource base is particularly important in pursuing an outward-looking, pro-poor growth strategy. South Asia’s ability to pursue this strategy will depend on its success in shifting public expenditure priorities to the social sectors to ensure a more rapid buildup of human capital. Currently, life expectancy in South Asia lags behind that in East Asia; out of every ten children born, at least one is expected to die before reaching his/her first birthday and nearly half of the children in the region do not complete primary school.

Prospects are excellent

With sustained reforms and an external resource flow to support restructuring, the prospects are very good that developing Asia will achieve GDP growth of 6.5 percent between now and the end of the century. In purchasing power terms, developing Asia already accounts for about one fourth of the world economy. Looking ahead five to ten years, developing Asia continues to promise rapid growth, expanding markets, and excellent export opportunities. On the whole, the region is likely to continue to be marked by stable macroeconomic management, a steadily improving environment for private investment, and a continuation of its nearly impeccable record of prompt servicing of debt.

East Asia’s performance owes much to its export strategy. This, in turn, was possible not only because of the policies of the East Asian countries themselves but also because the United States and the European Union provided market access. East Asian countries have been liberalizing their trade regimes, but further efforts are necessary. Trade restrictions—both tariff and nontariff—still remain higher than those of industrial trading partners, contributing to trade frictions.

South Asia’s growth prospects depend to a large extent on what happens in India. The reform efforts in India, combined with similar reforms of investment and the trade and payments system initiated in Bangladesh, Pakistan, and Sri Lanka, augur well for the medium-term growth prospects of South Asia. Contingent on the successful completion of current reforms, export growth is expected to improve and boost growth in the latter half of the 1990s to the 5-6 percent range from the present low of 3-4 percent.

Uncertainties remain. Several of the important countries in developing Asia face transitions in leadership. The political process is broadening out in these countries, and generational changes in political and economic leadership are taking place. No one can be sure how these processes will evolve or what the economic consequences will be. And in some of the bigger countries in the area—China, India, and Pakistan—there are large numbers of very poor people at early stages of an accelerated development process. Rapid rates of growth are not synonymous with robust institutions at the local level, which is where ultimately most decisions on investments and implementation are made. It will take time for the institutional infrastructure—public and private—to effectively support the modernization of these economies.

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