Raising Productivity Growth is Critical for Middle-income Asia - ADB Study

Reforms to increase productivity on the basis of better innovation, education, and infrastructure can help developing countries in Asia and the Pacific graduate to high-income status, says a new Asian Development Bank (ADB) report.

Transcending developing Asia's middle-income challenge is the subject of the special theme chapter in the Asian Development Outlook (ADO) 2017 report. ADO is ADB's flagship economic publication.

Past development success in Asia and the Pacific means most citizens in the region now live in a middle-income country, said Yasuyuki Sawada, ADB's Chief Economist, Policymakers will need to change their approach to reach high income. It is no longer a question of them using more resources to sustain growth, economies must become more productive to clear the final hurdle.

The report notes that in 1991 only 10% of the population in Asia and the Pacific lived in middle-income economies. By 2015, this had increased to over 95% of the region's population, fueled by growth in the region's most populous countries: the People's Republic of China (PRC), India, and Indonesia.

To raise productivity, countries in developing Asia will need to focus on innovation. Middle-income countries that successfully moved up to high income have more than two and half times as much stock of accumulated research and development as other middle-income countries.

Innovation requires a skilled workforce, and hence an emphasis on improving education quality. The report estimates that a 20% increase in human capital spending per capita can increase labor productivity by up to 3.1%. Sound educational policies can also promote equity and close the wide education gaps between developing Asia and high-income economies, while encouraging innovation and entrepreneurship.

Infrastructure investment, particularly in energy and information and communications technology, can contribute to innovation and human capital, and thus sustaining growth in middle-income countries. A one-time public investment in infrastructure equal to 1% of gross domestic product can lift a country's output by as much as 1.2% in 7 years.

Asia's dynamic track record suggests that the journey to high income, while challenging, can be completed. Supportive institutions and policies, underpinned by macroeconomic stability, can strengthen the pillars of productivity growth innovation, human capital, and infrastructure.

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