Asia cannot take its success for granted - weak institutional capabilities, ineffective governance and income inequalities could derail the continent’s dream run.
The themes that have dominated the discourse in development economics since the 1970s, namely, the role of institutions and human capital in driving sustained economic growth and the limitations of ‘trickle down’ effects in spreading the benefits of economic growth uniformly, were revisited earlier this month at the annual conference of the Asian Development Bank in Hanoi, Vietnam, which saw the release of the draft report, Asia 2050 — Realizing the Asian Century.
The report identifies six themes that would drive Asia’s growth in the forthcoming decades: technical progress, capital accumulation, demographics and the labour force, the emerging middle class, climate change mitigation and the competition for resources, and the communications revolution. The sobering takeaway from the report is that Asia cannot take its success for granted — one or more of the above themes, in the absence of well-calibrated policies, could well derail Asia’s dream run.
The more optimistic of the two forecasts in the report, called the Asian Century, is considered a virtual certainty in contemporary popular imagination. Under this scenario, Asia would have a cumulative GDP of $148 trillion, a per capita GDP of $38,500 (in purchasing power parity) and account for 51 per cent of global output. The less sanguine prediction, called the Middle Income Trap, places the corresponding figures at $61 trillion, $20,300 and 32 per cent respectively.
It would seem counter-intuitive to derive ‘average’ numbers for a continent as heterogeneous as Asia. Asia, after all, includes three of the world’s ten largest economies — China (GDP $4.9 trillion), Japan (GDP $4.6 trillion) and India (GDP $1.6 trillion) — as well as some of the poorest and least developed countries in the world, such as Afghanistan, Myanmar and Laos. Even within the exalted cohort of the three largest economies, there is considerable variation in per capita income. Japan is among the world’s richest countries, China is straining to be classified as ‘lower middle income’, while India is still lower income. More importantly, there is no evidence of any significant convergence between the continent’s poorest and richest countries. In the foreseeable future, growth will continue to be predominantly driven by countries in East and South East Asia, along with India, a fact the report implicitly acknowledges.
Setting issues of methodology aside, the warning about economic stagnation manifested as a Middle Income Trap nevertheless needs to be considered seriously. The term Middle Income Trap describes the development experience of countries which experienced rapid growth during the early stages of development, but failed to maintain the same pace after graduating to middle income levels. Countries that fitted this description, mainly in Latin America, reached per capita GDP levels of $ 3,000-4,000 rapidly, before stagnation set in. Analytical studies, mainly by the World Bank, distilled a set of common features that applied to such countries. They include weak institutional capabilities, largely because institutions failed to evolve to meet the additional demands posed by a larger economy, largely ineffective governance and structural inequalities manifested as wide intra-country variations in income and opportunity.
| HOW THE SCENARIOS STACK UP: ASIAN CENTURY VS. THE MIDDLE INCOME TRAP | ||||||
| ASIA | People’s Republic of China | INDIA | ||||
| Asian Century | Middle Income Trap | Asian Century | Middle Income Trap | Asian Century | Middle Income Trap | |
| Share of global GDP (%) | 51 | 32 | 22 | 11 | 14 | 6 |
| GDP ($ Trillion MER) | 148 | 61 | 63 | 21 | 40 | 12 |
| GDP per capita ($PPP) | 38,600 | 20,300 | 47,800 | 23,700 | 41,700 | 17,800 |
| NOTE: * MER = Market Exchange Rates * PPP = Purchasing Power Parity Source: Asia 2050 — Realising The Asian Century, ADB | ||||||
The adverse impact of income inequality on long-term economic growth is hardly trivial and is something the Asia 2050 report highlights above all else. This conclusion has been corroborated elsewhere. A study of 65 industrial economies by Alberto Alessina and Dani Rodrik showed that countries where the lower and middle income groups had a larger share of the economic pie had consistently higher growth rates than countries where income was concentrated in the top 20 per cent of the population. Brazil and Mexico, both characterised by widespread income inequalities, are unsurprisingly the poster children for the Middle Income Trap. Equalisation is not merely an equity issue. In a purely pragmatic sense, the inability of a significant proportion of the population to participate in the domestic economy is bound to impede growth.
India would do well to take the warnings in the report seriously. As shown in the table, if India ends up at or around the Middle Income Trap, it would suffer seriously in comparison to Asian Century levels at the global, aggregate and per capita levels. For example, Middle Income Trap per capita income (at purchasing power parity) would be about 42 per cent that of the Asian Century. The welfare implications of such a decline are alarming. Going by present trends in the six criteria the report highlights, capital accumulation in India is proceeding just fine, though progress in the other five leaves much to be desired. Technological progress (measured by the volume of intellectual property generated) is way below potential, social sector spending is sub-par (despite recent efforts to reverse a secular decline from the 1980s) and India continues to remain a resource-constrained economy.
The way forward will be via significantly enhanced spending in developing physical and human capital, investments in R&D, designing policies that reward innovation (as the Science, Technology and Innovation (STI) Act of 2003 endeavoured to do) and investment in green technology. There is a high degree of correlation between these criteria. It follows that carefully calibrated policies could spur a virtuous cycle of sustained growth and development.
It is the deeply embedded inequality of income and opportunity that India needs to be seriously concerned about. While the official Gini Coefficient (a measure of income inequality within a country) for India is 0.36, skeptics like Pranab Bardhan place its value closer to 0.43. China, one of the most egalitarian countries in the world in 1980, is even more unequal than India today. As Michael Walton has argued, inequality in India is deeply structural and is increasingly being manifested in a surge in top bracket wealth (not captured in National Sample Survey Data), growing intra-regional and intra-group disparities and inequality of opportunity (above all in access to education). Indeed, the inability of certain socio-economic groups to access education is perpetuating existing inequalities, especially as the returns to highly skilled labour have increased sharply, especially after economic reforms were introduced in 1991.
The next decade will decide if India goes the way of Brazil or South Korea (though interestingly, income differences have recently narrowed in Brazil and increased in East Asia). It would be facile to assume that India’s growth is inevitable. Institutional reform would have to be dynamic so as to be in sync with the evolving expectations of a rapidly growing economy. In a Harvard University speech in 1990, Amartya Sen had described equalisation as a “social necessity”. The Asia 2050 report makes it as much of an economic necessity.
