Where next for Asian economies? Clearsighted reforms key for durable growth

The Asia-Pacific region has undergone rapid development over the past three decades. Between 1990 and 2023, its gross domestic product (GDP) per capita more than doubled. It will generate about 60 per cent of global economic growth this year. In the near term, we expect this to continue: our latest forecasts, finalised in October, show the Asia-Pacific region growing by 4.5 per cent in 2025, well ahead of the global average. For India, we project growth of around 6.5 per cent.

 

But can this success continue? Will growth remain strong? And how can countries secure good employment—particularly those, such as India, where the working-age population will continue to grow strongly, even as the average age increases?

 

 

Thinking about these questions leads us to look closely at how jobs and production have been changing in Asian economies.

 

For example, over the past 30 years, the share of those employed in agriculture in Asia has halved on average. Why is this important? Moving workers out of low-productivity agriculture jobs to higher-productivity industry and service sector jobs has been instrumental in raising productivity in the Asia-Pacific region.

 

In the case of India, this transition of employment has been relatively slow: the share of agricultural employment is higher and has been slower to fall than in many emerging economies. In comparison with other countries, agricultural productivity has been both low and growing slowly, holding back the economy.

 

But where should those workers go? It is true that many other Asian economies have gained by moving intensively into manufacturing. Consider Vietnam, for example: its share of employment in manufacturing has tripled in the space of 30 years, while its per capita income has quadrupled in real terms. Over that same period, the share of employment in manufacturing in India has increased only modestly, and per capita income by less than it has in Vietnam. 

 

Does that mean that the way forward for India is to deliberately steer the economy into manufacturing? Not so fast.

 

The progression from basic to high-value-added manufacturing is becoming more difficult. It is also becoming more capital-intensive and generates relatively little employment.

 

By contrast, in several modern services sectors—business services, information and communication technology (ICT), and finance—labour productivity typically exceeds that of manufacturing. Those sectors can boost growth. But whether such sectors are sufficient to generate many jobs is another matter.

 

What does this imply for policies? Balancing growth objectives with employment goals is complex and challenging. India, which is adding 14 million individuals to its working-age population every year, will need to create conducive conditions for both manufacturing and services to allow for sufficient growth and job creation.

 

A first recommendation is to lower barriers to entry in all sectors so that jobs and production can move to where there is demand. For example, Asian economies are open to trade in manufactured goods compared with the rest of the world, but are relatively closed to agricultural and services trade. The issue is particularly pressing with regard to agriculture in India, where the implied tariff on agricultural products is substantially above the average for the Asia-Pacific region.

 

Improving agricultural productivity will release workers from the land. That is a good thing if those workers can move to more productive and higher-paying jobs. However, this necessitates strong job creation in the non-agricultural economy.

 

In manufacturing, productivity in East and Southeast Asia is already quite high, suggesting few frictions holding the sector back. In the case of India, the failure of firms to expand and increase exports is notable. This should prompt a focus on improving firm productivity and scale by reforming labour laws, reducing trade barriers and red tape, while continuing to invest in public infrastructure and boosting research and development (R&D).

 

Prospects for increased demand for services appear strong. India is already doing quite well in developing highly productive sectors such as information technology (IT) and business services. However, these sectors will likely become more competitive as services become more easily tradeable.

 

Supplying the skills demanded requires a stronger focus on the quality of education and skilling, especially as new technologies, notably artificial intelligence (AI), transform jobs.

 

At the same time, focusing solely on modern services will not generate enough jobs. Improving productivity in low-skill services will also be important to balance job creation with productivity growth. This requires microeconomic reforms to enhance productivity in small firms and improve the employability of those moving out of agriculture.

 

This brings me to a final remark: success will not be achieved by picking particular sectors to drive the economy forward. That is like imagining a team could consistently win matches by concentrating on its batting and ignoring bowling and fielding. Instead, efforts need to be sustained across many policy fronts to ensure economies are flexible and able to adjust to a fast-changing world. 

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Krishna Srinivasan is Director, Asia and Pacific Department, International Monetary Fund. In this capacity, he oversees the institution’s work on all countries in the Asia-Pacific region.

 

Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper