Despite its impressive achievements in economic development, region still faces enormous challenges

Although the COVID-19 pandemic has had devastating economic and social impacts on countries around Asia and the Pacific, it cannot hide the great achievements the region has made in economic development and catch-up over the past half century.

In the 1960s, the per capita GDP of developing Asia was only $330 (in constant 2015 dollars). At that time, the region had widespread poverty and struggled to feed its large and growing population. Gunnar Myrdal, a Swedish economist who received the Nobel Prize for Economics in 1974, portraited Asia as a "land of economic stagnation" with slow progress and a limited prospect of catching up in his book Asian Drama, published in 1968.

But half a century later, Asia has developed into a region beyond Myrdal's imagination. Asia is now a global manufacturing powerhouse, with diverse exports, growing innovation capacity, burgeoning cities, and an expanding skilled labor force and middle class. In 2021, developing Asia's per capita GDP reached $5,500 (at the same constant dollar), a nearly 17-fold increase from the early 1960s, while the global per capita GDP only tripled over the same period. Whether in economic growth, structural transformation, poverty alleviation, or improvements in health and education, Asia has achieved more than expected on the road to prosperity, albeit with large cross-country differences.

What can explain Asia's economic success?

In the past half century, although a few countries had been ravaged by wars, Asia as a whole has maintained peace and stability. Peace and stability have also led to rapid population growth and a rising share of working-age population, bringing a "demographic dividend". At the same time, the open trade and investment policies of developed countries created a favorable external economic environment for Asia, enabling the region to benefit greatly from technological progress and globalization. The convergence between economies has also provided opportunities for rapid growth.

However, peace and stability, demographic dividends and a favorable external environment alone will not necessarily lead to rapid economic growth. A recent book released by the Asian Development Bank Asia's Journey to Prosperity: 50 Years of Policy, Market, and Technology, points out that Asia's economic success over the past 50 years owes much to its sound economic policies and effective institutions.

Also behind the region's success, the book adds, were a pragmatic approach to implementing policy reforms, the ability to learn from its own successes and failures as well as from those of others, and, in many countries, a clear development goal that was championed by visionary leaders and supported by the whole society and strong implementation capacity backed by an effective bureaucracy.

While countries vary in policy mix and implementation timing, with occasional setbacks and reversals, successful Asian economies have all pursued the policies that are needed for sustained growth. These include: relying on market mechanisms and private enterprises to drive growth, but with proactive state support to address market failure; promoting the development of manufacturing, while modernizing agriculture and developing services; encouraging domestic savings and capital accumulation; supporting technological innovation and upgrading; building human capital; adopting open trade and investment regimes; investing in infrastructure; maintaining macroeconomic stability; promoting social inclusiveness and gender equity; and engaging with development partners and promoting regional cooperation.

Some scholars associate Asian development with the so-called developmental government model, and attribute the region's economic success to the role of government interventions. However, a review of Asian development experiences in the past half century suggests that market-oriented reforms and opening to the outside world were always followed by rapid economic growth — whether in the four tiger economies — Hong Kong, Singapore, the Republic of Korea, the island of Taiwan — from the 1960s; in Malaysia, Thailand and Indonesia from the 1970s; or in China, Vietnam and India from the 1980s and 1990s. In these economies, when the development policy shifted from government-led to market-driven, growth started to accelerate.

Compared with other countries and regions, Asian countries have adopted a more gradual and pragmatic approach to implementing reforms, including piloting policy changes before full-scale implementation and careful sequencing reform measures. For example, they recognized that capital account liberalization should presuppose sufficient development of the domestic financial sector. The Asian financial crisis was a major setback to the region, but countries learned the lessons and have made significant efforts in post-crisis reforms.

Many Asian countries have used the so-called targeted industrial policies to promote industrialization, including measures such as tariffs, subsidies, preferential credit and tax incentives that support specific industries or firms. These policies have been very controversial and were discredited after the Asian financial crisis — as they were considered one of the root causes of the crisis. But the reality is that targeted industrial policies have played an important role in developing new and non-traditional industries in many high-performing Asian economies, although these policies were not always successful.

Many now believe that targeted industrial policies, if used improperly, can lead to rent-seeking, unfair competition and inefficiency. However, if they are used wisely — if they are performance-based, promote fair competition, and come with clear targets and transparent implementation rules — such policies can be effective in facilitating development and structural transformation. Many also believe that when a country becomes more developed, industrial policies should focus more on supporting innovation that is less distortionary.

Today, developing Asia's per capita GDP is only 15 percent of the OECD average. To further narrow its development gaps, Asia should continue to pursue sound policy and build strong institutions. Continued efforts should be made to eradicate poverty, reduce income disparities, promote gender equality, strengthen environmental protection and fight against climate change, and invest more in healthcare, education, electricity, and safe drinking water. And most urgently, Asian countries should work together and with the rest of the world to end the COVID-19 pandemic that has inflicted tremendous human, social and economic pain on the region for almost three years.

Fifty years ago, the majority of Asians lived in low-income countries. Today, more than 95 percent of the Asian population lives in middle-income countries. The transition from middle-income to high-income is inherently more challenging. In Latin America, for example, many countries have been in the middle-income stage for a very long time, and they are stuck in the so-called middle-income trap. In Asia, only a handful of economies have succeeded in making the transition from middle- to high-income in the last 50 years — these are the four tiger economies.

Succeeding in the transition from middle- to high-income requires changing the growth model, from resources-driven to innovation-driven. This means more investment in human capital, research and development, promotion of competition, and the protection of intellectual property rights.

Some people predict Asia is likely to account for more than half of the global economy by 2050, and refer to the 21 century as the "Asian Century". While this is encouraging, there are still numerous hurdles Asian countries need to overcome to achieve this goal. There is no room for complacency.

The author is former deputy chief economist of the Asian Development Bank. The author contributed this article to China Watch, a think tank powered by China Daily.

Contact the editor at editor@chinawatch.cn.