Is Asia Ready for a Great Transformation?

If ever the Asian Development Bank’s schizophrenia was summed up in one document it is the draft report entitled “Asean, the PRC and India: The Great Transformation?” unveiled at last week’s annual meeting of the bank in Manila.

Depending on how you read it, the document could be a replay of mid-1990s Asian hubris, a stern lecture to assorted governments on their failure to address fundamental domestic and cooperation issues, or a statement of China’s long-run superiority over both India and the Asean nations.

At several points the document asserts that a Great Transformation is taking place so that by 2030 all will have collectively quadrupled their output and will play a role in the international arena commensurate with their size and wealth. “The ACI nations are on a trajectory which will affect all critical dimensions of global economic activity.” Yet, as the very title itself displays, there is a large question mark over this optimistic forecast.

The question mark does not seem to have bothered those compiling the gross domestic product projections for the years to 2030. They see China’s GDP continuing to grow at an annual average of 7 percent a year so that by 2030 it will hit $15,548 per head a year. India will grow slightly faster at 7.6 percent but the per capita gap will continue to increase so that India’s will have only reached $4,312 by the same date. (These are using market prices. The gap is narrower using Purchasing Power Parity but the trajectory is the same).

The report appears to see China having no real problem breaking out of the so-called “middle income trap” and following the path to rich country status of South Korea and Taiwan. However, its middle-income Asean neighbors are facing a much grimmer future, at least according to the data projections. Thailand is forecast to grow at a relatively miserable 4.8 percent so that by 2030 its per capita income will be a mere $9,702 per year or just 62 percent of China’s. Malaysia is in much the same boat and though its current per capita income is almost twice that of China by 2030 they will be similar.

This will be music to China’s ears but may raise issues of possible cultural or political biases towards “chopstick’ and neo-Confucian societies which may grate with some members.

The projections for Asean drag up the whole to an annual average of 5.6 percent thanks to that for Myanmar, at 9 percent but coming off a very low base, Vietnam at 7.3 percent and with Indonesia plodding along at an unremarkable 5.5 percent. In general these Asean projections seem rather more realistic than the numbers for China or even India.

They do however contain one big surprise, perhaps a bow in the direction of the ADB’s headquarters: 7 percent growth for the Philippines. It would indeed be welcome if the perennial laggard could finally reach a sustained growth level which would make a real difference to the lives of its still fast-growing population. However, it is a statement of pious hope rather than reflection of past attainment.

The overall projections, particularly for China, sit rather oddly too with some other recent ADB analyses. The most recent Asian Development Outlook, published in March, drew attention to the impact of wide income gaps on future growth potential with China’s Gini co-efficient (which measures income inequality) rising towards the stratospheric levels of perennial low-growth Latin America. The ACI report mentions this too. And it points to various other crucial issues which have to be tackled if the Great Transformation is to become a reality. These include environmental degradation, corruption and governance issues, water and power waste, weak financial systems, and declining levels of growth in productivity of both labor and capital. Unbalanced growth is unsustainable with China having excess investment and much of the rest of the region having insufficient.

Even more crucial is the question of regional cooperation in an environment where the old developed world, long the engine of demand growth for the developing world, is growing very slowly. It is certainly possible that regional integration will continue to increase led by the Asean free trade links to China, Japan, Korea and Australia, and that India’s trade with east Asia will continue to grow rapidly – and presumably too that India improves its trade links with its populous South Asian neighbors.

It is certainly possible that trade barriers in Asia will continue to fall and regional currencies, including the yuan and rupee become fully convertible and thus agents of cross-border flows of goods and investment. But the question mark is very necessary.

The numerous caveats in the report are typical of an ADB that has generally never been as uncritically gung-ho about longer-term Asian growth prospects as some commentators. Read these and they put the GDP growth projections into the realm of the possible rather than probable. But even with caveats it glosses over some problems that will make the next 18 years more difficult than the past 18.

One is the demographic transformation which is now a negative for China and Thailand as well as for the major regional developed economies – Japan, Korea, Taiwan and Singapore. Another is that the change in industrial systems, partly driven by China’s emergence as a manufacturing base, which have driven so much East Asian trade, is slowing and may even reverse in response to issues including supply-chain weaknesses as revealed by the Thai floods and Japanese tsunami, and rising wages and currencies, political tensions and threat of trade wars.

But for all its gaps and apparent inconsistencies, the report makes interesting – if repetitive -- reading. Interesting too will be the final version to emerge after member countries have commented on this product of the ADB’s Tokyo-based research arm, the ADB Institute.