Public Discourse, Asia’s Transformation: Where to? How? And How Fast?

Public Discourse, Paramadina-ADB

Asia’s Transformation: Where to? How? And How Fast?

Jakarta, 3 September 2013

The last four to five decades have witnessed Asia’s enormous yet uneven transformation. Countries considered “Factory Asia”, in reference to mostly East Asian economies, have successfully become industrial, service economies. Others appear to not have industrialized significantly and have weak supply chains.

Certain factors are of the essence here. Labor productivity, for one, has been more focused within sectors instead of into more productive ones. Second, agriculture’s declining share of total output does not deter it from engaging almost half of Asia’s total employment (42.2%). Third, though Asia’s GDP might identify the region as a service economy, services in the region still consist of both low and high productivity services. Moreover, advanced Asian economies tend to differ from others in that their export baskets have diversified. Last but not least, only certain Asian countries have access to the global value chain, which is essential for market development. The least desirable stages of the chains however would usually not serve as a springboard for fast development.

The ADB outlines a number of considerable steps to be taken by Asian countries. Developing Asia needs to make a significant qualitative leap in structural transformation and to focus on transferring labor from sectors of low productivity (typically agriculture) into sectors of high productivity. Policymakers also need to focus on facilitating the development of capabilities to manufacture new products, enter new markets, and move up the development ladder.

Industrialization of agriculture is the key to, particularly low-income, Asia’s future. Increases in agricultural productivity allow for wage increases, which lead to investments in farm and human capital that are key for poverty reduction and, ultimately, inclusive growth. As technological advances in agriculture can help increase productivity, links to global agricultural value chains is important to facilitate technology adoption.

Manufacturing is important as no country has been able to obtain high income levels without it reaching at least 18% share of total employment. Furthermore, manufacturing halts labor from simply moving out of low-productivity agriculture into low-productivity services. Upcoming inventions may revolutionize manufacturing, but they are likely to benefit developed countries first and foremost. Upcoming inventions tend to be very technology-intensive and will not create millions of jobs.

Other factors are also highlighted as important. The ADB’s study indicates that a country which industrializes in output and (i) has 17 kilometers of road per 1,000 persons has a 44.5% chance of being high income, (ii) has liquid liabilities representing 75% of GDP has a 43.5% chance of being high income, (iii) where workers have 9 years of average schooling has a probability of 48.5% of being a high income, (iv) with a share of high-tech manufacturing output representing 52% of total manufacturing GDP has a 75% chance of being high-income, and (v) with a share of high-tech manufacturing employment representing 49% of total manufacturing employment has also a 75% chance of being high-income.

Apart from industrialization, investment and education are highlighted by the ADB. Countries that have based their industrial development strategies on foreign direct investment and disregarded the importance of local firms, can lack industrial deepening. Provision of primary education and education of high quality, though facilitates export diversification, is considered “path dependent”. This means that economies cannot readily jump from exporting unsophisticated products such as t-shirts to exporting very sophisticated ones such as cars. Education achievement alone does not help countries leapfrog into significantly more sophisticated products than those they currently export, but the provision of good quality education reduces path dependence.

In closing, the ADB points out how analytical results have different implications for different country profiles. Countries with large shares of employment in agriculture, for example, need to develop industries and services that absorb labor. The PRC and India’s investment in producing cheaper versions of existing technology need to evolve into higher levels of innovation. Advanced Southeast Asian economies can focus on upgrading as they are already quite diversified, but the need to deepen and upgrade industries is still necessary to avoid being caught in the middle-income trap. Islands in the Pacific subregion will have difficulty industrializing and thus their future lies in developing niches in some services. Economies rich in natural resources (e.g., Kazakhstan) need to manage those resources well and think about diversification. Last but not least, countries that are just embarking on a deep reform process, such as Myanmar, can benefit from the experiences of other countries that have gone through the process.

For further inquiry, please contact:

WijayantoSamirin

Co-founder &Managing Director, PPPI

E: wijayanto@paramadina.ac.id

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