IMF Survey, Volume 35, Issue 17

Article

Global Surveillance: Asia is Rising, but The Next Steps May Be The Hardest

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 2006
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Over the past three and a half decades, Asia’s growth has been nothing short of dazzling. Most of the region is progressing steadily toward advanced levels of per capita income. But securing full convergence will require continued productivity gains and action to tackle poverty rates, which remain high in some countries. Chapter III of the September 2006 World Economic Outlook (WEO) examines the progress Asia has made thus far and outlines the crucial next steps.

Since 1970, output per capita has grown, on average, by 4 percent a year in the 18 Asian economies that the WEO analyzed (see box). The study finds that growth in most of these countries has been driven by the fast accumulation of physical and human capital (see chart below), as well as by rapid increases in total factor productivity. These developments, in turn, attest to the region’s generally strong policy environment.

A long way to go

Achieving convergence with advanced-economy per capita income levels, however, will require significant measures on several fronts. The WEO highlights the following key steps:

• Boosting productivity. Asian countries are continuing to catch up to advanced-economy productivity levels in manufacturing, but this process has come to a halt in the services sector (see chart, right). To encourage competition and productivity growth in this increasingly important sector, Asian countries will need to remove barriers to entry (both domestic and foreign), streamline regulations, and strengthen human capital.

• Reducing surplus rural labor. Many Asian countries still have significant potential to shift surplus agricultural labor to industry and services. Since 1970, such labor shifts have accounted for about one-fourth of Asia’s catch-up to U.S. productivity levels. The share of agriculture in employment remains large in most of developing Asia, however. Fortunately, the same measures that are likely to stimulate productivity growth in industry and services will also help these countries transform their economies and reduce rural poverty. These crucial reforms will entail further liberalizing trade, broadening and deepening financial systems, strengthening human capital, and remedying widespread weaknesses in infrastructure. Fostering flexible labor markets while establishing social safety nets will also be a key element in the reform process.

Growing more productive

Asia’s rapid development has been propelled by striking gains in labor productivity.

(percentage points a year)

Data: IMF staff calculations.

Room for improvement

Asia’s productivity levels still have a way to go, however, before they can catch up with those in the United States.

(percent of U.S. productivity level)

Note: Data are in purchasing parity terms.

Data: IMF staff calculations.

Recipe for growth

In sharp contrast with Asia’s performance, the world’s other developing countries have seen their GDP per capita grow since 1970 by a meager 1 percent a year. There are important lessons here for late-developing countries in both Asia and other parts of the world. In particular, the WEO study argues, the Asian experience shows that stable macroeconomic frameworks, openness to trade, strong institutions, and well-developed financial systems are vital ingredients in achieving strong and sustained growth.

Florence Jaumotte and Nikola Spatafora

IMF Research Department

The study drew data from 18 economies: Bangladesh, Cambodia, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Lao P.D.R., Malaysia, Myanmar, Pakistan, Philippines, Singapore, Sri Lanka, Taiwan Province of China, Thailand, and Vietnam.

The full text of the analytical chapters of the September 2006 World Economic Outlook is available on the IMF’s website (www.imf.org).

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