beyondbrics

Is Asia sleepwalking to disaster while dreaming of global domination? Rajat Nag thinks it may be, unless the complacency of regional political leaders is replaced with a relentless focus on economic transformation.

As managing director general of the Asian Development Bank, Nag is one of the few people in a position to issue a challenge to the entire Asian political hierarchy – which is exactly what he did on Wednesday at the ADB’s annual meeting in Hanoi.

In a book-sized report – the executive summary runs to 128 pages – Nag presented the country delegations that make up the ADBs governors with a provocative challenge to the consensus view that the 21st century will belong to Asia.

The report sounds innocuous enough: Asia 2050, Realizing the Asian Century. But it sets out to shake complacency by making clear that there is a serious chance that the region’s economic miracle will get caught in the so-called middle income trap – where countries grow quickly out of absolute poverty but then stagnate.

Nag, who puts the odds of this happening at “better than even” points out that the implications are much bigger than Asian political pride. Taking into account forecast population growth, as many as 3bn people might be condemned to remain in poverty if things go wrong on the scale the report suggests is possible.

Instead of accounting for 51 per cent of global GDP by mid-century, with an average income per head of $38,600, Asia could instead find itself wallowing in low growth with about 32 per cent of global output and incomes per head of around $20,000.

The report pulls few punches, arguing that fashionable talk about the “Asian Century” has created an impression that “the ascendancy of Asia is somehow an immutable fact and the only question is merely when the PRC and India will become the largest and second largest global economies, as if the countries are on autopilot, gliding smoothly to their rightful destiny.”

Here’s a bit more flavour from the report:

Amidst the excitement about the transformations taking place in Asia, it is also important to recognize that Asia faces a number of mega challenges:

(i) large and, in some cases, rising inequities and disparities within countries that could alter the political and social fabric of the region;

(ii) the risk of falling into the Middle Income Trap due to a host of economic, social and political challenges faced by individual countries;

(iii) intense competition for finite natural resources (energy, other minerals, water and fertile land) that would be unleashed in the next 40 years as some 3billion additional Asians become much more affluent and strive to achieve even higher living standards;

(iv) the potential sharp rise in disparities across countries and subregions if the past differentials in relative growth rates continue between now and 2050 that in turn would destabilize the countries and subregions concerned; and

(v) global warming and climate change.

The risks arising from climate change and associated water shortages extend not only to the vast populations that inhabit coastal areas but also to areas that rely heavily on agricultural production. Increased incidence of natural disasters could affect vast numbers of people throughout Asia. In addition there is the overarching challenge of governance, improvements in which will be the key to overcoming all other challenges. If current adverse trends in the quality of institutions and in rising corruption continue unchecked, the ability to sustain the growth momentum would be severely jeopardized.

Addressing that list of challenges would be a tall task for any set of political leaders, who might, in any case, argue that things are going very well for Asia. With growth expected to average 8.5 per cent this year, why worry about problems that may simply disappear?

That, says Nag, is exactly the kind of thing they used to say in Latin America before the continent got stuck in the middle income trap in the 1960s.

“Whether we go the Asian century scenario or get stuck in the middle income trap scenario will depend on how Asian leaders address these points now,” says Nag.

Related reading:
ADB warns on China’s long-term growth, FT
Boom vs Doom: is Nouriel Roubini right on China?, beyondbrics
Why Roubini is wrong on China, Shaun Rein on CNBC.com
Asia toys with introducing capital controls, FT