Paradigm shift

[ By Supachai Panitchpakdi ]

Ten years ago, Asia was hit by the 1997 financial crisis. The region learned many painful lessons, but governments and people of Asia proved resilient. Today, Asia is prospering again, and undergoing an historic transformation. By 2020, Asia will have largely conquered poverty, have the largest share of global GDP in terms of purchasing power and remain a large exporter of capital. As Asia enters the next phase of its development, traditional forms of development assistance – transferring capital from external donors – will become outmoded. These are the main conclusions of a six-member Eminent Persons Group which was set up by ADB President Haruhiko Kuroda and which I had the honour of chairing.

Asia is once more the world’s highest growth region. From 1990 to 2004, the incidence of poverty declined from 35 % to
19 %. Asia is outperforming other regions in terms of share of global trade and private financial inflows. Severely short of capital 40 years ago, Asia now has a capital surplus and has accumulated massive foreign exchange reserves (over $ 3 trillion, or 60 % of the world total). Large outflows of equity capital have begun from two developing countries: China and India.

Given the strong fundamentals, major economies in Asia should continue to enjoy high growth and become more integrated regionally as well as globally. By 2020, more than 90 % of its people will live in middle-income countries. In a dramatic turnaround from 1980, its average income per capita will be comparable to Latin America’s. Its share of global GDP will approach 45% and its share of world trade 35%.

Tempering this overall positive picture, some of the fastest growing countries will still have large numbers of poor people. And Asia will still have many low-income or fragile economies with large development challenges. The rapid rise of the major Asian economies, particularly China and India, also makes them key players in major global issues such as carbon emissions and energy security. They must confront these issues head-on.

In this transformed Asia, the main policy challenges will change very fundamentally for most countries from fighting extensive poverty to tackling issues arising from economic success. The central issue will be: how can they best raise productivity and create better-paying jobs while minimising problems posed by rapid growth?

The traditional model of development banking – transferring outside official capital – will become redundant. All development institutions, multilateral and bilateral, must embrace this new reality or become irrelevant. The Eminent Persons Group has recommended that the ADB change radically and adopt a new paradigm. The “New ADB” should help tackle issues critical to the emerging middle-income Asia. It must offer a more balanced blend of knowledge and financial assistance.

Its new mandate should be driven by three complementary strategic directions, moving
– from fighting absolute poverty with donor funds to supporting faster and more inclusive growth with capital from the region,
– from promoting economic growth per se to making it environmentally sustainable, and
– from a primarily national focus to a regional and ultimately global focus, including building and expanding regional collective actions and helping the region engage effectively at the global level.

These findings, while specific to Asia and the ADB, have some broader implications. Multilateral institutions operating in Latin America, Europe and the Middle East face similar challenges. In Africa, traditional development banking remains relevant. But African countries should look closely at the basic factors behind Asia’s success: strong emphasis on education, a disciplined labour force, a propensity for high domestic savings and investment rates, strong public institutions, an increased role for the private sector, freedom for entrepreneurs, and integration with global markets.