If it?s to be an Asian century

Asian economies need to build on their productivity and technological gains, writes NK Singh.

Asia's Prosperity has gained much international attention. China’s unabated growth, the revival of the Japanese economy after a decade of stagflation, and the sustained high growth of the Indian economy are pointers to the future balance of economic power. It was appropriate that the Stanford Center of International Development organised its Seventh India Conference on the theme ‘Challenges of Economic Policy Reform in Asia’.

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The three-day conference witnessed constructive dialogue among policy makers, academics, corporates and venture capitalists on subjects including intellectual property rights and the business environment, effectiveness of health, education, and rural development interventions, macroeconomic factors such as monetary policies and productivity trends, and global concerns like environmental sustainability. These issues are inexorably linked to the economic prospects and challenges facing Asian countries.

A closer look at the challenges facing Asia, and India in particular, brings out these complementaries. First, productivity. Not surprisingly, total factor productivity in China has grown faster than in India. India’s relatively high barriers to technology diffusion, inefficient allocation of resources across firms and its labour market inflexibility have tipped the balance in China’s favour. What are the steps to increasing productivity? These range from legal solutions to new management styles to technology innovations.

Productivity-enhancing economic reforms must continue. All countries have some priority goals: Japan needs to do much more on banking, while the rest of Asia must focus on reforming labour laws, financial systems, the legal environment, non-tariff barriers, and shifting to more market-friendly investment policies.

Second, extending some of the benefits of growth in technology to a wider group of people remains a key challenge. Part of the solution lies in increased connectivity that frees economic activity from geographical constraints. India has comparative strengths on ICT penetration, but rural penetration is still low by global standards. China is making enormous progress driven by a faster rollout plan, improved infrastructure and a supportive business environment.

China and India have diverged in their treatment of this challenge. High rates of regressive taxation on rural peasantry in China, which has only recently been moderated, created large surpluses with the central authorities for infrastructure development. This urban push in support of increased income enabled a supply-side response to support manufacturing activity. It was ironic that the peasant revolution resulted in regressive taxes that eventually subsidised the growth of the manufacturing sector and infrastructure. Taxation of rural incomes in India remains unpopular, but the outcome is that 24 per cent of GDP from the agricultural sector is entirely out of the purview of the tax regime.

Sub-national policies also play a role. The perspectives of Bihar and Punjab reminded us at the conference of the potential for sub-national leadership to resolve some equity-growth challenges. The efforts of the Nitish Kumar government on improved governance and development politics is a pointer in this direction.

Third, there is a need to change the perceptions about Asia to enable it to play an international diplomatic role commensurate with its economic importance. Asia’s rising share of world GDP and trade, high growth rates, and younger population, have brought about a dramatic change. Clearly, Asia in the decades ahead will be a critical driver of global prosperity.

The challenges facing Asia include aggressive lobbying for enabling the world to accord it a greater voice in world fora like the World Bank, IMF and the UN as well as according India its rightful place in the enlarged Security Council. Asia needs to use its increased influence to promote trade liberalisation from which it is likely to gain the most.

Finally, the challenge of demographic transition requires creative thinking on various issues – domestic and international, economic and political, cultural and social. Parts of Asia are ageing, while others have a younger population. Addressing these asymmetries requires attitudinal changes in accepting immigration as well as more efficient relocation of activity in consonance with changing demographic realities.

It is easy to be persuaded about Asia’s glittering future. Nonetheless, large income differentials among Asian countries, varied quality of governance, continued high incidence of poverty even among the faster-growing countries, and tardy growth in gainful employment commensurate with the younger population will remain daunting challenges.

Multilateral institutions like the Asian Development Bank have concentrated on lending activities and poverty redressal programmes. While these are pivotal in the realisation of the Millennium Development Goals, they are inadequate for Asia to fully realise its potential.

If the 21st century is to be Asia’s century, these challenges must be overcome. Sharing regional experiences across a broad range of perspectives and backgrounds, as at the Stanford Conference, is helpful in promoting this process.

(The writer is a former member, Planning Commission)