Will Asia’s growth fizzle out?

By Peter Drysdale
Over the past half century and more, many countries have committed to promoting economic development and catching up to the income and productivity levels achieved in advanced industrial economies. Indeed, with a large part of the industrial world facing stagnation or very modest rates of growth in the decade ahead, the emerging economies, as they are called, are the great hope for global growth. But the remarkable fact is that only 13 of 101 countries across the world have been able to make the transition from lower or middle income levels to high income levels since 1960 and catch up to the technological frontier.

This is the problem of getting stuck in the middle-income trap. A number of countries have enjoyed strong rates of economic growth through lower levels of income but, after a time, their growth has fizzled out. A classic case is that of Latin America. Thirty or 40 years ago, Latin American growth rates suggested that the continent was on the way to developed economy status but in intervening years the growth rate of Latin American countries has averaged little more than 1 percent and left it trailing behind.

Some Asian economies, of course, are among the 13 success stories in the transition from poverty to prosperity and high income and productivity. Japan was at the leading edge, having committed to catching up with the industrial world during the Meiji Restoration over 100 years ago. But Korea, Hong Kong, Singapore and Taiwan are other examples that stand out.

China and other countries in Southeast Asia have succeeded in emulating the rapid catch-up growth of Japan and the newly industrialised economies (NIEs) but have yet to make the transition to high income. They are still in catch-up mode: some are on the way into middle income, reckoned at this stage as a per capita income somewhere between US $ 8,000 and US $ 16,000 (such as Malaysia, Thailand and China); some are further back (like Indonesia, India, Sri Lanka and Bangladesh). The good news is that, for most of Asia, the potential for economic catch up is still huge and the prospects of maintaining higher than average global economic growth — essential to making it to the top at some point — over the coming decades are good.

Latin America is a salutary warning: things could go wrong. Certainly the leaders of some of the region’s biggest emerging countries like China, Indonesia or India are confronted daily with questions about what might knock their ambitions to becoming rich off course.

The refrain that China’s high rates of economic growth cannot last and that the Chinese economy is on the way to collapse is one way of posing the question. China has certainly experienced a slow-down in growth as it rapidly approached higher levels of middle income and now a major policy preoccupation is with maintaining growth momentum and avoiding getting stuck in a middle-income trap.

China, or any other economy, is unlikely to continue growing forever at last year’s growth rate of almost 7.5 percent. Being more cautious about China’s and India’s growth outlook is one thing. But it doesn’t necessarily help understanding of the factors that might shape their growth trajectories. Will they grow fast enough to continue to edge towards the industrial advanced country frontier or will the frontier, as in the case of Latin America for the time being at least, slip like a mirage further away from their reach? Will there be a steady transition to lower rates of growth, for example, as China’s productivity catches up with more advanced economies? Or will China suddenly drop off the growth cliff, and revert to long run global mean of 2 percent or thereabouts, as Summers and Pritchett recently suggested?

What went wrong in Latin America and what could go wrong in Asia as Asian economies try to navigate the middle-income trap?

In Singapore this week, some of the region’s top policy economists will thrash this issue out at the 37th Pacific Trade and Development (PAFTAD) Conference, a forum that has pioneered thinking about regional development questions for almost 50 years.

This week’s lead digests a paper that David Dollar is presenting to PAFTAD. He points out the strong relationship between institutional quality and success in growth. ‘But institutional quality does not change very much from year to year or sometimes even from decade to decade’, Dollar adds, ‘which makes it hard to explain why countries have periods of high growth followed by low growth (or vice versa)’.

The paradox can be resolved, Dollar explains, if it’s remembered that institutions which are well-suited to one phase of economic development may be ill-suited to another — the focus is on the quality of institutions relative to the level of development. China and Vietnam, for instance, have seen high growth in recent times even though they have relatively low institutional quality in an absolute sense, but they have above-average quality institutions given their stage of development. That allows them to attract foreign investment, for example, ahead of other countries with similarly low wage levels but weaker institutions.
Another question is whether authoritarian institutions are better for economic growth. At lower levels of income, authoritarian institutions don’t appear to be a handicap. But no large country has yet reached advanced economy status without a retreat from authoritarian institutions. China could be the exception, Dollar acknowledges, but the jury is still out. 

(Courtesy East Asia Forum)
(Peter Drysdale is the Editor of the East Asia Forum)