Asian Economies: Making the Transition to High Income
Countries in developing Asia have moved more quickly and in greater numbers to join the ranks of middle-income economies than anywhere else in the world over the past 50 years.
But now there’s a more difficult challenge. Shifting further up the economic “value chain” to become a high-income region.
How developing Asia made the transition from a low to a largely middle-income region, and what countries need to do to continue on an upward path are the focus of a recent in depth Asian Development Bank study, “Asia’s Middle-Income Challenge: An Overview.”
In 1960, 10 out of 15 large developing Asian economies were either extremely low-income, or low-income. By 1980 just over half of all economies in the region had reached middle-income status, and by 2015 more than 95% of people in the region lived in middle-income economies. This dramatic transformation coincided with a period of strong export-led growth in many countries in Asia.
The decade between 2000 and 2010 was especially transformative with the number of low-income countries in developing Asia falling by more than half and the number of lower middle-income economies rising by around a half.
The pace of change also outstripped other regions with developing Asia taking an average of 13 years to move from lower-middle to upper-middle income status, compared to 17 for the rest of the world.
Structurally, the report highlights key differences that separate middle-income economies from those with income levels, above and below them.
They include demography, infrastructure, human capital, finance sector development and the quality of governance.
Jumping to high-income status from the middle-income level has proven tough for most regions in the world, with the global median between 1960 and 2014, taking 23 years.
Developing Asia, however has outstripped other regions in making this transition, with its average just 19 years. Countries in the region that have moved up include the newly-industrialized economies of Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China.
How were they able to do it when others in Asia and other parts of the world have struggled to make the leap from the middle to the top?
The key factors were the individual countries’ strong support for innovation, knowledge and human capital development, technology adoption, protection of intellectual property rights and infrastructure investment.
The Republic of Korea, offers a good case study for countries searching for the right ingredients to become more prosperous.
It was able to make the shift from middle-income to high income by moving from a focus on heavy industry in the 1970s to high technology industries from the mid 1980s on.
This shift was accompanied by the government upgrading infrastructure, deregulating the finance sector, introducing education reforms to promote science and technology, building up the country’s research and development capacity, and providing tax subsidies and other incentives for the private sector to play a larger role in the knowledge economy.
From 1988 to 1994, the country’s proportion of high technology exports to total manufacturing exports rose from about 16% to nearly 23%.
Ultimately, if more Asian economies are to move up to the high-income level they will need to embrace greater productivity growth, increased innovation, and more investment from both the government and the private sector in supportive infrastructure, including modern information and communications technology systems.
This will be a more challenging transition than the previous one and will bring new risks as countries become more interlocked with the global economy and vulnerable to external shocks.
However, the performances of the newly-industrialized economies offer a way forward for other countries in developing Asia to follow suit in future, the study concludes.