Reforms to increase productivity on the basis of better innovation, education, and infrastructure is key to helping developing countries in Asia and the Pacific graduate to high-income status, says a new Asian Development Bank (ADB) report.
“Past development success in Asia and the Pacific means most citizens in the region now live in a middle-income country,” said Yasuyuki Sawada, ADB’s Chief Economist, “Policymakers will need to change their approach to reach high income. It is no longer a question of them using more resources to sustain growth, economies must become more productive to clear the final hurdle.”
The report notes that in 1991 only 10% of the population in Asia and the Pacific lived in middle-income economies. By 2015, this had increased to over 95% of the region’s population, fuelled by growth in the region’s most populous countries – China, India, and Indonesia.
To raise productivity, countries in developing Asia will need to focus on innovation. Middle-income countries that successfully moved up to high income have more than two and half times as much stock of accumulated research and development as other middle-income countries.
Innovation requires a skilled workforce, and hence an emphasis on improving education quality. The report estimates that a 20% increase in human capital spending per capita can increase labour productivity by up to 3.1%. Sound educational policies can also promote equity and close the wide education gaps between developing Asia and high-income economies, while encouraging innovation and entrepreneurship.
Infrastructure investment, particularly in energy and information and communications technology, can contribute to innovation and human capital, and thus sustaining growth in middle-income countries. A one-time public investment in infrastructure equal to 1% of gross domestic product can lift a country’s output by as much as 1.2% in 7 years.
Asia’s dynamic track record suggests that the journey to high income, while challenging, can be completed. Supportive institutions and policies, underpinned by macroeconomic stability, can strengthen the pillars of productivity growth — innovation, human capital, and infrastructure.