Rise of Asia plausible, not preordained, warns Asian Development Bank

Back in May, finance minister Pranab Mukherjee had, without a hint of hesitation, expressed his disdain for the term ‘middle-income trap’, a description of middle-income countries having to deal with stagnation or decline in their economies after bursts of growth.

“I am not enamoured by that particular phrase,” Mukherjee told an audience at the annual meeting of the Asian Development Bank (ADB), before explaining how India would look at dealing with this challenge through “sustainable inclusive growth”.

With the Reserve Bank of India raising key policy rates for the 11th time since March 2010, the fears of an economic slowdown in the subcontinent have not dissipated, even as high inflation remains stubborn.

But sustaining growth is not the only challenge that emerging Asian economies will face in the coming four decades, as the region grows to comprise about half of the global gross domestic product (GDP), ‘Asia 2050: Realizing the Asian Century’, a study by the ADB released on Wednesday, has suggested.

Rising inequality, including growing income disparity, the spectre of the ‘middle-income trap’, competition for resources, climate change and poor governance, coupled with weak institutional capacity, have been underlined as “mega-challenges and risks”.

“By nearly doubling its share of global gross domestic product (GDP) to 52 per cent by 2050, Asia would regain the dominant economic position it held some 300 years ago, before the industrial revolution. But Asia’s rise is by no means preordained,” the report stated.

A group of seven economies — India, China, Indonesia, Japan, Korea, Malaysia and Thailand —will power the rise of the region, and could account for 45 per cent of global GDP and 48 per cent of the world’s middle and upper classes by 2050.

The projections also expect Asia to house some the largest global equity, debt and banking markets, with the region increasingly shaping the global financial architecture, the monetary system and global financial intermediation.

But Asian “leaders must remain mindful of the lessons of the 1997-1998 Asian financial crisis and the Great Recession of 2007-2009. Asia will need to formulate its own approach to finance, avoiding both over-reliance on market self-regulation and excessive central government control of bank-dominated systems,” it said.

“A combination of bad macro policies, finance sector exuberance with lax supervision, conflict, climate change, natural disasters, changing demographics, and weak governance could jeopardise Asian growth,” the report warned.

Notably, governance and institutional capacity has been described as “the Achilles Heel” of most Asian economies. “Large improvements in the quality and credibility of national political and economic institutions (illustrated by falling corruption) are pre-requisites for sustaining Asia’s growth trajectory. High-quality institutions will help the fast-growing converging economies avoid the Middle Income Trap,” the study said.

In May, when pressed on India’s ubiquitous corruption, especially involving graft allegations within the government, Mukherjee had spoken of the Lokpal Bill as evidence of the Centre’s intention to deal with the problem. “Various aspects of the governments’ functioning should be transparent, accountable and it must be corruption-free. Through the Lokpal, we are trying to introduce that system,” he had said.

Months later, not only has the spectre of corruption not lifted, parliamentary disruptions over alleged graft have continued. The rise of Asia, the ADB-commissioned report concludes, is plausible but not pre-ordained. It is much the same for India.