The growth of potentially destabilising income gaps in Asia “cannot go on”, ADB president Haruhiko Kuroda said on the eve of the launch of a report that warns of a slide into a “middle income trap.”
The ADB report, Asia 2050, says that by mid-century Asia could account for half of world output, double its current contribution, with annual per capita income reaching $39,000 (in purchasing power parity terms) as billions are lifted out of poverty
But this is not a foregone conclusion and growth of per-capita regional income could stall at between $7,000 and $10,000, consigning Asia to a Latin-American style middle income trap, ADB managing director Rajat Nag said last week.
With economic growth back on track in most of Asia, the focus of the annual meeting will be on these longer term issues, Kuroda told Emerging Markets in an interview in Hanoi – although he acknowledged that the short-term problem of rising inflation would also be high on the agenda.
“Asian nations have to overcome the widening income gap between rich and poor”, he said. “Almost all developing countries [in the region] have seen a widening income gap. This cannot be continued, otherwise growth will be undermined and the middle income trap may materialise,” he said.
“In order to achieve high-income status, developing countries in Asia must make their economies much more resource-efficient.” They need to strive for “more environment-friendly and sustainable growth and to strengthen cooperation.”
His comments came as a growing chorus of experts sound the alarm about Asia’s longer-term growth prospects. Writing in today’s Emerging Markets, UC Berkeley economist Barry Eichengreen warns that Asia faces “a very different economic landscape” when its current growth cycle comes to an end. The trigger for this will be a slowdown in China, he says. “The direction of the change – slower growth, and sooner rather than later – is incontrovertible. The implications for Asia and the world will be profound,” says Eichengreen.
Nag told Reuters last week that Asian governments needed to make “policy decisions now to reduce inequity, increase the basic education, address issues of governance and corruption, have strong regional integration if you are going to avoid the middle income trap.”
Meanwhile, Kuroda said, inflation is “probably the most important immediate challenge”. Inflation has been fuelled by overheating but, most importantly, it has been affected by the global price hike in food and energy, he said.
“At the annual meeting last year, although there were various signs of recovery from recession and from the global financial crisis,” Asian governments “were not so sure that their recoveries were firmly based.
“Now they are quite sure that recovery is well based, because last year almost all of the emerging economies and developing countries in Asia and the Pacific recorded extremly high growth.We expect that these high rates of growth will be maintained although somewhat [slowed] because of various factors including exiting from extraordinary stimulus measures.
“Given this higher confidence in their continued economic growth, [ADB gov ernors]will be more interested in medium and long term issues such as how to achieve more inclusive growth,equitable growth and how to protect the environment and address climate change.”
Kuroda noted that “supply chain disruptions” caused by Japan’s natural disasters would have impacts on the rest of Asia and beyond.
Interruptions to production in Japan have affected “not just Asia but even as far away as America,” he said. “I think that within three to four months many of the Japanese factories affected by the earthquake will be reconstructed.”
But the problem of electricity shortages in Japan as a result of the nuclear poer station crisis at Kukushima on the country’s northeast coast “are quite serious,” he added. The challenge of dealing with this problem “can be overcome – although not easily”.