May 10th, 2011
Econintersect by Sanjeev Kulkarni: The ADB (Asian Development Bank) has a lengthy report entitled "Asia 2050, Realizing the Asian Century." The report projects that seven countries in Asia (China, India, Japan, South Korea, Indonesia, Malaysia and Thailand) will account for account for 45 percent of global GDP, with average per capita income of $ 45,800 (Purchasing Power Parity). This figure is 25 percent higher than the projected global average of $36,400.
However, there are many potential pitfalls along the way to achieving the projections. Some of these are periods of economic instablilty; social disparities and inequities; and something called the "Middle Income Trap. Follow up:
Follow up:"The "Middle Income Trap" refers to the failure of growing economies to grow consistently, rather than in fits and spurts, in such a way that a prosperous middle class develops. Financial inclusion is one of the major challenges identified in this report.
The following graphic from the report illustrates the "Middle Income Trap:"
Of course, being caught in the "Middle Income Trap" increases the other risks mentioned in the report involving social, economic and political unrest.
The report is also highly critical of what has been prevailing economic thinking in recent decades. From pages 55 and 56:
The conventional wisdom of current economic and finance theory is based on assumptions of rational expectations and efficient markets. The belief in unfettered finance and free markets allowed global finance to expand exponentially since the 1990s. However, financial regulation and risk management of derivatives were seriously flawed, causing an unsustainable conundrum whereby finance was allowed to grow without limits, with its systemic risks underwritten by the public sector. The unintended consequence was unprecedented state intervention to stem the global financial crisis.
The “free market knows best” dictum caused complacency in financial oversight and surveillance. The Independent Evaluation Office (IEO) of the IMF has, for example, concluded that the IMF and the advanced countries paid little attention to the risks of contagion and spillovers, due to “a high degree of groupthink, intellectual capture, a general mindset that a major financial crisis in large advanced economies was unlikely, and inadequate analytical approaches."
Reuters summarized the situation as follows:
Yet the tone of some officials' recent comments has been strikingly cautious, reflecting an awareness that Asia has failed to seize the chance during the past decade of strength to address long-standing vulnerabilities.
Asia is still hopelessly dependent on final demand from rich countries. Investment, the seed corn of future growth, remains far below levels scaled before the 1997/98 financial crisis -- except for China and India.
Cross-border financial and monetary linkages are puny. Infrastructure, the sinews of every economy, is patchy. Asia generates less electricity than Latin America and has proportionately fewer phone connections.
So far, so familiar.
But policy makers are drawing increasing attention to another shortcoming of Asia's export-oriented growth model: inequality.
Disquiet over a widening gap between the haves and the have-nots was a factor in Singapore's election on Saturday, which resulted in unprecedented gains for the opposition.
And the urban-rural fault line running through Thai politics is in good part a rich-poor divide.
"There has been a significant increase in attention to inequality globally, and particularly in Asia," said Xiaoqing Yu, the World Bank's lead economist for social protection in East Asia and the Pacific.
"Countries realize that inequality is contributing to social tensions and lost opportunities," Yu said. "Global events in recent months point to that," she added, alluding to turmoil in the Middle East.