VIEWPOINTS

Eight key conditions
for economic development
TAKEHIKO NAKAO

Once, Asia was a region defined by poverty. One of the most important issues for the Asian Development Bank (ADB) when it
was established in 1966 was agricultural assistance to safeguard people against hunger in a region with a large and increasing population. Nearly half a century later, Asia’s amazing growthand successful poverty reduction have exceeded the most optimistic forecasts. The ratio of extremely poor people (with a percapita income of $1.25 or less a day in 2005 purchasing powerparity terms) against the region’s total population was 55% in
1990, but dropped to 19% by 2010. Similarly, its share of global
GDP -- including Japan and Australia -- increased from about 15%
in 1970 to over 30% by 2013. The 2008 global financial crisis did
not derail the region’s robust growth momentum.
It is fair to say, however, that growth rates vary across the region. For instance, the Philippines, whose per capita income waswell over that of Thailand in 1965, now comes last among theoriginal five members of ASEAN. In contrast, South Korea, whoseper capita income was lower than Ghana’s half a century ago, has
attained high-income status. While India remains a lower-middle
income country, the People’s Republic of China, the region’s othergiant, attained upper-middle-income status through sustained
high growth based on reforms after opening its economy.
Since becoming ADB president in April 2013, I have visited
more than 20 developing member countries in Asia and the Pacific, and had candid discussions with leaders and senior officials about their policy challenges. I have been engaged in development issues throughout my career, including at Japan’s
Ministry of Finance and at the International Monetary Fund. My
recent encounters with leaders in Asia have increasingly convinced me that economic development depends not so much ona country’s “original characteristics” such as endowment of human capital, natural resources, or cultural and social traditions,but on the right policies. I believe there are eight key conditions
for development.
Infrastructure investment Sufficient infrastructure for energy,
roads and railways helps countries develop industry and attract
foreign direct investment (FDI). A good quality road network gives
people access to schools and clinics, and enhances job opportunities. Infrastructure is the core area of the ADB’s loans andtechnical assistance. In providing assistance, the ADB places
special emphasis on adhering to international standards for environmental and social safeguards, and on fair and transparent
procurement processes. These standards meet the evolving and52

expanding needs of society in our member countries.
In many of the region’s developing countries, the share of public investment in total GDP stood at 5% or less in 2010 -- farlower than China’s 22%. In those countries, development tends
to be slower. According to an ADB study last year, an increase ininfrastructure investment to GDP ratio by 1 percentage point
would increase the growth rate by 1.3 percentage points. In addition to ensuring sufficient tax revenues to build basic infrastructure, countries must aim at mobilizing private resources. In thiscontext, the ADB is promoting public-private partnerships (PPPs).
In Vietnam and the Philippines, the ADB has helped draft basic
laws on PPPs and set up special government agencies for PPPs.
Investment in education and health to develop humancapital In most countries, primary school enrollment has improved but the remaining challenges include low graduation rates
and the variable quality of secondary and tertiary schools. The
ADB is helping several countries, including Bangladesh, with vocational training reforms, engaging the business community to ensure that training matches its employment needs. The ADB is also
supporting the use of information technology in healthcare andthe transition to universal health coverage in member countries.
Macroeconomic stability In countries which suffer from inflation exceeding 10%, large fiscal deficits and high interest rates, it
is obvious that savings and investment for the future are hampered. It is encouraging that in Asia, after the currency crisis of
the late 1990s, governments now pay more attention to soundfiscal policy, stable monetary policy, and stronger regulation andsupervision of the financial sector.
Open trade and investment regimes, an active private sector In the past, even some countries such as India and Indonesia, though not formally classified as centrally controlled economies, adopted import substituting industrialization, price controls,and nationalization of key industries. The catalyst was an ideological pursuit of socialism combined with anti-colonial sentiment.
These policies seriously damaged their economic growth. Today,
there is no Asian leader who does not regard the market as thefoundation of economic development. In today’s more integrated
global economy, FDI and technology transfers from overseas play
an even greater role than in the past.
When I met Indian Prime Minister Narendra Modi and Indonesian President Joko Widodo after they took office, they expressed
deep commitment to promoting structural reforms by further
opening up their economies, streamlining regulations and cutting
NIKKEI ASIAN REVIEW | FEB. 9-15, 2015

VIEWPOINTS

carefully allocate public finances to priority
areas, while giving appropriate guidance tobusiness. Of course, this is not to say thatgovernments should embrace inward-looking
policies to protect domestic industries.

Reuters

Political stability, security and good relations with neighboring countries Sri Lanka’s economy has expanded by 7.5% annually since its civil conflict ended in May 2009.
Myanmar, thanks to efforts to pursue democratization and reconcile with ethnic minorities
together with economic reforms, has sucAn Afghan man walks on a makeshift footbridge on the outskirts of Jalalabad
cessfully re-engaged with the international
on Jan. 27. Sufficient infrastructure is needed for developing economies
community and attracted prodigious amounts
to grow their industry and attract foreign direct investment.
of foreign investment. In the Philippines, thegovernment recently reached a comprehenenergy subsidies. In many countries, the ADB provides bud- sive peace agreement with Islamic groups in Mindanao, a breakget-supporting program loans that are tied to the implementation through that raises new hopes for resurgent economic growth inof structural reforms. The ASEAN Economic Community, which that part of the country.
the ADB supports, is playing a key role in reducing tariffs, simpliI expect that successful implementation of policies in thesefying customs procedures and unifying standards in participating eight areas can elevate countries at least to upper-middle-income
countries.
status. I have been struck by the level of convergence in thethinking of Asia’s leaders about what needs to be done for ecoPublic governance Corruption is not only unjust. It smothers nomic development. At the same time, implementation is nevergrowth by diverting people’s energy to unproductive activities. easy, as reforms often widen political divisions, especially when
Good governance also means better transparency and account- they confront vested interests.
ability among governments and state-owned enterprises. CounMaking the transition further to high-income status involves
tries, including those in Central Asia, are increasingly aware that another set of tough challenges. In addition to the aforementhese issues need to be tackled. It is also important to note that, tioned actions, well-designed policies are needed to promote
as a 2013 ADB report indicates, the effectiveness of government technological innovation, elevate the skills of workers, upgradein delivering its services and the quality of regulations closely industrial structures, and foster sustainable growth.
correlate to the performance of its economy. In this regard, theAs professor Akira Suehiro of the University of Tokyo points
existence of a cohort of competent bureaucrats is essential.
out in his recent book, Asia’s growth model is being reshaped
into a complicated network model. Industrial catch-up takes lessSocial inclusiveness In a society with great disparities between time thanks to the IT revolution and rapidly changing production
rich and poor, economic growth goals may not be shared by its systems. The flying-geese paradigm of Asian growth, in which Jacitizens. Income inequality nullifies incentive to improve one’s pan flies fastest, may no longer capture the region’s growth story.
prospects by getting an education or vocational training, prevent- Still, Japan’s experience in building quality infrastructure, livable
ing quality enhancement of the labor force. To avert this scenario, cities with public transport systems, a social security system fordecisive steps are needed to strengthen public education, redis- its aging society and its financing, environmental protection, andtribute income by tax reforms, reduce rural-urban inequality, and disaster risk management, offer useful lessons for the ADB’s
provide farmers and small and midsize enterprises with access developing members. These lessons may include areas in whichto finance. I may add that a sound middle class increases do- late-comers should do better.
mestic consumption and fosters political stability.
The ADB will continue to serve the region, taking into accountthe above-mentioned eight key conditions for economic developVision for the future In this area, South Korea and Singapore ment, as well as lessons from Japan and other countries, as thehave shown how governments can make crucial contributions to region’s growth story unfolds.
national development. While the private sector is a key economic
growth engine, governments have a responsibility to examine
their national comparative advantages, design a development
Takehiko Nakao is president
strategy, and share this strategy with their citizens. They shouldof the Asian Development Bank.
NIKKEI ASIAN REVIEW | FEB. 9-15, 201553