Donghyun (Tom) Park is principal economist of the Asian Development Bank's economic research and regional cooperation department. At an Institute of Global Finance event at UNSW Business School, Park's topic was 'Transcending the Middle Income Challenge' – presenting the latest analysis from the ADB's flagship publication, Asian Development Outlook 2017. He spoke with Julian Lorkin for BusinessThink.
An edited transcript of the conversation follows.
BusinessThink: How can we sum up the macroeconomic issues facing the Asia-Pacific region?
Donghyun Park: I think the biggest challenge facing the economies of Asia and the Pacific right now is how to sustain growth, because Asian countries, like the rest of the world, are facing a more challenging external environment since the global financial crisis.
So how do Asian countries continue to grow rapidly despite this difficult global environment? We don't have such a problem in terms of inflation and macroeconomic stability more broadly; we are doing fine there. But how to continue to grow rapidly? That is our key challenge right now.
BusinessThink: And equally, growth seems to be a little bit uneven throughout the region. I'm looking at India and Indonesia, which are powering ahead; China, its growth – well, previously fantastic, now it has plateaued a bit.
Park: I would not worry about China's growth slowdown at all. It's completely a healthy, natural and welcome transition to a somewhat slower, but still very healthy and much more sustainable growth path.
In other words, I think it's in the best interests of China, Asia and the rest of the world that China grows at a sustainable 7%, 6% or even 5%, rather than grow unsustainably rapidly at 10%, let's say, for three years. We know where that story ends – in a bigger financial and economic crisis, which would be bad news for China but also bad news for Asia and the rest of the world.
'I don't think Asia has hit any kind of middle-income plateau, or middle-income trap as it is widely known'
– donghyun (tom) Park
BusinessThink: And how about the financial shocks from commodity prices? After all, we've seen some commodity prices have been rising quite nicely. But thankfully, for many of the world economies oil prices have seemed relatively low, certainly compared with a decade or so ago. That could cause problems in the future.
Park: Well, it won't cause problems for all Asian countries, first of all, because some Asian countries, such as Kazakhstan and Azerbaijan are oil exporters. But in any case, what we foresee is a gentle and moderate increase in prices in the foreseeable future. We don't see a sharp V-shaped recovery of oil prices. We see a more gentle, moderate increase. An evolutionary increase if you will.
And that's because of both supply and demand factors. Although demand is increasing as the world economy is recovering, which is of course a good thing, there is also abundant supply right now, especially in the non-OPEC countries – such as US shale, for example. It is a big cushion against sharp increases and sharp volatility in the global oil prices right now.
BusinessThink: Of course, oil prices are rising because we are seeing increasing demand, particularly from places such as Indonesia which has been investing a lot of money in its infrastructure. And yet, some countries seem to be sort of – again – sticking at that kind of plateau, that middle-income plateau. Is more infrastructure the answer? Or what do we need to see?
Park: Well, I don't think Asia has hit any kind of middle-income plateau, or middle-income trap as it is widely known, though I personally don't subscribe to that notion of a middle-income trap, nor do many other economists. But of course, we both know what we are talking about – that countries sometimes encounter a lot of difficulties in growing rapidly at middle income, as they did at low income. That's certainly true.
But I think in Asia you see a number of success stories that are the exception, that go against that kind of general trend. I'm talking about the newly industrialised economies (NIEs) – Korea and the three other NIEs. And they've reached high income; they've jumped from middle income to high income quite rapidly.
And if you look at Asia generally right now, there's plenty of cause for optimism that Asia too can follow in the footsteps of the NIEs. After all, we have very strong fundamental, sound macroeconomic policies, and we continue to invest a lot in human and physical capital. And then some of these ingredients will continue to be important in the middle-to-high transition as they were during the low-to-middle income transition.
But there will be some changes, in particular innovation. In other words, productivity growth based on innovation will come to the fore. Countries developing in Asia used to largely just borrow advanced technology from the US and other industrialised countries, but now as we converge, as we grow richer, as we become more developed [this will change].
And China, by the way, is already upper-middle income; not just middle income but upper-middle income according to World Bank classifications. And China's growth rate – yes, it has come down, but for an upper-middle income country it's very robust growth, and also it's doing a lot of innovation, a lot of R&D. Of course, you might quibble about quality of R&D, but it's still investing heavily in R&D, producing a lot of patents.
And China is technologically upgrading at a furious pace, so there is plenty of cause for optimism for Asia about Asia's capacity or prospects for making the final transition or final jump toward high income. Because at the end of the day, knowledge-based economy and knowledge are the core essence of a more innovative economy. These things will have to become more important.
'What I think Asia really needs more than anything else to make it to the next level, the high income level … is entrepreneurship'
– donghyun (tom) park
BusinessThink: They certainly will. And you can see different countries doing different things. You've touched on China there, and really a high-tech manufacturing country. Indonesia's got a reputation very much for its software, as does India as well – it's investing a lot of money there. But what policy settings would you like to see to really ensure that those countries within the core of Asia can escape that controversial middle-income trap, if we subscribe to the notion that there is one? What policies would you like?
Park: Let me focus on what I think Asia really needs, more than anything else, to make it to the next level, the high income level. And that's entrepreneurship. We have to free up entrepreneurship.
Vested interests, large firms with close ties to the government, these vested interests stand in the way of innovation. If you look at the US Silicon Valley, for example, start-ups, entrepreneurs, new firms, new entrepreneurs with fresh ideas, fresh products, fresh services, fresh technologies, these are the people that drive innovation. So Asia will really need to level the playing field so that these kinds of entrepreneurial innovations can flourish.
For example, India, as we all know, has an abundance of IT talent. Many of Silicon Valley's brightest stars are from India. So there's no reason why India – if it had a more level playing field that was conducive to entrepreneurship and unleashing of entrepreneurial energy – with all of its IT talent cannot one day produce its own Steve Jobs, or other frontier-shifting, innovative entrepreneurs.
So I think very much the constraints to the entry of new businesses, or if you want to look at it the other way, the close ties between big business and the government that still characterises a lot of Asian countries, that has to weaken, if not be broken down altogether so that new entrepreneurs, a new front with fresh ideas, can flourish. That, I think more than anything else, will help us, help Asia, get from middle income to high income.