Asia facing ‘triple policy challenge’ to long-term growth, new Asia House report finds

DigitalCFO Newsroom | 27 January 2022

Asia is facing a triple policy challenge that could see even the region’s fastest-growing economies fall into the ‘middle-income trap’, according to new research by Asia House.

The report highlights Asia’s position at a crossroads, with countries’ trajectories towards becoming advanced economies at risk of being derailed by economic scarring from the COVID-19 crisis, the disruptive impact of climate change, and a slow pace of digitalisation.

Without urgent and robust policy action to address these challenges, Asia’s economies face being caught in a middle-income trap that hampers development and puts the region’s long-term growth at risk, the report finds. 

‘A shift is needed towards policies that specifically address both the immediate economic scarring of the pandemic and secure longer-term resilience and prosperity,’ the report recommends.

‘For the 21st century to become the Asian Century, with Asia’s economies set to take a share of over half of global GDP by 2050, only a determined effort by the authorities to fill an evident policy gap will enable growth to continue at the required levels. Adopting a trio of priorities now will enable a robust economic tomorrow: green finance, digitalisation and enhanced regional cooperation.’

The London-based think tank assessed eight key economies in Asia across metrics conducive to meeting these challenges. In two new indices published today, Asia House analyses the performance of China, India, Indonesia, Japan, Malaysia, the Philippines, Thailand, and Vietnam in the critical areas of green finance and digitalisation readiness – areas that will unlock future productivity and enable sustainable growth.

China leads the Asia House Economic Readiness Indices, but will see economic growth slow in 2022 due to the ongoing disruption of COVID-19. While India is expected to be the world’s fastest-growing economy this year, its ranks lowest for digital readiness out of the eight economies assessed. Closing its digital divide will be essential for its long-term growth.

Japan ranks second across both indices, and is likely to experience a moderate acceleration in growth in 2022, but authorities must speed up digitalisation efforts, the report finds. Within Southeast Asia, Malaysia and Indonesia lead in green finance readiness and digital transformation respectively.

View the Asia House Economic Readiness Indices in the Executive Summary here. The indices form part of the inaugural Asia House Annual Outlook, published by the think tank to track key economic trends across Asia and provide a forecast for the region’s growth.

Comment

Phyllis Papadavid, Head of Research and Advisory, Asia House:

“Our research underlines the critical importance of green finance, broader digitalisation, and greater regional coordination for Asian economies if they are to avoid being caught in a middle-income trap that holds them back from greater development.

“If Asian economies can respond effectively to this triple policy challenge, then sustainable, equitable and productivity-driven growth will likely follow, along with brighter prospects for the ‘Asian Century’.

“For this to happen, we need to see unprecedented investment for energy transitions, including fast-tracking green finance, and more diversified digitalisation in Asia. More comprehensive policy cooperation by regional economies will be critical to achieve these shared objectives.”

Michael Lawrence, Chief Executive of Asia House:

“The Asia House Economic Readiness Indices shed new light on the progress of Asia’s economies at a critical time in their development. Alongside the Asia House Annual Outlook report, we hope they will serve as valuable insights into the region’s transition, and will aid policymakers in identifying areas where action is needed.

“Asia is estimated to account for half of global GDP by 2050, but as our research shows, this is not guaranteed. Asia House will be publishing the indices annually to track this trend and add to global understanding of this key region for the world economy.”

Policy recommendations

Drawing on the indices, the Asia House Annual Outlook report includes several recommendations for policymakers across Asia.

  • Economic policymakers should elevate the use of institutionally mobilised finance, including blended finance, to de-risk and catalyse investment flows.
  • Private and public sector coordination to promote and incentivise green finance should be prioritised to combat the climate crisis.
  • Asia’s central banks should include sustainability objectives into their monetary policy mandates and explicitly incorporate climate risks into their assessments.
  • The promotion of Industry 4.0 – the integration of automation, artificial intelligence, cloud computing etc in manufacturing – coupled with digital re-skilling and knowledge diffusion is needed to secure the Asian Century and avoid the middle-income trap.
  • Currency reserves should be pooled and their management coordinated, while the foundation for a common digital currency in Asia will ensure the region is well prepared to sustain growth.

Access the full Asia House Annual Outlook report here