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TitleAsia's Economic Transformation: Where to, How, and How Fast?
Author
LanguageEnglish
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Table of Contents
                            Foreword
Contents
Abbreviations and Acronyms
Highlights
Structural transformation: What is it and why does it matter?
	Five components of structural transformation
	The variable pace of structural transformation
	Structural transformation: A key to Asia’s future
The transformation of Asia’s economies
	Changes in sectors’ shares
	Agriculture: Declining output share but still the largest employer in many Asian economies
	Industrialization: Different patterns of manufacturing across economies
	Services: Asia’s service sector follows a two-wave pattern, and the share of complementary services is increasing
	Most labor productivity growth has been within sectors; less has come from reallocating labor across sectors
	Diversifying and upgrading the complexity of exports have been uneven across Asian economies
	Conclusions
Asia’s future transformation
	Asia’s agriculture sector needs upgrading and modernizing
	The importance of industrialization
	What role will technology play in the coming decades?
	Linking to global value chains
	Services and manufacturing complement each other
	The service sector is the major absorber of employment in Asia
	Conclusions
How does education contribute to export diversification?
	Years of schooling and diversification are positively related and the qualityof education matters more than the quantity
	The quality of education helps reduce path dependence, and “teleportation” into the most complex products is practically impossible
	Discussion and implications
Priorities for structural transformation
	Key patterns of structural transformation in Asia
	The future of Asia’s transformation
	Priorities for Asia’s transformation in the coming decades
Endnotes
Appendix
References
                        
Document Text Contents
Page 1

Asia’s Economic Transformation:
Where to, How, and How Fast?

Key Indicators for Asia and the Pacific 2013
Special Chapter

Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org

Printed on recycled paper Printed in the Philippines

Asia’s Economic Transformation: Where to, How, and How Fast?
Key Indicators for Asia and the Pacific 2013 Special Chapter

During the last 4 decades, Asia has grown faster than any other developing region, and a
few of its economies have undergone a rapid and remarkable transformation. However, the
pace at which some of the region’s economies have transformed has been slow. In many
of them, agriculture is still the largest employer, industrialization has hardly taken place,
and workers are moving from agriculture into low-productivity services. The Key Indicators
for Asia and the Pacific’s 2013 special chapter—Asia’s Economic Transformation: Where to,
How, and How Fast?—reviews the direction and pace of Asia’s recent transformation. It also
sketches the main contours of economic transformation that can be expected in coming
decades. The chapter argues that, for developing Asia to move ahead, (i) agriculture needs
to be modernized by deploying infrastructure, introducing technological improvements,
developing the agribusiness sector, and increasing linkages to global value chains; (ii) the
industrialization step cannot, in general, be bypassed on the path to becoming a
high-income economy; (iii) the service sector is already the largest source of employment
and this trend will continue; (iv) basic education of high quality matters for industrial
upgrading and, in general, for the development of new industries that can compete
internationally; and (v) although it is important for countries to exploit their comparative
advantages, some form of government intervention may be necessary and unavoidable to
expedite economic transformation.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing
member countries reduce poverty and improve the quality of life of their people. Despite
the region’s many successes, it remains home to two-thirds of the world’s poor: 1.7 billion
people who live on less than $2 a day, with 828 million struggling on less than $1.25 a day.
ADB is committed to reducing poverty through inclusive economic growth, environmentally
sustainable growth, and regional integration.
Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main
instruments for helping its developing member countries are policy dialogue, loans, equity
investments, guarantees, grants, and technical assistance.

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KI-2013-Special-Chapter-Cover.indd 1 03-10-2013 11:14:18 AM

Page 53

39Asia’s Economic Transformation: Where to, How, and How Fast?
Sp

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39

the transition to the high-income level, and to avoiding
the middle-income trap. That is, countries need more
than opening to reach the high-income status. The
same logic could apply to FDI inflows. They might be
important for low-income countries. But FDI alone does
not necessarily bring effective technology transfer.

The road to high income. We conclude that
economies that aim to become high income generally
need to industrialize—in particular, they need to
create manufacturing jobs. And industrialization alone
is not sufficient to become a high-income economy.
Infrastructure, financial development, education, and
sizable high-tech manufacturing contribute to becoming
a high-income economy.

Some economies may have great difficulty
industrializing. Indeed, for the Pacific islands to develop
a wide range of competitive manufacturing activities
will be very hard because of their remoteness and
small populations. Although Papua New Guinea,
Solomon Islands, and Vanuatu have developed small
manufacturing subsectors, they are far from what is
required to induce high and sustainable growth. Fiji had
a garment industry, but it has been in decline since the
end of the Multi Fibre Arrangement. Fiji also developed
a small sugar industry and recently has started bottling
mineral water. Samoa has a small automotive harnessing
industry. Overall, the future of the Pacific island region
depends largely on the performance of the rest of Asia
(Box 3.2).

What role will technology play in the
coming decades?

We now discuss the roles of technology and GVCs
in agriculture and manufacturing. Given the low
productivity of developing Asia’s agriculture, technology
will have to play an important role in the coming
decades. Likewise, given the relevance of manufacturing
for becoming a high-income economy, the obvious
question is: Will Asia’s developing countries be able to
industrialize? The results in Table 3.2 are based on an
analysis of the past, and extrapolating into the future
is always risky. It could be argued that developing
Asian economies may become high income in the 21st
century without achieving 18% of its employment

in manufacturing. The economic environment today
is different from that of the second half of the 20th
century, so that “latecomer” countries may not need
to follow the same path that today’s high-income
economies followed. And perhaps services could be a
springboard, like manufacturing in the 1970s and 1980s.

New technologies will help modernize Asia’s
agriculture

Improvements in infrastructure, water management,
irrigation, and crop varieties introduced during the
Green Revolution were instrumental for increasing
yield growth. Economies for which agriculture still
represents a large share of total output or employment
(e.g., Cambodia, the PRC, India, Myanmar, Nepal, and

Table 3.2 Determinants of high-income status
(economy with per capita income more than $15,000 in 2010)

Industrialization (in output) and: Percentile10th 50th 90th

Roads per capita
(km/’000 persons)

actual value 1.267 4.359 17.045

probability 16.00% 20.20% 44.50%

Financial development
(liquid liabilities as %
of GDP)

actual value 17.37 36.625 75.74

probability 14.40% 22.30% 43.50%

Schooling (average
number of years)

actual value 2.631 6.186 9.853

probability 6.00% 21.00% 48.50%

Share of
manufacturing value
added in high-tech
sectors
(% of manufacturing
value added)

actual value 10.507 36.128 52.389

probability 1.60% 33.80% 75.30%

Share of
manufacturing
employment in
high-tech sectors
(% of manufacturing
employment)

actual value 13.226 34.402 49.395

probability 0.80% 27.5% 75.40%

GDP = gross domestic product, km = kilometer.
Note: The probit regressions include (i) the “industrialization” dummy,

which takes on the value 1 if the output manufacturing share
reached, during some 7-year period in the last 40 years, at least
18% on average; and 0 otherwise; and (ii) “The additional (control)
variable in each regression was measured in the midyear. We added
to the regression one variable at a time. The exceptions are roads
and resource intensity, only measured as far back as 1990 and
1995, respectively. These two variables are, therefore, measured at
the latest of these years, or at the year peak industrialization was
reached. We report the predicted probability that a country is rich in
2010, given that it industrialized during the last 40 years, and that
the additional variable in question is observed at the 10th, 50th, and
90th percentile.


In all regressions, the two variables included are statistically

significant. Sample size varies across regressions, from 59 data
points to 117.

Source: Authors.

Page 54

40 Key Indicators for Asia and the Pacific 201340

The Pacific islands are unique in developing Asia, as they face
disadvantages due to their small size, low population, and
remoteness (Duncan 2013). As a result, scale economies are
almost nonexistent for both economic activities and provision of
basic public services, making them more expensive to undertake.

Overall, growth during the last several decades has been slow in
the Pacific islands, leading to unemployment and joblessness. In
addition, several of the economies face serious environmental
problems as a consequence of climate change and rapid
urbanization. The Pacific subregion also suffers from high
population growth, poor quality education, weak governance,
poverty, and poor infrastructure.

Box Figure 1 provides a snapshot of the economic structure of
Pacific economies in terms of output. The high share of services
mostly reflects the role that the public sector plays in the
economies. Many of the employed people are, however, highly
underemployed; and many of the islands in the region are heavily
dependent on transfer payments related to aid, military bases,
and workers’ remittances. This is particularly true for Kiribati, the
Marshall Islands, the Federated States of Micronesia, Nauru,
Palau, and Tuvalu.

How can the Pacific economies generate structural change and
thus growth in these circumstances? Progress in three areas
is fundamental. First, most of them need more private sector
investment. This requires tackling a number of problems, such
as political instability, lack of law and order, and corruption. The
subregion also needs to develop its financial systems, reform its
legal and regulatory approaches, and revamp its state enterprises.
Second, land reform, however sensitive an issue, is necessary in
many countries. Given the importance of customary ownership,
a gradualist approach must be taken. Improving both record
keeping for land rights and land administration services will prove
crucial. Third, strengthening political governance is required (the
2006 coup in Fiji, and civil unrest in the Solomon Islands and
Timor-Leste, spring to mind), and cannot be postponed.
Strengthening political governance will involve strengthening
parliaments and electoral systems as well as developing
partnerships with civil society.

Although up to a level the fate of the region is linked to developments
in the rest of Asia, how can economic transformation help deliver
higher growth? As we argue in this chapter, policymakers have to try
to identify the new activities that a country can develop—activities
that exploit the existing capabilities (markets, inputs, institutions).
This is especially important for relatively backward economies,
because creating new activities that require factors and capabilities
that an economy does not have is very difficult. For this reason,
developing a wide range of competitive traditional manufacturing
activities is next to impossible in most of these island countries.
Papua New Guinea has a very high resource intensity (over 70%
of its exports are natural resources) and its export diversification is
very low, at only 34 products. The economies of Papua New Guinea,

Solomon Islands, and Vanuatu have developed some small
manufacturing sectors. Still, these activities are far from what is
required to induce high and sustainable growth. Fiji had a garment
industry, but this has been in decline since the end of the Multi
Fibre Arrangement. It also developed a small sugar industry and

Box 3.2 Options for the Pacific Islands

continued on next page

Sources: Duncan (2013); ADB (2012c).

Box Figure 1 Sectoral output of selected
Pacific island countries, 1995–1997 to 2007–2009

0 20 40 60 80 100

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

1995–1997

2007–2009

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Agriculture Industry Services

Page 106

Asia’s Economic Transformation:
Where to, How, and How Fast?

Key Indicators for Asia and the Pacific 2013
Special Chapter

Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
www.adb.org

Printed on recycled paper Printed in the Philippines

Asia’s Economic Transformation: Where to, How, and How Fast?
Key Indicators for Asia and the Pacific 2013 Special Chapter

During the last 4 decades, Asia has grown faster than any other developing region, and a
few of its economies have undergone a rapid and remarkable transformation. However, the
pace at which some of the region’s economies have transformed has been slow. In many
of them, agriculture is still the largest employer, industrialization has hardly taken place,
and workers are moving from agriculture into low-productivity services. The Key Indicators
for Asia and the Pacific’s 2013 special chapter—Asia’s Economic Transformation: Where to,
How, and How Fast?—reviews the direction and pace of Asia’s recent transformation. It also
sketches the main contours of economic transformation that can be expected in coming
decades. The chapter argues that, for developing Asia to move ahead, (i) agriculture needs
to be modernized by deploying infrastructure, introducing technological improvements,
developing the agribusiness sector, and increasing linkages to global value chains; (ii) the
industrialization step cannot, in general, be bypassed on the path to becoming a
high-income economy; (iii) the service sector is already the largest source of employment
and this trend will continue; (iv) basic education of high quality matters for industrial
upgrading and, in general, for the development of new industries that can compete
internationally; and (v) although it is important for countries to exploit their comparative
advantages, some form of government intervention may be necessary and unavoidable to
expedite economic transformation.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing
member countries reduce poverty and improve the quality of life of their people. Despite
the region’s many successes, it remains home to two-thirds of the world’s poor: 1.7 billion
people who live on less than $2 a day, with 828 million struggling on less than $1.25 a day.
ADB is committed to reducing poverty through inclusive economic growth, environmentally
sustainable growth, and regional integration.
Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main
instruments for helping its developing member countries are policy dialogue, loans, equity
investments, guarantees, grants, and technical assistance.

A
sia

’s E
co

n
o

m
ic Tra

n
sfo

rm
a

tio
n

: W
h

e
re

to
, H

o
w

, a
n

d
H

o
w

Fa
st? | K

ey Indicators for A
sia and the P

acific 2
01

3
S

pecial C
hapter

KI-2013-Special-Chapter-Cover.indd 1 03-10-2013 11:14:18 AM

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