ASIA
08 August 2014
Asia's economic transformation
Asia's rapidly developing economies are in the midst of a "structural transformation", which is very challenging and will take a very long time.
Asia's rapidly developing economies are in the midst of a challenging "structural transformation" from low-productivity, agricultural-based economies towards high-productivity, service- and knowledge-based economies -- according to analysis of the Asian Development Bank.
The "developed" economies of the Western world went through this same economic transformation over the past four centuries, led by the United Kingdom.
Employment in the UK agricultural sector declined from 60% of total in 1700 to 40% in 1820, as industrial and service sector employment rose in tandem, with the arrival of the "industrial revolution". Agricultural employment then fell to 16% in 1890, and further to 2.5% over the next century. A similar trend followed in other Western countries.
Improving productivity in the agricultural sector freed resources for the birth of new manufacturing and services industries. As development proceeded, countries that had industrialized then saw their industrial sectors decline again in importance (de-industrialization), and knowledge-based service industries became the leading edge of their economies. This is because middle class societies consume growing shares of services.
Only five Asian economies -- Japan, Hong Kong, Korea, Singapore and Taiwan -- have undergone a similar structural transformation, and this has mainly taken place in the second half of the 20th century. These economies and their exports are diversified and sophisticated, and they participate deeply in global value chains.
In other Asian economies, structural transformation is proceeding more slowly, with weaker industrialization and participation in global value chains. As recently as the mid-1970s, over 60% of Asian workers were still employed in agriculture. And while Asia's spectacular development has driven a deep structural transformation, over 43% of Asian workers are still employed in low-productivity agriculture today -- more than in industry, at 23%, or services, at 33%. China and India are widely perceived as emerging great economic powers, but agriculture remains the largest employer in these countries, as well as in other countries like Bangladesh, Pakistan, Thailand and Vietnam.
Despite the progress over this time, not all structural transformation has been positive. Most workers who have left the agricultural sector, have moved into the service sector, and all too into often low-productivity service activities like neighborhood retailing and barbershops, rather than high productivity service activities like transport, finance and business services.
Even though agriculture accounts for over 40% of Asian employment, it only contributes 11% to Asia's GDP. In other words, labor productivity in the agricultural sector is very much lower than in the manufacturing and service sectors. Overall, the service sector is the biggest contributor to Asian GDP, followed by manufacturing and then agriculture.
The fundamental challenge of economic development -- reducing poverty and generating prosperity -- can only be realized through pursuing and completing the structural transformation from low-productivity, agricultural-based economies to high-productivity, service- and knowledge-based economies.
How can this structural transformation be achieved? What are the main challenges?
Structural transformation involves the progressive upgrading of economies' capabilities to produce higher quality and more complex products. Investments in education and training, and infrastructure are critical, as are policies to facilitate the development of financial sectors, and entrepreneurship. This facilitates the manufacture of new products, the entry of new markets, and climbing the development ladder. But for structural transformation to really happen, policy must also promote mobility and flexibility -- so that workers and investment can make the shift to higher productivity activities.
Openness to international markets can enable countries to attract foreign investment, export and participate in global value chains. This gives access to the world market and advanced technologies. It can also facilitate industrial upgrading as local workers and firms learn from working with global business, and meeting production quality standards of international markets.
But only a few Asian economies -- like Japan, Korea, Taiwan, Singapore, Hong Kong, China, Malaysia and Thailand -- participate deeply in global value chains. And their value added in exports varies greatly, with assembly operations notably in China representing a low share of value added.
Experience shows that, despite the benefits of foreign investment, it is also critical to foster the development of local enterprises to be successful in industrial upgrading. Otherwise, there is a risk that countries might get stuck at lower levels on global value chains, and fall into a middle income trap.
History also shows that structural transformation must involve industrialization. Countries like India and the Philippines may have enjoyed success in developing export-oriented services sectors, exploiting the potential of information and communications technologies. But this positive development mainly absorbs mid-to-higher skilled workers and is not sufficient to absorb the very large numbers of people vacating the agricultural sector. Only industrialization can do this.
While the rise of "Factory Asia" has been a powerful motor for development, greater efforts must be made to improve productivity in the agricultural sector, especially in low income countries. Agriculture needs to "industrialize" itself by developing agribusiness, adopting modern methods, and participating in global value chains.
These lessons from the development of Asia's advanced economies are clear. But with Western market growth likely to be weaker in the years ahead, economic transformation will be more challenging than in the past. In this regard, Asian economies themselves like Japan could help greatly by opening markets, especially in the agricultural and service sectors, where they are far too restricted.
Executive Director
Asian Century Institute
The "developed" economies of the Western world went through this same economic transformation over the past four centuries, led by the United Kingdom.
Employment in the UK agricultural sector declined from 60% of total in 1700 to 40% in 1820, as industrial and service sector employment rose in tandem, with the arrival of the "industrial revolution". Agricultural employment then fell to 16% in 1890, and further to 2.5% over the next century. A similar trend followed in other Western countries.
Improving productivity in the agricultural sector freed resources for the birth of new manufacturing and services industries. As development proceeded, countries that had industrialized then saw their industrial sectors decline again in importance (de-industrialization), and knowledge-based service industries became the leading edge of their economies. This is because middle class societies consume growing shares of services.
Only five Asian economies -- Japan, Hong Kong, Korea, Singapore and Taiwan -- have undergone a similar structural transformation, and this has mainly taken place in the second half of the 20th century. These economies and their exports are diversified and sophisticated, and they participate deeply in global value chains.
In other Asian economies, structural transformation is proceeding more slowly, with weaker industrialization and participation in global value chains. As recently as the mid-1970s, over 60% of Asian workers were still employed in agriculture. And while Asia's spectacular development has driven a deep structural transformation, over 43% of Asian workers are still employed in low-productivity agriculture today -- more than in industry, at 23%, or services, at 33%. China and India are widely perceived as emerging great economic powers, but agriculture remains the largest employer in these countries, as well as in other countries like Bangladesh, Pakistan, Thailand and Vietnam.
Despite the progress over this time, not all structural transformation has been positive. Most workers who have left the agricultural sector, have moved into the service sector, and all too into often low-productivity service activities like neighborhood retailing and barbershops, rather than high productivity service activities like transport, finance and business services.
Even though agriculture accounts for over 40% of Asian employment, it only contributes 11% to Asia's GDP. In other words, labor productivity in the agricultural sector is very much lower than in the manufacturing and service sectors. Overall, the service sector is the biggest contributor to Asian GDP, followed by manufacturing and then agriculture.
The fundamental challenge of economic development -- reducing poverty and generating prosperity -- can only be realized through pursuing and completing the structural transformation from low-productivity, agricultural-based economies to high-productivity, service- and knowledge-based economies.
How can this structural transformation be achieved? What are the main challenges?
Structural transformation involves the progressive upgrading of economies' capabilities to produce higher quality and more complex products. Investments in education and training, and infrastructure are critical, as are policies to facilitate the development of financial sectors, and entrepreneurship. This facilitates the manufacture of new products, the entry of new markets, and climbing the development ladder. But for structural transformation to really happen, policy must also promote mobility and flexibility -- so that workers and investment can make the shift to higher productivity activities.
Openness to international markets can enable countries to attract foreign investment, export and participate in global value chains. This gives access to the world market and advanced technologies. It can also facilitate industrial upgrading as local workers and firms learn from working with global business, and meeting production quality standards of international markets.
But only a few Asian economies -- like Japan, Korea, Taiwan, Singapore, Hong Kong, China, Malaysia and Thailand -- participate deeply in global value chains. And their value added in exports varies greatly, with assembly operations notably in China representing a low share of value added.
Experience shows that, despite the benefits of foreign investment, it is also critical to foster the development of local enterprises to be successful in industrial upgrading. Otherwise, there is a risk that countries might get stuck at lower levels on global value chains, and fall into a middle income trap.
History also shows that structural transformation must involve industrialization. Countries like India and the Philippines may have enjoyed success in developing export-oriented services sectors, exploiting the potential of information and communications technologies. But this positive development mainly absorbs mid-to-higher skilled workers and is not sufficient to absorb the very large numbers of people vacating the agricultural sector. Only industrialization can do this.
While the rise of "Factory Asia" has been a powerful motor for development, greater efforts must be made to improve productivity in the agricultural sector, especially in low income countries. Agriculture needs to "industrialize" itself by developing agribusiness, adopting modern methods, and participating in global value chains.
These lessons from the development of Asia's advanced economies are clear. But with Western market growth likely to be weaker in the years ahead, economic transformation will be more challenging than in the past. In this regard, Asian economies themselves like Japan could help greatly by opening markets, especially in the agricultural and service sectors, where they are far too restricted.
Author
John WestExecutive Director
Asian Century Institute