Asia’s New Middle Income Challenge

Decades of sustained economic growth has left the Asia- Pacific region with very few lower income countries. In the future absolute poverty will keep falling too. This is a cause for celebration. But it also requires a new policy agenda to respond to the specific development challenges that arise as Asia becomes a firmly upper middle-income continent.

The scale of this change in Asia is immense. In 1990, more than 80 percent of those around the world living in extreme poverty — estimated at $1.25 per day, measured by purchasing power parity — lived either in East Asia and the Pacific, or South Asia. Today that number is far smaller, and getting smaller still. By 2030, just 0.1 percent of the population of East Asia is expected to live below the extreme poverty line. In South Asia the figure will be only 2 percent.

Put another way, half of the world’s population in 2025 will likely live in Asian middle-income countries. Today, almost all of the region’s nations already enjoy middle income status. Ever more of them are now moving beyond the threshold of around $4,000 per capita that signifies a shift from lower middle-income to upper middle-income status. By 2025, only Afghanistan and Nepal are expected to remain officially poor.

This improved status is obviously positive. Many millions have been lifted out of extreme poverty over the past decade alone, with just as many now able to benefit from improved social services, notably education and health facilities. But it also requires a rethink both of the kind of policy obstacles that emerging Asian countries must now overcome, and also the way in which they interact with development institutions.

For starters, middle income status does not mean development gets suddenly easier. Although the growth of many Asian countries post-global financial crisis has been robust, many regional middle-income economies continue to suffer from persistent pockets of poverty, while their people remain vulnerable to income shocks.

Viewed on broader measures of human development, Asia today still ranks lower than the average for regions like Latin America and the Caribbean. Taken together, Asia-Pacific nations also lie below the global average for the Human Development Index, a measure often used by the United Nations.

Some countries also continue to confront fragile situations associated with long-term and often subnational conflict. An ageing population is another challenge particularly in China and East Asia. This will translate into rising dependency ratios, increasing old age care costs and probably higher taxation.

Moving nations out of extreme poverty also tells us relatively little about the extent to which their people are vulnerable to falling backwards. This vulnerable share is rising around Asia, meaning those who hover precariously above the poverty line but do not advance quickly towards the middle class. In countries from India to Indonesia to the Philippines and Bangladesh, this category now covers hundreds of millions of citizens.

Finally, although growth has lifted millions above the breadline, the quality of that growth has also not always been propoor. In particular, recent decades have often exacerbated income inequality levels within many Asian countries including Bangladesh, Cambodia, India, Sri Lanka, Vietnam and Papua New Guinea.

All of these changes require different policies by governments, both to continue to push growth but also to make it more equitable. Yet Asia’s new middle-income era also poses searching questions for global development institutions too, as I argued in a recent co-authored report published by the Overseas Development institute.

Improved income status means important aspects of Asia’s development finance landscape are now quickly changing. As countries become wealthier the sources of finance and financial instruments available to them change too, as will the volume of aid they receive and the conditions attached to it. Borrowing from international capital markets will become more important, with rating agencies influencing the terms on which they can do so.

Middle-income status is often considered a signal for a successful development trajectory, hence the rationale for bilateral and multilateral development partners to play a progressively smaller role.

But development bodies in Asia should not move from an aid relationship simply to no relationship at all, however. Instead, they need to create a new and different kind of relationship, based at first on a mixture of aid and trade, and, eventually, trade and private investment alone — in the process finding new ways to help transform Asian nations whose development journeys are only at most mid-way complete.