East Asia needs to push ahead with reform programs

06 Apr '07

3 min read

By 2010, more than nine in 10 East Asians will be living in a middle income economy. To move out of the middle-income trap, a key challenge is maintaining high growth in a sustainable way. In China, this means new strategies to tackle severe environmental problems and other stresses and imbalances that have emerged during the last 20 years of very rapid growth.

Elsewhere in East Asia, the challenges are different. In several economies which have been growing at 2 per cent less than before the crisis, investment has been relatively weak and firms have been facing big competitive pressures in world markets, not least from China's booming economy. In these economies, a strong focus on strengthening the investment climate and improving labor force skills is key, allowing firms to find new competitive advantages.

Another challenge is to combine growth with equity. Before the crisis, half the people of East Asia lived on less than $2 a day while today poverty is down to 29 percent of the population. But income inequality is rising in many East Asian economies - in some cases, sharply. "High inequality can hamper growth as poor people without access to credit may be unable to exploit investment opportunities," says Brahmbhatt. "It can also be a source of political and social unrest that stymies investment and growth."

A third challenge is the need to manage vulnerability and prevent new crises. Since 1997, countries have built up large foreign exchange reserves as a buffer against further crises but this could have the unwanted side effects - overheating economies and asset price bubbles, the report says. Further, while countries have been strengthening their financial and banking sectors since the crisis, many economies need to pick up the pace of this effort.

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