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Asia Economy Last Updated: Aug 22, 2013 - 9:03 AM

Path to prosperity in Asia remains via manufacturing
By Finfacts Team
Aug 21, 2013 - 9:04 AM

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The path to prosperity in Asia remains via manufacturing despite gross domestic product (GDP) shares, which show a dominant service region. The service sector is however heterogeneous with both traditional, low productivity services and modern, high-productivity services. In many Asian economies, structural transformation appears as a shift from agriculture into low-productivity service subsectors.

In its flagship annual statistics report, 'Key Indicators for Asia and the Pacific 2013,' published Wednesday, the Manila-based Asian Development Bank says history suggests that manufacturing is important and that industrialization has been nearly essential for an economy to achieve high income levels. No country has achieved high-income status without its manufacturing sectors reaching at least an 18% share of total employment. Modern industrial and service economies have manufacturing at their core. "We estimate that an economy where the shares of manufacturing in total employment and output are at least 18% has a 42% probability of achieving high income levels, but the probability of an economy with a small manufacturing sector (in both output and employment) achieving high-income status is less than 5%," the ADB says.

Other factors are also important. Results also indicate that a country that industrializes in output and (i) has 17 kilometers of road per 1,000 persons has a 44.5% chance of being high income, (ii) has liquid liabilities representing 75% of GDP has a 43.5% chance of being high income, (iii) where workers have 9 years of average schooling has a probability of 48.5% of being a high income, (iv) with a share of high-tech manufacturing output representing 52% of total manufacturing GDP has a 75% chance of being high-income, and (v) with a share of high-tech manufacturing employment representing 49% of total manufacturing employment has also a 75% chance of being high-income.

The report notes that one group of economies—Hong Kong, China; Japan; the Republic of Korea; Singapore; and Taiwan—rapidly industrialized to become high income countries, while another group of economies, including China, Malaysia, and Thailand, are transforming more slowly.

Other developing Asian nations, such as Bangladesh, India, Pakistan or the Philippines, are changing even more slowly, have created few manufacturing jobs, and are shifting from agriculture into services.

“Right now, as services boom in the region, it’s tempting to shun industrialization, but it will be a serious mistake if a country wants to be prosperous,” Changyong Rhee, ADB’s chief economist said.

Industry does not lead the way in Asia, the report noted. Services are the largest share of developing Asia’s output and agriculture remains the largest employer, providing an income for 700 million people.

Regional diversity means Asia’s economies require different policy priorities to promote transformation. Modernizing the agricultural sector is a key task in developing Asia, in particular for low income countries.

For middle income economies heavily dependent on labor-intensive sectors or currently bypassing industrialization, the focus should be on upgrading their industrial base. For these nations, good quality education is essential for industrial diversification and reducing the path-dependency nature of structural transformation.

For small island economies, industrialization may not be cost effective, and the future lies in becoming competitive in certain service sector niche markets.

'Key Indicators for Asia and the Pacific 2013' also charts regional progress in achieving the Millennium Development Goals (MDGs). It notes that two years before the MDG deadline in 2015, most of the region has made significant progress in reducing poverty, improving access to universal primary education, and promoting gender equity and women's empowerment.

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