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Next challenge for East Asia is to avoid middle-income trap

Next challenge for East Asia is to avoid middle-income trap
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First Published: Fri, Apr 06 2007. 01 14 AM IST
Updated: Fri, Apr 06 2007. 01 14 AM IST
Ten years after weathering the financial crisis which devastated East Asia in mid-1997, the region has fewer poor people and a larger global role to play, says the World Bank’s latest East Asia & Pacific Update—a six-monthly report on the region’s economic and social health.
But the report’s principal author and lead economist for the World Bank’s East Asia and Pacific region Milan Brahmbhatt cautions that as economies climb steadily to higher income levels, the next challenge is to avoid the ”middle-income trap”.
The report finds that growth in Emerging East Asia reached 8.1% in 2006—the strongest in the past 10 years and it is likely to slow only modestly to 7.3% in 2007.
Per capita incomes in the former crisis-affected economies  have significantly exceeded their pre-crisis levels and are growing steadily nearly everywhere.
In China and low-income transition economies like Vietnam, Cambodia and Lao PDR, incomes have grown at ‘exceptional rates’, the report says.
“The region has grappled with and overcome the crisis to return to solid growth,” says the report.
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.
However, the report warns new challenges are arising which could slow or even derail growth if not handled properly.
“The idea of a ‘middle-income trap,’” says Brahmbhatt “is that the strategies that allow countries to grow from low income to middle income are not enough to get them to high income.
Historically, few countries have mastered the complex technical, social and political challenges that arise.”
Another challenge is to combine growth with equity. Before the crisis, half the people of East Asia lived on less than $2 (Rs86) a day while today poverty is down to 29% of the population. But income inequality is rising in many EastAsian 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.
The report says countries in East Asia need to push ahead with their reform programmes. Special attention needs to be paid to improving the governance and investment climate; developing more diversified capital markets including credit access for the poor; liberalizing services trade; boosting education systems to address skilled labour shortages; and emphasizing prudent macroeconomic policies.
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First Published: Fri, Apr 06 2007. 01 14 AM IST
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