Southeast Asia’s High-Income Aspirants Should Focus on Quality of Growth

There is a growing recognition around the world that pursuing quality of growth — that is, economic growth that accounts for social inclusion and environmental protection — is a more sustainable goal than mere quantity of growth. For Southeast Asian countries aspiring to achieve high-income status over the next two decades, the pressing question is whether this will be better achieved by resetting growth strategies and charting steadier and healthier pathways.

Across Southeast Asia, the ambition is to sustain high growth and to move up the World Bank’s global income classification ladder. For example, Indonesia and Vietnam are targeting 2045 as the year to attain the high-income label, which is currently based on a threshold of about USD14,000 in Gross National Income per capita. The Philippines has a vision and plan for Filipinos to have “a strongly rooted, comfortable and secure life by 2040”. The others have articulated variants of long-term advancement or high-income status.

Progress toward high-income levels can be expected to come from investment and productivity in three forms of capital — physical, human and natural — as set out in a 2000 publication. Countries that pursue quality of growth would prioritise all three. But it is tempting to focus mostly, if not exclusively, on physical capital, given its association with visible, immediate, and quantitative products, like roads and bridges. Human capital investment is less tangible and more long-term in nature, although encouragingly, it has become recognised as essential for growth. The same cannot be said for investing in natural capital, such as protecting biodiversity or preserving mangroves. 

The bias against natural capital goes further. The ranking of economies by the quantity of Gross Domestic Product (GDP) growth, which does not account for environmental and social damage, has caused natural capital to be sidelined while physical capital dominates. The conventional GDP growth rate is a gross measure that does not account for economic activities that damage the planet and people, such as pollution and deforestation. Using GDP growth as the primary performance indicator has promoted ecologically harmful investments, exemplified in a recent report on deforestation and road construction that has permanently destroyed biodiversity in Indonesia.   

The “soft” case for worrying about quality of growth is that the benefits of quantity are best realised when growth is equitably shared and environmentally sustainable. The “hard” case is that climbing to high-income status will be harder if we ignore social and environmental concerns. Even the International Monetary Fund (IMF), which for decades showed a wariness toward social equity, has published research suggesting that growth spurts last longer under conditions of inclusion.

The case for inclusive growth, which can bolster the underlying sources of economic growth and domestic demand, has strengthened amid contemporary conditions of high domestic debt, aging populations in developing countries and growing protectionism in the US. In the environmental dimension, countries’ vulnerability to energy shocks — especially massive shocks triggered by conflict in the Middle East — reinforces the argument for transitioning to green energy.

More broadly, runaway climate change adds urgency for countries to pursue green growth, as once-in-a-hundred-year weather events become frequent occurrences. Southeast Asian countries must be prepared for worst-case scenarios. Today’s disasters result from decades of carbon accumulation that will inevitably worsen climate crises. There are ample indications that higher temperatures and rising sea levels, together with land subsidence in coastal cities, are wreaking havoc. A one per cent increase in temperature could hike food production costs by 0.5–0.8 per cent in Southeast Asia.

Today’s climate and energy crises give countries added impetus to drive decarbonisation by taking advantage of low-carbon technologies and climate financing, thus integrating economic growth with emission reduction and energy security.

Countries seeking to escape the middle-income trap should prioritise quality of growth in their policy framework. Only 34 out of 142 middle-income economies have graduated to high-income in the past 35 years. The remaining 108 have remained stuck in “the middle-income trap”, which occurs when countries lose their competitive advantage in manufacturing due to rising wages while failing to transition to high-value, innovation-driven economies. For example, Malaysia has been a highly successful exporter that has also attracted large amounts of FDI. But since the Asian financial crisis, its growth rate has fallen notably. China has also slowed over the past decade and a half and shown signs of weakness in the housing and local-government projects that kept its economy booming at double-digit rates until around 2010.

Giving precedence to quality of growth calls for a directional shift in growth strategy. The focus would move from capital investment-driven growth to innovation-driven growth that prioritises human capital and social inclusion as well as natural capital and the environment. 

The policy ingredients would vary depending on the specific gaps on the one side, and opportunities on the other. For the Philippines and others with young populations and high inequality, greater inclusion in the growth process would be imperative for unlocking potential and sustaining growth. Decarbonisation should be high on the list across Southeast Asia — including for Singapore and Malaysia with high shares of fossil fuels in energy; and for Indonesia, the Philippines and Vietnam with their high shares of coal, the most polluting fossil fuel. The opportunity to switch to renewables is present across the board. Hydro power is strikingly abundant in Lao PDR; Vietnam, Thailand and Malaysia enjoy good prospects for solar, and Vietnam and the Philippines could harness wind energy. Forest protection has potentially high payoffs in most countries, from Lao PDR and Brunei which have the highest forest cover, to Malaysia, with its experience in protecting reserves, while Indonesia and the Philippines have articulated vast agendas for forest protection and restoration.

Today’s climate and energy crises give countries added impetus to drive decarbonisation by taking advantage of low-carbon technologies and climate financing, thus integrating economic growth with emission reduction and energy security. In pursuing its high-income aspirations, Southeast Asia should decisively focus on quality of growth.

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