The Asia-Pacific region has experienced significant economic and human development over the past three decades, but the path forward is fraught with challenges. Structural transformation—shifting labour and resources from low-productivity sectors like agriculture to higher-productivity sectors such as manufacturing and services—has been a key driver of growth in the region. However, the dynamics of this transformation are evolving, raising important questions about the future trajectory of economic growth and development in the region.
Since 1990, the Asia-Pacific region has made remarkable progress. GDP per capita in the region has risen from 10% of the G7 level (excluding Japan) to over 20% by 2020. Poverty levels have also plummeted, with the poverty headcount ratio falling from over 25% to less than 5% in the same period. These gains were driven by industrialisation, demographic dividends, and integration into global trade networks, creating an economic landscape that has allowed millions to escape poverty and join the ranks of a growing middle class. Yet, while these achievements are commendable, they raise the question of sustainability in a changing global environment.
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Demographics, trade, and productivity
The region’s growth is now entering a challenging phase, marked by the weakening of key tailwinds that supported its rise. One major concern is the demographic shift. Many countries in the region, such as Japan, South Korea, and China, are experiencing rapid aging, with shrinking working-age populations, while emerging economies like India and Vietnam are witnessing slower labour force growth than in previous decades.
Coupled with these demographic challenges is a worrying stagnation in productivity growth. Since the global financial crisis, productivity improvements and private investment have plateaued, reducing the momentum that once drove economic transformation. Furthermore, trade fragmentation, exacerbated by protectionist policies and geopolitical tensions, is making the external environment less conducive for trade-led growth, threatening the model that powered the region’s industrialisation.
Role of agriculture, industry, and services
Structural transformation in the Asia-Pacific region has historically followed a predictable pattern: labour shifts out of agriculture, moves into manufacturing, and eventually transitions to services as economies mature. However, this narrative is becoming more nuanced. Agriculture, while having shed much of its labour force, continues to exhibit significant productivity gaps. Addressing these gaps is critical for releasing more labour for productive uses.
Meanwhile, manufacturing, which once served as the backbone of transformation, is showing signs of stagnation, with its share of employment either plateauing or declining in some economies. This has raised concerns about whether manufacturing can continue to drive structural transformation. In contrast, the services sector has become increasingly important, absorbing more labour than manufacturing and driving significant productivity gains. Tradable services, such as finance, technology, and logistics, are emerging as the most dynamic contributors to economic transformation.
Trade integration has historically been a cornerstone of Asia’s growth story. Countries like China, South Korea, and Vietnam leveraged their participation in global supply chains to boost industrialisation and create millions of jobs. However, India’s trajectory has been distinct, with less integration into global manufacturing supply chains, resulting in a slower pace of industrialisation. With global trade growth stagnating and the rise of protectionism creating additional hurdles, Asia-Pacific economies must explore alternative engines of growth. Regional trade agreements and new forms of economic collaboration could provide some respite, but the reliance on traditional export-led industrialisation appears increasingly uncertain.
Premature de-industrialisation a concern
A growing concern for many economies in the region is premature de-industrialisation, where industrialisation peaks at lower income levels compared with historical examples like Japan and South Korea. This phenomenon, partly influenced by China’s dominance in global manufacturing, has disrupted the traditional pathway of development for several countries. For instance, India’s industrialisation has not reached the intensity of its neighbours, highlighting the challenges of competing in a global market dominated by China. These dynamics underscore the need for innovative strategies to sustain growth in an era where traditional industrialisation may no longer be a guaranteed pathway.
The services sector is emerging as a critical driver of structural transformation in the Asia-Pacific region, often overshadowing the traditional focus on manufacturing. Services are increasingly tradable and capable of generating both static and dynamic productivity gains. Sectors such as IT, finance, and business services are at the forefront, with labourproductivity in these areas often surpassing that of manufacturing. This shift presents a significant opportunity for economies in the region to harness the potential of services to drive growth, especially in an environment where global trade in goods faces persistent challenges.
Policy priorities for the future
To sustain growth and navigate the evolving dynamics of structural transformation, Asia-Pacific economies must implement targeted policies. Improving agricultural productivity remains a critical priority, as closing productivity gaps in this sector would free up labour for higher-productivity industries. Simultaneously, investments in education and upskilling are essential to equip workers transitioning out of agriculture for roles in advanced manufacturing and services.
Leveraging technological advancements, particularly in AI and digitisation, can enhance productivity across sectors, though this requires careful management to mitigate potential job displacement. Moreover, reducing barriers to entry and fostering competition in the services sector can unlock substantial growth potential. Strengthening regional integration through cooperative trade agreements can also provide new opportunities for economic collaboration and resilience.
The Asia-Pacific region stands at a critical juncture. While the forces that propelled its past growth are waning, new opportunities in services, technology, and regional collaboration offer a promising path forward. Success will depend on the region’s ability to adapt its growth strategies to the changing global economic landscape. Structural transformation remains the cornerstone of development, but its future lies in embracing the evolving roles of services and technology, ensuring inclusive and sustainable growth for the decades to come.
This article has drawn from a presentation by Dr Rahul Giri, Senior Economist, IMF at a seminar organised by EGROW Foundation in New Delhi.