Chapter 3

Dynamics of Structural
Transformation

3.1 Introduction
For the last 5 decades, structural transformation in Asia has been
the primary driver behind the region’s rising income and geographic
movement of capital and labor. It goes beyond shifting resources
across broad industry sectors—from agriculture to manufacturing
and services. Structural transformation involves diversifying and
deepening production, linking processes to global value chains, and
moving resources from rural areas to cities. The process increases labor
productivity for the overall economy, as resources shift toward more
productive sectors, and more investment and increased efficiency lift
productivity within sectors. Historically, most successful high-income
countries followed similar patterns of economic development, but
Asia’s transition has been particularly rapid. Structural transformation
also facilitates urbanization, which, in turn, supports the changing
industrial composition.
This chapter examines developing Asia’s structural
transformation process over the past half century, looking at
both aggregate performance as well as cross-country differences.
Section 3.2 looks at the region’s shifts in economic structure among
agriculture, industry, and services, and the contribution these shifts
made to productivity growth. Sections 3.3–3.5 examine progress in
86 | Asia’s Journey to Prosperity—Chapter 3

diversifying and upgrading economic activities within each of these

three broad sectors and their contributions to productivity growth.
In particular, section 3.5 discusses the growing importance and
diversity of services. Section 3.6 reviews the region’s urbanization
process and its importance in raising living standards and the quality
of life. Finally, section 3.7 explores the challenges that today’s policy
makers in developing Asia need to confront, depending on the stage of
development of their economy.

3.2 Overview of Asia’s structural transformation

Economic literature has long viewed development as a process
of transforming the productive structure of an economy and
accumulating the physical and human capacities needed to drive this
change.1 Development and growth occur as new economic activities
emerge, old ones are replaced, and resources are reallocated from
less productive firms and activities to more productive ones. During
structural transformation, resources are reallocated across and within
the three broad sectors of economic activity: agriculture, industry,2 and
services. The process involves upgrading technology, upskilling labor,
and shifting resources from rural to urban areas.
The most striking feature of development when viewed over
a long time span is the secular decline in the share of agriculture and
corresponding increase in the combined share of industry and services,
whether measured in terms of output or employment.3 Industry’s share
increases to a certain point and then starts to decline, as the economy
shifts from the industrialization stage to a “deindustrialization” stage,
while services’ share continues to increase.
Over the past half century, developing Asia has followed a similar
pattern of structural transformation as today’s high-income countries,
though at a much faster pace (Figure 3.1, Table 3.1, and Appendixes 5
and 6). From 1970 to 2018, the share of agricultural output in total gross
domestic product (GDP) and employment in developing Asia declined

1
For a review of the literature, see Asian Development Bank (ADB). 2013. Key Indicators for Asia
and the Pacific 2013: Asia’s Economic Transformation: Where to, How, and How Fast? Manila.
2
According to the United Nations (UN) International Standard Industrial Classification
of All Economic Activities, revision 4, the industry sector comprises economic activities
categorized as (i) mining and quarrying; (ii) manufacturing; (iii) electricity, gas, steam, and
air-conditioning supply; (iv) water supply, sewerage, waste management, and remediation
activities; and (v) construction.
3
ADB. 2013. Key Indicators for Asia and the Pacific 2013: Asia’s Economic Transformation:
Where to, How, and How Fast? Manila.
 Dynamics of Structural Transformation | 87

as countries grew richer. A pattern of structural change in industry is

clear, especially its employment share. Industry’s shares of GDP and
employment expanded in most Asian countries, but in high-income
economies including the newly industrialized economies (NIEs),
these two shares began to decline (deindustrialization), suggesting an
inverted-U shape relationship. Services was already the largest sector
by output and employment for most countries in 1970, rising steadily
with income, although its composition changed substantially over time.
The decline in agriculture’s share of GDP was especially
prominent in the People’s Republic of China (PRC) and India: from
31.9% in the 1970s to 7.2% in 2018 in the PRC and from 39.6% to 16.0%
in India. The region’s two city economies—Hong Kong, China and
Singapore—always had low shares of agricultural output (including
fishing) and employment. In developing Asia as a whole, the share of
agriculture in GDP dropped from 31.9% in the 1970s to a low of 8.5%
in 2018, while the share of employment decreased from 71.0% to only
33.5%, reflecting a slower pace of labor productivity growth in the
agriculture sector.
While industry’s share of GDP remained about the same in the
PRC and increased by a small margin in India between 1970 and 2018,
it increased significantly in countries such as Bangladesh and Thailand.
Economies reliant on mining—such as Azerbaijan, Mongolia, and Papua
New Guinea—tend to have relatively high industry-to-GDP shares.
Industry’s share of employment in developing Asia increased
from 14.1% in the 1970s to 25.5% in 2018, which was comparable to the
Middle East and North Africa (26.7%), but higher than other regions
such as Sub-Saharan Africa (11.4%) and Organisation for Economic
Co-operation and Development (OECD) members (22.7%). In 2018,
developing Asia’s industry share of GDP (37.5%) was lower than the
Middle East and North Africa (42.4%). In natural resource-rich
countries, industry’s employment share is small even though its GDP
share is large (because mining is particularly capital-intensive).
Services has always been an important contributor to both
production and employment. In the 1970s, it already accounted for
the largest share of GDP in most countries, and its share has grown in
parallel with the decline in agriculture’s. The growing role of services
is evident in all subregions and country income groups both for GDP
and employment. For example, in the Republic of Korea (ROK), which
grew rapidly through export-oriented industrialization, industry’s
dominance is giving way to services. A similar pattern is happening in
88 | Asia’s Journey to Prosperity—Chapter 3

Figure 3.1: Output and Employment Shares by Sector

against Per Capita GDP, 1970–2018

Figure 3.1a: Agricultural Output Share Figure 3.1b: Agricultural Employment Share
100 100

(% of employment)
80 80
(% of GDP)
Agriculture

Agriculture
60 60
40 40
20 20
0 0

1 10 100 1 10 100
GDP per capita (constant 2010 US dollars, thousand) GDP per capita (constant 2010 US dollars, thousand)

Figure 3.1c: Industrial Output Share Figure 3.1d: Industrial Employment Share
100 100
(% of employment)

80 80
(% of GDP)

Industry

60 60
Industry

40 40
20 20
0 0
1 10 100 1 10 100
GDP per capita (constant 2010 US dollars, thousand) GDP per capita (constant 2010 US dollars, thousand)

Figure 3.1e: Services Output Share Figure 3.1f: Services Employment Share
100 100
(% of employment)

80 80
(% of GDP)
Services

Services

60 60
40 40
20 20
0 0
1 10 100 1 10 100
GDP per capita (constant 2010 US dollars, thousand) GDP per capita (constant 2010 US dollars, thousand)

Developing Asia Rest of the World

GDP = gross domestic product, US = United States.

Notes: The years of data for each economy vary depending on availability, with 1970 as the
earliest year and 2018 as the latest. Sector shares are rescaled to sum to 100.
Sources: For output shares: World Bank. World Development Indicators. https://data.worldbank
.org/indicator (accessed 2 August 2019); United Nations (UN). UN Statistics Division Database.
https://unstats.un.org (accessed 28 August 2019); national sources; and Asian Development
Bank estimates. For employment shares: International Labour Organization (ILO). ILOSTAT
Database. https://www.ilo.org/ilostat (accessed 28 August 2019); Organisation for Economic
Co-Operation and Development (OECD). OECD Employment and Labour Market Statistics.
https://www.oecd-ilibrary.org/employment/data/oecd-employment-and-labour-market
-statistics_lfs-data-en (accessed 28 August 2019); Timmer, M. P., G.J. de Vries, and K. de Vries.
2015. Patterns of Structural Change in Developing Countries. In Weiss, J., and M. Tribe, eds.
Routledge Handbook of Industry and Development. Abingdon: Routledge. pp. 65–83 (for the
Groningen Growth and Development Center 10-Sector Database) (accessed 28 August 2019);
and Asian Development Bank estimates.
 Table 3.1: Output and Employment Shares by Sector, 1970–2018
Table 3.1a: Sector Shares in Output (gross value added as a % of GDP)
Agriculture Industry Services
1970–1979 1990–1999 2018 1970–1979 1990–1999 2018 1970–1979 1990–1999 2018
Developing Asia 31.9 14.9 8.5 33.8 36.5 37.5 34.3 48.6 54.0
Central Asia … 23.3 10.3 … 32.7 39.9 … 43.9 49.8
East Asia 28.0 11.2 6.3 41.3 39.1 39.5 30.7 49.7 54.1
People’s Republic of 31.9 20.1 7.2 44.2 45.0 40.7 23.9 34.9 52.2
China
South Asia 40.5 27.8 16.5 24.0 28.5 28.7 35.6 43.6 54.8
India 39.6 28.1 16.0 25.6 30.0 29.8 34.8 41.9 54.2
Southeast Asia 27.1 12.6 10.4 31.2 36.9 36.4 41.8 50.4 53.2
The Pacific 30.2 26.8 16.6 26.2 29.5 31.2 43.6 43.7 52.3
Developed Asia 5.3 2.0 1.7 41.8 35.0 27.2 52.9 62.9 71.2
Australia 6.6 3.4 2.7 37.4 28.4 24.7 56.0 68.2 72.6
Japan 4.9 1.9 1.1 42.8 35.7 28.1 52.3 62.5 70.8
Latin America and 12.3 7.2 5.3 36.9 32.5 27.9 50.7 60.3 66.8
the Caribbean
Middle East and 10.1 9.0 4.2 52.1 40.7 42.4 37.8 50.4 53.4
North Africa
Sub-Saharan Africa 21.3 17.9 18.2 29.8 30.4 27.8 48.9 51.7 54.0
OECD 4.5 2.3 1.5 34.7 30.2 23.7 60.8 67.5 74.8
World 8.1 4.2 4.1 35.4 31.3 28.5 56.5 64.5 67.4
... = data not available, GDP = gross domestic product, OECD = Organisation for Economic Co-operation and Development.
Notes: Sector shares are rescaled so that the sum of shares in value added is equal to 100. Latest data refer to 2015 for Turkmenistan, Tuvalu, and Vanuatu, and 2016 for
the Federated States of Micronesia, New Zealand, Papua New Guinea, and Tonga. Data for Australia; Hong Kong, China; Indonesia; and Japan are from 2017.
Sources: World Bank. World Development Indicators. https://data.worldbank.org/indicator (accessed 2 August 2019); United Nations (UN). UN Statistics Division
Dynamics of Structural Transformation | 89

Database. https://unstats.un.org (28 August 2019); national sources; and Asian Development Bank estimates.
 Table 3.1b: Sector Shares in Employment (% of total employment)
Agriculture Industry Services
1970–1979 1990–1999 2018 1970–1979 1990–1999 2018 1970–1979 1990–1999 2018
Developing Asia 71.0 54.7 33.5 14.1 20.1 25.5 14.9 25.2 41.0
Central Asia … 40.2 29.8 … 20.0 23.9 … 39.8 46.3
East Asia 74.5 52.2 25.6 14.4 24.0 28.5 11.2 23.8 45.9
People's Republic of 76.4 54.1 26.8 13.7 23.6 28.6 9.9 22.2 44.6
China
South Asia 67.4 60.9 43.6 14.4 15.6 23.8 18.1 23.6 32.6
India 68.6 61.8 43.9 14.0 15.7 24.7 17.4 22.5 31.5
Southeast Asia 61.1 52.0 32.1 12.2 16.1 22.1 26.7 31.9 45.8
The Pacific … 66.4 61.7 … 6.3 6.9 … 27.3 31.4
Developed Asia 12.8 5.9 3.4 35.9 32.3 23.6 51.3 61.8 73.0
Australia 7.2 5.2 2.6 34.6 23.0 19.4 58.2 71.8 78.1
Japan 13.4 5.9 3.4 36.1 33.7 24.5 50.5 60.4 72.1
Latin America and 32.6 22.0 13.9 24.4 22.3 21.0 43.0 55.6 65.0
the Caribbean
Middle East and 50.6 27.7 16.9 18.7 24.6 26.7 30.8 47.7 56.3
North Africa
90 | Asia’s Journey to Prosperity—Chapter 3

Sub-Saharan Africa 61.9 61.3 53.5 13.2 10.1 11.4 24.9 28.5 35.2
OECD 11.4 8.3 4.6 35.9 28.6 22.7 52.7 63.1 72.7
World 51.1 42.0 28.2 21.0 21.7 23.0 28.0 36.3 48.8
... = data not available, OECD = Organisation for Economic Co-operation and Development.
Sources: International Labour Organization (ILO). ILOSTAT Database. https://www.ilo.org/ilostat (accessed 28 August 2019); OECD. OECD Employment and Labour
Market Statistics. https://www.oecd-ilibrary.org/employment/data/oecd-employment-and-labour-market-statistics_lfs-data-en (accessed 28 August 2019);
Timmer, M. P., G.J. de Vries, and K. de Vries. 2015. Patterns of Structural Change in Developing Countries. In Weiss, J., and M. Tribe, eds. Routledge Handbook of Industry
and Development. Abingdon: Routledge. pp. 65–83 (for the Groningen Growth and Development Center 10-Sector Database) (accessed 28 August 2019); and
Asian Development Bank estimates.
 Dynamics of Structural Transformation | 91

the PRC, which also leveraged manufacturing to propel rapid growth.

The relative importance of services also grew in countries such as India
and the Philippines. As a result, the pattern of structural change in
services is clearer and more uniform than that in industry.

3.3 Critical contribution of agriculture

Structural transformation in developing Asia began with the growth
in agricultural productivity (Chapter 4). The food problem was the
foremost concern 50 years ago. At that point, agriculture in much of
Asia was predominantly subsistence farming of food crops (such as
rice and wheat), where farmers cultivated small plots of owned or
leased land, using manual labor and applying age-old technologies,
while being at the mercy of the vagaries of weather. In countries going
through socialist transformation, such as the PRC, the Central Asian
republics, and Viet Nam, agriculture was structured under state or
collective systems. Consequently, farm productivity was low, unstable,
and unable to meet growing food demand. Many countries had to rely
on imports or food aid to fill the gap. Regionally, the priority was to
transform traditional agriculture and improve food productivity.
Since the late 1960s, the “Green Revolution” has brought major
changes to traditional agriculture. This technology-led transformation
involved developing and disseminating a series of high-yielding modern
varieties of crops, primarily rice and wheat, together with improved
production practices.
More than a technological fix, the Green Revolution
encompassed policy and institutional changes along with increased
investment. In 1972, Asian countries, on average, directed 15% of
public spending to agriculture. As investments in support of the Green
Revolution picked up, the value of agriculture spending had doubled
in real terms by 1985.4 Critical investments included rehabilitating
irrigation systems, improving farm-to-market roads, and establishing
networks of agricultural research and extension services.
Governments also directly intervened in markets—establishing
rural credit systems; subsidizing key inputs such as fertilizers, power,
and water; and providing price support—to ensure farmers could
profit from adopting these new technologies, especially in small
farms. Although many countries started land reform prior to the

4
Rosegrant, M., and P. B. R. Hazell. 2000. Transforming the Rural Asian Economy:
The Unfinished Revolution. New York: Oxford University Press.
92 | Asia’s Journey to Prosperity—Chapter 3

Green Revolution, implementing these reforms varied greatly, and

consequently, performance was mixed. Where implemented well,
tenure reforms corrected exploitative leasing terms, and redistribution
schemes helped improve land ownership structures.
These changes led to remarkable growth in agricultural
productivity. Expanded irrigation and cultivation of higher-yielding,
faster-growing varieties generated strong growth in yields per hectare.
Cereal production in Asia more than doubled between 1970 and 1995,
from 313 million tons annually to 650 million tons. Despite a 60% jump
in population during the period, calories available per capita increased
by nearly 30%. Higher food production came with a decline in food
prices—for example, the real price of rice in 2000 was roughly one-
third of the 1970 cost.5
Changes in dietary demands in Asia due to rising incomes
and more open foreign trade enabled production diversification into
higher-value crops and livestock, which contributed to increased land
and labor productivity (Figure 3.2). Increased land productivity came
mostly from more intensive land use with modern varieties, modern
inputs, and a shift from single to multiple cropping per year. Adopting
high-value crops also helped raise land productivity. For instance,
between 1970 and 2015, Viet Nam more than doubled land productivity
(from $600 per hectare to $1,600 per hectare) and labor productivity
(from less than $400 per worker to over $1,000 per worker). Similar
patterns occurred in the Philippines, Indonesia, and other Southeast
Asian countries. South Asian countries, such as India and Pakistan,
also increased land productivity by adopting modern agricultural
technology, though they remain at a comparatively lower level.
As the potential gains from Green Revolution technology
were exhausted, rice and wheat land productivity nearly reached its
technical limits. Meanwhile, rising wages of agricultural labor under
this economic transformation induced farmers to substitute machines
for labor. Japan’s agricultural land productivity, for example, remained
at the same level over the past 3 decades, while its labor productivity
increased by more than 20% (Figure 3.2). Malaysia’s experience
appears similar.

5
Otsuka, K. 2012. Economic Transformation of Agriculture in Asia: Past Performance and
Future Prospects. Asian Journal of Agriculture and Development. 9 (1). pp. 1–19.
 Dynamics of Structural Transformation | 93

Figure 3.2: Agricultural Land and Labor Productivity,

Selected Asian Economies, 1980–2015

3.8

3.6 KOR

3.4 JPN
PRC
3.2
Land productivity (in log)

VIE MAL
3.0
PHI
2.8 UZB

2.6 INO
IND
2.4

2.2 PAK

2.0

1.8
2.5 2.7 2.9 3.1 3.3 3.5 3.7 3.9 4.1 4.3 4.5
Labor productivity (in log)

IND = India, INO = Indonesia, JPN = Japan, KOR = Republic of Korea, MAL = Malaysia,
PAK = Pakistan, PHI = Philippines, PRC = People’s Republic of China, UZB = Uzbekistan,
VIE = Viet Nam.
Note: Values are in constant 2004–2006 international dollars, in base-10 logarithmic scale.
Source: United States Department of Agriculture Economic Research Service. 2019.
International Agricultural Productivity. https://www.ers.usda.gov/data-products/international
-agricultural-productivity.

Agricultural growth contributed to the development of other

sectors. In the early stages of development, surplus labor in subsistence
agriculture can shift to the industry sector without reducing agricultural
output until the excess labor is exhausted (the so-called “Lewis turning
point”).6 This helps keep wages in industry stable during the early stage
of industrialization. Further, the increased food surplus helped prevent
the rise of living costs for urban workers. Low food prices enabled
urban households to spend more on education and health, in the long
run contributing to the increased supply of productive labor.

6
Lewis, W. A. 1954. Economic Development with Unlimited Supplies of Labor.
The Manchester School. 22 (2). pp. 139–191; and Ranis, G., and J. C. H. Fei. 1961. A Theory of
Economic Development. American Economic Review. 51 (4). pp. 533–565.
94 | Asia’s Journey to Prosperity—Chapter 3

Agricultural development also helped industry by increasing

demand for agricultural inputs (fertilizers, pesticides, and tractors)
while increasing supplies of agricultural raw materials to manufacturing
(such as cotton for textile and wheat for instant noodles). The rural
population’s improved living standards increased domestic demand for
nonagricultural goods and services, providing a nascent and expanding
market to nurture the growth of firms outside agriculture in the early
stage of development. Finally, rural savings were channeled to finance
urban and industrial development. Overall, the continued dynamism in
agriculture and the rural economy is an integral part of the economy-
wide structural transformation.

3.4 Industrialization as the path to high income

Industrialization has been indispensable on the road to high per capita
income. East Asia’s rapid structural transformation toward industry,
manufacturing in particular, is a key part of its success.7 Workers moved
out of agriculture and into manufacturing, and the manufacturing sector
itself transformed as it diversified and upgraded. In postwar Japan, for
example, shifts in labor between sectors helped boost overall economic
productivity—and therefore the growth rate—but most of the gains
came from productivity growth in the nonagriculture sectors.8 Many
manufactured goods have high income elasticities of demand, which
generate strong demand as incomes rise, and they exhibit economies of
scale in production. The shift in employment to industry also enhances
incentives for workers to acquire skills adapted to new tasks, which, in
turn, strengthens the foundation for future growth.
When accompanied with greater trade openness,
manufacturing geared toward export markets can generate the foreign
exchange needed to finance capital goods imports. Openness helped
further boost manufacturing productivity by attracting foreign direct
investment that introduced new technologies and forged links to global
value chains. The rise of cross-border production networks in the 1990s
further enhanced industry’s role, especially in East Asia and Southeast
Asia (Chapter 9).

7
See Felipe, J. 2018. Asia’s Industrial Transformation: The Role of Manufacturing and
Global Value Chains (Parts 1 and 2). ADB Economics Working Paper Series. Nos. 549 and
550. Manila: ADB.
8
Aoki, S., et al. 2011. The Role of the Government in Facilitating TFP Growth during Japan’s
Rapid-Growth Era. In Otsuka, K., and K. Kalirajan, eds. Community, Market, and State in
Development. London: Palgrave Macmillan.
 Dynamics of Structural Transformation | 95

Why manufacturing is an engine of growth

A significant part of the reason Asian economies grew so fast is that
policy makers recognized the important role manufacturing plays in
(i) diversifying and upgrading an economy, (ii) earning sufficient foreign
exchange for imports, and (iii) ultimately raising living standards.
Manufacturing matters for growth for several reasons.
A structural shift toward manufacturing spurs greater capital
accumulation. More than agriculture, where constraints on arable
land tend to create decreasing returns to scale, manufacturing
exhibits economies of scale. Technological advances can spill over to
other firms and generate cost-reducing innovations in production.
This can lead to situations where a doubling of capital and labor can
more than double output. A significant portion of technical progress
occurs in manufacturing. In particular, the manufacture of capital
goods (such as machinery and equipment) and consumer durables
(such as automobiles) has been the “learning center” of capitalism in
technological terms as well as process and organizational innovation.
Historically, the share of PRC manufacturing in total output has
been very high. It still accounts for about 30% now (Figure 3.3). Even
as the PRC lost millions of manufacturing jobs due to the intensified
restructuring of state-owned enterprises that began in the mid-1990s,
new private sector manufacturing jobs emerged, especially in labor-
intensive light industries. As a result, the share of manufacturing
employment increased from about 15% in the 1980s to around 22% in
2018. Manufacturing in several Asian economies (especially Malaysia;
the ROK; Singapore; and Taipei,China) have undergone important
transformations, shifting output and employment to more technology-
and scale-intensive subsectors (Chapter 5). In contrast, the share of
India’s manufacturing sector has changed little since the 1970s, with
the share of output (16%) and employment (11%) relatively stable.
Manufacturing particularly links to other productive sectors
and has positive spillover effects. Linkage effects refer to intersectoral
purchases and sales, while spillover effects refer to knowledge
flows between sectors. Both linkage and spillovers are strong within
manufacturing as well as between manufacturing and services and
agriculture. For example, the main customers of high-productivity
service activities are manufacturing firms.
96 | Asia’s Journey to Prosperity—Chapter 3

Figure 3.3: Manufacturing Output (gross value added

as a % of GDP) and Employment (% of total) Shares, 1970–2018

Figure 3.3a: Percentage of GDP

35

30

25

20

15

10

0
India PRC NIEs ASEAN4

1970–1979 1980–1989 1990–1999 2000–2009 2010–2018

Figure 3.3b: Percentage of Total Employment

35

30

25

20

15

10

0
India PRC NIEs ASEAN4

1970–1979 1980–1989 1990–1999 2000–2009 2010–2018

ASEAN = Association of Southeast Asian Nations, GDP = gross domestic product,

NIEs = newly industrialized economies, PRC = People’s Republic of China.
Notes: ASEAN4 includes Indonesia, Malaysia, the Philippines, and Thailand. NIEs include
Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China.
Sources: For output shares: World Bank. World Development Indicators. https://data.worldbank
.org/indicator (accessed 2 August 2019); United Nations (UN). UN Statistics Division Database.
https://unstats.un.org (accessed 28 August 2019); national sources; and Asian Development
Bank estimates. For employment shares: International Labour Organization (ILO). ILOSTAT
Database. https://www.ilo.org/ilostat (accessed 28 August 2019); Timmer, M. P., G.J. de Vries,
and K. de Vries. 2015. Patterns of Structural Change in Developing Countries. In Weiss, J., and
M. Tribe, eds. Routledge Handbook of Industry and Development. Abingdon: Routledge. pp. 65–83
(for the Groningen Growth and Development Center 10-Sector Database) (accessed 28 August
2019); and Asian Development Bank estimates.
 Dynamics of Structural Transformation | 97

Interaction between manufacturing and openness

As the producer of physical and nonperishable products, manufacturing
has higher tradability than agriculture or services. A development
strategy based on manufacturing allows a country to become increasingly
engaged in international trade and, in particular, exporting. This remains
true, although improvements in transportation (such as containerization,
refrigeration, port efficiency, and other aspects of the timely movement
of goods) broadened the range of international trade in agricultural
goods, and progress in information and communication technology
(ICT) opened possibilities for international trade in some services.
A country’s growth becomes constrained by its balance of
payments if it cannot generate sufficient foreign exchange to import
the necessary capital goods to spur future development. The core of the
problem lies in the differences between the income elasticities of goods
a country exports and those that it imports. Agricultural products tend
to have low income elasticity of demand, such that consumer spending
on these goods rises more slowly than growth in income (known as
Engel’s Law). In contrast, most industrial products, largely produced
by advanced economies, have high income elasticity, with demand for
these goods growing even faster than income. If a developing country
does not have a strong manufacturing sector, it will end up running
a deficit in merchandise trade. This is one assertion of the “center–
periphery” model (Chapter 2).
Critically, Asia’s industrialization since the 1960s has gone
hand in hand with increasing openness. Fast export and industrial
output growth relaxed the balance of payments constraint, which
allowed successful Asian economies to sustain higher rates of GDP
expansion. Rapid expansion of exports and industrial output also
boosted productivity, setting the stage for higher future growth. In
contrast, countries that persisted in pursuing import substitution
development strategies—such as many Latin American and South
Asian economies in the past—were unable to kick-start this virtuous
cycle and had more modest growth as a consequence (Chapter 9).
While market forces and openness are critical conditions for
developing manufacturing, evidence shows that some type of proactive
industrial policy helped industrialization and upgrading. Virtually no
country in the world has industrialized and moved up the development
ladder without an appropriate balance between government
engagement and market forces (Chapter 2).
98 | Asia’s Journey to Prosperity—Chapter 3

In general, exports raised firm efficiency as exposure to

larger world markets enabled firms to benefit from economies of
scale and forced them to enhance competitiveness and technological
development. Exporting is associated with increased rates of
technological learning, as firms adjust to the different demands of
trade partners and as they develop producer–user relationships.
Foreign buyers of electronics provided East Asian producers with
information and advice on product designs, quality, production
processes, and procurement of capital goods and inputs. When some
countries adopted targeted industrial policies, competing on world
markets provided a means for governments to test and benchmark
manufacturing firms, allowing them to examine whether their efforts
in developing a manufacturing base were successful.
The economic transformation of successful Asian economies
included a shift toward goods whose demand increases when
consumers grow richer (high income elasticity). These types of goods
compete on non-price factors—such as branding, quality, reliability,
speed of delivery, and extent and efficacy of the distribution network—
which play a bigger role in consumer choices at higher income levels.
Recent work on complexity, an idea that encompasses diversification
at the country level and sophistication at the product level, shows
that the export structure of many Asian countries shifted significantly
during the last few decades, from products like simple footwear and
basic textiles to precision machinery and high-end branded consumer
durables (Chapter 5).9

Deindustrialization and scope for services-led development

The share of agriculture in output and employment falls and the shares
of manufacturing and services correspondingly rise during the early
stage of industrialization. However, as industrialization proceeds,
labor productivity growth in manufacturing reduces the need for more
workers and thus, the employment share of manufacturing begins to
decline. As a result, the share of employment in industry tends to peak
and then begins to decline—the stage of structural transformation
known as “deindustrialization.”

9
See Hidalgo, C., and R. Hausmann. 2009. The Building Blocks of Economic Complexity.
Proceedings of the National Academy of Sciences. 106 (26). pp. 10570–10575; and Felipe,
J., et al. 2012. Product Complexity and Economic Development. Structural Change and
Economic Dynamics. 23 (1). pp. 36–68.
 Dynamics of Structural Transformation | 99

The newly industrialized economies (NIEs) (other than

Taipei,China) have clearly begun to deindustrialize. This is
particularly evident in Hong Kong, China, where industry’s share of
employment decreased by nearly 40 percentage points over 5 decades.
Deindustrialization is the natural consequence of the NIEs’ economic
dynamism as they transition to service-led economies. This process
was similar to that of the OECD countries.10
Unlike the historical pattern of moving from agriculture to
industry and then to services, some countries are making a direct
transition from agriculture to services. In India and the Philippines, a
vibrant services sector—epitomized by business process outsourcing
enabled by advances in ICT—contributed much to their rapid growth.
Whether countries can bypass industrialization and leapfrog
directly from agriculture-led growth to services-led growth remains
a contentious issue. In modern history, countries that moved up
from middle income to high income typically developed strong
manufacturing sectors. Traditionally, there are several characteristics
of manufacturing that boost economic development as discussed
earlier: tradability of products, more rapid creation of jobs for
unskilled labor, the need for scientific and technological expertise
(which have large spillover impacts), and division of labor and scale
economies.11 On the other hand, it is possible that advances in ICT
may dramatically change this pattern by fostering these characteristics
within services.
While the “leapfrogging” debate continues, what is far
more certain is that economic dynamism requires both a productive
manufacturing sector and a productive services sector. In fact, there
is a great deal of synergy between manufacturing and services. Better
transportation services, for example, improve the ability of factories
to deliver their products to markets at home and abroad. Spillover
effects also flow from manufacturing to services. Better ICT hardware,
for example, facilitates and enhances online education and remote
medical care.

10
Rowthorn, R., and R. Ramaswamy. 1997. Deindustrialization: Causes and Implications.
IMF Working Paper Series. No. WP/97/4. Washington, DC: International Monetary Fund;
and Rowthorn, R., and R. Ramaswamy. 1999. Growth, Trade, and Deindustrialization.
IMF Staff Papers. 46 (1). pp. 18–41.
11
See Yang, X., and S. Ng. 1998. Specialization and Division of Labour: A Survey.
In Arrow, K. J., Y. K. Ng, and X. Yang, eds. Increasing Returns and Economic Analysis.
London: Palgrave Macmillan.
100 | Asia’s Journey to Prosperity—Chapter 3

3.5 Large and growing imprint of services

Definition of services and their diversity
The services sector has been growing both in terms of GDP and
employment, and this will most likely continue in most countries. But
services is perhaps the most diverse of the three broad sectors of an
economy. It covers activities as diverse as bespoke tailoring, haircuts,
convenience store sales, legal advice, architectural design, computer
engineering, and business process outsourcing.
According to the United Nations International Standard
Industrial Classification of All Economic Activities, revision 4,
the services sector comprises economic activities categorized as
(i) wholesale and retail trade; repair of motor vehicles and motorcycles;
(ii) transportation and storage; (iii) accommodation and food service
activities; (iv) information and communication; (v) financial and
insurance activities; (vi) real estate activities; (vii) professional,
scientific, and technical activities; (viii) administrative and support
service activities; (ix) public administration and defense; compulsory
social security; (x) education; (xi) human health and social work
activities; (xii) arts, entertainment, and recreation; (xiii) other service
activities; (xiv) activities of households as employers; undifferentiated
goods- and services-producing activities of households for own use;
and (xv) activities of extraterritorial organizations and bodies.
To complicate things further, there is often a great deal of
diversity within service subsectors. Because of the enormous range
of quality within each subsector, broadly defined service subsectors
cannot be strictly categorized as “high value added” or “low value
added.” For example, the quality of education can vary greatly—which
explains why parents all over the world compete to get their children
into good schools. In traditional services such as haircutting and
restaurants, there is plenty of scope to add value. This explains why
highly skilled celebrity hair designers or stylists command hundreds, if
not thousands, of dollars for one haircut. The restaurant industry also
ranges from street hawker food stalls to Michelin 3-star restaurants.
Besides being more diverse, the intrinsic value of services is
also more difficult to measure than agriculture or manufacturing. The
importance of productivity gains from services may be understated
due to the difficulty of measuring their output, and hence productivity.
Unlike rice, apples, and beef (agriculture), or cars, laptops, and mobile
phones (manufacturing), services output is intangible—such as expert
 Dynamics of Structural Transformation | 101

advice from a lawyer or the auditory experience of a concert—and the

quality (reflected in value added) is difficult to capture.
Accurate measurement of the value of services is further
hindered by the “servicification” of manufacturing.12 This refers
to manufacturing firms increasingly outsourcing services such as
marketing, designing, and data processing, which increases the scale
of the services sector. On the other hand, those services that are not
outsourced tend to be an increasingly important part of the value of a
manufacturing firm’s output, which leads to undercounting services.
The boundary between services and manufacturing is becoming
more and more blurred. In a typical global value chain, activities at
the beginning of the value chain (such as research and development,
and industrial design) and those at the end (such as distribution
and marketing) are services. Activities traditionally thought of as
manufacturing (such as fabrication and assembly) generally occur in
the middle of the chain.13

Growing importance of services

Notwithstanding these measurement issues, the economic importance
of services in Asian economies is clearly on the rise. Services already
loom large in the region’s economic landscape, accounting for 54%
of regional output in 2018. However, the share of services to GDP in
developing Asia remains well below that of the OECD (Table 3.1). As
noted, the deindustrialization process in economies approaching high
income means that the process of structural transformation will tilt
further toward services in the future. Services will become a growing
share of household consumption.14 When incomes rise, people spend
more for health, entertainment, and other recreation. As technologies
advance, people tend to want more real experiences through tourism
and concerts. Entertainment and game industries are growing across
national borders, benefiting from digital and other technologies. K-pop
is one good example of success in marketing internationally.

12
Mercer-Blackman, V., and C. Ablaza. 2019. The Servicification of Manufacturing in Asia:
A Conceptual Framework. In Helble, M., and B. Shepherd, eds. Leveraging Services for
Development: Prospects and Policies. Tokyo: Asian Development Bank Institute.
13
Miroudot, S. 2019. Services and Manufacturing in Global Value Chains—Is the Distinction
Obsolete? In Helble, M., and B. Shepherd, eds. Leveraging Services for Development:
Prospects and Policies. Tokyo: Asian Development Bank Institute.
14
ADB. 2012. Asian Development Outlook 2012 Update: Services and Asia’s Future Growth.
Manila.
102 | Asia’s Journey to Prosperity—Chapter 3

Job creation is critical for inclusive growth, and services are

labor-intensive by their very nature. Moreover, manufacturing is
poised to become less labor-intensive, with some modern firms now
using robots rather than people along the assembly line.
The services sector has already made a huge contribution to
employment and thus inclusive growth in Asia (Table 3.1). Importantly,
many traditional service jobs remain in the informal sector, shifting to
the formal services sector as economies develop. Hence, services will
continue to create more jobs in developing Asia, including the shift
from the informal to formal sector. Vibrant, high-productivity services
will create high-quality, high-wage jobs.
The development of services may also support inclusive
growth by fostering greater gender equality. Since service jobs tend
to be less physically demanding than manufacturing, they are often
more conducive to providing employment for women. A World Bank
analysis shows that across 77 countries, services accounts for a higher
proportion of female employment than male employment, with the
reverse true for manufacturing.15

Shift toward high value-added services

Technological progress is fueling the growth of high value-added
service industries and activities across Asia, with advances in ICT
transforming and upgrading the entire services sector. The PRC has
seen the rise of e-commerce giants Alibaba and JD.com. India has
its own tech giants such as Infosys and Wipro. Besides technological
progress, rapidly rising disposable incomes and the fast-growing middle
class across the region are boosting demand for more personalized
services tailored to individual preferences. For example, the number of
gourmet restaurants and luxury hotels has risen sharply in Asian cities
in recent years.
One type of high value-added service is skill- and technology-
intensive services (STIS), serving both businesses and consumers. STIS
tend to be more sophisticated, add more value, and offer better wages
compared to other services. The increased importance of STIS can be
proxied by the GDP share of information and communication, finance
and insurance, and professional and business services. By this measure,
developing Asia still has relatively small STIS sectors (Figure 3.4).

15
World Bank. 2012. World Development Report 2012: Gender Equality and Development.
Washington, DC.
 Dynamics of Structural Transformation | 103

Figure 3.4: Value-Added of Skill- and Technology-Intensive Services

and Other Services in Selected Asian and Advanced Economies
(% of GDP)

100

80

60

40

20

0
1990
2018

1993
2018

1990
2018

2000
2018

1998
2018

1990
2016
1990
2018

1993
2018

1997
2018

1990
2018
IND INO KOR MAL PHI PRC TAP THA UKG USA

Skill- and Technology-Intensive Services Other Services

GDP = gross domestic product; IND = India; INO = Indonesia; KOR = Republic of Korea;
MAL = Malaysia; PHI = Philippines; PRC = People’s Republic of China; TAP = Taipei,China;
THA = Thailand; UKG = United Kingdom; USA = United States.
Note: Skill- and technology-intensive services include information and communication, finance
and insurance, and professional and business services.
Source: Asian Development Bank estimates based on data from CEIC Data Company.
https://www.ceicdata.com/en (accessed 6 July 2019).

The expansion of high value-added services raises growth

directly and also indirectly through manufacturing synergies.
Business services have particularly large spillovers for manufacturing.16
For example, more and better industrial design, ICT, and
marketing services can improve productivity and the international
competitiveness of manufacturing firms. Spillovers can also flow from
manufacturing to services, as discussed in the previous section.
Similar to the blurring of the boundary between manufacturing
and services, technological progress is making the distinction between
STIS and traditional services less clear. One prominent example is the
merging of ICT with services such as retail and transportation. For
example, Alibaba is an e-commerce retail giant, offering a wide range of

16
Shepherd, B. 2019. Services Policies and Manufacturing Exports. In Helble, M., and
B. Shepherd, eds. Leveraging Services for Development: Prospects and Policies. Tokyo: Asian
Development Bank Institute.
104 | Asia’s Journey to Prosperity—Chapter 3

services including its own innovative e-payment system and delivery.

Other well-known examples are the ride-sharing start-ups Grab and
Gojek in Southeast Asia, which use ICT to add value to traditional
taxi services.
Asian countries can benefit from further deregulation to
foster greater competition in service industries and develop STIS.
Historically, regulatory reforms covering service industries have
delivered significant economic benefits, such as higher labor
productivity and lower prices. For example, telecommunication
charges—such as those for international calls—fell drastically as a result
of telecommunication market deregulation in many countries.

Increasing tradability of services

A key consequence of technological progress, especially ICT, is the
growing tradability of many services. A generation ago, services were
regarded as typical non-tradables in economics textbooks. The advent
of ICT made it possible for India and the Philippines to become global
leaders in business process outsourcing. This industry has become a
major source of foreign exchange earnings (through service exports),
growth, and employment in the two countries. Many multinational
companies transferred their call centers and customer service units—as
well as internal business functions such as human resources or finance
and accounting—to these two countries. Advanced research activities
are being relocated to developing countries as well, including India and
the PRC.
Globally, cross-border services trade, as a share of world
income, has grown steadily over the past quarter century. And this has
occurred despite rigorous domestic regulations covering financial,
medical, and legal services, among others, which hinder their cross-
border trade.17 In almost all countries, services trade liberalization has
lagged far behind goods trade. Services trade became an important
part of the multilateral trading system only after the World Trade
Organization was established in 1995. Now, bilateral and regional trade
agreements increasingly incorporate services trade liberalization.18
17
Fiorini, M., and B. Hoekman. 2019. Restrictiveness of Services Trade Policy and the
Sustainable Development Goals. In Helble, M., and B. Shepherd, eds. Leveraging Services
for Development: Prospects and Policies. Tokyo: Asian Development Bank Institute;
and Jensen, J. 2013. Tradable Business Services, Developing Asia, and Economic Growth.
In Park, D., and M. Noland, eds. Developing the Service Sector as an Engine of Growth for
Asia. Manila: ADB.
18
OECD. 2018. OECD Services Trade Restrictiveness Index. Trade Policy Note. March. Paris.
 Dynamics of Structural Transformation | 105

In Asia, services trade has grown rapidly in recent years.

Exports of commercial services rose sharply from $515 billion in 2005
to $1,325 billion in 2017, growing faster than merchandise exports.19 The
growing role of regional and global value chains in the production of
manufactured goods—along with the synergy and blurring distinction
between manufacturing and services in those value chains—is fueling
trade in services. And there remains substantial scope for further growth.
Further reducing barriers to services trade will encourage
Asian providers to level up their game in the face of greater competition.
Empirical analysis reveals a trend toward higher productivity for some
service industries in Asia, comparable to that of the region’s globally
competitive manufacturing industries.20 The region’s manufacturing
firms in global value chains can become more competitive from a
more efficient regional services sector and vice versa. Services trade
liberalization enables manufacturers to access service inputs at more
competitive prices in global markets, thereby boosting productivity.
In the future, services trade will play an even more important
role in global trade. For example, ICT enables millions of students to
attend online courses from foreign universities and doctors to remotely
treat patients in other countries.

Rise of tourism
Tourism is growing rapidly worldwide and, as a result, becoming a
crucial industry for many economies. Fifty years ago, international
travel was largely confined to a small rich elite. Today, tourism is open
to many more people.21
Since 2011, international tourist arrivals have grown at an
average annual rate of 4.8% globally, adding about 55 million new
travelers annually. By 2018, the figure had reached 1.4 billion, of which
348 million (25%) were destined to Asia (Figure 3.5). Over the same
period, international tourist receipts grew by 4.9% per year, reaching
$1.45 trillion in 2018, of which $436 billion went to Asia (30%).
The importance of international tourism increased significantly

19
Helble, M., and B. Shepherd, eds. 2019. Leveraging Services for Development: Prospects and
Policies. Tokyo: Asian Development Bank Institute.
20
Shepherd, B. 2019. Productivity and Trade Growth in Services: How Services Helped Power
Factory Asia. In Helble, M., and B. Shepherd, eds. Leveraging Services for Development:
Prospects and Policies. Tokyo: Asian Development Bank Institute.
21
For an overview, see Park, D., and S. Wayne. 2019. Role of Tourism for Sustainable
Development. Background note prepared for the ADB Annual Meeting 2019. Fiji. 1–5 May.
106 | Asia’s Journey to Prosperity—Chapter 3

Figure 3.5: International Tourist Arrivals, 1995–2018

(million)
1,600
1,401
1,400 1,329
1,241
1,196
1,200
952
1,000
809
800 680

600 531

306 324 348

400 284
208
110 154
200 82

0
1995 2000 2005 2010 2015 2016 2017 2018

World Asia and the Pacific

Note: Regional grouping follows United Nations (UN) World Tourism Organization aggregations.
Sources: UN World Tourism Organization. 2018. UNWTO Tourism Highlights: 2018 Edition. Madrid;
and UN World Tourism Organization. 2019. UNWTO Tourism Highlights: 2019 Edition. Madrid.

in Asia, with some variation among countries (Figure 3.6). Domestic

tourism has also grown dramatically.
Asia is not just receiving more tourists. People from Asia’s
emerging economies have been traveling far more in recent years
domestically, regionally, and globally. Whereas emerging markets
were once primarily destinations for tourists from advanced countries,
they have become a major source of global travelers. In 2018,
359 million Asian tourists traveled abroad, accounting for 26% of all
international tourists.
Tourism contributes to inclusive growth by generating many
new jobs. It is inherently a labor-intensive industry, like other services,
but with a focus on visitor satisfaction. Its economic contribution
can be measured narrowly by considering only direct effects (such
as spending on hotels and airline tickets) or more broadly by adding
indirect effects (such as tourism-related investments in new airplanes
or hotel construction).
In Asia (including Australia, Japan, and New Zealand), direct
economic effects (contribution to GDP) of international and domestic
tourism amounted to $0.9 trillion (3.2% of GDP) in 2017, with indirect
effects adding $2.7 trillion (9.8% of GDP). Tourism is important
 Dynamics of Structural Transformation | 107

especially for small countries with unique cultural traits, historical

artifacts, or natural beauty. For example, in Fiji, total international
tourism receipts were 34% of GDP in 2018. But not all receipts are
counted as a contribution to GDP (value added in a country), because
the tourist industry also requires many inputs from abroad—including
food and beverages, global hotel chain services, and foreign workers,
among others. Tourism receipts, after accounting for imported inputs,
were 17% of GDP, but the impact was estimated to reach about 40% of
GDP when indirect effects were added.

Figure 3.6: International Tourism Indicators

for Selected Asian Economies
Figure 3.6a: Tourism Receipts (% of GDP) Figure 3.6b: Tourist Arrivals (2018, million)

CAM 17.7 PRC 62.9

2.1 1,427.6
FIJ 17.4 38.3
18.7 THA 69.4
THA 12.5 31.2
5.5 JPN 127.2
SIN 5.6 25.8
8.7 MAL 31.5
MAL 5.4
5.7 15.5
VIE 95.5
VIE 4.5
3.5 15.3
KOR 51.2
LAO 4.0
2.9 SIN 14.7
3.4 5.8
MYA 2.2 13.4
INO 267.7
PHI 2.3
1.5 7.1
1.4 PHI 106.7
BRU 2.8 6.2
1.4 CAM 16.3
INO 2.6
0.9 3.8
KOR LAO 7.1
1.2
0.8 3.6
JPN MYA 53.7
0.1
0.3 0.3
PRC BRU 0.4
1.2
0 5 10 15 20 0 100 200 300 400 1400

1995 2018 Tourist Population

GDP = gross domestic product, BRU = Brunei Darussalam, CAM = Cambodia, FIJ = Fiji
INO = Indonesia, JPN = Japan, KOR = Republic of Korea, LAO = Lao People’s Democratic
Republic, MAL = Malaysia, MYA = Myanmar, PHI = Philippines, PRC = People’s Republic of
China, SIN = Singapore, THA = Thailand, VIE = Viet Nam.
Notes: The initial years for Brunei Darussalam, Myanmar, and Viet Nam in Figure 3.6a are 2001,
2000, and 2003, respectively. Data for 2018 for Myanmar refer to 2017.
Source: UN World Tourism Organization. 2019. UNWTO Tourism Highlights: 2019 Edition. Madrid;
and World Bank. World Development Indicators. https.//data.worldbank.irg/indicator (accessed
10 October 2019).
108 | Asia’s Journey to Prosperity—Chapter 3

In addition to the rapid expansion of disposable income and the

dramatic increase of the middle class, especially in emerging economies,
conducive policies (such as open sky agreements), the widespread use
of social media that facilitates travel planning and reservations, and
low-cost air travel (including regional budget airlines such as AirAsia)
contributed significantly to the rise in tourism. Although the industry
is not generally viewed as an STIS, it holds much potential to add value
by including higher-end services, leveraging technology, and utilizing
branding. There are also new tourism subsectors such as medical
tourism, wellness tourism, and ecotourism.
Despite its many benefits, there is growing recognition of
potential negative side effects to further increases in tourism. For
example, a sudden surge of tourist traffic can seriously damage
environmentally fragile attractions such as beaches or coral reefs. It
also can create inconvenience and hardship for local residents, who
must deal with increased traffic congestion or a sharp escalation of
real estate prices and cost of living. If the environment is damaged and
the community disrupted—a negative outcome in itself—it makes the
tourism business unsustainable.
Thus, the concept of “sustainable tourism” is attracting more
attention. There are several measures that can promote sustainable
tourism: (i) ensure guidelines and regulations protect local communities
and protect local heritage, (ii) invest in tourism infrastructure such
as airports and broadband networks, (iii) build capacity of tourism
professionals, and (iv) improve travel facilitation such as visa-free entry
for short-term visitors. Bhutan, for example, has started restricting the
number of tourists and aims at higher-end travel to enhance tourism’s
economic impact and sustainability. Also, tourist services can have
positive spillovers to manufacturing and inclusive growth. In Bali,
Indonesia, for example, tourism has led to an expansion of garment and
art exports, which draw on tradition and culture.

3.6 Urbanization as a geographic transformation

Urbanization is central to structural transformation. The shift of
resources away from agriculture to industry and services is intertwined
with the shift of people from rural to urban areas and the consequent
growth of cities. Moreover, manufacturing and many services
often benefit from “agglomeration economies,” whereby increased
interactions among more and different types of firms and workers in
 Dynamics of Structural Transformation | 109

any given location boost productivity. The benefits accrue as there

are greater opportunities for workers to find suitable jobs, stronger
networks of interdependent experts interacting in larger and denser
locations, and more scope for spillover of ideas and knowledge between
firms and workers. These reinforce traditional advantages of cities,
such as port access or proximity to navigable rivers.
The urbanization process is closely associated with stages of
economic development. Middle-income countries tend to have at least
50% urbanization rates, with the proportion in high-income countries
above 70%. Given Asia’s dramatic structural transformation over the
past 50 years, it is not surprising that the share of population residing
in urban areas in developing Asia rose from 20% to 46% from 1970 to
2018, an increase from about 375 million to almost 1.9 billion urban
dwellers (Figure 3.7). If these trends continue, the UN projects some
3 billion people—or two-thirds of developing Asia’s population—will be
living in cities by 2050.

Figure 3.7: Urban Population, 1970–2020

(million)

5,000

4,000

3,000

2,000

1,000

0
1970 1980 1990 2000 2010 2020

India People’s Republic of China

Rest of Developing Asia Rest of the World

Note: 2017 to 2020 data are projections.

Source: United Nations. 2018. World Urbanization Prospects: The 2018 Revision. Online Edition.
https://population.un.org/wup (accessed 16 July 2019).
110 | Asia’s Journey to Prosperity—Chapter 3

Figure 3.8: Urbanization Rate and GDP, 2017

100 100

Urbanization rate (% of total population)

Urbanization rate (% of total population)

80 80

60 60

40 40

20 20

0 0
4 6 8 10 12 20 40 60 80 100
Log GDP per capita (current US dollars) Industry + Services (% share of GDP)

Developing Asia Developing Asia

Rest of the World Rest of the World

GDP = gross domestic product, US = United States.

Sources: United Nations. 2018. World Urbanization Prospects: The 2018 Revision,
Online Edition. https://population.un.org/wup (accessed 16 July 2019); and World Bank.
World Bank Development Indicators. https://data.worldbank.org/indicator (accessed 1 April 2019).

Thus, urbanization rates are positively correlated with income

per capita (Figure 3.8). At the same time, the rate of urbanization
is increasing with the share of industry and services to GDP.
Not surprisingly, cities generate a large portion of GDP.22 While the
growth of industry’s and services’ share of GDP goes hand in hand with
urban growth, cities cannot prosper without the support of the rural
economy. This link between rural and urban economies underscores
the need for balanced development—among cities, secondary cities,
and rural areas—which includes modernizing agriculture.
Although other countries in the world achieved high rates of
urbanization earlier, the process is unfolding faster in Asia. Because
of its faster pace of economic development, Asia achieved a level of
urbanization in 95 years that took 100–200 years in other regions.23 In
many respects, Asia’s urbanization process has been compressed.
Urbanization is often a natural process associated with
changing job opportunities as part of structural transformation, and the

22
ADB. 2008. Managing Asian Cities. Manila.
23
ADB. 2012. Asian Development Outlook 2012 Update: Services and Asia’s Future Growth.
Manila.
 Dynamics of Structural Transformation | 111

attraction of cities such as better access to education and health. Some

countries have tried to control migration from rural areas to cities.
In the PRC, the hukou registration system manages migration from
rural to urban areas. More recently, the government has taken steps to
relax the system to encourage migration from rural areas to secondary
cities. Some governments, such as those of Indonesia, Japan, and the
ROK, have tried to deconcentrate populations for more balanced
regional development.
Asia is expected to continue high-speed urbanization, resulting
in rising numbers of densely populated, increasingly large cities.
Worldwide, the number of megacities (cities with more than 10 million
inhabitants) is expected to grow from 29 in 2015 to 37 in 2025. Most of
them are expected to be in Asia, and 6 out of the world’s 10 largest ones
are already in Asia (including two from Japan). Asian megacities will
increase from 15 to 20 (from 17 to 22 if Tokyo and Osaka are included).24
While Asia reaps many benefits from urbanization, its speed has
meant that accumulation of physical and institutional infrastructure
has often lagged behind growth of the urban population. This can have
negative consequences for urban dwellers such as traffic congestion,
environmental degradation, health problems, and even rising crime.
A key challenge for governments is to harness the agglomeration
economies of cities while minimizing urbanization’s negative effects.

3.7 Looking ahead

The shift from agriculture to manufacturing and services, and rapid
urbanization propelled much of the region from low- to middle-income
status. Sustained rapid growth brought the share of developing Asia’s
population living in middle- or high-income countries from less than
10% in 1991 to more than 95% by 2015. Moving from middle to high
income will require further structural changes.
Policies needed to do this—to continue sustainable and
inclusive growth for developing Asia—have common elements, many
of which are discussed in this book. These common elements include
the promotion of efficient markets, strong governance, technological
advancement, human capital development, infrastructure investment,
open trade and investment regimes, prudent macroeconomic policies,
measures to address inclusiveness and gender equality, and support

24
UN. 2018. World Urbanization Prospects: The 2018 Revision. Online Edition.
https://population.un.org/wup (accessed 16 July 2019).
112 | Asia’s Journey to Prosperity—Chapter 3

for the environment. At the same time, overcoming the challenges of

further structural transformation hinges on an economy’s development
status and other specific conditions.
Low-income countries, or those that recently graduated to
lower-middle-income status, must undertake policy reforms and
investments to raise agricultural productivity, invest more in basic
infrastructure (both rural and urban), improve secondary education
and technical and vocational education and training, and further
improve the business environment to attract more foreign direct
investment. They would benefit from applying the lessons of their
successful regional peers.
For economies at or near upper-middle-income status, such as
the PRC and Malaysia, transitioning to high income and avoiding the
“middle-income trap” will require new and different drivers of growth.
They must focus more on investing in higher education and research,
increasing ICT networks and other high-quality infrastructure, and
deepening and broadening financial markets.25 They should address
rising income inequalities between advanced and lagging regions,
including the reform of residential registration systems. They
should further strengthen economic institutions and policies, such
as intellectual property protection and stronger competition laws,
to create an environment conducive for attracting new players, new
products, and new services.
For high-income economies like the NIEs, the innovation
challenge is even more acute as they are at (or near) the global
technology frontier. These economies will also need to strengthen
policies that avoid widening the income gap between high- and low-
skilled labor to maintain social cohesion. At the same time, they must
address challenges coming from a declining working-age population
and rapid aging.
Given rapid urbanization, appropriate investments in urban
infrastructure are needed—especially network infrastructure such
as transport, water supply, sanitation, and waste management—as
well as education and health services. To mitigate the concentration
of populations in big cities, connectivity between cities and between
urban and rural areas must be strengthened. It is important to have
strong governance and civil participation for planning and regulations
regarding city development, land use, and environmental protection.
25
ADB. 2017. Asian Development Outlook 2017: Transcending the Middle-Income Challenge.
Manila.