As developing Asia’s recovery from the global crisis gains firm hold, medium- and long-run growth will re-assert itself as the region’s top economic priority. The central challenge now facing the region is to transform its V-shaped recovery into sustained growth beyond the recovery.

“Strong and sustained growth is critical for developing Asia’s future prosperity,” says Asian Development Bank (ADB) Chief Economist Jong-Wha Lee. “Despite its rapid pre-crisis growth and resilience during the crisis, the region lags far behind the industrial economies in per capita income and remains home to two-thirds of the world’s poor.”

The Asian Development Outlook 2010 Update points out that in order to sustain growth Asia’s policymakers must give higher priority to structural reform. Policies to improve the region’s productive capacity by fostering factor accumulation and productivity growth are vital. While the region’s fiscal and monetary stimulus limited the depth of the downturn, they cannot sustain growth over a longer time horizon.

The report highlights that some policies which were effective in earlier years’ low-income, capital-scarce Asia are likely to be less effective in today’s middle-income, capital-abundant Asia. Promoting productivity is set to become a more influential driver of the region’s growth, which in the past depended mainly on greater use of capital and labor. Elements such as trade, human capital, infrastructure and financial development are likely to be especially important for growth.

The report proposes several growth-conducive policy recommendations in each of these four areas.

- While trade will continue to be a core ingredient in the region’s development, the importance of emphasizing cross-border production networks, trade facilitation, or export diversification in this process depends on the country’s level of development.

- For human capital investments to be effective, the education reform agenda must be designed to produce educational outcomes that match the standards and skills required by the labor market.

- In order to keep Asian cities competitive, infrastructure investments must effectively tackle congestion, environmental degradation, and other costs associated with urbanization.

- The role of Asian financial systems in Asia’s growth must no longer be limited to boosting the quantity of investment but must also enhance the efficiency of investment and thus contribute to productivity growth.

“Good governance and institutions matter for growth as well. Competent and honest governments that efficiently deliver basic public services, such as administration, education, and health care, raise the productivity of all firms,” says Mr. Lee.

Greater regional integration and cooperation expands markets and improves connectivity. A policy package that combines all these elements will help push developing Asia’s future growth potential.