Next year will present significant challenges and new responsibilities - political, economic, and social - for developing Asia. The path to sustainable, inclusive economic growth will be difficult, but it will also entail exciting opportunities for Asia and the rest of the world.

Five years into the Great Recession, recovery remains elusive in advanced economies. Europe's leaders must make tough decisions in order to resolve the euro crisis and revive growth. And, although the United States is beginning to show signs of economic recovery, the country faces a political stalemate over the so-called "fiscal cliff." Indeed, while leading indicators may be stronger than they were a year ago, risks have only intensified.

In Asia, fiscal prudence allowed the stimulus measures that were needed to revive global economic growth in 2010. But the economic transformation that has occurred over the last several decades has reached a crossroads. Notwithstanding a few low-income economies catching up, the years of double-digit GDP growth are unlikely to continue, particularly in China and India, owing to the anemic external environment, together with internal weaknesses.

Asia needs to adjust to a new era of more moderate growth, while addressing widespread inequality and improving sustainability. The unprecedented economic expansion that has lifted millions out of poverty has been accompanied by widening income disparities, as well as serious environmental damage. As a result, Asia now has two faces: a prosperous and growing middle class, and those who have yet to benefit from the region's rapid economic development, and whose health and well-being is being adversely affected by acute problems like air and water pollution.

In short, the key challenges facing Asia today are to sustain economic growth, at lower, but still enviable rates, and to improve its quality. Asia needs strong, inclusive, green, knowledge-led growth, which implies the need to rebalance the sources of economic dynamism to emphasize domestic, regional, and inter-regional "South-South" demand.

Economic relations with the West would not be diluted by this shift. Just as the West has provided exports and expertise to bolster Asia's economic expansion, Asia offers opportunities for advanced economies to transform their growth models to cope with the challenges of globalization. Indeed, the coming year will mark a seminal moment for developing Asia in terms of advancing its own agenda, which, in turn, will give developed economies the flexibility and opportunities that they need to fulfill their own economic potential.

To be successful, Asia's leaders must not allow diplomatic distractions, including territorial disputes in the region, which intensified in 2012, to destabilize further an already uncertain economic and geopolitical environment. Given current global economic uncertainties, there is no room for this kind of disruption. Continued geopolitical volatility will delay, if not obstruct, the emergence of a new, world-class Asia.

In this context, Asian leaders ascending to power in 2013, for example, in China, Japan, and South Korea, must prioritize enhanced regional economic and political cooperation. Such relationships will be all the more crucial if global economic conditions deteriorate. Political disputes must not be allowed to hinder the adjustments needed to ensure long-term sustainable development.

And those adjustments are many. Over the last two decades, Asia's economic boom was largely driven by intra-regional manufacturing linkages, in which intermediate goods and parts were sourced from within Asia to be assembled into final goods for export to developed markets, earning the region the moniker "factory Asia." But the protracted global slowdown has highlighted the risks of excessive reliance on exports. In order to ensure long-term stability, Asia must find new sources of growth, increase productivity, and improve efficiency.

Expanding South-South trade and investment links could enhance the region's growth potential and contribute to global economic stability by promoting worldwide rebalancing. To facilitate this, developing Asia must work to reduce internal trade and investment barriers, which remain higher than those in place vis-a-vis industrialized nations, and continue to promote global and regional integration.

Developing a vibrant service sector is also crucial. As manufacturing wages rise and labor intensity falls, Asia will need to rely more on services to create jobs for the millions of people who join the workforce each year. While little investment is needed to upgrade the service sector, dismantling excessive regulations will require strong political will.

Moreover, recent natural disasters have highlighted the importance of climate resilience as a means to improve quality of life. Protecting the poor and managing urban migration would help in this regard, and requires a subtle mixture of innovation and public fortitude. Measures should include issuing land titles, removing slumlords, and providing basic services.

Asia's ongoing transformation, rooted in the long-term conviction that more equitable, inclusive, and increasingly knowledge-led growth will help to reduce poverty and offer greater prosperity to its citizens, requires a short-term commitment to mitigating any global economic slowdown caused by new shocks. It also demands determined efforts to reduce global imbalances by rebalancing Asia's own sources of growth. If successful, the Asia that emerges from this transformation will not only be prosperous; it will also be a bulwark of world peace, the ultimate global public good.

Haruhiko Kuroda is president of the Asian Development Bank. Changyong Rhee is chief economist, Asian Development Bank.

Project Syndicate

(China Daily 12/31/2012 page9)