Debt, trade barriers and policy uncertainties are dulling the region’s economic dynamism and governments need to do more to address long-term problems such as weak social safety nets and underinvestment in education, the report says.

Asia’s economies are growing more slowly than before the pandemic, but faster than other parts of the world. And a rebound in global trade — trade in goods and services grew by only 0.2% in 2023 but is projected to grow by 2.3% this year — and easing financial conditions as central banks cut interest rates will help offset weaker growth in China.

“This report demonstrates the region is outperforming much of the rest of the world, but it’s underachieving its own potential,” Aaditya Mattoo, the World Bank’s chief economist for East Asia and the Pacific, said in an online briefing.

“The leading firms in the region are not playing the … role that they should,” he added.

A key risk is that the U.S. Federal Reserve and other major central banks might keep interest rates higher than before the pandemic. Another comes from the nearly 3,000 trade-distorting measures, such as higher tariffs or subsidies, that were imposed in 2023, the report said.

Most of those policies were set by major industrial economies such as the U.S., China and India.

China’s ruling Communist Party has set an official target for about 5% growth this year, just below the 5.2% annual pace of last year.

The World Bank is forecasting that growth will slow to 4.5%.

“China is aiming to transition to a more balanced growth path but the quest to ignite alternative demand drivers is proving difficult,” the report says.

Mattoo said Beijing still has a way to go in shifting its economy away from reliance on real estate construction to drive business activity, and just spending more money won’t fix the problem.

“The challenge for China is to choose efficient policies,” he said. “Fiscal stimulus will not fix structural imbalances,” he said. What is needed are stronger social welfare and other programs that will enable households to spend more, boosting demand that will then encourage businesses to invest.

The region could be doing much better with improved productivity and greater efficiency, Mattoo said.

Vietnam, for example, is drawing huge amounts of foreign investment as a favored destination for foreign manufacturers, but its growth rate of about 5% is below its potential.

“To be happy that Vietnam is growing at 5% reflects the kind of underachievement we should not be happy about,” Mattoo said in an online briefing.

One key problem highlighted in the report is lagging improvements in productivity, the report said. Leading companies in Asia are far behind the leaders in wealthier nations, especially in technology-related areas.

The report faults governments for imposing restrictions on investment that prevent foreign companies from entering key parts of regional economies, a need to build skills and weak management. Opening to more competition and investing more in education would help, it said.