It has 2 billion people of working age and will add another 770 million in the next 40 years. The ‘next billion consumers’ in the global economy will be based largely in Asia and the region’s middle class will quintuple in size by 2030, raising its spending from about US$4 trillion to over US$30 trillion — or roughly 42 per cent of the predicted worldwide consumer spending. Asia already accounts for 40 per cent of the world’s GDP and about 65 per cent of global growth. The emergence of global companies headquartered in Asia is also gathering pace. There are currently 91 Asian companies listed on the global Fortune 500, two thirds of which are based in China. So, what is there not to like?

The answer is that all of this shaping comes along with a whole lot of shaking. Leaving aside geopolitical and big power issues, Asia will have its economic and political work cut out at home because regardless of its past performance, future economic success is not preordained. There is strong empirical evidence to show that most countries that emerge from poverty to become middle-income countries get stuck in a so-called middle-income trap. Since 1960, only 13 of 101 countries, then deemed middle-income countries, went on to become high-income economies. Asia’s economic model, then, needs a reboot. Individual economies must address their own economic problems. In China, the problems lie in its over-active investment and credit expansion, and weak governance and legal institutions. In India, it’s more about the stifling effect of the government sector on the private sector.

For now, developing Asia’s principal economic problems are the wider lethargy in Western economies, containing the damage from the euro zone crisis and restraining a new credit boom. The ratio of credit to GDP across the region has now surpassed the peak level seen just before the Asian financial crisis in 1997, much of it due to China.

More broadly, developing Asia will only succeed if it can rebalance successfully and address deficiencies in infrastructure, innovation, employment, public health, educational attainment levels and the position of women in society. Ageing societies, such as China, have to develop income and retirement security programs. Younger ones, like India, have to think fast about employment creation.

Almost 30 per cent of Asians are under 15 years of age and will soon need jobs. Only 60 per cent of young men and 40 per cent of young women are classified as employed. Meanwhile, about 700 million people in Asia do not have unrestricted access to drinking water, 1.9 billion people experience poor sanitation, 100 million children in Asia are not enrolled in primary schools, and over 100 million children under the age of five are underweight.

These are economic issues but the solutions are political, namely improvements in governance, public management and legal institutions, stronger and more inclusive private sector growth and innovation. The outgoing Chinese Premier Wen Jiabao highlighted the significance of political reform, arguing that without it, China would be unable to implement successful economic rebalancing. Whatever he meant, China, and other Asian economies, will need to summon much political will to strengthen or create the new robust institutions needed for a modern high-income economy.

Comprehensive economic reforms need to be undertaken quickly to sustain high growth — which is the source of the Chinese Communist Party’s legitimacy — and to avoid a hard landing in the next two years. The main rebalancing issue concerns the economy’s investment-centric nature, with spending at around 50 per cent of GDP. This cannot go on without causing a bust. The speed with which investment has increased, aided and abetted by the lowest real lending rates in a generation (with preferential rates for state-owned enterprises) and strong vested political interests, is leading to a growing misallocation of capital, weakening investment returns, and deteriorating asset and lending quality.

But rebalancing is only partly about economics. To succeed, China must be willing and able to transfer legal power and commercial and financial privileges from state-owned enterprises, state banks, family clans, military apparatus and itself to private firms, small and medium-sized firms, households and its citizens. And if it is not willing and able to do so, what sort of shaking is that likely to bring?

In China and developing Asia, the next several years brim with economic promise. But the realisation depends on sound economic management and the building of robust institutions, which is about political will, not economic predictions. A much more pedestrian outlook than is widely assumed and a lot more shaking are both likely.

George Magnus is a Senior Economic Adviser to UBS Investment Bank.

This is an abridged version of an article that originally appeared here on the European Centre for International Political Economy.