East Asia's economies are growing at their swiftest pace since
before the financial crisis with fewer people than ever living in
extreme poverty, according to the latest
East Asia and Pacific Regional Update, the World Bank's
twice-yearly look at the region's economies.
Economic growth is expected to top 7 percent for East Asia and
Pacific (excluding Japan), while developing economies in the region
are expected to expand by more than 8 percent. High growth is being
experienced by middle income and poor economies alike. Exports
should turn in their strongest performance since 1988, supported by
demand from China, the global recovery, a rebound in the global
high-tech industry, and strong commodity prices. Investment has
also recovered, contributing half of aggregate demand growth. This
strong performance has lifted 40 million East Asians out of
poverty, mostly in China, Indonesia, Thailand and Vietnam.
"We are estimating that by the end of this year, the number of
people living on less than US$2 a day will be around one third of
the region's population. Even excluding China, the absolute number
of poor would be at their lowest level ever, finally overcoming the
higher poverty created by the 1997 crisis," said Regional Vice
President for East Asia and Pacific Mr. Jemal-ud-din Kassum. "This
expansion is happening during a time of major political advances
with a sweep of legislative and presidential elections, including
Indonesia's first ever direct election of a president, capping what
looks like being a remarkable year for the region."
Yet, amid these successes, there are growing concerns that the
outlook for 2005 may be less favorable and more uncertain. The
spike in oil prices, slower growth in rich countries, and downturns
in the high-tech and commodity cycles are all unfavorable trends
for East Asia.?? Major global macroeconomic
balances, in particular record US current account deficits and East
Asian surpluses, and the investment boom in China, still need to be
brought onto sustainable paths, intensifying the risks facing the
region.
"Although 2004 has been a strong year, recent data also suggest
that the recovery in East Asia has peaked, and that economic
activity is shifting into lower gear," said Mr. Homi Kharas, chief
economist for the East Asia and Pacific region. "The risks we
talked about in previous editions of the Regional Update are
intensifying, making the outlook more uncertain."
The consensus view is that growth in the developed world,
including the United States, Japan, and Europe, will slow
temporarily but build into a sustained expansion. Although China's
growth, investment and imports might also slow gradually, this
would be more sustainable and add a measure of stability to the
regional economy.
"Policy measures to cool down the economy are starting to show
some success, but it is too early to call the end of the investment
boom that has become known as 'overheating,'" Bert Hofman, lead
economist for China said, noting that underlying incentives for
over investment have not changed. "At the same time, the recent
increase in interest rates, while modest, is encouraging, as it
shows the authorities willingness to use this instrument when
needed, and signals a further move to more market-based
macroeconomic management."
For
China, the World Bank expects that, with underlying
inflationary pressures projected to remain limited, drastic
macroeconomic measures to cool down the economy are unlikely to be
imminent, and if the economy lands at all, it is likely to be a
soft landing. Fears of a hard landing also remain limited in light
of continued strong demand indicators in recent months. The World
Bank expect GDP growth to ease to 91/4 percent for 2004 as a whole
and around 8 percent in 2005.
The steep spike in global oil prices will increase the oil
import bill for emerging East Asia by US$25 billion this year,
reducing the incomes of the majority of regional economies that are
net energy importers, as well as the region's primary export
markets like Japan, the US, and Europe.
"The impact of higher oil prices could shave 0.5 to 1 percentage
points off growth rates in the region next year," Mr. Kharas said,
"with countries like the Philippines, Thailand and Korea at the
upper end of this range."
Also of concern is the nature of adjustment required to reduce
the size of current account surpluses in East Asia and deficits in
the United States. "The best contribution East Asian economies can
make is to reduce their surpluses by expanding domestic private
investment and further liberalizing trade, especially in services,"
added Mr. Kharas.
What should policymakers do?
A key issue for policy makers, the report says, is to nurture
the recent investment recovery in the region by strengthening the
investment climate, so that the recovery is sustained through the
present period of global uncertainties and cyclical slowdown.
"Rather than fretting too much about a cyclical slowdown that is
inevitable to some extent, the focus is better placed on nurturing
the emerging recovery in private investment," said Mr. Milan
Brahmbhatt, a lead economist and principal author of the Regional
Update. Increases in investment would broaden the recovery beyond
the limitations of the current drivers of growth, exports and
consumer demand. "Export growth could be crimped by the cyclical
factors and the global outlook, and private consumption growth has
its dangers when it is boosted by rapid growth in household credit,
as recently shown in Korea and Hong Kong (China)," according to Mr.
Brahmbhatt.
A Special Focus section at the end of the report, entitled
Strengthening the Investment Climate in East Asia documents the key
constraints and problems faced by firms in East Asia, based on
responses from over 6500 businesses in five countries. The section
points to country-specific actions that can be taken immediately to
reduce uncertainty, lower the costs of investing and increase
returns. It prioritizes among getting greater predictability in
court judgments and interpretation of regulations, reducing
macroeconomic risk, cutting business regulation, labor
inflexibility and red tape, reducing bribes and corruption,
improving the reliability of power and other infrastructure
services, and building skills.
(China.org.cn November 9, 2004)