Regions and Countries

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Developing Asia and the Pacific

The annual growth rate of gross domestic product (GDP) for all of developing Asia and the Pacific taken together increased from 6.3 percent in 1999 to 7.2 percent in 2000, with growth in the PRC and the NIEs continuing to be the most rapid in the region.

Strong export growth, positive external balances, and revived domestic demand characterized the region’s economic performance. However, the rise in international oil prices in 2000 affected India’s GDP growth, mainly because it is the most heavily oil-dependent economy in the region. The volatility in currency and equity markets in 2000 had little impact on the economic performance of the rest of developing Asia and the Pacific, mainly because of minimum pressure on the balance of payments in the crisis-affected countries and NIEs. Flexible exchange rates in most countries, low levels of short-term debt, and strong reserve positions helped the region as a whole to maintain macroeconomic stability.

Although GDP growth accelerated in 2000, the equity markets in most of the major economies of developing Asia did not perform well, mainly because of their large technology capitalizations. The currencies of many of these countries weakened in 2000 because of higher oil prices, rising interest rates, and political uncertainties in Indonesia; Philippines; Taipei,China; and Thailand.

Soft equity market performance and weakening domestic currencies notwithstanding, aggregate demand and consumer confidence remained at high levels, on average, suggesting that the negative wealth effect resulting from the decline in stock prices in developing Asia was not as significant as historically experienced in the United States (US) (except for the NIEs).⁵ Consumption levels thus returned to their precrisis levels in most of the crisis-affected countries, while investment spending continued to slacken considerably. Weak credit growth and low rates of capacity utilization characterized this softness in investment.

Inflation slowed to 1.5 percent in 2000 from 2.5 percent in 1999. Overall, inflation was not a concern in the region and monetary policy remained accommodative, partly in an effort to stimulate credit growth, which in most countries remained below precrisis levels.

As for the external account, exports continued to expand in the region, recording a growth rate of 19.9 percent in 2000. Electrical and electronic products were the major sources of growth in exports, as the boom in information and communication technology (ICT) continued worldwide. Although net exports contributed positively to growth in 2000 in most countries, the size of this contribution diminished relative to recent years. From a peak contribution of around 7 percent of total growth in 1998, net exports contributed an average of only 2 percent of total growth in the region in 2000, suggesting that while exports grew strongly, imports on average grew more rapidly. The recovery in imports relative to previous years resulted from a combination of restocking of inventories of intermediate inputs, rising demand for imported consumer goods as domestic demand strengthened, and an increase in oil prices. As a result, current account surpluses in 2000 narrowed for the region as a whole. In 2000, market participants perceived the crisis-affected countries to have slowed implementation of needed structural reforms, thus leading to a downturn in investor confidence. This, combined with domestic equity markets declining in tandem with the US stock markets, led to a net private capital outflow of $3.8 billion in 2000 from the five crisis-affected countries (see table below).

Because of strong reserve positions and low short-term debt-to-GDP ratios, public debt and external liabilities were not a major concern in the region in 2000. Short-term nominal interest rates across the region remained below precrisis average levels, except for Indonesia. Central banks in the region kept short-term interest rates low to encourage financial sector reforms and to bolster domestic demand to sustain growth.

The major exports from developing Asia to the US are manufactured goods, a large portion of which are ICT and electronics-related products. With the US now accounting for half of global expenditure on ICT, exports from the major countries of Southeast Asia (with the exception of Indonesia) and the NIEs are vulnerable to a slowdown in the global economy as a whole. In addition to a slowdown in domestic GDP growth resulting in a slackening in foreign trade, indirect linkages through consumption and investment may also transmit a global slowdown to the domestic economy via capital outflows and rising interest rates.

Intraregional trade accounts for the largest external dependency in most countries in developing Asia. There is thus a potential virtuous circle of rapid growth in intraregional trade, leading to increased domestic demand and higher real incomes and to even more rapid growth in intraregional trade. However, for this virtuous circle to prevail in the region, the external environment will have to remain favorable. Continued global GDP growth and expansion in international trade volumes, combined with firmness in the prices of oil and other commodities, are crucial to maintaining export growth momentum. A major concern is thus a correction in global economic growth.

Sustainable growth in the region also depends on individual countries completing corporate and financial sector reforms necessary for reducing vulnerability to downturns in the global economy.

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