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Asian Development Outlook 2001 : II. Economic Trends and Prospects in Developing Asia
Newly Industrialized EconomiesGrowth in the newly industrialized economies (NIEs) accelerated to 8.4 percent in 2000 from 7.9 percent in 1999 as the subregion further recovered from the Asian financial crisis. Rapid export growth led the expansion, supported by strong investment spending and a moderate increase in consumption. The economic performance of the four economies was more consistently broad based relative to 1999 as Hong Kong, China; Republic of Korea (Korea); and Singapore all recorded similar growth rates of about 9-10 percent. Exports were boosted by robust demand from the US. For the subregion, the rate of growth in shipments increased to 19.6 percent in 2000 from 5.5 percent in the previous year. The rapid increase in demand for exports triggered a surge in domestic investment, especially in the electronics sector. Gross capital spending was particularly strong in Korea; Singapore; and Taipei,China. In the latter two economies, investment spending rose strongly after very weak performance in 1999. Private consumption spending rose as consumer confidence increased, labor markets tightened, and property prices firmed. On the supply side, the industry sector performed well in Korea; Singapore; and Taipei,China, buoyed by production in the high-technology sector, particularly electronics. In Hong Kong, China supply-side growth was led by the services sector, while the relocation of manufacturing to nearby mainland provinces continued. Despite a rise in interest rates in industrial countries in the first half of 2000, monetary policy was basically neutral and there was little interest rate volatility. Korea and Singapore maintained relatively flat rates throughout the year, while Hong Kong, China generally kept pace with interest rate developments in the US. Fiscal policy was tightened during the year, partly because rapid growth brought in more taxes than anticipated. The fiscal surplus increased in Singapore; the deficit fell in Taipei,China; and the deficit turned into a surplus in Korea. Inflation remained subdued in the subregion, though some upward movement toward the end of the year was seen in response to higher world oil prices. However, capacity utilization rates remained comparatively low in contrast to the years before the financial crisis and had a moderating effect on inflation, as did generally tighter fiscal policy. In Korea, for example, the rate of capacity utilization was around 70 percent. In Hong Kong, China, fierce competition in the retail sector led to price deflation. Although net exports made a positive contribution to growth in the NIEs, the size of this contribution diminished, from a peak of around 7 percentage points on average in 1998, to about 2 percentage points in 2000. This is primarily because imports also grew quite rapidly, reflecting a combination of restocking of intermediate inputs and, increasingly, of rising demand for consumer goods, as domestic demand conditions improved. The onset of the global electronics downturn in the last quarter of 2000 further weakened the contribution of net exports to overall growth, and was a factor in the modest reduction in the subregional current account surplus. Nevertheless, the surplus remained substantial at $40 billion or 4.7 percent of GDP. The export boom was aided by a modest amount of currency depreciation (aside from Hong Kong, China where the rate is fixed against the US dollar) ranging from just over 4 percent in Taipei,China to nearly 7 percent in Korea (December to December). As the NIEs are small open economies with a substantial international trade share of GDP, their prospects depend largely on external developments in industrial countries. As early as October 2000, softness in global electronics demand had already begun to have an effect: in Singapore and Taipei,China industrial production slowed, while in Korea the deceleration started a month later. As external demand weakened in the last quarter of the year, equity price indices for three of the NIEs ended the year lower in 2000 than in 1999. The Hang Seng Index finished 11 percent weaker, while the Taiwan Weighted Stock Exchange Index and the Singapore Straits Times 55 Index dropped by 36 percent and 22 percent, respectively. In 2001, GDP growth is likely to fall back to just over 4 percent for the group. Slower export growth will be the main cause of this: from 19.6 percent in 2000, it is projected to fall to 7.5 percent. Slower export growth translates into a slowdown in domestic consumption and investment. The inventory cycle will also play a role in taking investment lower as firms work off excess inventories as external demand softens. Nevertheless, some additional investment in the high-technology sector is expected as the NIEs invest in new equipment and processes to enhance productivity and to take advantage of developments in the new economy. Of particular interest are the general increases in investment in research and development; the greater investment in human resources in the technology area; the growth of technology parks in both Hong Kong, China and Singapore; the expansion of information and communications technology (ICT) infrastructure in Korea; and the attraction of higher value-added firms in the electronics industry to Singapore. Furthermore, the strong performance of the People's Republic of China and its strong trade linkages with Hong Kong, China and with Taipei,China should provide a partial buffer for these two economies. Governments are also likely to adopt appropriate macroeconomic policies to soften the downturn. Across the NIEs, monetary policy is expected to ease more and interest rates may fall further. Fiscal stimulus is more likely in Korea and Singapore than in Hong Kong, China and Taipei,China. Economic restructuring will continue in the NIEs as they make the transition toward higher value-added and technology-intensive products and services. This will involve additional investment in new plant and equipment and in research and development. Sophisticated services-based activities and broadened diffusion of ICT pose challenges to those workers with fewer skills and lower education. Further upgrading of the workforce will be needed, particularly at the post-secondary level. Greater investment in physical infrastructure, particularly in the ICT sector, will also be required. In the financial sector, especially banking, the NIEs face a variety of challenges, from overcrowding, low profitability, and growth of nonperforming loans in Taipei,China; to the continued problem of restructuring of financial and corporate institutions in Korea; to the development of domestic capital markets in Singapore; and to the strengthening of the regulatory framework and increasing efficiency through greater competition in securities and futures markets in Hong Kong, China. To meet these challenges, flexible policies will have to be developed to deal with a rapidly changing and potentially volatile external environment.
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