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Asian Development Outlook 2004 :
I. Developing Asia and the World
Economic Highlights in 2003 and Prospects for Developing Asia and the Pacific in 2004-2005
The economies of developing Asia and the Pacific generally showed significant resilience in 2003. Despite the uncertainties caused by the Iraq conflict, high oil prices, the outbreak of the severe acute respiratory syndrome (SARS) epidemic, and a slow recovery in major industrial countries during the first half of the year, gross domestic product (GDP) growth for the region reached 6.3% in 2003, making it the most dynamic region in the world. Among the larger economies, People's Republic of China (PRC), India, Thailand, and Viet Nam turned in particularly strong performances. Average inflation remained low at 2.3%, compared with 1.5% in 2002. The aggregate current account of the region posted a sizable surplus of 4.2% of GDP. Finally, foreign exchange reserves of developing Asia rose to $1.3 trillion at the end of 2003.
However, the overall economic strength of the region hides significant differences in economic performance both among the subregions and among countries within subregions (Table 1.1). Among the subregions, economic growth in 2003 was particularly strong in East Asia, South Asia, and Central Asia, moderate in Southeast Asia, and still fragile in the Pacific (though much better there than in the past 3 years). Within subregions, developments also varied considerably. In East Asia, the impact of SARS, together with weak domestic demand conditions, resulted in low growth in Hong Kong, China; Republic of Korea (henceforth Korea); and Taipei,China. In Southeast Asia, the Singapore economy remained weak as economic restructuring continued and the uncertain employment situation kept domestic demand subdued. Indonesia and the Philippines expanded moderately but at rates below potential. In South Asia, most economies showed strong performances in 2003, in part due to very favorable weather conditions. However, uncertain political conditions kept economic growth below par in Nepal. In Central Asia, the Uzbekistan economy continued to grow quite slowly. In the Pacific, several of the smaller economies experienced no growth in 2003, such as the Federated States of Micronesia and Nauru, or a decline, as in the case of Timor-Leste.
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Table 1.1 Selected Economic Indicators, Developing Asia, 2001-2005
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2001
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2002
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2003
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2004
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2005
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Gross Domestic Product (annual % change)
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Developing Asia
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4.3
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5.8
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6.3
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6.8
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6.7
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East Asia
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4.6
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6.7
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6.5
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6.9
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6.8
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Southeast Asia
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1.9
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4.2
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4.6
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5.7
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5.4
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South Asia
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5.2
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3.9
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6.9
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7.0
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7.2
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Central Asia
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10.8
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8.1
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8.4
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8.1
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8.4
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The Pacific
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0.6
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0.8
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2.7
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2.9
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2.4
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Consumer Price Index (annual % change)
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Developing Asia
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2.4
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1.5
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2.3
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3.3
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3.1
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East Asia
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1.2
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-0.1
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1.2
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2.6
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2.4
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Southeast Asia
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4.6
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4.2
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3.1
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3.6
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3.8
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South Asiaa
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3.7
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3.5
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4.9
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4.9
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4.6
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Central Asia
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14.3
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10.9
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6.9
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8.6
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8.3
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The Pacific
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6.4
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7.0
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7.4
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5.6
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6.0
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Current Account Balance (% of GDP)
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Developing Asia
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2.8
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3.8
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4.2
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3.2
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2.9
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East Asia
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2.6
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3.7
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4.0
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2.8
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2.6
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Southeast Asia
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6.9
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7.4
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9.1
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8.2
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7.6
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South Asia
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0.0
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1.1
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1.1
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0.4
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0.2
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Central Asia
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-3.0
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-2.2
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-3.3
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-3.6
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-4.3
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The Pacific
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3.9
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-1.7
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1.7
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0.9
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-1.3
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a India reports on a wholesale price index basis.
Sources: Asian Development Outlook database; staff estimates.
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The region has witnessed two notable economic developments over the past 2 years. The first is the emergence of the PRC as a major engine for intraregional trade (Figures 1.1 and 1.2). This trend
accelerated in 2003 for most of developing Asia. The economies in East Asia and Southeast Asia benefited most from the strong increase in the PRC's imports. The PRC has become the single largest export market for East Asia while for Southeast Asian countries, its share in total exports has become sizable. In a major new development, exports from South Asia to the PRC also expanded rapidly in 2003, albeit from a low base (Box 1.1). Although economic growth in the PRC is projected to settle to more sustainable rates in 2004-2005, intraregional trade will remain a major driver of growth in developing Asia over the next 2 years. Progressively, the whole of the region will benefit from the dynamism in intraregional trade.
The second main feature of recent regional economic developments is the increasing importance of consumer demand in most countries. Although there are notable exceptions, consumer spending in 2003 was an important boost for many of the economies in East Asia and Southeast Asia, in particular PRC, Indonesia, Malaysia, Philippines, and Thailand. In a noteworthy development, similar changes are occurring in South Asia, particularly in India. The increasing importance of consumer demand in GDP growth has been supported in most countries by expansionary fiscal policies, and a low interest rate environment associated with accommodative monetary policies. An expanding urban middle class and the relatively young age structure of populations are fundamentally changing consumption behavior throughout developing Asia. Overall, confidence is high in the economic outlook for the region.
Intraregional trade and strong consumer demand will continue to define the outlook in 2004-2005. Developments in 2003 and the first quarter of 2004 show that the economic fundamentals of the region are strong. Domestic demand has been picking up in some of the East Asian and Southeast Asian economies where it was weak in 2003, notably Hong Kong, China; Korea; Singapore; and Taipei,China. In addition, the strengthening of the recovery in major industrial countries is already showing up in the external sector performance of many regional economies. The stronger outlook in industrial countries for 2004-2005 will provide a cushion against some possible slowing of the surging export growth to the PRC. It will also mitigate the impact of fiscal consolidation measures that need to be taken in some of developing Asia's economies.
An important point is that the brighter economic outlook for 2004-2005 will present a timely opportunity to strengthen policies aimed at resolving macroeconomic imbalances, addressing the fragility of banking and financial systems, and implementing structural policy reforms to progressively improve the investment climate. The implementation of such reforms and the combination-for the first time since the Asian financial crisis of 1997-98-of buoyant domestic, regional, and international markets should significantly boost business investment in the region. Assuming robust growth in industrial countries over the next 2 years, and in the absence of major unforeseen shocks, aggregate GDP growth for developing Asia is projected at 6.8% in 2004 and 6.7% in 2005.
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Box 1.1 The People's Republic of China-A Growing Market for Regional Exports
A notable feature of Asia's economic development is the emergence of the People's Republic of China (PRC) as an important export destination for regional economies. Exports to the PRC have been spurred by that country's strong economic growth, stable yuan exchange rate, and the international segmentation of production processes. Over 1995-2003, exports from all of Asia to the PRC, measured in dollars, grew at an average annual rate of 16.9%, or more than three times the 5.3% growth rate in world trade.
The product mix of exports to the PRC has changed, too. During 1995-2003, exports of precision instruments and electrical machinery to the PRC from its nine major Asian trade partners (Asia-9) soared sixfold. Their exports of machinery, chemical products, and transportation equipment to the PRC surged threefold. However, shipments of agricultural goods and food, textiles and apparel, as well as leather and shoes to the PRC grew only slowly, or even declined (Box Figure 1).
Almost all major economies in East and Southeast Asia have experienced a shift in their exports to the PRC from low value-added sectors to high valued-added sectors in the past decade. Indonesia, Malaysia, Philippines, and Thailand exported mainly primary goods to the PRC in the early 1990s. By 2003, though, 56% of their aggregate exports comprised machinery and electrical machinery. In the more developed economies in the region-Japan and the newly industrialized economies of Hong Kong, China; Korea; Singapore; and Taipei,China-exports to the PRC have shifted from more traditional manufacturing sectors such as textiles and machinery to high-technology, high value-added sectors such as electrical machinery, transportation equipment, and precision instruments.
In 2003, the biggest category of exports to the PRC from its nine major regional trading partners was electrical machinery (34%), followed by machinery (17%), and chemical products (15%). Textiles and apparel accounted for only 6%. Sales of primary goods to the PRC were even less important for the nine economies, with just 1.3% of their exports comprising agricultural goods and food and 3.5% raw materials and oil.
An increase in production sharing, or vertical specialization, helped drive the significant changes. The PRC has established a strong comparative advantage in downstream stages of production, especially for electronics products, largely a result of its massive foreign direct investment inflows and large supply of low cost labor. The final stages of production of some items have been moved to thePRC from other Asian economies. As a result, the PRC's demand for intermediate components from its nine major regional trading partners has grown sharply, while its exports of final goods to non-Asian industrial economies also increased significantly. The structural trade balances between the PRC and its major trading partners clearly show its role as an assembly center for many exports from Asia to the United States and European Union (Box Figure 2).
Participants in the regional production chain benefit by specializing in particular steps in the production process. Production sharing has enabled the PRC to diversify into higher-technology products and so boost its total exports. Also, the PRC's structural deficit with other Asian countries has shrunk in some sectors such as machinery, partly reflecting the PRC's sharpening competitive edge in higher-technology products.
As PRC industries move up the value-added chain, they may win a greater slice of the global export market, so other economies need to adapt to this changing competitive landscape to maintain their export shares. However, no country could have a comparative advantage in all products or all stages of production. Indeed, production sharing is expected to become more important to regional trade, facilitated by improvements in transportation and communications and falling trade and investment barriers.
While the PRC's surging export industries provide a growing market for inputs from the region, its developing domestic market is starting to offer huge potential as well. In 2003, for example, PRC imports of automobile products and steel surged by 84% and 52%, respectively. Overall, the PRC's large size, rapid growth, and its deeper integration with other Asian economies will be a dynamic influence in the region. However, it will be crucial for those other economies to position themselves to take advantage of the changes in comparative advantage.
Source: ADB staff using data from CEIC Data Co. Ltd.
1 Hong Kong, China; Indonesia; Japan; Korea; Malaysia; Philippines; Singapore; Taipei,China; and Thailand. A total of 54% of the PRC's total imports and 82% of its imports from Asia in 2003 were sourced from these nine economies.
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