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Asian Development Outlook 2004 : I. Developing Asia and the World
Developing Asia: Subregional Trends and Prospects East Asia East Asia's aggregate GDP expanded by 6.5% in 2003, a little slower than in 2002 but a much stronger result than was anticipated during most of 2003 (Figure 1.12). Expectations were relatively low because, in addition to the setbacks in the first half caused by SARS, the weak international economy, and conflict in Iraq, three of the five East Asian economies struggled with deep-seated problems of their own-widespread personal debt delinquencies in Korea; the slide in the Hong Kong, China property market, which did not bottom out until August; and the aftermath for Taipei,China of the ending of the global information technology (IT) boom.
The prospects for 2004-2005 are bright. Global economic conditions have improved, Hong Kong, China's property market is recovering strongly, IT demand has picked up, and Korea is addressing its household debt problems. Average growth for East Asia in 2004 is expected to increase to 6.9%, the highest rate in 4 years, and to stay close to that level in 2005. One significant development is that rising domestic demand will play an important role in lifting overall growth. While exports will remain strong, the contribution to growth of net exports will probably moderate in most economies because imports will rise as domestic demand increases. Again, the PRC will stand out with likely growth of 8.3% in 2004 and 8.2% in 2005, on the back of buoyant domestic and external demand. Strong investment growth will contribute the majority of its overall growth. Consumption will accelerate, supported by rapid urbanization and changing consumption patterns, such as increased demand for higher-quality and a wider variety of goods and services. Growth in exports will slow from the torrid 34.6% pace in 2003, with the result that net exports will contribute little to overall GDP growth in the PRC. The strong demand from consumers and industries in the PRC will continue to fuel growth in exports from many economies, especially the PRC's neighbors, though rising domestic demand will become the main factor propelling the economies of Hong Kong, China and Taipei,China as robust growth in their imports outpaces still-strong growth in exports. The importance of exports, however, should not be underestimated because buoyant foreign sales will be a major factor leading to stronger domestic demand. In Taipei,China, for example, strong international demand for IT exports in recent months has raised capacity utilization at exporting firms, prompting them to expand their production capacity. This has laid a solid foundation for stronger investment growth. In turn, the labor market will receive a fillip from the greater production capacity and related construction activity. Increased employment will spur consumer spending. Consequently, GDP growth in Taipei,China is expected to jump by more than 2 percentage points in 2004. In Hong Kong, China, strong exports and a rebound in the property market will boost investment, employment, and consumption. GDP growth in that economy is likely to nearly double to around 6% in 2004, then slow a little to around 5% in 2005. Korea presents a somewhat different scenario because net exports will continue to be the main driver of growth. Strong exports will increase investment demand, but it might be some time before private consumption growth revives as severe household debt problems have hit consumer confidence. When domestic demand strengthens later in 2004 and 2005, the relative contribution to growth of exports will fade. Korea's GDP growth is forecast at 4.8% in 2004, rising to 5.2% in 2005. In Mongolia, the least developed of the five East Asian economies, further expansion of agriculture and moderate gains in industry and services are projected to lift GDP growth to 5.8% in 2004 and to 6.0% in 2005. Despite the positive outlook, all of the East Asian economies face policy challenges in 2004. One major challenge for the PRC is to prolong robust growth without causing serious imbalances, some of which emerged in 2003. A lending boom is fueling overinvestment in some sectors and pushing up prices of raw materials. There are concerns that the surge in lending may lead to more NPLs in the already weak banking system. Strong demand for electricity from industry and consumers has caused increasingly frequent power shortages. Economic policies need to maintain the growth momentum, facilitate expansion in sectors that need extra supply capacity, and also curb overheating, as the PRC monetary authorities have started to do by tightening credit. The functioning of factor markets-labor and capital-requires attention in several economies. High unemployment is especially acute in the transition economies of the PRC and Mongolia. The PRC's rapid growth still is inadequate to absorb surplus agricultural labor, new labor market entrants, and workers laid off from state-owned enterprises (SOEs). Unofficial estimates put the jobless rate at 8%. Much of the unemployment comes from structural changes and cannot be quickly solved through rapid economic growth. Governments faced with such a situation need to ease the adjustment costs through retraining assistance, job creation, and by providing basic social safety nets if they are to maintain broad support for economic reforms. The key, though, is to improve the environment for the private sector to create jobs. Hong Kong, China; Korea; and Taipei,China have also experienced rising unemployment in recent years. Although employment has started to improve, strategies for the longer term require more flexible labor markets, mainly in Korea, and the related issue of training and support for people moving between jobs. In the capital markets, financial reforms remain incomplete in the subregion. NPL ratios in Korea and Taipei,China have declined because of extensive financial reforms, though in Korea the need for further reforms was demonstrated by failures in risk control and regulation that allowed a consumer credit bubble to build. The Government of the PRC has a long way to go to strengthen its banking sector. Much also needs to be done to strengthen capital markets and nonbank financial institutions in much of the rest of East Asia. Fiscal policy issues represent another area for attention in 2004. As growth gathers momentum, the need to use fiscal policy for short-term demand management has lessened. Instead, fiscal policy needs to shift to address the longer-term market failures and structural problems. In the PRC, budgetary resources are needed to tackle issues of poverty, structural unemployment, inadequate education and health care in rural areas, a weak social security system, a deteriorating environment, and underdevelopment of the central and western regions. In Taipei,China, rising public deficits and debt have raised questions about the adequacy of tax revenues. The bursting of Hong Kong, China's property bubble exposed the vulnerability of its land-based revenue system and the authorities are considering changes to this system. Subregional governments should also consider further measures to deal with poverty. Although the PRC's rapid growth has lifted millions out of poverty, eliminating absolute poverty remains a distant goal, and in Mongolia, poverty incidence is still high. They also need to tackle rising income inequalities, which have been widening in most of the subregion. East Asia remains a dynamic region with a better record than most in terms of facing up to policy challenges. It is likely do so again, which will alleviate the risks emanating from the domestic factors as well as those from external events. Southeast Asia Despite a series of external shocks, aggregate GDP for Southeast Asia expanded by 4.6% in 2003, more than half a percentage point faster than anticipated (Figure 1.13). Thailand and Viet Nam posted particularly strong and broadly based growth. In Cambodia and the Lao People's Democratic Republic (Lao PDR), growth remained relatively robust. Malaysia's economy, the second highest in per capita income in Southeast Asia, pursued its recovery, growing well above the subregional average. GDP growth remained moderate in Indonesia and the Philippines, though improving somewhat relative to 2002. In contrast, Singapore's economy hardly grew as major structural changes dampened domestic demand. It was also the most affected by the SARS epidemic.
In a worrisome development, the 2003 outcome showed continued weakness in business investment in most Southeast Asian countries. The notable exceptions were Thailand and Viet Nam. Weak investment in the other countries stemmed from a variety of reasons, including remaining excess capacity, political uncertainties linked to elections in 2003 and 2004 in several countries, and uncompetitive investment climates checking FDI. The acceleration of recovery in many industrial countries as well as the huge increase in the PRC's demand for regional imports spurred strong export growth in many Southeast Asian countries in 2003. Despite the upward pressure of buoyant consumption demand on imports, net exports also contributed substantially to overall growth in most countries. (The only reason for Singapore's growth in 2003 was the contribution of exports.) Exceptions were the Philippines and Viet Nam: in the Philippines, some major exports such as electronics and garments turned in a lackluster performance, while in Viet Nam, despite a surge in exports, imports increased faster due to high demand for capital and intermediate goods by a fast-growing industry sector. Strong growth in the PRC and rapidly rising production-sharing in developing Asia has spurred the export growth of Southeast Asian countries to the PRC (Box 1.1). Exports of the subregion to the PRC accounted for 6.4% of exports and expanded by an average 59.1% in 2003. GDP projections for Southeast Asia indicate an acceleration in growth to 5.7% in 2004, moderating somewhat to 5.4% in 2005. Prospects for all countries will improve, as in addition to domestic factors, the global outlook will be the most favorable in many years, benefiting the export-oriented economies of the subregion, though robust growth will largely emanate from the two best performers in 2003, namely Thailand and Viet Nam. The Lao PDR and Malaysia will also grow at just above the subregional average. A firm recovery should take hold in Singapore as measures to reduce the cost of business and to improve productivity and competitiveness start to show an impact. However, despite some improvement, growth will remain subdued in the Philippines and more so in Indonesia. Consumption, particularly private consumption, will strengthen its position further as the main driver of growth in all countries. Supportive macroeconomic policies pursued in 2003 are expected to continue in 2004-2005, mainly in the guise of accommodative monetary policies. Consumption will also be supported by the sustained per capita income growth since 2002 in most subregional countries as well as by high commodity prices, while spending for 2004 elections in Indonesia, Malaysia, and Philippines will provide a further boost. The wide diversity in growth performances among the countries of Southeast Asia over the forecast period can be traced to significant differences in investment expenditures. As in 2003, investment performance, though improving somewhat, will remain relatively weak in Indonesia, Philippines, and, to a lesser extent, Malaysia in 2004-2005. This trend can be observed both from the contribution of investment to growth and from low or falling investment ratios in these countries. As restructuring of its economy proceeds and its cost structure is reduced, Singapore should see a recovery in investment, particularly in 2005. Projections indicate continued strong investment activity in Thailand and Viet Nam. A stable policy environment and strong domestic and external demand will lead to continued expansion in private investment in construction and equipment in Thailand. In Viet Nam, the private sector will develop rapidly as reforms to further improve the business environment continue. An estimated 19,000 private enterprises have been registered annually over the past 4 years alone. Investment-to-GDP ratios are also forecast to rise well above 20% in Cambodia and the Lao PDR, as the former benefits from increased investment in tourism activities and an improved political environment, and regional investment from Thailand in particular increases in the latter. A very mixed picture for 2004-2005 emerges from the external sector performance in Southeast Asia. After the recovery in exports in 2003, export growth will settle to somewhat lower rates in 2004 and especially 2005, despite bullish global prospects. (The PRC's import growth rate should also moderate from its surge in 2003.) In contrast, buoyant domestic demand should lead to higher import growth in 2004. The overall current account surplus for the subregion might increase marginally to around $60 billion in 2004-2005 but mainly as a result of a widening surplus in Singapore. Overall, the external sector is forecast to contribute significantly to GDP growth in 2004 in Singapore and Thailand only. In all other countries, contributions will be negative (Philippines) or marginally positive. Inflation in Southeast Asia will accelerate somewhat over the forecast horizon but remain relatively subdued at an average of 3.6% in 2004 and 3.8% in 2005. It is not a major concern except in Indonesia, Lao PDR, and Myanmar. Fiscal deficits will remain high in the subregion with projections at 5.8% and 5.6% of GDP in 2004 and 2005, respectively. In most countries, fiscal deficits are a matter of concern and the scope for continued fiscal expansion will be limited over the next 2 years. Government debt levels are also high in Indonesia (55% of GDP), Malaysia (48% of GDP) and, particularly, the Philippines (77% of GDP). The window of opportunity given by a strong outlook should therefore be used by governments to ensure fiscal consolidation. This will better prepare these economies to withstand possible future economic shocks and slower economic growth, and to cope with higher interest rates. The most worrisome feature of the outlook is the slow pace of business investment forecast for several countries of Southeast Asia at a time when these economies are expected to show more robust growth. These countries will need to substantially boost investment if they are to raise their potential growth rates and remain competitive in an increasingly integrated Asian region. They also need to position themselves to be able to compete with the PRC while being able to export to that country. In all of these countries, policies to improve the investment climate will be of paramount importance over the forecast period. Broadly, these include continued financial sector and fiscal reforms, public administration, trade and labor market reforms, and the establishment of a simple and transparent FDI regime (see Part 3). Finally, another main concern is that while the growth environment over the next 2 years will be one of the best in a long time, GDP forecast growth in several Southeast Asian countries remains well below their potential, and will be insufficient to generate employment for new labor force entrants. As a corollary, these growth rates will be too low to bring about a significant reduction in the incidence of poverty. Economic growth projections for both Indonesia and the Philippines are of particular concern. The combined population of both countries is significant at 320 million, and unemployment is high and well above the levels in other countries in the subregion. It is estimated that economic growth in these two countries would need to accelerate by 1.5-2 percentage points above the average performance in 2002-2003 to ensure a decrease in unemployment and a significant reduction in poverty. Economic growth projections for Cambodia, too, are well below the pace required to generate sufficient employment in a country where the incidence of poverty is 35-40%. Unemployment is not a major issue in Malaysia, but the economy is forecast to expand below its potential, which is estimated at about 6.5-7%. Hence, several subregional countries risk falling behind their competitors unless they aggressively pursue policies to improve productivity and competitiveness. The main challenge for them over the forecast period will be to raise investment substantially. South Asia The return of favorable weather conditions generally in South Asian countries in 2003 led to a marked recovery in agricultural output from the very depressed levels of a year earlier. With a relatively large share of agriculture in output and employment, GDP growth for the subregion rebounded to a record high of 6.9%, well above the 5.7% recovery projected in ADO 2003, with all countries achieving a more rapid expansion than had been projected (Figure 1.14). In India (accounting for nearly 80% of the subregion's GDP output) the sharp turnaround in agricultural output (from a contraction of 5.2% to an estimated 7-8% growth in FY2003) combined with a continuing rapid expansion in industry and services pushed GDP growth to an estimated 7.3%. Growth in private consumption nearly doubled from a year earlier and contributed about two thirds of the increase in GDP; expansion of fixed investment continued to be relatively strong. Pakistan also saw a significant upturn in agriculture after 2 years of decline. GDP growth strengthened to 5.1%, the best outcome in 6 years, pushed by net exports that accounted for more than three fifths of the expansion. Faster growth in Bangladesh at 5.3% in FY2003 also reflected a significant pickup in agriculture and private consumption. Despite gains in export-oriented manufacturing, the net foreign balance, generally a positive source of growth, turned slightly negative because of buoyant import growth.
In the second year of the cease-fire agreement, Sri Lanka continued to recover from the 2001 recession with GDP in 2003 estimated to have grown by 5.5%. Tourist arrivals rose by over 27% to exceed 500,000, a record, supporting expansion in the services sector that accounted for about two thirds of the increase in GDP. Tourist arrivals also reached a record number of about 560,000 in the Maldives, where the economy grew by 8.4% after 2 tepid years stemming from the downturn in travel after the September 11 events. In Nepal, a cease-fire agreement with insurgents from January to August fostered a moderate economic recovery following the downturn of a year earlier. The trade and tourism sectors rebounded and manufacturing output strengthened, bringing GDP growth to 2.6% in FY2003. Bhutan's economy continued its steady development, growing at 6.5%, though this was a slight slowing from a year earlier mainly due to more moderate construction activity. Growth in South Asia is projected to edge up from the record performance in 2003 to 7.0% in 2004 and to 6.9% in 2005 with virtually all countries boosting performance. This forecast assumes that the breakthrough cooperative efforts that India and Pakistan started in 2003 to assure peaceful relations are continued and that there is no deterioration in the security situations in Afghanistan, Nepal, and Sri Lanka. India's GDP growth outlook is buoyant--7.4% in 2004 and 7.6% in 2005. Agriculture is expected to return to trend (3.0%). However, a peaking of industry sector growth in 2004 would be offsetting while expansion of the services sector would continue and provide the fillip in 2005. Despite this remarkable overall performance and the fact that India is becoming one of the fastest-growing economies in the world, it appears that it will not quite achieve the 8% target that the Government has set for rapid poverty reduction. Pakistan's outlook is also for stronger growth of 5.5% and 5.8%, respectively, in 2004 and 2005. Solid improvement in macroeconomic fundamentals and structural reforms that are boosting investment activity (e.g., to modernize the textile industry) underpin this outlook. The Bangladesh economy has been strengthened by the policies adopted in completing its first-year of the Poverty Reduction and Growth Facility (PRGF) program with the International Monetary Fund. Deepening of reform efforts that would foster greater investment and the availability of additional concessional aid has improved the outlook for growth, which is projected to increase to 5.7% and 6.0%, respectively, in 2004 and 2005. However, the outlook for the garment and textile industry and employment generally in the post-Multifibre Arrangement (MFA) environment is worrisome. Economic prospects in Afghanistan are promising and annual growth of 15% in the medium term is certainly feasible, though this will require the commitment of the international community to meet the country's investment and security needs. Sri Lanka's GDP growth is tentatively projected to be 5.0% and 5.5% in 2004 and 2005, respectively, rates somewhat below those set in the ongoing PRGF program. There are, however, major uncertainties, including the approach to economic policy by the new Government following recent elections, the evolution of the cease-fire and peace negotiations, and developments in the garment and textile industry post MFA. With a full recovery in tourism, growth in the Maldives is projected to moderate to 5.5% and 5.0% in the period ahead. The Government is seeking to expand its tourist marketing effort in new regions, find sources for economic diversification, and stimulate outer atoll development in an effort to reduce poverty. Despite a breakdown in the cease-fire agreement in August 2003, the security situation in Nepal has remained relatively calm. On the assumption that this situation does not deteriorate, the outlook is for the economic recovery to continue with GDP growth increasing to 4.0% and then to 5.0% in 2005 based on further improvement in trade, tourism, and agriculture. Economic performance sufficient to substantially reduce poverty in the medium term, however, crucially depends on a lasting resolution of the insurgency as well as reconciliation between the Government and political parties over the dismissal of Parliament. In Bhutan strong growth is projected at 7.0% in 2004 and then 8.0% in 2005. A major hydropower project to be commissioned in September 2005 will provide a large step-up in export and budget revenues. Balance-of-payments developments in South Asia continued to be strong in 2003 with all countries, except the Maldives and Sri Lanka, achieving a current account surplus that for the subregion amounted to 1.1% of GDP. Exchange rates against the dollar were generally stable or slightly appreciated over 2003; foreign exchange reserves substantially strengthened. Reflecting the pickup in the global economy, most subregional countries in 2003 posted double-digit growth in exports and imports while tourism and worker remittances also registered large gains. The outlook is for continued rapid growth in trade and the maintenance by countries of their current account surpluses, though these are expected to moderate; for the subregion as a whole they are projected at 0.4% and 0.2% of GDP, respectively, in 2004 and 2005. Average subregional inflation increased to 4.9% in 2003 from 3.5% a year earlier, reflecting an edging up in prices in Bangladesh, India, and Nepal. Policies in Pakistan and Sri Lanka aimed at limiting inflation scored successes. While not at excessive levels, inflation in the subregion is appreciably higher than in East Asia or Southeast Asia. The projections for 2004 and 2005 indicate little change in the country pattern or level of inflation at just under 5%. This suggests that monetary policies will have to be tightened if global inflation picks up, particularly if oil prices exceed forecast assumptions, as South Asian countries are heavily dependent on imports. Orientation toward economic liberalization and great reliance on private sector development is now more strongly rooted in subregional country economic policies and this augurs well for strong growth in the medium term. However, the maintenance of outsized fiscal deficits and high levels of government debt in nearly all countries is a source of serious concern. The adoption of fiscal responsibility laws containing specific consolidation objectives in India, Pakistan, and Sri Lanka as well as medium-term fiscal objectives in PRGF programs in Bangladesh, Nepal, and Sri Lanka are important first steps. Firm implementation of fiscal consolidation will, though, be necessary to avoid risk of disruption to the present encouraging outlook for growth and poverty reduction. Central Asia GDP growth in 2003 in the six Central Asian republics (CARs) as a group is estimated to have been 8.4%, well above the 5.8% projection made in ADO 2003 (Figure 1.15). In all countries GDP grew by more than had been forecast. Most of underestimation, however, was due to unanticipated strength in the oil- and gas-producing countries-Azerbaijan, Kazakhstan, and Turkmenistan-but especially in Kazakhstan, which accounts for about 45% of subregional GDP.
Outside this group, the Kyrgyz Republic's economy rebounded to grow by 6.7% with a full recovery in gold production (following an accident at the large Kumtor mine in 2002 that stalled the economy that year). In Tajikistan, about two thirds of the economic expansion, where GDP posted 10.2% growth, came from outside the traditional economic pillars-cotton and aluminum-reflecting strong expansion in private consumption expenditure, spurred mainly by an upsurge in worker remittances. Uzbekistan maintained GDP growth at about only 4%, which was well below its potential. The medium-term outlook-2004 and 2005-for the CARs is quite favorable though little change is expected in the subregion's high overall GDP growth rate-8.1% and 8.4%, respectively-from that in 2003, nor is great change foreseen in the country pattern of economic expansion. The oil and gas sector will continue to drive growth in the three hydrocarbon-producing countries. In Azerbaijan, growth is expected to moderate to 9.0% in 2004 before picking up to 12.5% in 2005 as output from ongoing oil and gas development investment comes on stream. In Kazakhstan and Turkmenistan, growth is expected to be maintained at about 9.5% and 10.0%, respectively. While some weakening in oil and gas prices is foreseen in 2005, an expansion in production volumes should offset this. Kazakhstan will benefit by the phasing-in of production from large projects at Karachagan and Kashagan, while Turkmenistan's outlook is underpinned by new long-term gas contracts with the Russian Federation and Ukraine. Due to declining gold production (in view of depleting ore reserves) and the absence of any compensating source of economic expansion, GDP growth in the Kyrgyz Republic is expected to slow to 4.1%, but then lift a little to 4.5%, in 2004 and 2005. Tajikistan's GDP growth is expected to slow to 8.0% and then to 5.0% over these 2 years because of capacity limits to expansion in aluminum and cotton production. Growth in Uzbekistan is expected to continue to be relatively low at about 4.5% and 4.0% in 2004-2005, respectively; however, if policy reforms that have begun are accelerated, the outlook could brighten. Inflation is no longer a central policy issue in the CARs, except for Tajikistan and Uzbekistan. It moderated in four of the six countries with the subregion's average rate declining to 6.9% in 2003 from 10.9% a year earlier, despite upward pressure in the year caused by weather-related poor subregional grain harvests. An unintended loosening of monetary policy was the main reason for a planned reduction in inflation in Tajikistan not being realized. Over 2004-2005, inflation is projected to be moderate in all CARs except Uzbekistan where inflation rates of 20% are forecast due the expected unwinding of the macroeconomic imbalances created in 2003 by the extensive ad hoc measures to stabilize the exchange rate. In recent years, appropriate macroeconomic and structural policies in most CARs have maintained stability among balance-of-payments outcomes that were responsive to underlying economic forces, except in Turkmenistan and Uzbekistan that extensively relied on direct controls. In 2003, the subregional current account deficit averaged 2.5% of GDP, essentially unchanged from a year earlier. All countries recorded increases in foreign exchange reserves. The subregional current account deficit is projected to increase to about 4% of GDP in 2004-2005, but is expected to be fully financed by capital flows. The CARs, all of them countries in transition to market economies, have made varying degrees of progress in their reform efforts. Kazakhstan, with a per capita GDP of $1,510, has made the greatest progress in the transition by early adoption of structural reforms and sound macroeconomic policies. In 2003, it adopted an Industrial and Innovation Strategy to 2015 that targets 8% growth in manufacturing activity that will help deepen economic diversification and maintain growth momentum. Agriculture is one of the priority sectors in the strategy and large planned budget allocations for the sector (2-3% of GDP in 2004-2005), in combination with a recently passed Land Code, are expected to have a favorable impact on employment and poverty reduction. Azerbaijan (per capita GDP $710), Kyrgyz Republic (per capita GDP $290), and Tajikistan (per capita GDP $180) have all now formulated medium-term poverty reduction and growth strategies that include broad structural and institutional reform agendas. The countries have PRGF economic programs with the International Monetary Fund and their development efforts are being supported by ADB, the International Bank for Reconstruction and Development, and bilateral donors. Azerbaijan has enjoyed impressive oil-led economic growth in the past 5 years, though this resource is limited and it will be essential to translate oil-boom savings into sustainable economic growth and poverty reduction. Good progress has been made in fiscal and monetary reforms and macroeconomic performance has been strong. However, actions are still needed to implement the second phase of agricultural reform and to overcome obstacles to development of the non-oil private sector, including enhancing competition, enforcing property rights, and ending cumbersome licensing procedures. The Kyrgyz Republic has also achieved macroeconomic stability and put in place a broad range of structural reforms to lay the basis for a market economy. A sustained farm sector-led expansion since 1996 has significantly reduced poverty, based on mutually reinforcing agriculture sector reform and a high level of public investment. Even though 2003 saw completion of bilateral negotiations under Paris Club understandings, external debt at about 100% of GDP poses a significant constraint on development. Growth that is sufficiently high to reduce poverty significantly will require new sources of growth, improved public resource management, easing of trade barriers, and enhanced subregional cooperation to diversify exports and, probably further external debt restructuring. In the 6 years since the agreement that ended its civil war, Tajikistan has recorded strong growth based on recovery in cotton and aluminum production, though weak institutional capacity, deficiencies in the legal structure, and an underdeveloped financial sector are among the constraints that hamper investment and private sector development. Moreover, a large external debt has meant that public sector investment is limited and must be entirely financed by concessional assistance. Despite daunting reconstruction and development obstacles, policy efforts are focused on strengthening fiscal performance and reducing the quasi-budget deficit in the energy sector, containing inflation, and pursuing needed structural reforms. Turkmenistan has relatively high income (per capita GDP $1,200) largely due to energy production and export. Poverty is limited as the Government guarantees employment and can subsidize or freely provide many basic consumer items. The Government also maintains highly centralized economic management, resulting in limited private sector activity. Although immediate growth prospects are good, investment resources are being put into projects of questionable economic and social value, and strains in the economic system are apparent-such as little diversification of production, deterioration in the education and health care systems, and a highly depreciated black market exchange rate. Uzbekistan (per capita GDP $450) is largely dependent on its agriculture sector, especially cotton production. Economic reform has been limited and gradual while growth and investment have been sluggish. The Government achieved current account convertibility in 2003 as part of its medium-term effort to attract greater FDI and liberalize trade; however, significant economic imbalances were built up in stabilizing the exchange rate. Reforms to date in agriculture are expected to underpin growth of about 4% in the period ahead, though implementation of announced policies, including withdrawal of government participation in the economy, could raise long-term growth rates to 7-8%. The Pacific The economic performance of the Pacific subregion in 2003 was generally good, as the aggregate GDP growth of the Pacific DMCs (excluding the Republic of Palau, which joined ADB on 29 December 2003) was an estimated 2.7%, with increases ranging from 0.1% (Federated States of Micronesia) to 5.0% (Fiji Islands and Samoa). Only Timor-Leste registered a contraction (3.0%), which resulted mainly from drought and the scaling down of the postconflict international presence. Growth in the Pacific DMCs also benefited from high international prices for their primary commodity exports. Papua New Guinea especially, benefited from higher oil, gold, and copper prices (Figure 1.16). Primary production grew rapidly in Solomon Islands, which emerged from 4 consecutive years of contraction, as the arrival of a multicountry regional assistance mission in July 2003 helped restore law and order. Tourism bounced back across the subregion, stimulating the services sector and investment in infrastructure, particularly in the Fiji Islands. The weak international financial markets resulted in fluctuating returns for the Kiribati and Tuvalu trust funds, although a certain strengthening was registered toward the end of the year. In line with faster economic growth and increase in domestic demand, labor market conditions generally improved and inflation accelerated to an average 7.4% in the subregion. Fiscal outcomes varied considerably among countries. In Papua New Guinea, revenue collection was on target, but expenditure restraint was required to minimize the need for domestic borrowing and the consequent pressure on interest rates. The fiscal deficit exceeded the budget in the Fiji Islands, due to unanticipated expenditures and a failure to realize planned asset sales, despite strong revenue collection. Expenditures were uncontrolled and misallocated in Solomon Islands, but a considerable effort to regain control was made with the arrival of an Australian budget stabilization team in the latter part of the year. External accounts showed substantial variation in 2003. While export growth was generally positive, import growth was erratic; currency trends and earnings from tourism determined disparate outcomes in the accumulation of international reserves. Political uncertainty and poor governance continued to hamper growth in several countries. The Pacific Islands Forum, the main regional cooperation body, is paying increasing attention to ways of pooling resources in the areas of governance, air transport, security, and international crime. A gradual move toward freer trade in the subregion occurred with the entry into force in April 2003 of the Pacific Islands Countries Trade Agreement, signed by 14 members and covering a 10-year implementation period. At the national level, the main policy focus in the majority of countries was on maintaining macroeconomic stability through sound fiscal management as a key condition to encourage private investment and economic growth. Efforts to consolidate gains from implementation of economic and public sector reforms varied in intensity and effectiveness. Based on further improvements in the tourism sector and continued strong commodity prices, economic growth is forecast to continue at a relatively fast pace in 2004 and 2005, at least by historical standards. GDP in the subregion is expected to increase by 2.9% in 2004 and by 2.4% in 2005, while inflation is projected to slow to 5.6% but then increase to 6.0% over this period. These trends are essentially determined by projections for Papua New Guinea, by far the largest economy in the Pacific. While expected medium-term growth and inflation rates represent improvements from the trends of the last few years, creating jobs in the formal sector will remain a major concern, as almost all economies are unlikely to be able to absorb the net increase in labor market entrants, with high youth urban unemployment leading to potential social unrest. Aside from adverse external shocks, the main risk to the growth forecasts rests with the evolution of the internal political conditions and the capacity of local institutions to build up a climate of stability to boost business confidence. With regard to policies, all Pacific DMCs are struggling with fiscal governance and public administration reform issues, the need to create an environment enhancing private sector development, and the necessity to improve local capacity and institution building. A prerequisite for attracting investment and boosting the private sector is bringing about an effective system for land-titling registration, which, given the general shortage of land and customary traditions in the Pacific, is not easy to achieve. External assistance, with an increased focus on participation and self-reliance, continues to play a crucial role for economic development and poverty eradication in the subregion.
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Economic conditions varied between economies in the subregion. The PRC stood out with growth accelerating to 9.1%, bolstered by buoyant domestic demand, booming exports, and surging FDI. Hong Kong, China; Korea; and Taipei,China experienced brisk export growth, but their domestic demand was subdued for most of the year. In Mongolia, a recovery in agricultural output and expansion of services more than offset a slowdown in industrial growth. The generally firmer economic growth in the second half of 2003 reduced deflationary pressures in Hong Kong, China and in Taipei,China. In the PRC, concerns about overheating in some sectors prompted government measures to curb credit. Unemployment tended to rise in the subregion during the first half, then started to fall as economic growth picked up.
A key feature of the 2003 performance is that, in all countries (with the notable exception of Singapore), consumption expenditures, particularly private consumption, contributed the most to GDP growth. The continued strengthening of consumption in 2003 was fueled by generally accommodative monetary policies, combined with moderately expansionary fiscal policies. The fiscal stimulus was more aggressive in Malaysia where government consumption expanded rapidly. In Thailand, expenditures in rural areas were further boosted by off-budget programs. Strong growth in remittances supported consumer spending in the Philippines.
The first rough estimates of GDP in Afghanistan indicate that the economy is likely to have grown by 20% in FY2003 after a 28.6% gain a year earlier. Following a 3-year drought, grain production increased by about 83% in 2002 and by 62% in 2003. This was a significant boost to welfare as agriculture accounts for about one half of GDP and four fifths of employment. The growth of the opium trade to about one half the size of the legal economy however, providing a large impact on domestic demand and incomes, is a major issue to be faced if Afghanistan is to become a truly secure and stable nation.
Higher than expected oil and gas prices boosted exports and economic activity in these three countries and the very rapid growth rates experienced in recent years were maintained. In Azerbaijan, investment in the oil sector was especially important, contributing just over one half of GDP growth of 11.2%. Kazakhstan saw some moderation in investment but exports were very strong and a sharp expansion in private consumption supported GDP growth (up by 9.2%) and the first signs of diversification in manufacturing production. Growth in Turkmenistan, where GDP rose by 10.0%, was largely due to continued expansion of energy production and exports.
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