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p. 1 of 69 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia III. Foreign Direct Investments in Developing Asia

Asian Development Outlook 2004

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Foreword

The Asian Development Outlook 2004 is the 16th edition of the annual comprehensive economic report on the developing member countries of the Asian Development Bank (ADB).

ADO 2004 provides a detailed analysis and assessment of macroeconomic conditions-including fiscal, monetary, and balance-of-payments developments-for 41 Asian and Pacific economies for 2003, as well as projections for 2004-2005. It also provides a broad diagnosis of macroeconomic challenges and future growth prospects for the region's economies.

The recovery in major industrial countries remained subdued in the first half of 2003, but strengthened considerably in the last 2 quarters of the year and in early 2004, mainly in the United States and Japan, as economic growth in the euro zone was insipid. Despite the upturn in growth, inflation remained generally low while in Japan deflation abated. Hence, monetary policies stayed highly accommodative in major industrial countries. Such a policy stance is likely to continue for most of 2004 with a tightening of monetary policy and higher interest rates likely later in the year and in 2005. Fiscal policies in major industrial countries, which have also been expansionary, are expected to become more neutral to moderately contractionary over 2004-2005.

The economies of developing Asia and the Pacific generally showed remarkable resilience in 2003. Despite the uncertainties caused by the Iraq conflict, high oil prices, and the outbreak of the severe acute respiratory syndrome (SARS) epidemic, gross domestic product growth reached 6.3% in 2003, much better than expected earlier in the year and making it the most dynamic region in the world. Average inflation remained low at 2.3%. The region also posted a sizable aggregate current account surplus of 4.2% of gross domestic product.

Two notable features characterized economic developments in the region over the past 2 years. The first is the emergence of the People's Republic of China as a major engine for intraregional trade, a trend that accelerated in 2003 as exports from the rest of the region to that country continued to surge. The second is the increasing importance of consumer demand as a domestic source of growth; with some exceptions, consumer spending in 2003 was a significant boost for many regional economies.

Given the strong economic fundamentals in the region, and with the outlook for major industrial countries brighter over the next 2 years, the economies of developing Asia and the Pacific are expected to expand by a robust 6.8% in 2004 and 6.7% in 2005. Such growth performance is expected to be increasingly broad based as domestic demand, particularly business investment, strengthens further, and as external demand, including intraregional trade, remains buoyant. There are, however, several significant risks to this outlook. First, geopolitical risks such as terrorist acts or an epidemic outbreak such as SARS or more recently the avian flu remain a reality. Second, imbalances in the recovery of industrial countries hold significant risks for developing Asia's economies, as their recovery might not be sustainable. Finally, the rapidly increasing regional economic interdependence and the surge in intraregional trade, while a very positive development for the region, also carries uncertainties.

ADO 2004 contains a theme chapter discussing foreign direct investment (FDI) in developing Asia and the Pacific. Such investment in the region has grown rapidly in recent years, both facilitating and being attracted by the region's economic dynamism. Governments throughout the region have been striving to find the best policy mix for FDI that will maximize the net benefits for their economies. The chapter discusses recent trends in FDI flows in the region, their impact on the domestic economy, and the importance of the policy context in which these flows occur. While incentives and regulations targeting FDI may have some effect, a conducive environment for domestic investment and competition is more important.

TADAO CHINO

President

Acknowledgments

The Asian Development Outlook 2004 was prepared by the staff of the Asian Development Bank (ADB) from East and Central Asia Department, Mekong Department, Pacific Department, South Asia Department, Southeast Asia Department, the Economics and Research Department (ERD), as well as the resident missions of ADB.

The economists who contributed the country chapters are: Ramesh Adhikari and Dao Viet Dung (Viet Nam), William Bikales (Malaysia), Johanna Boestel (Sri Lanka), Giovanni Capannelli (Fiji Islands, Republic of the Marshall Islands, Federated States of Micronesia, Papua New Guinea, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, and Tonga), Sunniya Durrani-Jamal and Rafi Fazil (Afghanistan), Emma Xiaoqin Fan (Taipei,China), Jesus Felipe (Philippines), Yolanda Fernandez-Lommen (Mongolia), Bahodir Ganiev (Azerbaijan and Turkmenistan), Nirmal Ganguly (Myanmar), Akiko Hagiwara (Republic of Korea), Naved Hamid and Safiya Aftab (Pakistan), Tadateru Hayashi (Bhutan), Mandar Jayawant (Uzbekistan), Jayant Menon (Lao People's Democratic Republic and Thailand), Aliya Mukhamedyarova (Kazakhstan), Sudipto Mundle and Hiranya Mukhopadhyay (India), Michaela Prokop (Cook Islands and Nauru), Sungsup Ra and Raju Tuladhar (Nepal), Purnima Rajapakse and Mohammad Zahid Hossain (Bangladesh), Purnima Rajapakse and Eric Manes (Cambodia), Meriaty Subroto and Sophia Ho (Maldives), Ramesh Subramaniam and Amanah Abdulkadir (Indonesia), Min Tang and Jian Zhuang (People's Republic of China), V. B. Tulasidhar (Kyrgyz Republic), Umaporn Wongwatanasin (Kiribati, Tuvalu, and Vanuatu), Fei Yue (Tajikistan), and Fan Zhai (Singapore). Prof. Lok Sang Ho of Lingnan University contributed the Hong Kong, China chapter. The subregional coordinators were Jayant Menon and Tao Zhang on Southeast Asia, Rajiv Kumar on Central Asia, Joseph Ernest Zveglich, Jr. on South Asia, and Giovanni Capannelli on the Pacific.

A team of economists from ERD, led by Jean-Pierre A. Verbiest, Assistant Chief Economist, Macroeconomics and Finance Research Division, assisted by Charissa N. Castillo, coordinated the overall production of the publication. Jean-Pierre A. Verbiest and Charissa N. Castillo also contributed the chapter in Part 1 on Overveiw of Economic Highlights and Prospects. The chapter on Resolving Developing Asia's Nonperforming Loans was produced by Akiko Hagiwara and Douglas Brooks with input from Gloria Pasadilla. The special chapter on Foreign Direct Investment in Developing Asia was prepared by Douglas Brooks with significant input from Hal Hill.

Technical and research support was provided by Laura Britt-Fermo, Gmelina Guiang, Aludia Pardo, Pilipinas Quising, Grace Sipin, and Lea Sumulong.

Richard Niebuhr and Anthony Patrick as the economic editors made substantive as well as advisory contributions. Jonathan Aspin did the copy editing and Elizabeth E. Leuterio was responsible for book design and typesetting, and data linking. Pats C. Baysa, assisted by Zenaida Acacio and Susan Torres, provided administrative and secretarial support. The publication would not have been possible without the cooperation of the Printing Unit under the supervision of Raveendranath Rajan.

Robert H. Salamon, Ann Quon, Carolyn Dedolph, Tsukasa Maekawa, Lynette Mallery, and Ainslie Smith of the Office of External Relations planned and coordinated the dissemination of ADO 2004.

IFZAL ALI

Chief Economist

Economics and Research Department

Contents

Part 1 Developing Asia and the World 1

Developing Asia and the World 3

Overview of Economic Highlights and Prospects 3

Resolving Developing Asia's Nonperforming Loans 31

Part 2 Economic Trends and Prospects in Developing Asia 39

East Asia 40

People's Republic of China 41

Hong Kong, China 50

Republic of Korea 55

Mongolia 60

Taipei,China 64

Southeast Asia 68

Cambodia 69

Indonesia 72

Lao People's Democratic Republic 79

Malaysia 82

Myanmar 86

Philippines 88

Singapore 94

Thailand 98

Viet Nam 102

South Asia 108

Afghanistan 109

Bangladesh 113

Bhutan 118

India 120

Maldives 126

Nepal 128

Pakistan 132

Sri Lanka 138

Central Asia 144

Azerbaijan 145

Kazakhstan 149

Kyrgyz Republic 153

Tajikistan 156

Turkmenistan 160

Uzbekistan 163

The Pacific 168

Cook Islands 169

Fiji Islands 172

Kiribati 177

Republic of the Marshall Islands 180

Federated States of Micronesia 184

Nauru 187

Papua New Guinea 189

Samoa 193

Solomon Islands 196

Democratic Republic of Timor-Leste 199

Tonga 202

Tuvalu 205

Vanuatu 208

Part 3 Foreign Direct Investment in Developing Asia 211

Foreign Direct Investment in Developing Asia 213

Trends 214

Impact of Foreign Direct Investment 217

Importance of the Policy Context 232

International Investment Agreements 235

Six Asian Case Studies 244

Conclusions and Policy Implications 259

Statistical Appendix 270

Statistical Notes and Tables 271

Boxes

Box 1.1 The People's Republic of China-A Growing Market for Regional Exports 5

Box 1.2 Developing Member Country Access to International Capital Markets 16

Box 1.3 Classification of Lending as Nonperforming Loans 33

Box 1.4 New Nonperforming Loans in Thailand 38

Box 2.1 Protecting Minimum Living Standards in Rural Areas 44

Box 2.2 Medium-Term Risks and Uncertainties 49

Box 2.3 Challenges in Meeting Infrastructure Needs 78

Box 2.4 Republic of Palau 176

Box 2.5 The Amended Compacts of Free Association of the United States with the Federated States of Micronesia and the Republic of the Marshall Islands 183

Box 3.1 Does FDI Contribute to Economic Growth … or Doesn't It? 220

Box 3.2 Special Economic Zones: The Case of India 222

Box 3.3 FDI in the Indian Automobile Industry 229

Box 3.4 Bilateral Investment Treaties 236

Box 3.5 The ASEAN Investment Area 238

Box 3.6 The TRIMS Agreement 240

Box 3.7 Possible Lessons for Viet Nam from Other ASEAN Countries' Experience 252

Figures

Figure 1.1 Growth of PRC Exports, 2001-2003, % 4

Figure 1.2 Growth of PRC Imports, 2001-2003, % 6

Figure 1.3 Quarterly GDP Growth, Q1 2002-Q4 2003 7

Figure 1.4 GDP Growth Components, United States, Q1 2002-Q4 2003 8

Figure 1.5 US Institute for Supply Management Index, January 2002-March 2004 9

Figure 1.6 US Consumer Confidence Index, January 2002-February 2004 9

Figure 1.7 Growth of Real Exports, Japan, Q1 2003-Q1 2004 10

Figure 1.8 Tankan Survey of Business Conditions, Q2 2001-Q1 2004 10

Figure 1.9 US Treasury Yield Curves 15

Figure 1.10 Euro Benchmark Yield Curve 15

Figure 1.11 Sovereign Risk Spreads, Emerging Markets, January 2002-March 2004 15

Figure 1.12 East Asia, GDP growth, % 17

Figure 1.13 Southeast Asia, GDP Growth, % 19

Figure 1.14 South Asia, GDP growth, % 22

Figure 1.15 Central Asia, GDP Growth, % 24

Figure 1.16 The Pacific, GDP Growth, % 26

Figure 1.17 Correlation Between 1-Year Lagged NPL Ratio and Annual Credit Growth 31

Figure 1.18 Nonperforming Loan Ratios of Banks in Selected Developing Member Countries, end-2002 32

Figure 2.1 GDP Growth and Inflation, People's Republic of China, Q1 2002-Q4 2003 42

Figure 2.2 Composite Consumer Price Index, Hong Kong, China, January 2000-February 2004 51

Figure 2.3 Contribution of Expenditure Components to Change in GDP, Republic of Korea, 1997-2003 56

Figure 2.4 GDP Growth and Inflation, Mongolia, 1998-2003 61

Figure 2.5 Growth Rates of GDP and Its Demand Components, Taipei,China, 1999-2003 65

Figure 2.6 GDP Growth, Cambodia, 1999-2005 70

Figure 2.7 Exchange, Inflation, and Interest Rates, Indonesia, December 2001-December 2003 73

Figure 2.8 Central Government Expenditures and Revenues and GDP Growth, Lao People's Democratic Republic, 1997-2003 80

Figure 2.9 Net FDI, and Total and Private GFCF, Malaysia, 1997-2003 83

Figure 2.10 Government Expenditures by Sector, Philippines, 2002-2004 89

Figure 2.11 GDP Growth and Contribution by Expenditure Account, Singapore, 2002-2003 95

Figure 2.12 GDP Growth by Expenditure Account, Thailand, 1999-2003 99

Figure 2.13 GDP and Sector Growth, Viet Nam, 1998-2005 103

Figure 2.14 Foreign Exchange Reserves and Worker Remittances, Bangladesh, FY1993-FY2003 114

Figure 2.15 Central Government Finance, Bhutan, FY1997-FY2004 119

Figure 2.16 GDP and Business Cycles, India, FY1950-FY2005 121

Figure 2.17 Tourist Arrivals by Month, Maldives, 2001-2003 127

Figure 2.18 Government Expenditures on Development and Security, Nepal, FY1997-FY2003 129

Figure 2.19 Interest Rates, Pakistan, July 2002-March 2004 133

Figure 2.20 Colombo Stock Exchange, Sri Lanka, 1993-2003 139

Figure 2.21 Estimated Sector Contributions to GDP Growth, Azerbaijan, 2000-2003 146

Figure 2.22 GDP Growth and Unemployment, Kazakhstan, 1996-2003 150

Figure 2.23 Real Wages and Poverty, Kyrgyz Republic, 1996-2003 154

Figure 2.24 GDP Growth and Fiscal Balance, Tajikistan, 1997-2003 157

Figure 2.25 GDP Growth and Consumer Price Inflation, Turkmenistan, 1998-2003 161

Figure 2.26 Visitor Arrivals by Quarter, Cook Islands, Q1 2000-Q3 2003 170

Figure 2.27 Current Account Components, Fiji Islands, 2000-2004 173

Figure 2.28 Government Revenues and Expenditures, Kiribati, 1997-2003 178

Figure 2.29 Government Wages, Republic of the Marshall Islands, FY1993-FY2003 181

Figure 2.30 GDP Growth, Federated States of Micronesia, FY1997-FY2004 185

Figure 2.31 GDP Growth, Papua New Guinea, 1997-2004 190

Figure 2.32 GDP Growth, Samoa, 1997-2004 194

Figure 2.33 GDP Growth, Solomon Islands, 1997-2004 197

Figure 2.34 Timor Sea Revenue Estimates, Timor-Leste, 2002-2024 200

Figure 2.35 GDP Growth and Inflation, Tonga, FY1997-FY2004 203

Figure 2.36 Government Revenues and Expenditures, Tuvalu, 1997-2003 206

Figure 2.37 GDP Growth, Vanuatu, 1997-2004 209

Figure 3.1 Exports, Selected Regions, 1970-2002 214

Figure 3.2 World Exports, FDI Outflows, and GDP, 1990-2002 215

Figure 3.3 Average Annual Growth of World Exports and FDI Outflows, 1981-2000 215

Figure 3.4 Cross-Border Mergers and Acquisitions, by Subregion, 1987-2001 216

Figure 3.5 FDI Inflows, by Subregion, 1970-2001 216

Figure 3.6 FDI Inward Stock, by Subregion, 1981-2002 217

Figure 3.7 FDI Inward Stock, Top 10 in Developing Asia, 2002 217

Figure 3.8 BITs in Developing Asia, by Subregion, 1959-2002 235

Figure 3.9 Number of BITs and DTTs in Developing Asia, 1959-2002 237

Figure 3.10 Number of BITs, Top 10 in Developing Asia, end-2002 237

Figure 3.11 FDI Outflows, Top 10 in Developing Asia, 2000-2002 258

Tables

Table 1.1 Selected Economic Indicators, Developing Asia, 2001-2005 4

Table 1.2 Baseline Assumptions on External Conditions, 2002-2005 8

Table 1.3 Direction of Trade: Intrasubregional, Intersubregional, and Total Exports, September 2002-September 2003, Annual % Change 12

Table 1.4 Stock Market Prices and Capitalization in Selected Developing Member Countries 14

Table 2.1 Major Economic Indicators, People's Republic of China, 2001-2005, % 43

Table 2.2 Major Economic Indicators, Hong Kong, China, 2001-2005, % 52

Table 2.3 Major Economic Indicators, Republic of Korea, 2001-2005, % 57

Table 2.4 Major Economic Indicators, Mongolia, 2001-2005, % 62

Table 2.5 Major Economic Indicators, Taipei,China, 2001-2005, % 66

Table 2.6 Major Economic Indicators, Cambodia, 2001-2005, % 71

Table 2.7 Major Economic Indicators, Indonesia, 2001-2005, % 74

Table 2.8 Major Economic Indicators, Lao People's Democratic Republic, 2001-2005, % 81

Table 2.9 Major Economic Indicators, Malaysia, 2001-2005, % 84

Table 2.10 Major Economic Indicators, Philippines, 2001-2005, % 90

Table 2.11 Major Economic Indicators, Singapore, 2001-2005, % 96

Table 2.12 Major Economic Indicators, Thailand, 2001-2005, % 100

Table 2.13 Major Economic Indicators, Viet Nam, 2001-2005, % 104

Table 2.14 Major Economic Indicators, Bangladesh, 2001-2005, % 115

Table 2.15 Major Economic Indicators, India, 2001-2005, % 122

Table 2.16 Major Economic Indicators, Nepal, 2001-2005, % 130

Table 2.17 Major Economic Indicators, Pakistan, 2001-2005, % 134

Table 2.18 Major Economic Indicators, Sri Lanka, 2001-2005, % 140

Table 2.19 Major Economic Indicators, Azerbaijan, 2001-2005, % 147

Table 2.20 Major Economic Indicators, Kazakhstan, 2001-2005, % 151

Table 2.21 Major Economic Indicators, Kyrgyz Republic, 2001-2005, % 155

Table 2.22 Major Economic Indicators, Tajikistan, 2001-2005, % 158

Table 2.23 Major Economic Indicators, Fiji Islands, 2001-2005, % 174

Table 2.24 Major Economic Indicators, Papua New Guinea, 2001-2005, % 191

Table 3.1 FDI Inflows in Selected Developing Asian Economies, 2002 216

Table 3.2 Top 10 Destinations for FDI in Developing Asia, 1991-1993 and 1998-2000 218

Table 3.3 Foreign Investment Regime in the Host Economy: Main Types of Regulatory and Incentive Measures 233

Table 3.4 Comparative Statistics, Six Countries 245

Table 3.5 Annual FDI, Portfolio, and Other Capital Inflows, 1990-2002, $ million 246

Table 3.6 FDI Regimes: Some Stylized Facts 247

Statistical Appendix Tables

Table A1 Growth Rate of GDP (% per year) 277

Table A2 Growth Rate of Per Capita GDP (% per year) 278

Table A3 Growth Rate of Value Added in Agriculture (% per year) 279

Table A4 Growth Rate of Value Added in Industry (% per year) 280

Table A5 Growth Rate of Value Added in Services (% per year) 281

Table A6 Unemployment Rate (%) 282

Table A7 Gross Domestic Investment (% of GDP) 283

Table A8 Inflation (% per year) 284

Table A9 Change in Money Supply (% per year) 285

Table A10 Growth Rate of Merchandise Exports (% per year) 286

Table A11 Direction of Exports (% of total) 287

Table A12 Growth Rate of Merchandise Imports (% per year) 288

Table A13 Trade Balance (US$ million) 289

Table A14 Current Account Balance (US$ million) 290

Table A15 Current Account Balance (% of GDP) 291

Table A16 Foreign Direct Investment (US$ million) 292

Table A17 External Debt Outstanding (US$ million) 293

Table A18 Debt Service Ratio (% of exports of goods and services) 294

Table A19 Exchange Rates to the US Dollar (annual average) 295

Table A20 Gross International Reserves (US$ million) 296

Table A21 Central Government Expenditures (% of GDP) 297

Table A22 Central Government Revenues (% of GDP) 298

Table A23 Fiscal Balance of Central Government (% of GDP) 299

Acronyms and Abbreviations

AFTA ASEAN Free Trade Area

AMC asset management company

ASEAN Association of Southeast Asian Nations

AusAID Australian Agency for International Development

BIT bilateral investment treaty

CEPA Closer Economic Partnership Arrangement

CPI consumer price index

DMC developing member country

DTT double taxation treaty

EU European Union

FATF Financial Action Task Force

FDI foreign direct investment

FEZ free economic zone

GDP gross domestic product

GNP gross national product

ICT information and communications technology

IT information technology

IMF International Monetary Fund

kWh kilowatt-hour

Lao PDR Lao People's Democratic Republic

M&As mergers and acquisitions

MAI multilateral agreement on investment

MFA Multifibre Arrangement

NPL nonperforming loan

MNE multinational enterprise

ODA official development assistance

OECD Organisation for Economic Co-operation and Development

OPEC Organization of Petroleum Exporting Countries

PBC People's Bank of China

PRC People's Republic of China

PICTA Pacific Island Countries Trade Agreement

PRGF Poverty Reduction and Growth Facility

R&D research and development

saar seasonally adjusted annualized rate

SASAC State-owned Assets Supervision and Administration Commission

SARS severe acute respiratory syndrome

SME small and medium enterprise

SOCB state-owned commercial bank

SOE state-owned enterprise

TRIMs Trade-Related Investment Measures

UK United Kingdom

UN United Nations

US United States

VAT value-added tax

WTO World Trade Organization

Definitions

The economies discussed in the Asian Development Outlook 2004 are classified by major analytic or geographic groupings. For purposes of ADO 2004, the following apply:

• Association of Southeast Asian Nations (ASEAN) comprises Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.

• Developing Asia refers to 41 developing member countries (DMCs) of the Asian ­Development Bank ­discussed in ADO 2004.

• East Asia comprises People's Republic of China; Hong Kong, China; Republic of Korea; Mongolia; and Taipei,China.

• Industrial countries refer to the high-income OECD countries defined in World Bank, available: www.worldbank.org/data/countryclass/classgroups.htm#High-income.

• Southeast Asia comprises Cambodia, Indonesia, Lao People's Democratic Republic, ­Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.

• South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

• Central Asia comprises Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and ­Uzbekistan.

• The Pacific comprises Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Nauru, Papua New Guinea, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.

• Transition economies refer to the countries of Central Asia, People's Republic of China, Cambodia, Lao People's Democratic Republic, Mongolia, and Viet Nam.

• The euro zone comprises Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, ­Netherlands, Portugal, and Spain.

• Unless otherwise specified, the symbol “$” and the word “dollar” refer to US dollars. Currency abbreviations are given in Statistical Appendix Table A19.

The Statistical Notes give a detailed explanation of how data are derived.

ADO 2004 is based on data available up to 31 March 2004.

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