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Asian Development Outlook 2005 : I. Developing Asia and the world
Developing Asia: Economic highlights of 2004 and prospects for 2005-2007In 2004, developing Asia achieved its best growth performance since the Asian financial crisis of 1997-98. The region’s aggregate real gross domestic product (GDP) expanded by a strong 7.3% (Table 1.1). In fact, with the notable exception of the Pacific developing countries, nearly all developing Asian economies grew by more than 5% in 2004, a remarkable feature for a region of about 4 billion people. Using purchasing power parity weights, developing Asia’s GDP expanded even faster, at 7.7%. Some of the region’s best performers were the People’s Republic of China (PRC); Hong Kong, China; India; Kazakhstan; Malaysia; Singapore; Uzbekistan; and Viet Nam. The overall growth performance was underpinned by continued strength in external demand, complemented by more buoyant domestic demand, in particular business investment. On the external front, the economies of the region were the main beneficiaries of robust growth in major industrial countries, in particular the United States (US). Associated with this was a significant revival in the global electronics market, for which many Asian countries are major exporters. In addition, with the economy of the PRC showing hardly any signs of a slowdown and regional economic integration further moving forward, intraregional trade remained remarkably buoyant in 2004 as exports from the economies in the region increased by 27.9% in the year to September. For 2004 as a whole, exports from developing Asia rose by 25.5%, compared with 19.3% in 2003. However, rapid income growth for several years in a row, together with continued high oil prices, also led to surging imports in most Asian economies, as reflected in narrowing trade and current account surpluses or in widening
A major feature of economic developments in 2004 was a marked revival of business investment, particularly in East Asia and Southeast Asia where it had been lagging since the Asian crisis--with the notable exception of the PRC where it has remained robust over the past decade. In most countries in South Asia and the energy-rich countries of Central Asia, investment spending also showed a healthy upward trend in 2004, a positive sign for stronger long-term growth. High capacity utilization was in part due to robust external demand, low interest rates, and ample liquidity, as well as strengthening business confidence. Almost all countries showed an increase in their investment-to-GDP ratio. The revival of business investment, combined with continuing or strengthening consumption demand in most countries, and partly supported by further expansionary fiscal policies, translated into the robust rates of growth experienced in 2004. On the supply side, in many countries the agriculture sector accounts for a significant share of GDP. Conditions were favorable in Fiji Islands, Indonesia, Kyrgyz Republic, Mongolia, Nepal, Philippines, and Uzbekistan, but in India, agricultural growth could not match the exceptional recovery of 2003, thus contributing to somewhat lower GDP growth there. In spite of generally sustained high growth over the past few years and high oil prices, inflation in most countries remained largely subdued in 2004. In the PRC, even with continuing concerns about overheating of the economy, inflation averaged 3.9% in 2004 compared with 1.2% in 2003. There were, of course, exceptions where inflation became a concern over the course of 2004, notably Azerbaijan, Cambodia, India, Mongolia, Pakistan, Philippines, Samoa, Sri Lanka, Thailand, Tonga, and Viet Nam, though inflationary pressures became more apparent across the region as the year progressed. This led several countries to adopt a more flexible exchange rate stance and, as a result, a raft of Asian currencies--including the baht, New Taiwan dollar, Singapore dollar, and won, as well as the yen--appreciated against the US dollar, reducing the impact of imported inflation. Nevertheless, with relatively low inflation, monetary policies remained mostly accommodative during the year. The strong economic showing by most of developing Asia in 2004 was marked by a further accumulation of foreign exchange reserves, which are estimated to have reached about $1,624 billion at the end of the year. The region benefited from strong capital inflows, notably FDI that is estimated to have climbed to $69.3 billion (on a net basis) over the year. Foreign exchange reserves increased at about the same rate as in 2003, but were mainly concentrated in the PRC. In several countries, the holding of large amounts of foreign exchange reserves in dollar-denominated assets came under scrutiny in 2004 as the risks of a further substantial depreciation of the US dollar became more apparent and the need to significantly boost domestic investments, particularly in infrastructure, in order to boost competitiveness, was increasingly realized. Any acknowledgment of developing Asia’s strong economic performance in 2004 must be tempered by the fact that too many economies, in particular smaller economies, are still far from closing the income gap with the better-off countries in the region. These economies remain highly vulnerable to external shocks and have weak domestic fundamentals. Among their number are: many of the economies of the Pacific; Mongolia in East Asia; Cambodia, Lao People’s Democratic Republic (Lao PDR), and Myanmar in Southeast Asia; Afghanistan, Bangladesh, and Nepal in South Asia; and Kyrgyz Republic and Tajikistan in Central Asia. Over the forecast period 2005-2007, the overall outlook for developing Asia will of course depend heavily on developments in the world economy as a whole--particularly in major industrial countries and the PRC. The prospects for growth in major industrial countries and for world trade--in spite of significant downward risks--remain relatively buoyant, auguring well for the economies of developing Asia over the forecast period. At the same time, domestic market conditions have become stronger over the past 2 years in most countries, providing some cushion against a potential deterioration in the external environment. In spite of a rather confident baseline outlook for developing Asia, this environment could become much more somber over the next 3 years, depending on how the current uneven expansion among some major world economies affects key economic variables across the globe. A much more robust growth projection for the US economy, while Japan and the euro zone go through a relatively rough patch, implies that the problem of external imbalances in the US could become worse, triggering a sharp depreciation of the dollar, a spike in inflation, and more sudden increases in interest rates, thus ultimately restraining world growth and trade. In addition, stronger growth in relatively energy-intensive countries, particularly the PRC and the US, points to continued high oil prices and an exacerbation of the global imbalances. In short, while the region has built up significant resilience against external shocks, many economies remain vulnerable, particularly some of the poorer ones. The 2005-2007 baseline assumptions for external conditions (Table 1.2) indicate only a moderate slowdown of average GDP growth for developing Asia as a whole to 6.5-6.9% (7.1-7.5% on the basis of purchasing power parity weights). In East Asia, average GDP growth will be in the range of 6.7-7.2% as the PRC economy experiences only a mild slowdown while the economies of Hong Kong, China and Taipei,China perform somewhat better than the average of the past 4 years. In Southeast Asia, average GDP growth is forecast at 5.4-5.9%, higher than the average of the past 4 years, since most countries are projected to perform markedly better. (For Indonesia, the most populous country in the subregion, this is a very positive development.) In South Asia, growth is projected at 6.2-6.9%, substantially higher than historical averages, largely reflecting continued robust growth in the Indian economy, which accounts for about 80% of the subregional average. In Central Asia, growth rates, though fluctuating widely due to developments in the energy sector in some countries, are expected to settle to more sustainable levels as the effects of economic transition fade. In the Pacific, GDP growth rates will remain on average at around 2%, as the two largest economies--Fiji Islands and Papua New Guinea--are not projected to perform particularly well. While developing Asia’s economies will show significant divergence, domestic demand will increasingly play a significant role in supporting overall growth in 2005-2007. Generally robust income growth over the past few years has boosted consumer confidence and spending. At the same time, investor sentiment is strengthening in many major economies of the region, and increased domestic and foreign investments are forecast in the baseline. Even as the pace of the world economic expansion moderates over the next 3 years, developing Asia will remain a preferred investment location, provided that countries can enhance--or at the least, keep--their competitive advantage. In this context, furtherance of economic, governance, and administrative reforms, as well as improvements to infrastructure, will be particularly important.
The potential contribution of domestic demand to growth could, however, be negatively affected by inflationary trends and the response of the monetary authorities. Projections indicate that inflation in developing Asia could, on average, fall somewhat in the forecast period, leveling off in 2006-2007. No significant tightening of monetary policies is required, but it could be if the baseline assumptions are not realized. Higher interest rates would particularly affect countries where household or public debt is high, including PRC, Indonesia, Republic of Korea, Kyrgyz Republic, Philippines, Sri Lanka, Tajikistan, and Thailand. As often discussed in the Asian Development Outlook (ADO) in previous years, fiscal discipline is the best protection against potential external shocks. The external sector will remain important, but might contribute somewhat less to growth than in the recent past, since imports are projected to continue increasing rather rapidly in many countries. Although projections indicate that export growth will moderate over the next 3 years, the world trading environment remains relatively buoyant compared with historical averages. Moreover, intraregional trade should continue to expand at a brisk pace as the rest of developing Asia integrates further with the PRC and increasingly with India. Robust growth in the region, combined with continued trade liberalization reforms, will also lead to strong import growth, resulting in declining current account surpluses or widening deficits (mainly in South Asia). The external sector might therefore contribute less to growth than in recent years. As the external environment runs a risk of becoming less bright over the forecast period, initiatives by developing Asian governments to enhance competitiveness and promote stronger regional integration will become more important, and will be key factors in attracting foreign investment flows. In this context, the significant divergence in exchange rate movements in Asia relative to the US dollar could become a significant policy issue over the forecast period. For the countries of the region, some coordination of these movements is a preferred solution, and should be put high on the policy agenda. Economic prospects for developing Asia remain auspicious over the next 3 years. While inevitably such a vast region presents significant divergences, income growth will generally remain robust under the baseline scenario. Most of the larger economies in the region are well placed to weather external shocks, which current imbalances in the world economy could very well trigger over the next few years. However, and very importantly, the long-term prosperity of the region can only be built on robust economic growth that is inclusive. There is evidence that inequalities have increased significantly in many of the rapidly growing economies of the region. Policy measures to mitigate these inequalities will be particularly important over the next few years.
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deficits in some economies. The average current account surplus in the region was reduced to 3.7% of GDP in 2004, down from 4.3% in 2003, whereas the contribution of net exports to GDP growth was uneven.
Investment rates are expected to remain firm over the forecast period and to average about 30% for the region.
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