Catalog

Foreword

The Asian Development Outlook 2007 (ADO 2007) is the 19th edition of the annual comprehensive economic report on the developing member countries of the Asian Development Bank.

ADO 2007 provides an assessment of recent economic performance for 43 developing member countries, and projections for major macroeconomic indicators for 2007 and 2008. It also provides a diagnosis of macroeconomic challenges and future growth prospects for the region's economies.

The performance of developing Asia in 2006 was exceptional. Aggregate gross domestic product for the region grew at 8.3%, the fastest since 1995. Growth was aided by a highly favorable external environment, benign domestic circumstances, good economic management, and the fruits of reform efforts. Remarkable growth in the People's Republic of China and India underpinned this regional expansion, with a large number of other countries enjoying vigorous growth.

Even with exceptionally fast growth and rising oil prices, consumer price inflation did not, in general, accelerate in 2006. But this aggregate pattern disguises wide variation at the country and regional level. In some countries, evidence of overheating gathered as the year progressed. Authorities answered by raising interest rates, mopping up excess liquidity, and restraining credit growth and public spending.

The outlook for the international economy remains broadly favorable, although growth will slow in 2007. Despite production cuts by the Organization of the Petroleum Exporting Countries, crude oil prices are well off their highs of 2006 and are expected to continue stabilizing around $57 a barrel in 2007. Some metals prices, such as copper, have also come down. Lower commodity prices will generally ease inflationary pressures and bring terms-of-trade gains, as developing Asia is a net importer.

Against this backdrop, still-robust growth of 7.6% and 7.7% for developing Asia is expected in 2007 and 2008. These projections imply that growth will move to a more sustainable footing and that overheating pressures that surfaced in 2006 will gradually ease. Growth in all subregions, except the Pacific, is seen softening in 2007. In the People's Republic of China in 2007 and 2008, softer external demand and policy curbs are expected to pull growth down gradually. In the short run, the Government is likely to restrict investment growth and cool the economy. In India, steps taken by the central bank to cool inflation are expected to slow the pace of investment and consumption spending. In other countries, such as Indonesia, growth is seen picking up in 2007 as lower interest rates and lower inflation give a boost to domestic spending. Falling prices of commodities in international markets, as well as vigilance from monetary authorities across the region, will help ease inflation in 2007. Developing Asia's current account is expected to be in surplus for 2007 and 2008.

As always, events could evolve in surprising and unexpected ways, and derail projections. Risks remain tilted down. Markets have moved to reprice risks, but calm could yet give way to less settled conditions. If asset prices get badly punctured and reversals occur, the chill would be widely felt. Although average oil prices are expected to be lower this year than last and to come down some more in 2008, they remain sensitive to supply conditions, surges in demand, and geopolitical events. In trade negotiations, time is running out for an agreement in the Doha Round, and in the developing vacuum, preferential trade agreements are gathering momentum, and calls for protection are becoming more audible. A human flu pandemic remains a threat. In many countries, elections are scheduled in the next year. Their conduct and outcomes will be important for confidence.

Over the next few decades, developing Asia's prospects will depend critically on its ability to adapt to a constantly changing environment. The theme for ADO 2007, growth amid change, looks at the evolutions that have been associated with successful growth experiences. Increasing technological sophistication and structural complexity are important dimensions of change. Industry and manufacturing have played a pivotal role, and in most countries, services have been an important provider of jobs. A key message is that "walking on two legs"—fostering both industry and services—is the only viable development model for many economies.

While prescriptions and priorities need to be country specific, the following elements are crucial: high investment rates that over time build, expand, and upgrade the range of economic activities; funds for infrastructure services that are vital for economies of scale and other benefits; relevant and purposeful education; markets that support labor mobility and flexibility, alongside affordable social protection; arrangements that lower risks and uncertainty for businesses, and that allow new firms to enter and old firms to exit; and removal of at- and behind-the-border impediments to integration.

HARUHIKO KURODA
President

Acknowledgments

The Asian Development Outlook 2007 (ADO 2007) was prepared by the staff of the Asian Development Bank (ADB) from the Central and West Asia Department, East Asia Department, Pacific Department, South Asia Department, Southeast Asia Department, Economics and Research Department (ERD), as well as the resident missions of ADB.

The economists who contributed the country chapters are: Luxmon Attapich (Thailand); Sharad Bhandari and Joven Balbosa (Philippines); Johanna Boestel (Sri Lanka); Philip Chang and Rafael Abbasov (Azerbaijan and Kazakhstan); Emma Ferguson (Small Pacific countries); David Green and Hiroki Kasahara (Malaysia); Tadateru Hayashi (Bhutan and Maldives); Christopher Hnanguie and Rattanatay Luanglatbandith (Lao People's Democratic Republic); Anqian Huang (Fiji Islands); Neeraj Jain and Zafardjon Khotamov (Tajikistan); Mandar Jayawant and Luvsanchultem Vanjildorj (Mongolia); Shikha Jha (Armenia); Rezaul Khan and Mohammad Zahid Hossain (Bangladesh); Xuelin Liu (Turkmenistan); Aashish Mehta (Hong Kong, China); Hiranya Mukhopadhyay and Aashish Mehta (India); Cyn-Young Park (Republic of Korea); Safdar Parvez and Ghulam Qadir (Pakistan); Michaela Prokop (Islamic Republic of Afghanistan); Purnima Rajapakse and Vanndy Hem (Cambodia); Lyaziza Sabyrova and Gulkayr Tantieva (Kyrgyz Republic); Omkar Shrestha and Dao Viet Dung (Viet Nam); Paolo Spantigati and Shyamal Shrestha (Nepal); Pradeep Srivastava (Myanmar); Ramesh Subramanian and Hari Purnomo (Indonesia); Kiyoshi Taniguchi (Papua New Guinea, Democratic Republic of Timor-Leste, and Small Pacific countries); Hong Wei and Norio Usui (Uzbekistan); Fan Zhai (Singapore and Taipei,China); and Jian Zhuang and Jesus Felipe (People's Republic of China). Bruce Knapman also contributed material on the Pacific.

The subregional coordinators were Padmini Desikachar and Bahodir Ganiev for Central and West Asia; Klaus Gerhaeusser and V.B. Tulasidhar for East Asia; Tadateru Hayashi for South Asia; Sharad Bhandari for Southeast Asia; and Kiyoshi Taniguchi and Emma Ferguson for the Pacific. A team of economists from ERD, led by Frank Harrigan, Assistant Chief Economist, Macroeconomics and Finance Research Division (ERMF), assisted by Aashish Mehta and Editha Laviņa, coordinated the overall production of the publication. Part 1, Developing Asia and the world was prepared by Frank Harrigan and Cyn-Young Park. The chapter Ten years after the crisis was prepared by Frank Harrigan. Uncoupling Asia: Myth and reality was written by Cyn-Young Park. William James of Nathan Associates, Inc. prepared the section Trade and structural change in East and Southeast Asia. In Part 3, Jesus Felipe and Frank Harrigan wrote the chapter entitled Growth amid change; and Aashish Mehta and Jesus Felipe prepared the chapter Education and structural change in four Asian countries. Juthathip Jongwanich also contributed to Part 1.

Technical and research support was provided by Shiela Camingue, Gemma Esther Estrada, Pilipinas Quising, Nedelyn Magtibay-Ramos, Lea Sumulong, and Rashiel Velarde. Richard Niebuhr and Anthony Patrick as the economic editors made substantive contributions to the country chapters, subregional summaries, and other parts of the book. Jonathan Aspin did the style and copy editing, and Elizabeth E. Leuterio was responsible for typesetting and data linking, as well as graphics generation in which she was assisted by Maria Susan Torres. Artwork and cover design were rendered by Mike Cortes of /Doubleslash/ Media Inc. Maria Susan Torres, assisted by Zenaida Acacio, provided administrative and secretarial support, and Lily Bernal-Sadia did the proofreading. The publication would not have been possible without the cooperation of the Printing Unit under the supervision of Raveendranath Rajan.

Ann Quon and Saby Mitra of the Department of External Relations planned and coordinated the dissemination of ADO 2007.

IFZAL ALI
Chief Economist
Economics and Research Department

Contents

Highlights—ADO 2007 1

Part 1 Developing Asia and the world 1

Developing Asia and the Pacific: Performance and prospects 3
Prospects for the world economy in 2007 and 2008 20
Subregional summaries 25
Ten years after the crisis: The facts about investment and growth 46
Uncoupling Asia: Myth and reality 66
Trade and structural change in East and Southeast Asia: Implications for growth and industrialization 82

Part 2 Economic trends and prospects in developing Asia 101

Central Asia 102

Armenia 103
Azerbaijan 108
Kazakhstan 113
Kyrgyz Republic 117
Tajikistan 122
Turkmenistan 126
Uzbekistan 128

East Asia 131

People's Republic of China 132
Hong Kong, China 140
Republic of Korea 144
Mongolia 149
Taipei,China 152

South Asia 155

Islamic Republic of Afghanistan 156
Bangladesh 159
Bhutan 167
India 170
Maldives 181
Nepal 184
Pakistan 188
Sri Lanka 194

Southeast Asia 201

Cambodia 202
Indonesia 207
Lao People's Democratic Republic 213
Malaysia 216
Myanmar 220
Philippines 222
Singapore 228
Thailand 232
Viet Nam 236

The Pacific 241

Fiji Islands 242
Papua New Guinea 245
Democratic Republic of Timor-Leste 249
Small Pacific countries 253

Part 3 Growth amid change 268

Growth amid change 269
Education and structural change in four Asian countries 317

Statistical notes and tables 342

Definitions

The economies discussed in Asian Development Outlook 2007 (ADO 2007) are classified by major analytic or geographic groupings. For purposes of ADO 2007, 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 43 developing member countries of the Asian Development Bank discussed in ADO 2007.
• Central Asia comprises Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
• East Asia comprises People's Republic of China; Hong Kong, China; Republic of Korea; Mongolia; and Taipei,China.
• South Asia comprises Islamic Republic of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Southeast Asia comprises Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.
• The Pacific comprises Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Nauru, Papua New Guinea, Republic of Palau, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.
• Unless otherwise specified, the symbol "$" and the word "dollar" refer to US dollars.

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

ADO 2007 is based on data available up to 15 March 2007.

Acronyms and abbreviations

ASEAN   Association of Southeast Asian Nations
CPI   consumer price index
EU   European Union
FDI   foreign direct investment
FY   fiscal year
GDP   gross domestic product
IMF   International Monetary Fund
OECD   Organisation for Economic Co-operation and Development
PRC   People's Republic of China
US   United States
VAT   value-added tax
WTO   World Trade Organization