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Developing Asia: Robust Growth Will Prevail

Speech
by
Sirpa Jarvenpaa
Regional Director, SPSO
Asian Development Bank

at the 2005 Launch of the Asian Development Outlook

Suva, Fiji Islands
6 April 2005

Ratu Finau Mara
Ambassador Berg and High Commissioner Finikaso
Representatives of Media and Colleagues,

Good afternoon to all of you and thank you for joining us in the press conference for the 2005 launch of the Asian Development Outlook – a flagship publication of the Asian Development Bank

– published every April and updated in every September. Our launch today is concurrent with similar launches across the Asian member countries of ADB. As you all know, I am Sirpa Jarvenpaa, Regional Director of the South Pacific Subregional Office of ADB. With me is Dr. Sophia Ho, SPSO’s Principal Country Programs Specialist.

On your way out, the staff will give you a press kit that will provide the publication highlights, our Fiji Islands press release and press releases for the overall report and its section on the competition policy.

The 2005 Asian Development Outlook asserts that in 2004 the major industrial economies grew at their strongest rate in many years; and that

The 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%.

With the 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; and

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 Outlook provides that - 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.

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 strong in 2004 as exports from the economies in the region increased by 25.5%, compared with 19.3% in 2003.

A major feature of economic developments in 2004 was a revival of business investment, particularly in East 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.

The 2005 Asian Development Outlook provides that 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, - partly supported by further expansionary fiscal policies, translated into the robust rates of growth experienced in 2004.

2004 shows that the developing Asia maintains strong resilience;

Despite the huge loss of human life and a sharp increase in poverty in the affected areas—the recovery from the impact of the disastrous tsunami that struck the countries bordering the Indian ocean is nevertheless expected to be rapid.

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. Resilience is also drawn from a further accumulation of foreign exchange reserves, which are estimated to have reached about $1,624 billion at the end of the year.

Overall, the economies of industrial countries are projected to grow at 2.5% in 2005 and 2006, lower than the robust performance of 3.5% last year, but still considerably higher than the average growth rate during the 1990s. Nevertheless, there are signs that a gradual deceleration in the economic growth of these countries is likely to continue.

With a number of downside risks weighing on the medium-term outlook, growth in major industrial countries will slow to 2.4% in 2007.

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.

• Strong US domestic expenditures are deepening the US trade deficit, adding a downward pressure on the dollar and exacerbating inflationary conditions in the medium term.
• Inflationary risks in the US are tilted up with higher labor and nonlabor costs as well as softening productivity growth in the
• These could lead, later in 2005, to interest rates being considerably higher than currently expected, limiting further expansion in the US economy in the medium term.
• Against this backdrop, sluggish domestic demand in Japan and the euro zone poses a considerable downside risk.
• As the rest of the world economy, particularly Japan and the euro zone, still relies heavily on exports for growth, a sharp slowdown in US demand could lead to a worldwide slowdown.

Just before we discuss the Pacific, we need to be aware of the global economic risks to the forecast:

• The risk of global disruption stemming from large external imbalances in the US has been on the radar for some time, but the timing and impact of the inevitable adjustment process remain uncertain. Past periods of adjustment and resultant weakness in the dollar have proved quite painful for the world economy.
• Sharp increase in US interest rates could have negative impacts.
• High oil prices pose an added threat to the financial risks. The current price run-up beyond $50 per barrel is a vivid reminder that high oil prices remain a major risk for the region, given Asia’s high dependence on oil imports –– not least in the Pacific.

However, 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 ranging between 6.5–6.9% (7.1–7.5% on the basis of purchasing power parity weights).

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.

Any acknowledgment of developing Asia’s strong economic performance in 2004 must also 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.

Also, while the region has built up significant resilience against external shocks, many economies remain vulnerable, particularly some of the poorer ones. These economies remain highly vulnerable to external shocks and have weak domestic fundamentals. Among these are a number of the Pacific economies of the Pacific – among others; 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.

Looking ahead, Successful implementation of structural reforms remains a priority for sustaining the high growth rates in Asia.

Asia’s growth strategy needs to focus on balancing domestic growth and enhancing resilience to external shocks for long-term sustainability.

To this end, policy priority should be given to creating a positive investment climate for enhancing competitiveness and to generating sustainable increases in domestic demand across the region, as well as to further strengthening regional economic cooperation to improve the region’s resilience against adverse external conditions.

In this context, further economic, governance, and administrative reforms, as well as improvements to infrastructure, will be particularly important. Investment rates are expected to remain firm over the forecast period and to average about 30% for the region.

Moving on to the Pacific forecast, the aggregate GDP growth of the Pacific developing member countries was unchanged at an estimated 2.6% in 2004. Increases in GDP ranged from 1.6% (Tonga) to 4.6% (Solomon Islands). The Micronesia, the Marshalls, and Tuvalu registered contractions because of reductions in public sector activity.

In the forecast and under the weaker international economic environment, economic growth in the Pacifc subregion is forecast to slow slightly to around 2.0% in 2005–2007, while inflation is expected to be in the 3.4–4.0% range.

The Asian Development Outlook notes that this aggregate growth outcome will mean that a substantial proportion of the annual net increase in labor market entrants will continue to flow into the pool of the under- and unemployed, increasing hardship in both rural and urban areas.

The main downside risk to the growth forecast is that governments fail to implement the structural reforms necessary to stimulate private sector development for generating sustainable employment growth.

Maintenance of high international prices for primary commodity exports benefited those economies with relatively large natural resource endowments.

• Tourism continued to grow across the subregion, partly because of lower airfares to several destinations. Consequent stimulation of the services and construction sectors was important to the economies of Cook Islands, Fiji Islands, Samoa, and Vanuatu.
• Primary production also led a mild acceleration of growth in Vanuatu and contributed to a pickup in growth in the Fiji Islands, the second-largest economy.
• In Papua New Guinea, the biggest economy in the subregion, growth decelerated slightly to 2.6%, from 2.8% in 2003 due to the depletion of oil reserves and logging curtailed and is forecast to grow at an annual average rate of 2.4% in the period.
• The Asian Development Outlook, a major growth slowdown is forecast in the Fiji Islands, as the garment industry loses concessionary access to export markets and the sugar industry confronts structural adjustment.
• Modest growth is expected in most other Pacific DMCs.
• Solomon Islands’ second year of relatively rapid growth was led by agriculture, forestry and fisheries, though this entailed harvesting of the natural forest at an unsustainable rate.

The projections given in ADO reflect the vulnerabilities of Fiji Islands and the region’s economies to not only to smallness and remoteness, but also to external developments.

Fiji Islands’ economy is expected to slow down substantially in the medium term due to a major decline in the manufacturing sector, especially among the sugar industry and garment producers.

After picking up to 3.8% in 2004 from 3.0% in 2003, due to a recovery in the agriculture, forestry, and fisheries sectors; an expansion in the tourism industry; low inflation and interest rates; and accumulating official reserves, the economy is estimated to grow in the medium term at less than half the rates achieved in the past three years largely because of the anticipated contraction in the manufacturing sector.

The sugar industry, which provides a direct source of employment for more than 10% of the economically active adult population, is expected to contract further in 2005 in the face of various issues, such as the expiry of leases of sugarcane land and a fall in EU price subsidies.

The largest garment manufacturer, which generates 40% of garment exports and employs 5,000 people, is expected to close over the medium term after preferential access to the US market ended on 1 January 2005, declining value of the preferential access to the Australian market, and as competition from other countries intensifies.

The forecast notes that the impact of the manufacturing contraction in 2005 be offset to a certain extent by a further surge in industry, particularly tourismrelated activities which remain the most likely driver of growth over the medium term.

The recent positive economic indicators suggest that the economy will remain firm over the short term. However, prospects for faster growth rest heavily on the success of reforms being pursued to lift investment and improve the environment for the private sector.

Policies aimed at boosting private sector development have been presented in the current Strategic Development Plan and the 2005 Budget Statement, and the Government acknowledges the importance of necessary structural reforms to promote investment and the private sector.

These reforms include improvements in physical infrastructure, reliability and pricing of utilities, and costs of doing business.

To stimulate private investments, the Reserve Bank of Fiji has signaled its intention to maintain a low interest rate regime, after tightening monetary policy in early 2004, as long as low inflation and balance-of-payments stability is maintained.

On the fiscal front, after years of running substantial budget deficits and accumulating domestic debt, the Government has aimed to achieve a tighter fiscal position through a reduction in expenditure in the medium term. The target is to reduce the budget deficit to less than 2% of GDP by 2007.

Slowing of the current emigration of skilled labor and reducing the resultant labor shortages, improving the performance of utilities, and the regulatory environment for labor and product markets – rest on determined action on the reforms.

• In summary, the Asian Development Outlook points out that political uncertainty continued to be a concern in a number of Pacific DMCs, most conspicuously in Vanuatu; and corruption and poor governance remained as major obstacles to improving development outcomes in the subregion.
• On the positive side, Nauruan voters rejected the leadership that had mismanaged the economy for years and elected a reformist government.
• Some progress was made in 2004 in formulating and implementing economic and public sector reform strategies aimed at improving public service delivery and the enabling environment for private sector development.
• However, reforms needed to be extended and consolidated.
• For most Pacific DMCs, physical infrastructure development and creation of an effective legal and regulatory environment for business (including property rights) remained major challenges.
• Relatively large civil services still needed rightsizing and refocusing on performance, and the importance of public enterprise reform was exemplified by the bankruptcy of Royal Tongan Airlines.
• On a positive note, at the regional level, Pacific Island Forum leaders decided in 2004 to create a Pacific Plan for Strengthening Regional Cooperation and Integration. This will potentially strengthen the contribution of regional institutions to achievement of sustainable development, good governance, and regional security.

Ladies and Gentlemen, thank you for your attention. We can now take few questions. Details of the presentation are provided in the press package that you will receive at the closure of our meeting. Please have a good lunch.