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"Emerging East Asia: Economic Outlook and the Threat of Avian Flu"

Statement by
Haruhiko Kuroda
President
Asian Development Bank

At the 7th ASEM Finance Ministers' Meeting

9 April 2006
Vienna, Austria

I.  Introduction

Your Excellencies, government officials from the ASEM countries, ladies and gentlemen:

I am deeply honored to be here in Vienna, participating in such important discussions. I would like to express my gratitude for the invitation, the excellent preparations for the meeting, and the warm hospitality of our host, the Government of Austria. It is also good to meet many of you whom I had the privilege of meeting at the ASEAN Finance Ministers Meeting in Siem Reap, Cambodia only four days ago.

As you may know, three days ago the Asian Development Bank launched its flagship annual publication, the Asian Development Outlook for 2006. I am happy to inform you that, despite some risks on the horizon, the forecast for Developing Asia continues to be positive. Today, I would like to provide you with the highlights of the forecast as they pertain to Emerging East Asia, followed by an overview of the major risks - and, in particular, the threat of avian flu.

II.  Emerging East Asian Economic Outlook¹

Last year at this time, we saw that growth in the major industrial economies was slowing and that global demand was softening for information technology (IT) products - an important export item for many Emerging East Asian economies. Thus, we expected that growth would slow in the region. The outlook was generally borne out-the US and the euro area economies did slow, and IT demand did soften. But growth in Japan and the People's Republic of China (PRC) was stronger than we expected, which perhaps helped mitigate the impact of rising short-term interest rates and increasing oil prices. Overall, the pace of GDP growth for Emerging East Asia eased from a peak of 8.0% in 2004 to 7.5% in 2005.

For 2006, the global expansion looks to be largely on track. It is true that US economic growth is forecast to slow further, from 3.5% last year to 3.3% this year. However, improved prospects in the euro area and Japan, an upturn in global demand for IT products, and evidence of generally strengthening regional GDP growth in the second half of last year and the early months of this year bode well for Emerging East Asia in 2006. The region overall is expected to sustain a relatively high rate of GDP growth of 7.6% in 2006, slightly higher than last year's rate. We expect growth in the PRC to slow from its rapid pace of the last several years to about 9.5% this year. However, excluding the PRC, the region's economy is expected to grow a little faster, as the Republic of Korea recovers from a year of slower growth and the ASEAN economies broadly sustain the 2005 pace of economic expansion.

While this outlook is the most likely outcome, in our assessment, certain trends are a cause for concern. First, oil prices have increased quite sharply in the last couple of years and there is a risk that they will climb even further. While economies in the region have coped with these higher energy costs reasonably well, further inflationary pressures might become more difficult to manage-especially in those economies where consumers are already hard hit by higher energy prices and reduced subsidies.

Second, Mr. Greenspan's 'bond market conundrum' of a flat yield curve is still perplexing Mr. Bernanke and other policymakers around the globe. There are many explanations for this phenomenon. Some suggest, for example, that structural changes in financial markets and more effective monetary policy have permanently lowered long-term rates. However, few observers expect rates to stay quite as low as they are today. A sudden, sharp rise could be disruptive, especially if accompanied by a strong reversal of capital flows out of emerging markets. Although more resilient regional financial markets in Emerging East Asia might well cope with such an event, it would add to the drag on the economy.

This risk of sudden interest rate changes is exacerbated by the third major risk I will mention - that of the growing global payments imbalance and a potential disorderly adjustment. The US current account deficit widened further in 2005 to 6.4% of GDP, with associated current account surplus increases elsewhere - especially in the Middle East and Russia, but also in the PRC. Without appropriate policy actions by all concerned parties, this imbalance may not be corrected in an orderly manner and, in fact, may grow worse, triggering sharp, sudden movements in financial markets and resulting in a global slowdown. The global effects, including in export-reliant Emerging East Asia, could be quite painful. Policy measures to prevent such a serious scenario would be highly desirable, such as more rapid fiscal consolidation and savings stimulus in the US, structural reforms in the euro zone and Japan, and more flexible exchange rates and increases in investment and/or consumption in Emerging East Asia.

III.  An Avian Flu Pandemic

I would like to spend a little more time on the fourth risk - the threat of a human avian flu pandemic, which remains a very real danger.

In the first three months of 2006 alone, 23 additional countries in Europe, Asia, Africa, and the Middle East had confirmed cases among poultry, wild birds, and even domestic cats. And, tragically, there were 37 human casualties. Thus far, the incidence of casualties among humans has been limited-perhaps because of aggressive containment measures. Yet, the fact that the disease has now spread across such a large portion of the globe-with migratory birds apparently playing a role-gives us cause for concern.

Within the Emerging East Asian economies, outbreaks are still occurring. There have been additional casualties in Cambodia and Indonesia. And there were new outbreaks in the poultry sector of Myanmar, for the first time, and in Malaysia, for the first time in a year. As yet, there have been no new outbreaks in Thailand or Viet Nam, where the first human casualties were reported in 2003 and 2004. Each new outbreak, however, represents a chance for the disease to get out of control, perhaps by mutating into a strain that can be more easily transmitted from human to human. The risk of a large-scale pandemic-though still relatively remote-remains a real threat that could cause devastating losses of human life, and serious negative impacts on the global economy.

Our analysis suggests that the whole of Emerging East Asia could lose about 2.5 percentage points of economic growth in a year under a scenario with a relatively brief impact or as much as 6.5 percentage points of economic growth in a year as a result of the disruptions caused by a large-scale pandemic-including, for example, the indirect effects on tourism.² This compares with the experience with Severe Acute Respiratory Syndrome - or SARS - which was relatively mild but cost the region about $18 billion or 0.6 percentage points of GDP. Considering the possibility that a very widespread pandemic could disrupt trading, transportation, and even payment systems, thereby putting stress on financial systems, especially in emerging markets, economic damage worldwide could be quite severe.³

It is to avoid facing such a scenario that we are collectively striving for stronger programs of active surveillance, preventive measures, aggressive containment programs, and medical preparedness that will avert a costly pandemic. At the national level, governments are making progress in preparing and implementing national plans. In January, for example, the Government of Viet Nam completed a 2006-2008 Integrated National Plan for Avian Influenza Control and Human Pandemic Influenza Preparedness and Response.

However, it is recognized that national responses must be more standardized and coordinated. The World Health Organization (WHO) has developed a protocol that includes procedures for early recognition, verification, and containment of an outbreak. This protocol outlines the division of responsibility between the national governments and WHO. At the regional level, ASEAN officials and their dialogue partners are actively coordinating responses through vehicles such as the ASEAN bird flu task force's three-year strategy to "harmonize and standardize" the fight against the disease, which was presented at a January 2006 donors' meeting in Beijing.

ADB has pledged $470 million in grant and loan support for programs to combat the avian flu. As part of this response, we approved last November a $30 million Regional Communicable Diseases Control Project, to be jointly implemented by WHO, for Cambodia, Lao People's Democratic Republic, and Viet Nam. A $38 million project, co-financed by the government of Japan and jointly implemented with FAO and WHO, will provide a region-wide source of funds for quick response to countries in immediate need. We will continue to closely monitor and respond quickly to additional needs as they arise.

IV.  Conclusion

Let me close by calling on all of us to continue our efforts to address these issues together. In a world of increasing interdependence, it is the only way to ensure that the process of globalization remains a positive force in both the industrialized world and in the world's developing economies. If we manage the risks effectively in a coordinated manner - as I believe we can - the benefits will be felt for generations to come.

Thank you.