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"Asia's Economic Outlook, Risks and Policy Issues"

Statement by
Haruhiko Kuroda
President
Asian Development Bank

At the 8th ASEM Finance Ministers' Meeting

16 June 2008
Jeju Island, Korea

I.  Introduction

Your Excellencies, ASEM officials, ladies and gentlemen:

I am honored to participate in these important discussions on the economic trends and policies that affect our two regions. I express my thanks to our hosts, the Republic of Korea, for the excellent preparations and hospitality. We know Jeju well. We held ADB's annual meeting here in 2004. And it is good to see so many of you again just 6 weeks after ADB's 2008 annual meeting in Madrid.

I couldn't help but notice the economic bustle and the scale of development here in Jeju compared to just 4 years ago. It showed me once again how dynamic Asia continues to be. Despite the financial turmoil and spillover into the global economy, Asia remains resilient and its contribution to the global economy is increasing fast.

Asia-Europe ties are also growing. Total Asia-Europe trade nearly doubled between 2000 and 2006, to almost $1 trillion. Portfolio and foreign direct investment have also increased significantly over the past decade. A strong and expanding Asian economy is good for Europe and helps deepen the relationship between our two regions even further.

During the last 3 years, Asia's emerging economies have largely surpassed expectations, with aggregate GDP growth reaching a peak of 8.7% in 2007. And with increased economic growth, domestic demand keeps emerging Asian economies bustling even in the face of global financial turmoil and economic slowdown in the US, Europe, and Japan.

For 2008, we expect a somewhat slower but still strong growth. Aggregate GDP for emerging Asia is forecast to grow by 7.6%. Even with measures to cool its economy and the impact of the global slowdown, China may still grow around 10% and India 8%. The large ASEAN economies will expand about 5.6%, while the Asian newly industrialized economies are forecast to grow slightly below 5%, as they are more susceptible to downturns in the US, Europe, and Japan. Here in Korea, we expect GDP to expand by close to 5%.

Despite this relatively robust growth outlook, we still see several downside risks.

First is a sharper than expected slowdown in the US and other industrialized economies. Should the US experience a prolonged slowdown, Asia will obviously be affected. We estimate that a 1% reduction in US growth translates into an approximate 0.5% drop in aggregate growth in Asia, as Asia's export share to the US and other industrialized economies, although declining somewhat, remains significant.

Second is an escalation in the global financial instability that started with the subprime market crisis. A re-pricing of risk can lead to greater volatility and cause abrupt changes in capital flows or disorderly exchange rate adjustments.

Third is the continued rise in inflation, especially in energy and food prices. This may be the most important risk at the moment. And it poses several policy challenges.

Many countries face a growing dilemma on monetary policy: how to gauge the right mix to control rising inflation without excessively slowing economic growth. If Asian authorities raise rates to combat inflation, the wider differentials with the US may attract volatile portfolio investments and fuel asset-price inflation with an increased risk of a hard landing. But the risk would be even greater if prices spiral out of control, feeding higher inflation expectations.

And on fiscal policy, following years of fiscal consolidation, many governments in Asia have some room to maneuver. But high energy and food prices are getting in the way, particularly for those governments that use subsidies to control domestic prices.

That leads me to an issue that I'm afraid we will be confronting for years to come.

III.  Rising energy and food prices and their implications

Emerging Asian economies are highly vulnerable to surging oil prices, given their high dependency on oil imports. The region produces less than 10% of the world's crude oil supply but consumes more than 20%. Including Japan, the share reaches nearly 30%. Signs of stress are emerging, including rising inflation and fiscal strains in the countries where fuel subsidies or price controls are still used. With the global economy slowing and subsidies phasing out, high oil prices could have a more visible impact on domestic consumption and growth in Asia this year and in 2009. Facing this challenge requires global effort to increase oil production and improve energy efficiency, as suggested by the G8 Finance Ministers in Osaka two days ago.

For decades, real food prices had been declining. By the end of last year, however, they were roughly double the 2002 level. Since then, prices have skyrocketed. The price of Thai rice, for example, fetched a record $1,000 per ton in late April from less than $380 in January.

These trends have contributed to sharp increases in inflation, which in April reached 8.5% in China and 7.4% in India. It was 6.2% in the four large ASEAN economies at the end of the first quarter. And even Japan, long trying to break out of a deflationary trend, reached 1.2%.

The explosion in food prices across the region is a threat to macroeconomic stability not only through inflation. It also increases the fiscal cost of food subsidies and current account deficits in food importing countries. And increasing food prices can become a very sensitive economic and political issue. About one billion people in Asia spend at least 60% of their income on food. Should food become too expensive or scarce, the most vulnerable could begin to suffer malnutrition.

How to respond? In the short term, we should create safety nets for the poor. As I announced in Madrid, ADB is readying $500 million as immediate budgetary support to the hardest hit countries in Asia-Pacific for safety nets to protect the poor and vulnerable. But as we know, administrative solutions are not sustainable in the longer run. Agriculture sector reforms and measures to increase productivity must be put in place soon to avert a structural crisis. ADB is planning $1 billion for agricultural lending in 2008 and will double it to over $2 billion in 2009, to make input supplies more reliable and increase agricultural output. Countries should also make efforts to free up trade and avoid protectionist policies, including export restrictions.

Medium-term responses include improving institutional capacities and governance, and investing in post-harvest facilities. Substantial investment is also needed in the long-run to build and upgrade infrastructure, improve agricultural technology, increase farm productivity, and provide education in rural areas. ADB, in collaboration with other development partners, is committed to assist Asian countries in all these areas.

Ladies and gentlemen,

Let me conclude by stressing that regional cooperation can help. As it did with the Asian financial crisis of 1997/98, regional cooperation can help solve the food crisis and contain global financial instability.

Indeed, Asia-Europe policy dialogue can help our regions not only ride out the current turmoil, but also cope with longer-term challenges such as climate change, which is going to be discussed later today.

Thank you.