"Asia's Economic Outlook, Risks and Policy Issues"
Speech by
Haruhiko Kuroda
President, Asian Development Bank
At the Foreign Correspondents' Club of Japan
4 July 2008
Tokyo, Japan
I. Introduction
Good morning, ladies and gentlemen. Thank you for this opportunity to share with you a number of issues of concern to developing Asia and the Pacific, and to ADB. Our meeting today is very timely. I'm sure that much of what we discuss here will also be in focus at next week's G8 Summit in Hokkaido. I for one very much look forward to hearing the outcome of the Summit and the views of world leaders.
Since we last met just over a year ago, much has happened in the global economy. The slowdown in the G3 countries, the steady rise in oil prices to unheard of levels, and the emerging food crisis have placed the sustainability of global growth in question. For now, Asia and the Pacific - the world's largest and fastest growing geographic region - remains a stabilizing force. But it is tremendously important to respond to these new circumstances in a timely and appropriate manner to keep regional growth on track.
II. Asia's economic outlook, risks, and policy challenges
As you know, Asia's emerging economies have largely surpassed expectations in recent years, with aggregate GDP growth reaching a peak of 8.7% in 2007. This fast paced economic growth along with surging domestic demand, particularly consumer demand, keeps these economies well anchored even in this uncertain external environment.
While growth in emerging Asia will slow somewhat this year, we are still expecting a healthy aggregate growth rate of 7.6%. Even with measures to cool its economy and the impact of the expected global slowdown, China may still grow around 10% and India 8%. The large ASEAN economies will expand by about 5.6%. The Asian newly industrialized economies will experience lower growth of slightly below 5%, as they are more susceptible to downturns in the US, Europe, and other industrialized economies.
Of course, a much sharper than expected and protracted slowdown in the US and other industrialized economies could jolt this forecast. Although the share of Asia's exports destined for the US and Europe has declined somewhat, it remains significant. So, 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.
Similarly, an escalation in the global financial instability that started with the subprime market crisis about one year ago would be worrisome. A re-pricing of risk can lead to greater volatility and cause abrupt changes in capital flows or disorderly exchange rate adjustments.
Exchange rate policy is another challenge, as the region's deepening economic integration calls for greater cooperation. I believe Asian countries should start to coordinate their exchange rate policies. This would allow for greater external flexibility while maintaining exchange rate stability within the region.
But it is the continued rise in inflation, especially in energy and food prices, that is of most concern at the moment. Many countries face a growing dilemma on monetary policy: how to gauge the right mix to control rising inflation without excessively slowing economic growth. Raising rates may hamper domestic demand growth precisely when it is needed most. Moreover, the rapid drop in US interest rates has left several emerging Asian economies with large interest rate differentials. If Asian authorities raise rates to combat inflation, the wider differentials may attract volatile portfolio investments and fuel asset-price inflation, increasing the risk of a hard landing. But the risk would be even greater if prices spiral out of control and feed higher inflationary expectations.
Following several years of fiscal consolidation, many governments in Asia now possess some room to maneuver in reallocating resources. But high energy and food prices are getting in the way, particularly for those governments that use subsidies to try to control domestic prices. This is 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 and low energy efficiency. Signs of stress are emerging, including rising inflation and fiscal strains in the countries where fuel subsidies or energy price controls are still used. With the global economy slowing and oil subsidies phasing out, high oil prices could have a more visible impact on domestic consumption and growth in the region 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 a few weeks ago.
For decades, real food prices had been declining. Over the past 5 years, however, they have not merely caught up, but by the end of last year they were roughly double the 2002 level. Since then, they have skyrocketed, stoking fears of a "food crisis." The World Bank's food price index climbed 57% in the first quarter of 2008 alone.
These trends have contributed to sharp increases in inflation, which in May reached 7.7% in China and 7.8% in India. The ASEAN economies were experiencing inflation between 8.9% (Thailand) and 27% (Viet Nam) in June. And even Japan, long trying to break out of a deflationary trend, reached 1.3% in May.
The explosion in food prices also increases the fiscal cost of food subsidies and current account deficits in food importing countries. This can become a very sensitive economic and social issue, as 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. Aside from its stark human dimension, this is an especially tricky problem that could create political tensions, as it already has in several countries around the world.
How to respond? In the short term, we believe governments should create safety nets for the poor. As I announced at ADB's annual meeting in Madrid, we are 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.
In the medium term, institutional capacities and governance should be improved, and investments increased to upgrade post-harvest facilities. And substantial investment is needed in the long-run to build and upgrade infrastructure, improve agricultural technology, increase productivity, and provide education in rural areas. ADB is committed to assist Asian countries in all these areas and also to continue supporting the International Rice Research Institute and other institutions in the field of agriculture.
IV. Energy and Climate Change
Another very serious issue the region must deal with is climate change. We all recognize that climate change places Asia's development achievements and future prospects at risk. At the UN Climate Change Conference last December, global attention turned to implementing the "Bali Roadmap," which should lead to a new global agreement in late 2009. But we cannot wait until 2009; Asia must act now.
In the 1970s, the developing countries of Asia and the Pacific accounted for less than 10% of the world's energy-related greenhouse gas emissions. Today, these growing economies account for about 27% of the global total. Developing Asia has a heavy appetite for energy, and by 2030 its use is projected to increase by 112% - accounting by then for 36% of the world's energy consumption and 42% of its greenhouse gas emissions.
Shifting to a lower-carbon economy will help mitigate the causes of climate change, and will also enhance regional and global energy security. With the price of oil topping $140 a barrel, energy issues will continue to be in the limelight. Improvements in energy efficiency and the expansion of alternative energy sources will contribute to improved energy security while at the same time reducing greenhouse gas emissions.
ADB is committed to taking a leadership role in helping our developing member countries respond to environmental degradation and climate change to create a more sustainable future for us all. We are mainstreaming climate change considerations into our operations in key sectors such as energy, transport, urban development and agriculture. Three years ago, we launched an Energy Efficiency Initiative and set a target of increasing our investments in this area to $1 billion per year by 2008. Last month, we met that $1 billion target with our Board's approval of the $200 million Municipal District Heating and Combined Heat and Power Development Project for the People's Republic of China.
We have also established several funds to help finance climate change activities. And we are working with the World Bank to establish a new set of Climate Investment Funds. These funds will support the expanded use of clean technologies, help build climate resilient societies, and reduce greenhouse gas emissions from deforestation and other land use changes. Taken together, these new funds will make billions of dollars of new financing available to Asian and Pacific countries.
V. ADB's Strategy 2020 and ADF X
Before closing, I would like to briefly mention two recent, important developments at ADB that will have a great impact on our role as the region's development partner.
The first is the finalization of our new long-term strategic framework - Strategy 2020 - which was approved by our Board of Directors in April of this year. Strategy 2020 sets clear strategic directions, goals and objectives for ADB for the next 12 years. Our operations will become increasingly focused on the five core operational areas of infrastructure, environment, regional cooperation, the financial sector and education. We will place greater emphasis on leveraging private sector resources - financial, technological and human resources. And all our operations will be centered on partnerships with a wide range of institutions within and outside the region.
The second issue is the Asian Development Fund. I am very pleased that we successfully concluded ADF X negotiations last month in Madrid, giving us the financial resources needed for us to pursue our Strategy 2020 priorities in the poorer developing member countries. The expanded ADF X - $11.3 billion for the next four-year period- represents a significant jump over 60% from the previous replenishment. This will support an even greater effort to help these countries attain the Millennium Development Goals and raise the standard of living for some of the poorest people in the world.
While changes will be required to achieve our goals, our vision as an institution remains the same: a vision of an Asia and Pacific free of poverty. We earnestly look forward to your continued interest, partnership and support as we work to make it a reality.
Thank you very much for your attention today. I would now be pleased to take your questions.
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