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p. 1 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005

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Foreword

The Asian Development Outlook 2005 is the 17th edition of the annual comprehensive economic report on the developing member countries of the Asian Development Bank (ADB).

ADO 2005 provides a detailed analysis and assessment of macroeconomic conditions--including fiscal, monetary, and balance-of-payments developments--for 42 Asian and Pacific economies for 2004, as well as projections for 2005-2007. It also provides a broad diagnosis of macroeconomic challenges and future growth prospects for the region's economies.

The major industrial economies expanded by 3.5%, their strongest growth in many years. Boosted by a strong revival in business investment and continued robust consumption spending, the United States (US) economy grew exceptionally fast in 2004, while Japan and the euro zone also experienced somewhat faster growth in spite of some setbacks during the second half of the year. Inflation has remained moderate in major industrial countries in spite of their strong economic performance and continued high oil prices. As a result, monetary policy remained unchanged in Japan and the euro zone, while a very moderate tightening started in the US in the second half of the year. In spite of significant global economic imbalances, the outlook for the major industrial countries remains definitely optimistic over the period 2005-2007. Macroeconomic policies, though tightening somewhat, should remain supportive of continued robust growth. However, increasing risks loom over the baseline, which could be substantially altered if world inflation and interest rates rise much faster than expected, and global uncertainties and imbalances lead to sharp depreciation of the US dollar.

The economies of developing Asia and the Pacific achieved their highest growth performance since the Asian financial crisis in 1997-98 as their aggregate gross domestic product (GDP) expanded by 7.3% in 2004. Such robust performance was underpinned by the combination of a highly favorable external environment and buoyant domestic demand, in particular as a result of a significant strength in business investment in many economies in the region. In spite of robust growth for the third year in a row and the burden of persistent, high oil prices, average inflation remained rather subdued in 2004, although inflation started to pick up in several countries in the latter part of the year, triggering some tightening of monetary policies. On aggregate, the region continued to register a significant current account surplus, of 3.7% of GDP, though this was lower than in 2003.

The strong economic momentum in most regional countries, together with a continued favorable external environment, augurs well for income growth over the forecast horizon of 2005-2007. There will be some moderation in growth since the cycle probably peaked in 2004, but average GDP growth is projected at between 6.5% and 6.9% over the next 3 years. While export demand from the major industrial countries might subside a little, intraregional trade should remain buoyant as the PRC economy seems set to achieve a soft landing and the forces of regional integration intensify. With inflation projected to remain moderate, macroeconomic policies should continue to support domestic demand.

This issue of the Asian Development Outlook includes a chapter on promoting competition for long-term development in Asia. Its key message is that government policy should promote competition to ensure efficient resource allocation, while preserving incentives for innovation. Removing restrictions to competition enables markets to deliver benefits to consumers, and supports sustainable economic growth. However, competition must sometimes be accompanied by regulation. In addition, competition complements intellectual property protection, as both seek to promote innovation and enhance consumer welfare. Overall, competition policy is important in its own right, and countries should strive to develop and implement it for domestic benefit.

HARUHIKO KURODA

President

Acknowledgments

The Asian Development Outlook 2005 was prepared by the staff of the Asian Development Bank (ADB) from East and Central Asia Department, Mekong 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: Ramesh Adhikari and Dao Viet Dung (Viet Nam), Johanna Boestel (Sri Lanka), Padmini Desikachar (Uzbekistan), Jesus Felipe and Xuelin Liu (Philippines), Yolanda Fernandez-Lommen (Mongolia), Nirmal Ganguly (Myanmar), Marco Gatti (Turkmenistan), Naved Hamid and Safiya Aftab (Pakistan), M. Zahid Hossain and Rezaul Khan (Bangladesh), Abid Hussain (Bhutan and Maldives), Shikha Jha (Tajikistan), Aliya Mukhamedyarova and Ganeshan Wignaraja (Kazakhstan), Hiranya Mukhopadhyay and Saikat Sinha Roy (India), Cyn-Young Park (Republic of Korea), Michaela Prokop and Rafi Fazil (Afghanistan), Purnima Rajapakse (Cambodia), Ramesh Subramaniam and Amanah Abdulkadir (Indonesia), Kenji Takamiya (Lao People's Democratic Republic), Yumiko Tamura (Thailand), Min Tang and Jian Zhuang (People's Republic of China), Kiyoshi Taniguchi (Kiribati and Republic of Palau), Raju Tuladhar and Bipulendu Singh (Nepal), V. B. Tulasidhar (Kyrgyz Republic), Fan Zhai (Singapore), and Joseph Ernest Zveglich, Jr. (Azerbaijan).

The following consultants contributed other country chapters: Prof. Lok Sang Ho of Lingnan University (Hong Kong, China), Prof. Ji Chou of Chung-Hua Institution for Economic Research (Taipei,China), Dr. Mohamed Ariff of the Malaysian Institute of Economic Research (Malaysia), Bruce Knapman (Nauru, Papua New Guinea, Solomon Islands, and Vanuatu), and Craig Sugden (Cook Islands, Fiji Islands, Republic of the Marshall Islands, Federated States of Micronesia, Samoa, Democratic Republic of Timor-Leste, Tonga, and Tuvalu). The subregional coordinators were Jayant Menon for Southeast Asia, Ganeshan Wignaraja for Central Asia, Alain Borghijs for South Asia, and Kiyoshi Taniguchi for the Pacific.

Technical and research support was provided by Edith Laviņa, Aludia Pardo, Pilipinas Quising, Nedelyn Ramos, Grace Sipin, Lea Sumulong, and Bing Villarante.

Richard Niebuhr and Anthony Patrick as the economic editors made substantive as well as advisory contributions. Jonathan Aspin did the copy editing and Elizabeth E. Leuterio was responsible for book layout, typesetting, and data linking. Artwork and cover design were rendered by Mike Cortes of /Doubleslash/ Media Inc. Pats C. Baysa, assisted by Zenaida Acacio and Susan Torres, provided administrative and secretarial support. The publication would not have been possible without the cooperation of the Printing Unit under the supervision of Raveendranath Rajan.

Ann Quon and Omana Nair of the Office of External Relations planned and coordinated the dissemination of ADO 2005.

IFZAL ALI

Chief Economist

Economics and Research Department

Contents

Part 1 Developing Asia and the world 1

Overview of economic highlights and prospects 3
Export or domestic demand-led growth in developing Asia? 40

Part 2 Economic trends and prospects in developing Asia 63

East Asia 64

Southeast Asia 90

South Asia 128

Central Asia 166

The Pacific 188

Part 3 Promoting competition for long-term development 235

Statistical appendix 295

Boxes

Box 1.1 The impact on poverty of the tsunami 20

Box 1.2 Oil subsidies as fiscal liabilities 28

Box 1.3 What is Thaksinomics? 41

Box 1.4 Demand-side growth accounting 47

Box 2.1 Action taken since the People's Republic of China joined the World Trade Organization in 2001 69

Box 2.2 Weakening small and medium enterprises pose a threat 79

Box 2.3 Recommendations of the Twelfth Finance Commission 143

Box 3.1 Tied sales: Whiskey and beer 240

Box 3.2 Korea: The broadband Internet market 241

Box 3.3 Importance of competition advocacy 245

Box 3.4 Competition in the Malaysian services sector 248

Box 3.5 The colored television cartel in the People's Republic of China 252

Box 3.6 Malaysia: The steel industry case 256

Box 3.7 Malaysia: The EON and Proton Edar case 257

Box 3.8 The cable television monopoly in Thailand 259

Box 3.9 Malaysia: AFTA commitments and the national car industry 263

Box 3.10 Local protectionism and competition in the People's Republic of China: The car industry 267

Box 3.11 Export cartels in India: The case of a soda ash cartel 269

Box 3.12 People's Republic of China: Possible motivations for foreign direct investment 271

Box 3.13 Impact of mergers and acquisitions in India 272

Box 3.14 The vegetable seed industry in Korea 273

Box 3.15 The hypermarket case in Malaysia 274

Box 3.16 Impact of FDI on competition in cement and retailing in Thailand 276

Figures

Figure 1.1 Real GDP growth rate of US, Japan, and euro zone, Q1 2003-Q4 2004 7

Figure 1.2 Contribution to change in GDP, United States, Q1 2003-Q4 2004 8

Figure 1.3 Change in unit labor costs and productivity, United States, nonfarm business sector 9

Figure 1.4 Contribution to change in GDP, Japan, Q1 2003-Q4 2004 10

Figure 1.5 Tankan survey of business conditions and ESRI consumer confidence, Q1 2003-Q4 2004 11

Figure 1.6 Contribution to change in GDP, euro zone, Q1 2003-Q4 2004 12

Figure 1.7 Commodity prices, January 2003-February 2005 15

Figure 1.8 Major stock market price indexes, January 2004-February 2005 (1 January 2004 = 100) 16

Figure 1.9 10-year government bond yields, January 2004-February 2005 17

Figure 1.10 Net capital flows to emerging markets and Asia-Pacific, 2000-2004 18

Figure 1.11 Sovereign risk spreads, emerging markets, January 2004-February 2005, basis points 18

Figure 1.12 US dollar against euro and yen, January 2004-February 2005 19

Figure 1.13 GDP growth, East Asia, %, 2003-2007 22

Figure 1.14 GDP growth, Southeast Asia, %, 2003-2007 25

Figure 1.15 GDP growth, South Asia, %, 2003-2007 30

Figure 1.16 GDP growth, Central Asia, %, 2003-2007 32

Figure 1.17 GDP growth, The Pacific, %, 2003-2007 34

Figure 1.18 Private sector, fiscal, external stances relative to real GDP, People's Republic of China, 1983-2003 52

Figure 1.19 Private sector, fiscal, external stances relative to real GDP, India, 1983-2002 53

Figure 1.20 Private sector, fiscal, external stances relative to real GDP, Korea, 1983-2003 53

Figure 1.21 Private sector, fiscal, external stances relative to real GDP, Philippines, 1983-2003 54

Figure 1.22 Private sector, fiscal, external stances relative to real GDP, Thailand, 1983-2003 55

Figure 1.23 Average share of exports in nominal GDP: 1983, 1993, 2003 57

Figure 1.24 Average share of imports in nominal GDP: 1983, 1993, 2003 57

Figure 1.25 Average share of net exports in nominal GDP: 1983, 1993, 2003 58

Figure 1.26 Average share of consumption in nominal GDP: 1983, 1993, 2003 58

Figure 1.27 Average share of gross domestic capital formation in nominal GDP: 1983, 1993, 2003 59

Figure 2.1 GDP, private consumption, and fixed capital formation, People's Republic of China, 1999-2004 67

Figure 2.2 Consolidated fiscal position, Hong Kong, China, FY1998-FY2004 74

Figure 2.3 Household income growth and debt burden, Republic of Korea, 1995-2003 78

Figure 2.4 Inflation and GDP growth, Mongolia, 1998-2004 84

Figure 2.5 Contribution to GDP growth by expenditure account, Taipei,China, 2001-2004 88

Figure 2.6 GDP growth and current account deficit, Cambodia, 1998-2007 93

Figure 2.7 Selected budget components, Indonesia, 2000-2004 97

Figure 2.8 GDP growth by sector, Lao People's Democratic Republic, 1997-2005 102

Figure 2.9 Contribution to GDP growth by expenditure account, Malaysia, 2003-2007 105

Figure 2.10 Labor market entrants versus jobs generated, Philippines, 1981-2004 111

Figure 2.11 GDP growth, seasonally adjusted, Singapore, Q1 2001-Q4 2004 116

Figure 2.12 Private consumption and investment, Thailand, Q1 2003-Q4 2004 120

Figure 2.13 GDP and sector growth, Viet Nam, 2002-2004 124

Figure 2.14 Inflation, 12-month moving average, Bangladesh, June 2003-December 2004 135

Figure 2.15 Trade profile, Bhutan, FY2000-FY2004 139

Figure 2.16 Sectoral composition of growth, India, FY2002-FY2004 142

Figure 2.17 External public debt, Maldives, 2000-2004 148

Figure 2.18 Sources of growth, Nepal, FY1997-FY2004 151

Figure 2.19 Inflation, 12-month moving average, Pakistan, June 2003-December 2004 156

Figure 2.20 Inflation, year on year, Sri Lanka, January-December 2004 162

Figure 2.21 12-month moving average inflation rate, Azerbaijan, January 2001-December 2004 169

Figure 2.22 Unemployment and GDP growth, Kazakhstan, 1996-2004 172

Figure 2.23 Real wages and poverty, Kyrgyz Republic, 1996-2004 176

Figure 2.24 Public spending on social and economic services, Tajikistan, 2003-2007 179

Figure 2.25 Government expenditures, Cook Islands, FY2002-FY2006 190

Figure 2.26 Government revenues and expenditures, Fiji Islands, 1992-2007 194

Figure 2.27 Government revenues and expenditures, Kiribati, 1998-2004 197

Figure 2.28 Government expenditures on priority sectors, Republic of the Marshall Islands, 2001-2007 199

Figure 2.29 General government revenues and expenditures, Federated States of Micronesia, FY1999-FY2005 202

Figure 2.30 Credit to the private sector, Papua New Guinea, March 2000-September 2004 212

Figure 2.31 Net foreign assets and import cover, Samoa, 2001-2004 216

Figure 2.32 Domestic credit, Solomon Islands, March 2002-December 2004 220

Figure 2.33 Revenues and expenditures, Democratic Republic of Timor-Leste, FY2002-FY2008 224

Figure 2.34 Real effective exchange rates, Tonga, Q1 2000-Q2 2004 227

Figure 2.35 Revenues and grants, Tuvalu, 1996-2004 229

Figure 2.36 Budget balance, Vanuatu, 2000-2004 232

Tables

Table 1.1 Selected economic indicators, developing Asia, 2003-2007 4

Table 1.2 Baseline assumptions for external conditions, 2003-2007 6

Table 1.3 Shares of expenditure components in real GDP, 1990 prices, % 48

Table 1.4 Average growth rates of expenditure components based on constant 1990 prices, % 48

Table 1.5 Growth rates of expenditure components weighted by their share in GDP, % 49

Table 1.6 Contribution of demand components to GDP growth, % 49

Table 1.7 Phases of domestic demand- and net export-led growth in selected Asian countries: A summary 51

Table 2.1 Major economic indicators, People's Republic of China, 2004-2007, % 66

Table 2.2 Major economic indicators, Hong Kong, China, 2004-2007, % 73

Table 2.3 Major economic indicators, Republic of Korea, 2004-2007, % 77

Table 2.4 Major economic indicators, Mongolia, 2004-2007, % 83

Table 2.5 Major economic indicators, Taipei,China, 2004-2007, % 87

Table 2.6 Major economic indicators, Cambodia, 2004-2007, % 92

Table 2.7 Major economic indicators, Indonesia, 2004-2007, % 96

Table 2.8 Major economic indicators, Lao People's Democratic Republic, 2004-2007, % 101

Table 2.9 Major economic indicators, Malaysia, 2004-2007, % 104

Table 2.10 Major economic indicators, Philippines, 2004-2007, % 110

Table 2.11 Major economic indicators, Singapore, 2004-2007, % 115

Table 2.12 Major economic indicators, Thailand, 2004-2007, % 119

Table 2.13 Major economic indicators, Viet Nam, 2004-2007, % 123

Table 2.14 Major economic indicators, Bangladesh, 2004-2007, % 134

Table 2.15 Major economic indicators, India, 2004-2007, % 141

Table 2.16 Major economic indicators, Nepal, 2004-2007, % 150

Table 2.17 Major economic indicators, Pakistan, 2004-2007, % 155

Table 2.18 Major economic indicators, Sri Lanka, 2004-2007, % 161

Table 2.19 Major economic indicators, Azerbaijan, 2004-2007, % 168

Table 2.20 Major economic indicators, Kazakhstan, 2004-2007, % 171

Table 2.21 Major economic indicators, Kyrgyz Republic, 2004-2007, % 175

Table 2.22 Major economic indicators, Tajikistan, 2004-2007, % 178

Table 2.23 Major economic indicators, Fiji Islands, 2004-2007, % 193

Table 2.24 Major economic indicators, Papua New Guinea, 2004-2007, % 211

Table 3.1 Competition policy regimes 243

Table 3.2 Viet Nam: Nominal and effective rates of protection, 1997 and 2003 (%) 266

Table 3.3 PRC: Eight-firm concentration ratios in selected manufacturing industries, 1995 and 2000 (%) 268

Table 3.4 Comparative statistics 278

Table 3.5 Implementation arrangements: Competition laws 282

Table 3.6 Estimated savings to governments through a 1% reduction in bid rigging of government contracts 283

Table 3.7 Reduction in imports or government spending needed to justify $10 million for enforcement of competition law 284

Statistical Appendix Tables

Table A1 Growth rate of GDP (% per year) 303

Table A2 Growth rate of per capita GDP (% per year) 304

Table A3 Growth rate of value added in agriculture (% per year) 305

Table A4 Growth rate of value added in industry (% per year) 306

Table A5 Growth rate of value added in services (% per year) 307

Table A6 Unemployment rate (%) 308

Table A7 Gross domestic investment (% of GDP) 309

Table A8 Inflation (% per year) 310

Table A9 Change in money supply (% per year) 311

Table A10 Growth rate of merchandise exports (% per year) 312

Table A11 Direction of exports (% of total) 313

Table A12 Growth rate of merchandise imports (% per year) 314

Table A13 Trade balance (US$ million) 315

Table A14 Current account balance (US$ million) 316

Table A15 Current account balance (% of GDP) 317

Table A16 Foreign direct investment (US$ million) 318

Table A17 External debt outstanding (US$ million) 319

Table A18 Debt service ratio (% of exports of goods and services) 320

Table A19 Exchange rates to the US dollar (annual average) 321

Table A20 Gross international reserves (US$ million) 322

Table A21 Central government expenditures (% of GDP) 323

Table A22 Central government revenues (% of GDP) 324

Table A23 Fiscal balance of central government (% of GDP) 325

Acronyms and Abbreviations

AFTA ASEAN Free Trade Area

ASEAN Association of Southeast Asian Nations

CEPA Closer Economic Partnership Arrangement

CPI consumer price index

DMC developing member country

EU European Union

FATF Financial Action Task Force

FDI foreign direct investment

GDP gross domestic product

GNP gross national product

GST goods and services tax; general sales tax

HIV/AIDS human immunodeficiency virus/acquired immunodeficiency syndrome

ICT information and communications technology

IMF International Monetary Fund

IPR intellectual property right

IT information technology

Lao PDR Lao People's Democratic Republic

M&A merger and acquisition

MFA Multifibre Arrangement

NPL nonperforming loan

MNC multinational corporation

OECD Organisation for Economic Co-operation and Development

OPEC Organization of Petroleum Exporting Countries

PBC People's Bank of China

PRC People's Republic of China

PRGF Poverty Reduction and Growth Facility

R&D research and development

saar seasonally adjusted annualized rate

SARS severe acute respiratory syndrome

SME small and medium enterprise

SOCB state-owned commercial bank

SOE state-owned enterprise

UN United Nations

US United States

VAT value-added tax

WTO World Trade Organization

Definitions

The economies discussed in the Asian Development Outlook 2005 are classified by major analytic or geographic groupings. For purposes of ADO 2005, 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.
  ASEAN+3 consists of the above countries in addition to People's Republic of China, Japan, and Republic of Korea.



• Developing Asia refers to 42 developing member countries (DMCs) of the Asian Development Bank discussed in ADO 2005.



• East Asia comprises People's Republic of China; Hong Kong, China; Republic of Korea; Mongolia; and Taipei,China.



• Industrial countries refer to the high-income OECD countries defined in World Bank, available: www.worldbank.org/data/countryclass/classgroups.htm#High-income.



• Southeast Asia comprises Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.



South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.


• Central Asia--also referred to as the Central Asian republics--comprises Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.



• The Pacific covers Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Nauru, Republic of Palau, Papua New Guinea, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.



• The euro zone consists of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain.



• Unless otherwise specified, the symbol "$" and the word "dollar" refer to US dollars. Currency abbreviations are given in Statistical Appendix Table A19.

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

ADO 2005 is based on data available up to 31 March 2005.

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