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p. 1 of 77 BACK | NEXT Foreword, Acknowledgments, Contents, Acronyms and Abbreviations, Definitions I. Developing Asia and the World II. Economic trends and prospects in developing Asia III. Routes for Asia's Trade Statistical appendix

Asian Development Outlook 2006

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Foreword

The Asian Development Outlook 2006 is the 18th edition of the annual comprehensive economic report on the developing member countries of the Asian Development Bank.

ADO 2006 provides an assessment of recent economic performance for 43 developing member countries, and projections for major macroeconomic indicators for 2006 and 2007. This year's ADO features a new format for country chapters, including an expanded graphical presentation of information. The outlook also reviews medium term (2006-2010) opportunities and constraints facing developing countries of Asia and the Pacific.

In 2005, developing Asia grew by 7.4%, well above the recent trend, although not quite matching the 7.8% growth rate reached in 2004. Growth was again supported by favorable conditions in the global economy and by robust growth of global trade. In 2005, the People's Republic of China and India grew rapidly, and Pakistan grew at its fastest rate in over two decades. Net oil exporters such as Azerbaijan, Kazakhstan, and Viet Nam benefited from high oil prices. In most other countries, growth was healthy.

So far, developing Asia has been largely resilient to high oil prices, which rose by 42% in 2005. In a majority of countries, consumers were shielded against rising prices through direct or indirect subsidies. Eventually, these costs will have to be met by taxpayers. In countries that determinedly cut subsidies, such as Indonesia and Thailand, growth was crimped, but fiscal resources have been released for projects that can help support growth over the longer term. For the most part, inflationary expectations have been held in check and monetary authorities were adroit in raising interest rates.

The global outlook should again be broadly supportive in 2006 and 2007. The upswing in the electronics cycle, which started in 2005, should continue through 2006, and benefit Asian producers and exporters of electronics goods and parts. Global trade is expected to expand at a robust pace and commodity price inflation should taper off. Oil prices are expected to average over $60 a barrel, but volatility is also likely because of tight supply conditions. Interest rates will probably nudge up in many countries in 2006, and there is little scope for fiscal maneuver. Fuller pass-through of higher oil prices to end-users is expected to be a priority in many countries in 2006.

In these circumstances, growth in developing Asia in 2006 is expected to ease to 7.2% and to come down further to about 7% in 2007 as cyclical support for growth recedes. But these aggregate projections are likely to mask some diversity. As a result of conscious policy efforts, growth is expected to soften a bit in the People's Republic of China. But stronger domestic demand is seen lifting growth in the Republic of Korea in 2006. In India, growth may come off a little in 2006, before picking up again in 2007. In Southeast Asia, overall growth is expected to change little from 2005, but with a checkered pattern across countries. Indonesia may slow in 2006 as domestic demand is pinched by higher interest rates, but Thailand's growth should recover as the impact of the tsunami and a bad agricultural harvest in 2005 recede. Developing Asia will continue to run a large current account surplus with the rest of the world in 2006 and 2007, but there is already evidence of some adjustment, with domestic demand picking up and growth of international reserves slowing.

The profile of risks remains much as before, but these risks are probably more accentuated. A disorderly unraveling of global payments imbalances, an antigen shift of the H5N1 virus (avian flu) to people, yet higher oil prices, or a surge in trade protectionism would unsettle the outlook.

Trade will feature prominently in Asia's medium-term outlook and longer-term development prospects. The ADO 2006 explores Asia's interests in a successful conclusion to the Doha trade talks. A key message is that developing Asia—a region that has prospered due to its openness—has a strong interest in an agreement that paves the way for significant multilateral liberalization. Much of the potential gain to developing Asia from Doha would come through reducing its own levels of protection. Developing Asia's interests would also be best served by World Trade Organization rules that curb contingent protection measures (such as antidumping).

Last year, the ADO 2005 noted the risk to some countries posed by the elimination of textile and clothing quotas at the end of 2004. Encouragingly, data from the European Union and United States show that large Asian textile and clothing suppliers have expanded their market shares in the first year of the post-quota era. The textile and clothing industry continues to be an important source of export revenue and jobs, particularly for women, in low-income developing Asian economies. If the industry is to remain competitive, though, governments—especially—need to do more. For example, relaxing the restrictions on foreign investment would help improve efficiency.

Finally, bilateral trade agreements that crisscross the globe are proliferating, and Asia is being swept along by this trend. Developing Asia's participation in bilateral agreements is motivated by a wide variety of commercial and strategic interests that stretch beyond the region. However, uncoordinated bilateral agreements risk switching trade from lower- to higher-cost producers (trade diversion) and can raise frictions to commerce, through, for example, complicated rules of origin. A notable concern is the possibility that poorer countries may become marginalized, which could stymie their broader reform efforts. The ADO 2006, using a global economic model, sets out what is at stake through possible trade diversion. It also proposes steps that can mitigate risks. Measures such as better port infrastructure or improved customs facilitation offer possible gains to low-income countries by allowing them to get their products to world markets faster, and more cheaply. Initiatives like these, complemented by trade liberalization on a broader front, could confer substantial benefits on developing Asia.

HARUHIKO KURODA

President

Acknowledgments

The Asian Development Outlook 2006 (ADO 2006) 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: Luxmon Attapich (Thailand); Joven Balbosa and Jesus Felipe (Philippines); Johanna Boestel and Nimali Hasitha Wickremasinghe (Sri Lanka); Rafael Abbasov and Philip Chang (Azerbaijan); Kevin Chew of the Malaysian Institute of Economic Research (Malaysia); Padmini Desikachar (Uzbekistan); Jesus Felipe and Jian Zhuang (People's Republic of China); Nirmal Ganguly (Myanmar); Bahodir Ganiev and Jennet Hodjanazarova (Turkmenistan); Mohammad Zahid Hossain and Rezaul Khan (Bangladesh); Anqian Huang (Fiji Islands); Abid Hussain (Bhutan and Maldives); Neeraj Jain and Zafardjon Khotamov (Tajikistan); Mandar Jayawant (Mongolia); Shikha Jha (Armenia); Aashish Mehta (Hong Kong, China); Aashish Mehta and Jesus Felipe (Republic of Korea); Aliya Mukhamedyarova (Kazakhstan); Jesus Felipe, Aashish Mehta, and Hiranya Mukhopadhyay (India); Safdar Parvez and Ghulam Qadir (Pakistan); Rafi Fazil and Michaela Prokop (Afghanistan); Sungsup Ra, Bipulendu Singh, and Raju Tuladhar (Nepal); Purnima Rajapakse (Cambodia); Lyaziz Sabyrova and Gulkayr Tentieva (Kyrgyz Republic); Dao Viet Dung, with inputs from Sharad Bhandari, Raymond Mallon, and Bui Trong Nghia (Viet Nam); Amanah Abdulkadir and Ramesh Subramaniam (Indonesia); Rattanatay Luanglatbandith and Yumiko Tamura (Lao People's Democratic Republic); Kiyoshi Taniguchi (Democratic Republic of Timor-Leste, Papua New Guinea, and Small Pacific countries); Fan Zhai (Singapore and Taipei,China). The subregional coordinators were Hong Wei and Sharad Bhandari for Southeast Asia, Padmini Desikachar and Bahodir Ganiev for Central Asia, Toan Quoc Nguyen for South Asia, and Kiyoshi Taniguchi for the Pacific.

A team of economists from ERD, led by Frank Harrigan, Assistant Chief Economist, Macroeconomics and Finance Research Division (ERMF), assisted by Jesus Felipe, Charissa Castillo, and Edith Laviña, coordinated the overall production of the publication. Part 1, Developing Asia and the world was prepared by Frank Harrigan and Aashish Mehta. William James of Nathan Associates, Inc., and John Whalley of the University of Western Ontario prepared the section on Textiles and clothing in the post-quota era: The outlook for Asian suppliers. Patrick Messerlin of Groupe d'Economie Mondiale de Sciences Po, Michael Plummer of Johns Hopkins University SAIS-Bologna, Fan Zhai, and Frank Harrigan provided an analysis of Asia's interests in the Doha trade talks. Erik Bloom contributed material on avian flu. Douglas Brooks, Frank Harrigan, William James, and Fan Zhai wrote Part 3, Routes for Asia's trade. H. P. Brunner (SAGF), Emma Ferguson (PAHQ), Tom Hertel (University of Purdue), Jayant Menon (ADBI), Pradeep Srivastava (SEOD), Ganeshan Wignaraja (OREI), and Xianbin Yao (ECRD), provided useful comments.

Technical and research support was provided by Assad Abdullah Baunto, Shiela Camingue, Edith Laviña, Pilipinas Quising, Nedelyn Ramos, Grace Sipin, Lea Sumulong, and Rashiel Velarde.

Richard Niebuhr and Anthony Patrick as the economic editors made substantive contributions to the country chapters, subregional summaries and other parts of the book. Jonathan Aspin did the style and copy editing and Elizabeth E. Leuterio was responsible for typesetting, graphics generation, 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 and Rick Chan did the proofreading. The publication would not have been possible without the cooperation of the Printing Unit under the supervision of Raveendranath Rajan.

Ann Quon and David Kruger of the Department of External Relations planned and coordinated the dissemination of ADO 2006.

IFZAL ALI

Chief Economist

Economics and Research Department

Contents

Part 1 Developing Asia and the world 1

Developing Asia and the Pacific: Performance and prospects 3

Performance in 2005 3
Outlook for 2006 and 2007 9
Medium-term prospects and challenges 12
Risks 15

Prospects for the world economy in 2006 and 2007 18

Outlook for major economies 18
World trade and commodity prices 20
Capital flows and markets 22

Subregional summaries 24

Central Asia 24
East Asia 26
South Asia 28
Southeast Asia 31
The Pacific 33

Textiles and clothing in the post-quota era: The outlook for Asian suppliers 36

Introduction: An end to quotas? 36
Historical perspective on textiles and clothing in Asian development 38
Recent performance under the ATC and in the (almost) post-quota era 42
Impact of new US restrictions on the PRC's shipments of textiles and clothing 50
Agenda for future trade reform 53

The Doha Development Agenda: Asian challenges and prospects after the Ministerial Meeting in Hong Kong, China 58

Introduction 58
Key issues in the Doha Development Agenda 61
Gauging the gains of Doha trade liberalization for the region 74
Beyond Doha 76

Part 2 Economic trends and prospects in developing Asia 83

Central Asia 84

Armenia 85
Azerbaijan 90
Kazakhstan 95
Kyrgyz Republic 100
Tajikistan 104
Turkmenistan 108
Uzbekistan 111

East Asia 116

People's Republic of China 117
Hong Kong, China 125
Republic of Korea 129
Mongolia 133
Taipei,China 137

South Asia 141

Afghanistan 142
Bangladesh 147
Bhutan 155
India 158
Maldives 168
Nepal 171
Pakistan 177
Sri Lanka 185

Southeast Asia 191

Cambodia 192
Indonesia 197
Lao People's Democratic Republic 203
Malaysia 207
Myanmar 212
Philippines 214
Singapore 220
Thailand 224
Viet Nam 229

The Pacific 236

Fiji Islands 237
Papua New Guinea 240
Democratic Republic of Timor-Leste 244
Small Pacific countries 248

Part 3 Routes for Asia's trade 265

Introduction 267
The drivers of trade and integration in Asia 269
The rise of bilateralism 275
Trade scenarios: Potential benefits and risks 280
An agenda for trade and integration in Asia 289
Conclusions 296

Statistical appendix 303

Statistical notes and tables 304

Definitions

The economies discussed in the Asian Development Outlook 2006 are classified by major analytic or geographic groupings. For purposes of ADO 2006, 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.
• Developing Asia refers to 43 developing member countries (DMCs) of the Asian Development Bank ­discussed in ADO 2006.
• 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 members defined in World Bank, available: http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,
  contentMDK:20421402~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html.
• 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 comprises Armenia, Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and ­Uzbekistan.
• The Pacific comprises Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Nauru, Papua New Guinea, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.
• 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 2006 is based on data available up to 15 March 2006.

Acronyms and abbreviations

AFTA ASEAN Free Trade Area

ASEAN Association of Southeast Asian Nations

ATC Agreement on Textiles and Clothing

CAR Central Asian republic

CEPA Closer Economic Partnership Arrangement

CPI consumer price index

CY calendar year

DMC developing member country

EU European Union

FDI foreign direct investment

FY fiscal year

GATT General Agreement on Tariffs and Trade

GDP gross domestic product

GEMAT General Equilibrium Model of Asian Trade

GNP gross national product

GSP Generalized System of Preferences

GST goods and services tax

IMF International Monetary Fund

IT information technology

Lao PDR Lao People's Democratic Republic

MFA Multifibre Arrangement

NAMA Non-Agricultural Market Access

OECD Organisation for Economic Co-operation and Development

OPEC Organization of the 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

RBI Reserve Bank of India

SARS severe acute respiratory syndrome

SME small and medium enterprise

SOCB state-owned commercial bank

SOE state-owned enterprise

T&C textiles and clothing

UN United Nations

US United States

VAT value-added tax

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