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Asian Development Outlook 2006 : I. Developing Asia and the World : Developing Asia and the Pacific: Performance and Prospects
RisksThis generally positive outlook for developing Asia could muddy for several reasons. Avian flu continues to spread in bird populations, and although it is difficult to quantify what the ultimate economic costs would be of a global pandemic among humans, the short-term costs are likely to be substantial (Box 1.1.4). Poor countries in Asia would face immense challenges in coping with the stresses that would be placed on health and social infrastructure and on public services. Global payments imbalances are, if anything, likely to widen in 2006, and maybe beyond. But encouraging signs of a more balanced profile of growth are emerging among the major industrial economies and some narrowing of the savings and investment gap in Asia may be in prospect. Nevertheless, underlying structural imbalances are unlikely to correct themselves quickly and the possibility remains that a shift in investor preferences—which are, after all, volatile—will precipitate a sharp fall in the real value of the US dollar. Views about the extent of the required depreciation, its timing, and whether adjustments are likely to be smooth or sharp, vary widely. The most troubling scenario would be one in which the US dollar showed an abrupt and sharp depreciation. This would almost inevitably be accompanied by an increase in long-term US interest rates. Asia could then get caught in a double bind: not only would its exports to US markets become more expensive in US dollar terms, but domestic demand in the US could sag under the weight of higher market interest rates. As developing Asia is still highly dependent on the US as a market for its final goods, as seen in Part 3, this could stall an important engine of Asia's growth. In these circumstances, inflationary pressures in Asia would be tempered and monetary policy could be eased, but opportunities to support demand through fiscal expansion would be constrained. Better coordination of macroeconomic policies at an international level could help mitigate this risk. Looking further out, the quality of Asia's growth poses risks. Economic growth has taken a high toll on the environment, to the point where threats to water and other resources could increasingly constrain growth. The incidence of environmental disasters appears to be increasing and this has now captured the attention of policy makers in the PRC and in other countries. As Asia continues to modernize and industrialize, it must find ways to promote cleaner production and technologies as well as greater energy efficiency. Markets and incentives, together with controls and regulations, have an important role to play. Finally, the prospects for developing Asia will be imperiled if inequality continues to widen and growth does not provide jobs for its massive population. At least 500 million people in the region were either unemployed or underemployed in 2005, out of a total labor force of 1.75 billion. Between 2005 and 2015, another 245 million people will be added to the labor force. Developing Asia therefore needs to find almost three quarters of a billion new jobs in the next decade. If it fails to do this, its growth is unlikely to prove durable over the long run as social and other stresses—including badly overcrowded cities—increasingly consume resources and constrain opportunities. Ultimately, these jobs will not be provided if countries retreat into protectionism and turn their backs on trade liberalization, or fail to undertake other complementary reforms that will elicit the necessary supply responses.
ReferenceMlachila, Montfort and Yongzheng Yang. 2004. "The End of Textile Quotas: A Case Study of Bangladesh." IMF Working Paper 04/108. June.
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