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The developing economies of the Asian and Pacific region will maintain their strong performance for the next two years, growing at 7.1 per cent in 1996 and 7.3 per cent in 1997, according to the Asian Development Outlook.
The Outlook, an annual publication of the Asian Development Bank, points out that developing Asia recorded another year of remarkably buoyant economic performance in 1995, achieving an overall real gross domestic product (GDP) growth of 7.9 per cent. Asia remained the fastest-growing region in the world.
For 1996 and 1997, the Outlook notes that all the newly industrializing economies (NIEs) except Hong Kong are expected to grow at between 6 per cent and 8 per cent. In the case of Hong Kong, the outlook will continue to be dominated by growing integration with the People's Republic of China (PRC). Production is already shifting to the mainland and a large volume of capital flows to the PRC, as well as trade with PRC, is also being routed through Hong Kong. Exports from NIEs will continue to grow at about 14 per cent per annum on average, while imports will grow at the same rate due to strong domestic demand. Hence, some of the NIEs will have widening trade deficits. However, the current account surplus of most of the NIEs will continue to increase because of earnings from services and from past investments abroad, especially in other NIEs and Southeast Asia.
This, in turn, will enable the NIEs to export more capital to the same economies over the next two years. In the case of Korea, its large current account deficit is likely to shrink during the next two years as the country moves from being a net capital importer to that of a net capital exporter.
The Outlook observes that the PRC remains the fastest-growing economy in the world with output growing at 10.2 per cent in 1995. However, growth in 1995 was significantly lower than the rates of growth registered during the previous two years, mainly as a result of deliberate contractionary macroeconomic policies aimed at moderating the growth rate to sustainable levels.
The outlook for the PRC remains optimistic, as the economy is projected to grow annually at about 9 per cent over the next two years, while inflation should decline further to 12 per cent on average.
The Outlook says that in the Central Asian Republics, Kazakhstan and the Kyrgyz Republic are yet to start on the path of recovery. The economic difficulties and the breakdown of production which followed the collapse of the Soviet Union are continuing in these two new developing member countries (DMCs) of the Bank. Output declined by a further 8.5 per cent in the two economies in 1995 on top of a decline of around 40 per cent over the preceding two years.
The worst affected sector was manufacturing industry, especially engineering and machine building. However, production also declined in agriculture, particularly in Kazakhstan.
The high rate of unemployment, combined with the hyperinflation which was experienced by all these economies following the break up of the Soviet Union, has made deep inroads into the living standards of the population. In 1995, about 37 per cent of the population in Kazakhstan and 40 per cent in the Kyrgyz Republic were estimated to be living below the poverty line.
In this context, the provision of an adequate safety net and the creation of an alternative to the old enterprise-based system of providing essential social services has become urgent in both countries. External assistance can play a major role in reducing the social costs of transition.
The Outlook points out that the economic prospects for the fast-growing market economies of Southeast Asia remains bright. Growth is likely to be maintained at over 7 per cent per annum, led by exports and high rates of investment. Inflation should remain at single-digit levels.
Exports and imports are expected to grow rapidly as these countries open up their economies further and pursue their comparative advantage, supported by external flows of capital and technology in a context of "open regionalism." Yet there are some aspects of macroeconomic management which are beginning to cause concern.
According to the Outlook, in Malaysia, the public sector borrowing requirement has become quite large and in all these countries attempts to contain money supply growth have been eroded by the large inflow of foreign capital, leading to a buildup of inflationary pressures. On the external front, Indonesia's debt-service ratio continues to remain at a high level. In Thailand, the ratio is still modest but could rise sharply unless the shift from investments to loans in the composition of external capital flows is reversed.
The economy of the Philippines is in a different situation compared to those of Indonesia, Malaysia, and Thailand, the Outlook notes. The program of structural adjustment needs to be further consolidated before the Philippines moves into its high growth phase. However, the momentum of growth is already beginning to build up. In 1995, GDP grew by 4.8 per cent, and is projected to grow further at around 6 per cent during the next two years.
Cambodia, Lao PDR, Myanmar, and Viet Nam constitute a distinct subgroup within Southeast Asia in the sense that all these economies are in the process of transition from centrally planned systems to market economies and they share similar problems of transition. Unlike the Central Asian Republics, however, the Southeast Asian transition economies are already achieving high rates of economic growth. For example, in 1995 all these countries grew by more than 7 per cent and Viet Nam, by as much as 9.5 per cent.
In South Asia, the Outlook notes that GDP growth was in the range of 4-6 per cent. These countries include the two large economies of India and Pakistan, the two medium-sized economies of Bangladesh and Sri Lanka, the small island economy of Maldives, and the two small mountain economies of Bhutan and Nepal.
The outlook for South Asia is clearly less buoyant than it is for Southeast Asia. Nevertheless, the effect of several years of structural adjustment is beginning to have some positive effects. After the initial stabilization, growth has resumed in these economies and they are likely to grow at around 5-6 per cent over the next two years.
Finally, the Outlook points out that the prospects for the Pacific island economies are not very encouraging. Although the shortfall in production in Papua New Guinea may be reversed, it is unlikely that these island economies will grow at more than 2-4 per cent over the next two years.