East Asia increases integration,
outpaces the rest of the world in growth

 WASHINGTON DC OCTOBER 16, 2003 ¾ East Asia, already the fastest growing region in the world, is set to record strong growth in the coming year, fueled by a healthier global environment, improving domestic conditions, and continued strength of the Chinese economy.

Growth in 2004 is expected to reach 5.7 per cent, an impressive rebound from a year in which many economies were hurt by the financial impact of SARS and lingering uncertainty about the strength of the global economy, according to the World Bank’s Half-Yearly report on the state of the regional economy, released today. 

 “With the quick passing of SARS (at least for the time being), clearer signs of recovery in the developed world, and healthier domestic conditions in East Asian economies, the prospects for a strong cyclical recovery and  more sustained  long term  growth are good,” commented Regional Vice President for East Asia and the Pacific, Mr. Jemal-ud-din Kassum.

 Mr. Kassum said one such major change underpinning the better outlook was the increasing integration of the region, evident most strikingly in booming trade with China. “It is clear that East Asian firms  are vigorously seeking opportunity within the region.  This trend augurs well, and will reinforce the sorts of policy decisions agreed at the Bali Summit of ASEAN leaders last week  -  businesses are already pushing hard to build the sort of economic community the leaders were discussing.” 

 Overall, there are a number of positive factors that bode well for the region’s economies, said Mr. Kassum.  “Recovery in the developed world is picking up, led by stronger growth in the US and Japan, which, combined with strong growth in China, should also propel an upturn in world trade growth.  Portfolio flows to emerging markets including East Asia are also reviving this year, helping boost local stock markets. ” 

He also cited higher activity in the long depressed world high tech industry – important to Asian producers – and China’s emergence as an even more important global production base for high-tech multinationals, which is energizing intra-regional production networks and trade.

“Consumer spending is  strong, and  investment has also picked up in Thailand and to some extent in Indonesia. Partly because of restructuring, bank and corporate profitability and balance sheets are healthier in several economies, while capital inflows are rising, domestic bank lending is up and  stock markets are higher.”

Risks to Recovery

Now the challenge for the economies of the region, stated Mr. Homi Kharas, Chief Economist for East Asia and the Pacific, is to consolidate the cyclical recovery into sustained long run growth by strengthening fundamental institutions and policies that – among other things – will increase the resilience and flexibility of the economy. 

He noted, “This emerging cyclical recovery does face risks.  The global recovery is vulnerable because of large macroeconomic imbalances or structural weaknesses affecting various developed economies.  Slow progress on global trade talks combined with a revival of protectionist pressures could also sap confidence worldwide.  Within East Asia the recovery could be dampened if the momentum of policy reforms slackens. ” 

There are several priorities for policy.

• Prudent macroeconomic policy is, if anything, even more important, given a need  to better manage renewed capital inflows and discourage potential speculative excesses.
• Strengthening financial sector supervision and regulation, corporate governance and the supporting legal and judicial framework  also becomes more important, as well as fostering more diversified capital markets to better handle different kinds of risks.

·        Strengthening governance and public sector management, not only for effective economic management, but also to buttress political legitimacy and stability.  

·        Strengthening the delivery mechanisms for key services such as health, education, sanitation and water – which will play a key role in reducing poverty and meeting the Millennium Development Goals – and the theme of the Special Focus: Making Services Work in East Asia and the Pacific. 

·        Political commitment to continued liberalization and expansion of global and regional trade, which has long played a key role in the East Asian success story;

Commenting on the region’s reform priorities, Mr. Kharas observed that “Given the strong role  global trade has played in East Asia’s growth expansion – and the recent boom in trade between East Asian countries – trade talks at the multilateral  and regional levels need to progress.  World Bank calculations show that dynamic gains from trade liberalization could amount to more than $500 billion a year globally, with more than a third accruing to East Asia. The setback at Cancun may add momentum to protectionist interests, making it more critical than ever for countries to have a strategy for competitiveness which relies on policies supporting higher productivity, rather than temporary protection through trade policy,” said Mr. Kharas.

On governance he noted that recent World Bank data1 on perceptions of public sector governance around the world show that while governance in East Asia is rated as better than in Latin America, it is significantly poorer than in Central and Eastern Europe.  Viewed over time the quality of governance in East Asia is assessed as having remained fairly static over the last 6-7 years, while that in emerging Europe – which now attracts much more FDI (as a share of GDP) than East Asia - has improved substantially. 

Improving cyclical outlook in East Asia: 2003 and beyond

In 2003, growth in the low- and middle-income countries (developing economies) of the region has turned out stronger than expected, with solid 7-8 percent growth in China and Vietnam, and near 6 percent growth in Thailand.  East Asian GDP growth in the second quarter of 2003 fell to a year on year rate of 3% – down from almost 6% in the first quarter of the year, mainly as a result of the SARS crisis, although the SARS impact was less than had been initially feared, and overall growth for 2003 should remain about 5 percent, as expected in April this year. 

China, which saw growth dip from 9.7% in the first quarter, still showed robust growth of nearly 7% in the second.  Year on year growth turned negative in Hong Kong, Singapore and Taiwan (China), the three newly industrializing economies most affected by SARS, while overall growth in Southeast Asia has held up better than initially feared, continuing to run at y-o-y rates of 3-5 percent in the second quarter. 

Poverty continued to fall in East Asia, with the number of poor at the $2/day level expected to drop by around 30 million to around 680 million in 2003, with the poverty rate at the $2/day level expected to fall to about 37 percent, its lowest ever level, down from 39 percent in 2002.  This follows an especially strong performance in 2002, when the total numbers of poor in the region at the $2 level are estimated to have fallen by over 60 million, thanks to strong gains in rural incomes in countries like China, Thailand and Vietnam. 

However, while progress in reducing poverty in East Asia over the last decade has been impressive – even in the face of the financial crisis – future progress may be more difficult as poverty becomes more concentrated in remote areas and among ethnic minorities or other socially disadvantaged groups. “This will put a premium on developing detailed information about poverty so we can develop more carefully targeted and cost-effective poverty reduction strategies. Because poverty has many dimensions beyond just lack of income, including lack of access to basic services such as education and health, making progress on these dimensions cannot rely entirely on income growth,” said Mr. Milan Brahmbhatt, Lead Economist and principal author of the report.  

The report’s Special Focus on “Making Service Delivery Work in East Asia” reports on recent experiences with institutional reforms to improve access by the poor to these key services.

The full report, plus a special report Service Delivery in East Asia and individual Country Reports, will be available 12 am EDT on the World Bank’s East Asia page: www.worldbank.org/eapupdate