EAST ASIA UPDATE
Strong Fundamentals to the Fore
REGIONAL OVERVIEW
Special Focus: Scaling Up Poverty Reduction – Lessons and
Challenges from China, Indonesia, Korea and Malaysia
April 2004
East Asia and Pacific Region
The World Bank
CONTENTS
East Asia and Pacific regional overview................................................... 1
1. Introduction .................................................................................................... 1
2. Cyclical recovery gains strength ...................................................................5
A widespread acceleration in regional growth .............................................5
Poverty reduction – in time and space..........................................................7
3. The international and regional environment ..............................................9
Growth resurgent in (two thirds of) the developed world ..........................10
All round higher commodity demands. ......................................................11
International capital markets and flows......................................................14
The Chinese locomotive – how much longer? ...........................................17
4. Domestic trends and policy challenges .......................................................21
The investment cycle and FDI....................................................................22
Financial sector trends and reforms............................................................23
Corporate sector restructuring and reforms................................................25
Asian demographics: older, slower, wiser.................................................26
Country Sections .................................................…………………………29
Appendix Tables…………………………………...…..………………….42
Special Focus: Scaling up poverty reduction .................................................51
Key Indicators Tables.........................................................................................57
This Regional Update was prepared by Milan Brahmbhatt, Lead Economist, East Asia PREM, with the assistance of Antonio Ollero,
Qing Wu and Hedwig Abbey, drawing on inputs and comments from country economists and sector specialists throughout the East
Asia and Pacific Region of the World Bank. The report was prepared under the general guidance of Homi Kharas, Chief Economist,
and Jemal-ud-din Kassum, Regional Vice President, East Asia and Pacific Region.
EAST ASIA AND PACIFIC REGIONAL OVERVIEW
Introduction
East Asian economies mounted an unexpectedly
vigorous recovery in the second half of 2003.1 Growth in
many economies accelerated so quickly at this time that despite the shock of the SARS epidemic in the April-June
quarter of last year - regional output for the year as a
whole increased by 5.7 percent. This was not much
below the 5.9 percent seen in 2002 and a good deal higher
than the 5 percent growth projected for 2003 in our last
Regional Overview. Partly in consequence, the numbers
of people living below the $2 a day poverty line in East
Asia are estimated to have fallen by almost 50 million
during 2003 – up from our estimate of 33 million six
months ago.
Early data suggest that, if anything, the pace of
expansion accelerated in the first quarter of 2004: at the
level of city-states, Singapore’s GDP increased 7.3
percent from a year earlier, while – at the continental
scale – China grew 9.7 percent over the same period. It is
true that not all parts of the region are growing at such
fierce rates, although, even here, the trend towards
improvement is widespread. In Indonesia, for example,
growth has moved up to a 4-5 percent range, and is
expected to gradually rise further, supported by prudent
macroeconomic policies and continuing efforts on
investment climate and institutional reforms. Inevitably,
though, the development that is dominating regional
attention is the trajectory of the economic boom in the
largest and fastest growing economy, China, its impact on
and the potential risks it may pose for East Asia.
This year is seeing a wave of legislative and/or
presidential elections across East Asia, including in
Cambodia, Malaysia, Indonesia, Korea, Philippines,
Taiwan (China) and Thailand. The successful conduct of
so many elections and the associated transitions of power
under rule of law mark an important consolidation in the
legitimacy, institutions and procedures of representative
government in the region. In the Malaysian general
election in March, the ruling Barisan Nasional coalition
led by PM Badawi won a landslide victory, which is seen
as a vote of confidence in a program of economic reform
and anti-corruption, and a rejection of extremism. In
Indonesia parliamentary elections were held at the start of
April, a mammoth and largely peaceful undertaking in
which nearly 150 million went to the polls across the
1
East Asia comprises Developing East Asia (China,
Indonesia, Malaysia, Philippines, Thailand, Vietnam and
some smaller economies) and four Newly Industrialized
Economies or NIEs (Hong Kong, Korea, Singapore and
Taiwan, China).
sprawling archipelago. The elections saw the emergence
of a variety of political parties and the maturing of a more
issues-based politics, and resulted in President
Megawati’s PDI-P party slipping behind the former ruling
Golkar party, while some new parties gained ground. In
Korean parliamentary elections the Uri party of President
Roh Moo Hyun increased its seats from 49 to over 150, to
win a majority in the national assembly. Whatever the
specific party outcomes in the elections so far, the results
appear to reflect the strengthening of a broad political
consensus that favors continued pro-growth, outwardoriented and socially balanced reforms. Attention now
turns to the closely fought presidential elections in the
Philippines.
This report looks at three sets of issues
underlying the present cyclical moment and the outlook
for East Asia.
First, the evolution of the world economy is
always relevant in as open and globally integrated a
region as East Asia. Japan’s economy seems to have
finally returned to broad-based and sustainable growth,
while the U.S. economy is growing at 4-5 percent. Global
high technology industries appear to have returned to a
phase of multi-year expansion (no doubt with quarter to
quarter fluctuations). Rising world demand has helped
pull primary commodity prices sharply higher, a boon to
some of the low-income, commodity exporters in the
region, if not to their more industrially developed,
commodity importing neighbors. Large scale portfolio
capital flows returned to the region in 2003, helping fuel a
surge in equity and other asset prices. Protectionism and
macro imbalances remain a key global risk, however. The
setback at last September’s Cancun multilateral trade
talks has slowed momentum on global trade liberalization.
In places, special interests have been emboldened and
politicians have taken to protectionist rhetoric for
electoral purposes.
If notable fiscal and external
imbalances (for example those in the U.S. economy) lead
to a loss of confidence and a premature end to the global
recovery, protectionism could gain further ground.
The second set of issues centers on the
emergence of China as the economic powerhouse of the
region, its rapid integration with other Asian economies
and the region wide opportunities, risks and policy
challenges that are coming up as a result. Over the last
decade the structure of intra-East Asian trade with China
has been transformed by the emergence of intricate and
sophisticated production networks between countries. For
two years now the boom in the Chinese economy has
contributed around half the export growth in many other
East Asian economies. Surging raw material demand in
China has also materially contributed to recent global
East Asia Update
2
commodity price increases. The Chinese authorities are
aiming to eliminate overheating by slowing growth to a
more sustainable pace of around 7 percent, but their task
is complicated by the limited range and bluntness of
macroeconomic policy instruments available. A key risk at
the regional level is that attempts to slow China’s
economy could overshoot – a so-called “hard-landing
scenario” - with obvious implications for regional trade
and growth. The report looks at a key policy issue with
global and regional implications, the choice of the
appropriate exchange rate regime for China, another
question brought to the forefront by the country’s rapid
integration into the world and regional economies. The
report also analyzes and rejects the contention that high
FDI flows to China have diverted flows from other Asian
economies.
top policy priority. In most of the rest of the region
exports and personal consumption have been the
mainstays of the recovery so far, but conditions may
now be in place to support a stronger flow of private
investment spending as well. In South East Asia,
growth is expected to be most robust in Vietnam,
Thailand and Malaysia, with Indonesia also expected to
achieve some modest strengthening of activity. Perhaps
the strongest rebound is expected in the newly
industrialized economies such as Hong Kong (China),
Korea, Singapore and Taiwan (China), where 2003
growth had languished at around 3 percent or less, but
where consensus projections expect activity to pick up
to a 5-6 percent range in 2004.. Higher growth is also
expected in many of the smaller, low income or island
economies – several of which are benefiting from a
large influx of foreign exchange due to higher
commodity prices, or from more stable political and
security conditions.
A third set of issues in this report are the policy
efforts undertaken by countries to address domestic
challenges as well as international and regional ones.
While domestic and foreign direct investment is booming
in economies like China and Vietnam, it has only just
begun to recover in Thailand, and remains weak in several
of the other economies hit by the 1997-98 financial crisis.
Efforts to improve the investment climate are a key
element of the regional policy agenda. The report also
highlights demographic trends such as population aging
and the slowdown and approaching decline in the share of
the working age population, which are already starting to
play a role in the development of major economies in
North Asia, and will become ever more important in the
future.
Developments at the country level are discussed
in the “Country Sections” towards the back of the report,
while fuller Country Briefs are also available at the
website associated with this report.2 The report closes
with a Special Focus on Scaling Up Poverty Reduction.
This short paper introduces some of the issues to be
discussed at the “Scaling Up Poverty Reduction”
Conference to be held in Shanghai on May 25-27, 2004.
It discusses lessons on successful poverty reduction
emerging from the development experience of China,
Indonesia, Korea and Malaysia.
Cyclical recovery gains strength
•
2
Economic growth in East Asia is expected to reach
6.3 percent in 2004, the strongest since the start of the
global and regional recession in late 2000 (Table 1,
Exhibit 1). Growth is expected to rise in most
individual economies as well – with one large
exception, China. Such has been the scale of
investment spending in the country in 2003 that policy
makers have made stopping economic overheating and
slowing economic growth to a more sustainable pace a
http://www.worldbank.org/eapupdate/ .
Table 1. East Asia Economic Growth
East Asia
Develop. E. Asia
S.E. Asia
Indonesia
Malaysia
Philippines
Thailand
Transition Econ.
China
Vietnam
Small Countries
Newly Ind. Econ.
Korea
3 other NIEs
Japan
2002
5.9
6.7
4.4
3.7
4.1
4.4
5.4
2003
5.7
7.6
5.1
4.1
5.2
4.5
6.7
2004
6.3
6.9
5.4
4.5
5.5
4.2
7.2
2005
5.9
6.5
5.4
5.0
5.5
4.1
6.5
8.0
7.0
2.7
4.9
7.0
3.1
9.1
7.2
3.9
3.0
3.1
2.9
7.7
7.0
4.2
5.4
5.3
5.5
7.2
7.2
4.2
4.9
5.3
4.5
-0.3
2.7
3.1
1.4
World Bank East Asia Region; April 2004.
•
Poverty. The number of East Asians living below
$2 a day is estimated to have fallen by around 50
million to reach 674 million, or from 39.7 to 36.7
percent of the population. Of these about 190 million
live on less than $1 a day. This compares to a situation
in 1990 when two thirds of East Asia lived below the
$2 a day poverty line. In China, where two thirds of
East Asia’s poor live, $2 a day poverty fell to an
estimated 34.8 percent (450 million) from 37.9 in 2002,
which was about the same as the rest of developing
East Asia, despite China’s growth being much higher
than elsewhere. The discrepancy partly reflects the
slower rate of rural than of urban income growth in
China, and illustrates a wider point about the
importance of sectoral and geographical considerations
in poverty reduction. Vietnam, Thailand, Philippines
and Indonesia also registered important reductions in
poverty. This report presents for the first time Poverty
Maps which disaggregate poverty in East Asia down to
the provincial level. A number of policy implications
East Asia Update
3
more developed industrial economies in the region will
suffer some income losses, though, on current
projections, not by enough to seriously derail the
recovery. On the other hand the run up in commodity
prices will significantly boost national income in some
of the small low income economies in the region like
Mongolia and Papua New Guinea, as well as in some
of the larger economies like Vietnam and Indonesia.
One could say that higher commodity prices are
helping to distribute the fruits of the global recovery
more equitably around the East Asia region. Small
economies with very large commodity windfall gains
relative to GDP will face an important challenge in
properly managing these sudden riches.
emerge from the spatial view of poverty. For example
remote or mountainous areas tend to combine high
poverty incidence with low absolute numbers of poor,
requiring specific tailoring of poverty reduction
policies. Areas that combine large absolute numbers of
poor with high poverty incidence, on the other hand,
benefit most from general high growth strategies and
are especially attractive for targeting of public
resources.
The international and regional environment
•
Developed world recovery. The strength of cyclical
recovery in the United States and Japan in the latter
part of 2003 has led to forecasts for 2004 growth in
these two important export markets for East Asia being
boosted by 1-2 percentage points.
Of special
importance for East Asia, which has suffered from the
more than decade long stagnation of the Japanese
economy, there is now increasing confidence that the
recovery in Japan will be sustained, backed as it is by a
credible expansionary monetary policy and a
dissipation of deflationary expectations.
•
Capital Markets. 2003 marked a decisive return of
portfolio capital flows to emerging markets, and to East
Asia in particular, the first time since the financial
crises of the late 1990s. Net portfolio flows to six large
economies in the region are estimated to have jumped
to around $33 billion in 2003 from a net $9 billion
outflow in 2002. The surge of portfolio inflows has
contributed to sharp gains in East Asian equity and
other financial asset prices, and has also magnified
upward pressure on most East Asian exchange rates.
There is of course a risk of things going too well: a
period of sustained capital inflows, high domestic
credit growth and speculative increases in asset prices
could lead to excessive borrowing by firms or
households (as recently occurred with credit card
borrowing in Korea) and to a weakening of the
financial sector. This is a current concern of policy
makers in China. As the report notes, progress on
recapitalizing banks, reducing non performing loans
and better regulation and supervision have helped
strengthen East Asian financial systems in recent years,
which should help.
•
The Chinese locomotive. For two years now the
boom in the Chinese economy has contributed around
half the export growth in many other East Asian
economies. Efforts by the Chinese authorities to
eliminate overheating and slow economic growth have
been more pronounced recently, but with first quarter
growth of 9.7 percent already achieved, it is doubtful
that the authorities will meet their target of reducing
growth to 7 percent in 2004. Instead a more likely
scenario is for growth to slow in the second half of
2004, before settling on a trajectory close to 7 percent
in 2005. Indeed the first signs of a slowing trend are
already showing up in domestic credit and retail sales
data. Any growth slowdown would likely result in a
slower pace of import growth, including from East
Asia. In a “hard-landing” scenario where China’s
imports turn out 10 percent lower than assumed in the
baseline, economies with a high share of exports to
China like Korea and Taiwan (China) could experience
somewhat under 1 percent lower growth, while others
like Thailand could experience a little under 0.5
Exhibit 1
East Asia: Real GDP Growth 1990-05
15.0
S. E. Asia
NIEs
China
East Asia
10.0
5.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0.0
-5.0
S.E.Asia: Indonesia, Malaysia,
Philippines, Thailand.
NIEs: Hong Kong (SAR), Korea,
Singapore, Taiwan (China).
-10.0
•
Commodity Demands. Global investment in
information and communications technology and high
tech electronics has come out of deep recession and is
finally growing, supporting sharp gains in East Asian
high tech production and exports. Oil and other
primary commodity prices ran up by 10-20 percent in
2003 and have continued to rise in early 2004.
Demand for commodities is being pulled higher by the
powerful economic boom in China, as well as by the
developed world recovery. This is by no means an
unmixed benefit for East Asia – in fact several of the
East Asia Update
percent lower growth. Fortunately the fact that the
developed countries are in recovery should help
cushion the shock to regional exports. And whatever
the short run cyclical impacts of a slowdown in China,
there is also a longer run structural trend towards
growing
specialization,
complementarity
and
integration between the economies of the region, based
on the development of closely linked production
networks across countries. The growing integration of
the region has inevitably tended to bring to the
forefront discussion about the right level for China’s
currency and the appropriateness of its exchange rate
regime. The report reviews some of the relevant
evidence which suggests the tentative conclusion that,
given the structure of China’s economy and its
relationships with other economies, a well-prepared
long term move to some form of flexible exchange rate
regime would best serve China’s ability to manage its
own economy and enhance long run growth prospects,
once its banking sector and foreign exchange market
infrastructure have been strengthened.
Domestic trends and policy challenges
•
The investment cycle and FDI. Fixed investment
spending has boomed in China and Vietnam and 2003
also saw a return to solid growth in Thailand, but
remains weak elsewhere.
Looking forward, a
combination of relatively low interest rates, greater
credit availability, corporate profits, capacity utilization
and business confidence should help promote a wider
upturn of investment spending around the region,
including in foreign direct investment, which in recent
years has fallen in most economies other than China. It
is true that China’s recent accession to the WTO and
generally fast growth has attracted high FDI inflows
(currently around $50 billion a year), some of which at
the margin would likely have gone to other East Asian
economies. But several other factors are also at play.
In fact there has been a large fall in FDI globally over
the last three years of the world economic slowdown,
so other East Asian countries are not alone in this
respect. World FDI was also exceptionally high in the
late 1990s because of the boom or bubble in high tech
investment, so that the recent fall in world and East
Asian FDI is to some extent a return to more normal
levels. FDI inflows to economies like Philippines,
Malaysia and Thailand in 2001-03 were not far
different from the world average of about 2 percent of
GDP. In some cases like Indonesia lower FDI has
mainly reflected not external factors but a perceived
worsening in the domestic investment climate in the
wake
of
the
1997-98
financial
crisis.
4
•
East Asian demographics. Over the course of the
next 10-20 years changing population trends will begin
to profoundly alter the economic landscape of East
Asia.. Population growth will fall well below 1
percent, with the level of the regional population
stabilizing at around 2.4 billion in the latter part of the
century, compared to around 1.9 billion today. In most
countries the share of the population of working age –
which has been rising steadily since the late 1960s or
early 1970s – will begin falling after 2015 or 2020,
while the proportion of people older than 65 will
steadily rise. All countries in the region will ultimately
be affected by these trends, although the timing and
speed of the changes will differ.
The coming
demographic shifts are – other things remaining equal
– expected to lead to a slowing in the region’s rate of
per capita GDP growth, together with lower rates of
savings and investment.
With increasingly old
populations, the development and financing of pension
and health care systems will take on greater importance
than ever before. However, while there is a fair
amount of certainty about the coming demographic
changes, their economic consequences may depend to a
considerable degree on the policies that are put in place
to deal with them. Inward migration of young workers
can help offset the effects of a more slow growing or
declining labor force, but governments will need to
design migration policies that help migrants assimilate
and minimize potential stress on the host population.
East Asia Update
5
EAST ASIA AND PACIFIC REGIONAL OVERVIEW
Cyclical recovery gains strength
A widespread acceleration in regional growth
East Asian growth accelerated sharply in the
second half of 2003. Overcoming the hard but short-lived
blow of the SARS epidemic, which had depressed growth
to only about 3.4 percent in the second quarter of the year,
regional economic activity expanded at an estimated year
on year pace of 5.6 percent in the third quarter, rising to
6.6 percent in the fourth - which was in fact the most
rapid quarterly growth in East Asia since the start of the
global economic downturn in the latter part of 2000.
(Exhibit 2). The rebound in activity was also wide spread:
virtually all the main economies shared in the acceleration
of growth through the third and fourth quarters.
Exhibit 2
East Asia - Quarterly GDP Growth
portfolio quality of already weak banks - have made
policy actions to cool growth a top priority, while still
aiming to achieve growth strong enough to maintain
employment and facilitate structural reforms.
The
government aims to achieve a ‘soft landing’ mainly by
tightening fiscal policy and through various
administrative restrictions on domestic lending and
investment, as well as on certain capital inflows.
Although the official target is to slow growth to 7 percent
in 2004, a sizzling 9.7 percent growth rate in the first
quarter of 2004 indicates this may not be easy to achieve.
Exhibit 3
China- Real Estate Price Index for 35 Cities
10.0
(% Change Year Ago)
8.0
(% Change Year Ago)
12.0
6.0
9.0
4.0
6.0
2.0
House Selling Price Index
3.0
Land Rent Price Index
0.0
0.0
Q11999
-3.0
Q3
1999
Q1
2000
Q3 Q12001 Q3
2000
2001
E.Asia
SE Asia
Q1
2002
Q3
2002
Q1
2003
Q3
2003
NIEs
China
-6.0
China continues to dominate the regional scene
in terms of sheer economic size, pace of growth and its
locomotive effect on activity in the rest of the region.
Despite the disruption caused by SARS, the economy
ended 2003 at full tilt, growing by 10.4 percent in the
fourth quarter, to give a whole year increase of 9.1
percent. Output growth has been fuelled by both exports
and domestic demand, especially investment, which is
estimated to have surged to record levels close to 50
percent of GDP. The scale and impact of the investment
boom are reflected in the emergence of overcapacity in a
number of sectors, rapid bank credit and money supply
growth and a pickup in the pace of land, rental, producer
and consumer price inflation. (Exhibit 3). Policy makers –
concerned about the dangers of a sharp cyclical downturn
following the boom and possible deterioration in the loan
2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Vietnam’s economy achieved the next most
robust performance after China’s, growing 7.2 percent in
2003 despite being affected by the SARS driven downturn
in regional tourism. Exports increased over 20 percent,
led by a 60 percent surge in exports to the U.S. Domestic
investment increased to near 36 percent of GDP,
supported by capital spending in the fast growing
Vietnamese private sector and continued increases in
foreign direct investment inflows. Vietnam was one of
the countries most seriously affected by the avian flu
outbreak at the start of the year. Initial analysis suggested
that - depending on how seriously the outbreak hurt the
poultry sector and the number of tourist arrivals – it could
reduce growth by 0.3-0.9 percent of GDP. So far in 2004,
though, the overall economic impact of the outbreak has
remained relatively negligible. After dipping in February,
foreign tourist arrivals increased four percent in March
compared to the same time last year. Growth is expected
to reach around 7 percent for the year.
East Asia Update
6
In the middle income economies of South East
Asia the 2003 acceleration of growth was most marked in
Thailand and Malaysia, increasing by over one percentage
point from 2002 to reach 6.7 percent in the one case and
5.2 percent in the other. In both economies export growth
– dominated by growth in exports to China and the rest of
East Asia - was the largest contributor to growth in
overall final demand, with healthy household
consumption growth the second largest. (Exhibit 4).
Growth in Thailand was also fuelled by reviving fixed
investment growth, which reached its fastest pace since
the crisis, led by an 18 percent increase in private
investment.
Growth also picked up, though less
markedly, to reach 4.1 percent in Indonesia and 4.5
percent in the Philippines.
Exhibit 4
Contributions to 2003 Growth in Final Demand
8.0
Exports
Inventories
Fixed Investment
Govt. Consump.
Private Consump.
6.0
4.0
2.0
0.0
Indonesia
Korea
Malaysia Philippines Thailand
-2.0
(Final demand is the sum of domestic consumption, investment and exports.)
Among the Newly Industrialized Economies
(NIEs), growth in Hong Kong, Singapore and Taiwan
(China) had been especially hard hit by SARS in early
2003, but also saw an energetic rebound in the third and
fourth quarters. In Singapore, for example, GDP in the
second half of 2003 was up at an annualized pace of 13.7
percent on the first half of the year, while in Taiwan
(China) output was up an annualized 10.2 percent over the
same period. Some of this was of course a rebound from
SARs, but there are also signs of a more sustained
recovery: exports are strong, supported by demand from
China and the recovery in global high tech demand.
Fixed investment spending also began to strengthen in
several of the NIEs in the latter part of the year, growing
at over 30 percent seasonally adjusted annual rates in
Taiwan (China) for example. Singapore is seeing strong
growth in its pharmaceuticals sector, indicating growing
success in its effort to restructure its economy away from
lower end electronics sectors which face severe
competition from China. The Korean economy was one
striking divergence from the regional pattern of
accelerating growth in 2003 – growth fell to 3.1 percent
from 7 percent in 2002, mainly because of a fall in
personal consumption, which was depressed by tighter
credit policies and the efforts of households to restructure
their balance sheets and reduce excessive debt. However,
here too, signs of recovery amplified in the fourth quarter,
led by solid gains in exports and fixed investment.
Finally, 2003 also saw a welcome alleviation of
economic conditions in some of the smaller economies of
the region, partly because of higher primary commodity
prices for their exports and, in some cases, improvements
in political conditions. Papua New Guinea saw mildly
positive growth after three years of contraction, as prices
for a wide array of its mineral and agricultural exports
increased, while growth also accelerated in Mongolia,
prices for whose copper exports have surged. Growth
also improved among several of the Pacific Island
economies. In the Solomon Islands the entry of a regional
assistance mission helped stop ethnic violence - GDP
grew for the first time in five years, at 3.8 per cent, after
having fallen by a cumulative 28 per cent between 1998
to 2002.
A special and unpredictable event that countries
had to grapple with in late 2003 and early 2004 was the
outbreak and rapid spread of H5N1 avian influenza
around the region. By March it was estimated that the
outbreak had caused the death (through disease or
culling) of over 100 million poultry around the region,
with Vietnam and Thailand the most seriously affected
countries. The highly pathogenic virus can also be
transmitted from birds to humans, resulting in 23 deaths
in Thailand and Vietnam by March 23. The economic
impact of the ‘bird flu’ has mainly occurred through
extremely severe loss of income in the poultry sector,
which in itself is a fairly small part of the economy,
ranging from 0.5 to 1.5 percent of GDP in various
countries. So far, however, the impact of the epidemic on
the overall economy in affected countries appears to have
remained relatively small.
Poverty reduction – in time and space
As noted, growth in the low and middle income
countries of the region accelerated from a solid 6.7
percent in 2002 to 7.6 percent in 2003, the strongest since
before the financial crisis, with growth accelerating in
most of the countries in this group individually. Solid
output and income expansion in Developing Asia are one
principal reason for expecting poverty in the region to
have seen a further substantial decline over the last two
years, although it will take a little while for analysis of
household income and expenditure survey data to confirm
2003 outcomes. In specific areas and sectors, small
farmers in the region should also experience income gains
because of higher international prices for agricultural
East Asia Update
7
exports that they produce. The numbers of people living
below the $2 a day poverty line in East Asia are estimated
to have fallen by around 49 million during 2003, to
around 674 million by year end. The headcount index or
proportion of the population living below $2 a day is
estimated to have fallen from 39.7 to 36.7 percent.
(Exhibit 5; Appendix Tables 7 and 8). This compares to a
situation in 1990 when two thirds of East Asia lived
below the $2 a day poverty line. The Millennium
Development Goals for income poverty have already been
achieved in East Asia.
Exhibit 5
Poverty - Headcount Index
($2 a day poverty line. Percent)
90
Vietnam
East Asia
Other Small *
S.E. Asia (4)
China
75
60
45
30
Poverty rates are also estimated to have
continued to fall in the countries containing the other
major concentrations of poor people in East Asia. In
Indonesia $2 a day poverty is estimated to have fallen
from 58.7 percent in 2001 to 50.1 in 2003, which means
last year was the first when the poverty rate fell below
what it was in 1996, before the financial crisis. The
recent fast pace of poverty reduction has benefited from a
fall in the relative price of food, which comprises a large
share in the budgets of the poor: in 2003 food prices
increased less than 4 percent compared to over 8 percent
for prices of non-food items. Poverty rates also showed
sharp declines in Vietnam and Thailand. In Thailand the
government launched a drive to eradicate mass poverty by
the end of the decade, starting with a national poverty
registration program at the start of 2004. The registered
poor cited personal debt and lack of adequate access to
land and housing as by far the most important problems
they face. Thailand’s regional economic development
strategy also involves grouping provinces into clusters
which are forming development strategies based on their
particular comparative advantages. While these clusters
have not been formed from a poverty eradication
perspective, they are likely to play an important role in
formulating economic growth strategies which in turn will
impact on poverty, which in Thailand, as elsewhere, in
East Asia, shows high spatial concentration.
Understanding the geography of poverty
* Cambodia, Lao PDR, Papua New Guinea
1990
1996
1999
2000
2001
2002
2003
2004
2005
In China, where two thirds of East Asia’s poor
live, the last two years’ splendid growth of 8-9 percent a
year are estimated to have reduced the headcount index at
the $2 a day line from 41.5 to 34.8 percent between 2001
and 2003. Large as it is, what is most striking about this
fall in Chinese poverty, however, is that it is not much
larger than that estimated in the rest of Developing East
Asia, where GDP growth was several percentage points
less than in China. This discrepancy highlights the
importance of sectoral and geographical considerations in
determining poverty outcomes. In the case of China
about 90 percent of the poor live in the rural areas, where
income growth during the 1990s has been significantly
lower than in urban. In 2003, for example, urban
disposable income per capita rose 9 per cent, but rural net
income per capita by only 4.3 per cent. The government
introduced a new package of measures to promote rural
development in February 2004, including an increase in
fiscal resources for rural areas, access to finance, and
improvements in the provision of public goods and
services. In the longer run policies and investments to
smooth the migration of workers from rural areas to the
burgeoning opportunities in fast growing urban areas will
remain the most effective approach to reducing poverty.
East Asia’s impressive achievement in reducing
poverty in recent years (and decades) masks large
continuing disparities within countries and regions. The
effectiveness of poverty reduction policies can be raised if
they are based on good information about the spatial
distribution of poverty. This Regional Overview presents
for the first time poverty maps which disaggregate
absolute poverty in the East Asia region to the province
level for the year 2002. Exhibit 6 shows a map of how
poverty incidence or the headcount index – that is the
proportion of the population living below (say) $2 a day –
varies over the provinces of countries in East Asia. The
accompanying Exhibit 7 shows the absolute number of
poor below $2 dollar a day in the various provinces, each
dot on the map representing 10,000 poor people.
Mapping poverty at the province level
underlines three features. First, national averages hide
large differences within countries. Low income countries
include provinces with low incidence, and middle income
countries include provinces with high incidence. There
are some regularities across the region. Poverty incidence
tends to be higher in the remote rural upland areas (for
example, Vietnam, Laos and China’s Yunnan province),
in areas with a weak natural resource base, as the
Northeast of Thailand, and in areas far from major urban
centers. Conversely, poverty headcounts are generally
lower in urban agglomerations and surrounding areas.
East Asia Update
8
Exhibit 6
Provincial Poverty
Map of East Asia and
Pacific
Percen age o popu a on
v ng be ow PPP$2 day n
2002
80 60 40 20
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Exhibit 7
Provincial Poverty
Map of East Asia
and Pacific
Number o popu a on
v ng be ow PPP$2 day n
2002
Each do represen s 10 000
persons
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East Asia Update
The international environment
East Asian export growth in dollar terms almost
doubled, from 9.6 percent in 2002 to 19.1 percent in 2003.
Export growth was especially robust in China and Korea,
East Asia - Export Growth
(US$ - % Change Year Ago)
50.0
China
40.0
30.0
E.Asia
20.0
10.0
SE Asia
0.0
-0
0
n01
Ap
r-0
1
Ju
l-0
1
O
ct
-0
1
Ja
n02
Ap
r-0
2
Ju
l-0
2
O
ct
-0
Ja 2
n03
Ap
r-0
3
Ju
l-0
3
O
ct
-0
Ja 3
n04
A number of policy implications emerge from
the spatial view of poverty. First, economic policies need
to recognize the inter-linkage of geography and poverty.
Adverse environmental circumstances breed poverty, and
lack of resources prevents effective responses to difficult
conditions. Second, the targeting of public resources to
poor areas is attractive if high poverty incidence coincides
with a large number of poor. However, more typical is the
situation where there is a trade-off between reaching the
largest number of the poor – who may live in an overall
relatively prosperous province - and reaching the poorest,
who may live in a sparsely populated province. Third, the
cross-border clustering of poverty suggests an important
role for cross-country collaboration and regional
integration and trade in reducing poverty. For example,
the poor mountain areas in Lao PDR may benefit from
improved road infrastructure investments between
Yunnan province in China and ports in Thailand, and the
poor in the Northeast of Thailand and Cambodia can
access global and regional markets more easily through
gateways in Vietnam rather than through traditional
export outlets. Fourth, people relocate in search of a
better life. Removing impediments to migration and
endowing people with human capital, a mobile asset, can
contribute to poverty reduction.
Exhibit 8
-10.0
Ja
Third, in comparing the incidence of poverty
with the number of the poor, it is notable that areas with
high poor incidence are more often than not sparsely
populated. For example, areas with high poverty
incidence and low population density include the western
provinces of China (Xinjiang and Tibet), the Northern
Mountains areas of Vietnam, the upland areas of Laos and
the eastern provinces of Indonesia and Papua New
Guinea. At the other end of the spectrum, low-incidence
and high-population density areas include the Mekong
River and Red River delta areas in Vietnam, Vientiane
plain and Mekong River Corridor in Lao PDR, and Luzon
island in the Philippines. However, some areas are
characterized by both high poverty incidence and a large
number of poor. Poverty incidence and number of poor
overlap in the eastern provinces of Philippines, on Java, in
Yunnan province of China and the Northeast region of
Thailand.
reaching 35 and 20 percent respectively. Export growth
among the other South East Asian and the Newly
Industrialized economies hit something of a ‘soft spot’ in
the middle part of 2003, but then rebounded powerfully in
most countries in the last quarter of the year, with the year
on year pace for the region as a whole topping 30 percent
in December (Exhibit 8). For the second year in
succession, growth in exports to China contributed 50
percent or more of overall export growth in a number of
other East Asian economies, such as Korea and Taiwan
(China), while recovering growth in the rest of East Asia
and Japan also contributed to the buoyancy of intraregional trade.
O
ct
Second, poverty incidence tends to be spatially
clustered, and the clustering can transcend national
borders. This suggests an important role for geography in
determining poverty, which goes beyond the influence of
national history, policies and institutions. The sub-region
with the most significant cross-border spillovers of
poverty incidence is the Greater Mekong sub-region,
which includes Yunnan province in China, Laos,
Vietnam, Cambodia and Thailand.
9
NIEs
-20.0
East Asian export growth dipped in January
2004, but – having fallen mainly for technical reasons to
do with the timing of the Chinese New Year – growth
rebounded to 31 percent in February. Partial data for
China and Korea show solid 40 percent export growth in
March. Prospects for East Asian export growth in 2004
remain favorable, given the solid recovery in the U.S.
and Japanese economies, the recovery in world trade, and
in global high tech industrial and consumer demand more
particularly, with an unexpectedly sharp downturn in
China posing the most obvious risk to the outlook.
Growth resurgent in (two thirds of) the developed
world
Forecasts for global growth in 2004 have been
revised up to 3.7 percent from 3 percent six months ago.
(Table 2). Much of the improvement comes from stronger
expected growth in the OECD, especially in the US and
Japan, where growth projections for 2004 have been
East Asia Update
10
Exhibit 9
Labor Productivity Growth in U.S. Non Farm
Business Sector 1951-2003 - % Ch. Year Ago
6.0
4.0
Source: World Bank DEC Prospects Group update March 2004.
a/ In local currency, aggregated using 1995 weights.
Of course it is true that high labor productivity
growth is also the principal reason for the unusually slow
recovery in U.S. employment. The sluggishness in the
labor market, if long continued, would tend to undermine
household confidence and consumer spending, which
remains the dominant source of demand in the U.S.
economy. However several indicators – including higher
working hours, rising temporary employment and
surveyed hiring intentions, and a jump in March
employment - suggest that employment growth should be
finally rebounding in coming months. The near term
prospects for the U.S. economy are therefore good, but
there are also a number of well known risks or
2.0
-2.0
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
0.0
1951
The recovery of the United States economy
strengthened in the second half of 2003, with output
increasing by 4-5 percent from year earlier levels. Recent
indicators suggest a continuing solid expansion in the first
part of 2004. Among the main factors underpinning the
recovery in recent times are exceptional gains in
productivity, very low interest rates, higher household
wealth due to large increases in equity and housing prices
over the last year and a final dose of fiscal stimulus
through substantial tax rebates to households in early
2004. Among these factors the strength of productivity
growth is especially important in molding the distinctive
features of this recovery. As Exhibit 9 indicates, U.S.
labor productivity growth has been trending higher since
1995, and reached a 4-5 percent annual pace in both 2002
and 2003, among the highest in the last 50 years, pushing
unit labor costs lower and boosting corporate profits at a
15-20 percent year on year rate during these two years.
Burgeoning profits have finally helped stimulate a
rebound in business fixed investment, which rose at an
annualized pace of around 11 percent in the second half of
2003, after falling or stagnating for three years.
Trend (*)
1969
2005
1966
2004
1963
2003
1960
2002
% Change from previous year, except interest rates
GDP Growth
World
1.8
2.6
3.7
3.1
OECD
1.4
2.0
3.2
2.6
United States
2.2
3.2
4.6
3.2
Japan
-0.3
2.7
3.1
1.4
Euro Area
0.9
0.4
1.7
2.3
World Trade (Volume)
3.5
4.6
8.7
7.9
CPI Inflation - G7 a/
1.3
2.0
1.4
1.7
Oil Price - $/bbl
24.9 28.9
26
23
- % Change
2.4 16.0
-10.0
-11.5
Non-oil Commodity
5.1 10.0
10.4
-2.9
Prices
LIBOR (US$. 6 Mo.)
1.8
1.2
1.5
3.5
1957
Table 2. International Economic Environment
vulnerabilities.
Household savings remain low,
indebtedness is high, while the value of household assets
is increasingly dependent on the high recent levels of
housing prices, creating the risk of a pullback in consumer
spending once monetary policy is tightened and interest
rates rise. Concerns about fiscal deterioration and the
sustainability of the large U.S. current account deficit
could push long term interest rates significantly higher,
while the resulting slowdown in economic growth could
encourage a greater turn towards protectionism.
1954
boosted by over 1 and nearly 2 percentage points
respectively.
(* Trend using Hodrick-Prescott Filter).
However there are also somewhat less well
known “upside risks”. The rise in U.S. productivity
growth since 1995 provides increasingly convincing
evidence that the long run productivity trend over the next
several decades may remain significantly higher than in
the two decades before 1995, principally as a result of
continued rapid technological innovation and diffusion
and the new capital investment they stimulate. A detailed
study of this issue by Gordon (2003) arrives at a central
projection of 2.5 percent annual growth in U.S. non-farm
business productivity over the next couple of decades, a
full percentage point higher than the trend in 1973-1995.3
Higher long run growth would of course increase the
manageability of long run fiscal and external current
account challenges in the U.S. From the viewpoint of
East Asia these considerations suggest that the region’s
longstanding and deep symbiotic relationship with the
U.S. economy might also be sustainable for quite a while
longer, with the U.S. continuing to provide a dynamic and
3
Robert J. Gordon. (2003). “Exploding Productivity
Growth: Context, Causes, and Implications”. Brookings
Papers on Economic Activity, 2:2003. See also J.
Bradford De Long. (2002). “Productivity Growth in the
2000s”. University of California at Berkeley.
East Asia Update
11
important export market for the region, a major
destination for investment of its abundant savings, as
well as a leading source for technological innovation and
scientific knowledge.
more structural reforms going forward. A revitalized
Japan would mark a major improvement in the East Asian
regional economic environment in the 2000s, as well as in
the world outlook as a whole.
The Japanese economy also enjoyed an
unexpectedly robust 2.7 percent real growth in 2003, with
fourth quarter GDP jumping by 6.4 percent (saar) from
the third, the fastest quarterly growth in 13 years. The
recovery is broad-based, rests mainly on stronger private
sector demand rather than fiscal stimulus and is backed by
a resolute and increasingly credible expansionary
monetary policy by the Bank of Japan, as well as by the
global upturn.
In the Euro Area, growth was only 0.4 percent in
2003, although it had picked up to quarterly annualized
rates of 1-1.5 percent in the second half of the year. Mild
increases in exports and corporate investment were
among the contributors to this slow recovery. Growth was
also held back by a persistent weakness in consumer
confidence and private consumption.
Household
spending continues to be restrained by prevailing high
levels of unemployment, among other factors. Monthly
indicators for output, orders and employment all indicated
some weakening in activity in early 2004, even before the
horrific terrorist attacks in Madrid. Euro-zone area
growth is projected at a modest 1.7 percent for 2004 as a
whole, and at 2-2.5 percent in 2005..
Among the main contributors to the recovery,
Japan’s 2003 exports surged 10 percent in real terms,
helped by booming demand for capital equipment in
China, as well as rising exports to Europe in the wake of a
lower yen-euro exchange rate. The largest contribution to
growth in 2003 however came from business fixed
investment, which rose 9.4 percent in the year, with an
especially buoyant bounce in the fourth quarter (q/q,
saar). Corporate profits rose at double digit rates in the
last three quarters of 2003 reaching a 30 percent
annualized quarterly increase in the fourth quarter,
benefiting from several years of efforts by firms to cut
costs, restructure and pay down debt. (Corporate debt has
fallen from 125 percent of GDP in 1996 to about 90
percent today.) While private consumption was only up
1.1 percent in 2003, Japanese households have become
more confident in recent months as employment growth
has picked up and rising equity prices have boosted
household wealth. Retail sales in January 2004 rose by
their strongest pace in several years.
As noted, monetary policy appears to have
played a key role in fostering the recovery. Enormous
open market purchases of Japanese government bonds by
the Bank of Japan over the last two years helped boost
commercial bank reserves at the central bank by 165
percent in 2002 and 71 percent in 2003, while base money
rose 26 and 16 percent respectively. Base money growth
has also been supported by the central bank’s efforts to
hold down the yen’s appreciation against the dollar
through huge purchases of dollar assets, which have been
only partly sterilized – the central bank spent around 20
trillion yen for this purpose in 2003 and another 10 trillion
in the first two months of 2004 alone. The robustly
expansionary monetary policy appears to be working by –
in effect – setting a credible positive inflation target and
defusing the deflationary expectations that have depressed
domestic spending in recent years (for example by
increasing the real burden of corporate debt). Actual
deflation has also eased. Producer prices, which were
falling by 2-3 percent in 2001 and 2002, are in recent
months roughly the same as a year earlier. As a result
there is now more of an expectation that, despite several
‘false dawns’ over the past decade, the present Japanese
recovery could be sustained, especially if it is backed by
All round higher commodity demand
The impact of the global recovery on East Asia
depends not just on broad macroeconomic growth trends
but also on developments in specific global industrial
sectors, and how the region participates in these sectors,
whether as producer or consumer. The present recovery
is seeing significant boosts in demand and prices for
several key sectors affecting the East Asian economy
Trends in the global “high tech”, electronics or
information and communications technology (ICT)
industries are of key importance for East Asia, which has
become an increasingly dominant production platform for
servicing global markets in many of these sectors. Global
demand in many of these sectors plunged after the
bursting of the “high tech bubble” in 2000 and only began
a modest and somewhat erratic recovery in 2002. The
recovery strengthened in 2003, especially with the long
awaited upturn in overall fixed investment spending in the
U.S. and Japan in the second half of 2003. Responding to
these trends, high tech industrial production in East Asia
in the latter part of the year picked up to a quarter on
quarter pace of over 20 percent (seasonally adjusted
annual rate), from only 2-3 percent in the first half of the
year. (Table 3).
World sales of semiconductors – a basic input in
all high tech industries – surged over 50 percent between
their recession low in early 2002 and January 2004
(Exhibit 10). Semiconductor average selling prices also
rose about 20 percent over this period. With the
increasing relocation of electronics production to East
Asia, most notably to China, the share of world
semiconductor sales occurring in East Asia continues to
rise, reaching 39 percent in Asia excluding Japan (and
over 60 percent including it).
East Asia Update
12
Table 3.
East Asia: High Tech Production and Exports
Change % (saar)
Production /1
Korea
Taiwan (China)
Singapore
Malaysia
Thailand
Indonesia
Exports (US$)
Exhibit 11
US real investment in information
processing equipment and software
(% Ch. from year ago)
2003 2003 2003 2003
2002
Q1
Q2
Q3
Q42003Latest
6.2
2.9
10.6
4.4
8.1
24.2
-7.1
6.8
1.6
2.6 22.1 25.0 6.1 11.0
-19.1 -0.4 23.4 -3.2 -0.1 -14.9
8.8 -7.5 40.5 23.0 7.1 10.9
10.4 -19.4 28.9 45.3 5.3 20.4
12.2 15.0 13.8 50.9 9.6 46.5
2.1 100.6 -1.3 100.8 23.1 52.5
46.4 -11.9
7.5 -11.2 3.7 -5.4
-0.7
9.4 12.6 20.3 6.4 20.3
60
Computers & peripherals
40
Software
20
Source: Datastream and Haver Analytics. Note: \1 Export weights
Asia ex Japan as % of World Sales:
December 1995: 20.0%
December 1998: 23.4%
October 2000: 24.7%
December 2000: 33.3%
January 2004: 39.0%
16
Asia x. JP
Japan
Europe
Americas
-20
12
8
4
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
0
An early 2004 downtick in U.S. orders for
computers and electronic equipment and in world
semiconductor sales and prices has raised some concern
that the current semiconductor and overall high tech cycle
may already have peaked. After the sharp rise in demand
over the past 1-2 years, it is quite likely that year on year
rates of growth will dip for a time. However, as Exhibit
11 indicates, in the present recovery U.S. investment on
ICT equipment and software has been rising for only
about 2 years (well in advance of other sectors of business
investment), while the previous cycle of expansion began
in 1991 and extended through 2000, though with ups and
downs. Given that the investment cycles in Japan and
Europe are only now starting to gather momentum, it
seems reasonable to expect that global investment
spending on ICT should continue in an expansion phase
for some years, though, no doubt, with cyclical ups and
downs.
2003-I
2002-I
2001-I
2000-I
1999-I
1998-I
1996-I
1995-I
1994-I
1993-I
1992-I
1991-I
1990-I
World Semiconductor Billings
(Bill US$. 3 Mo.Mov.Averages. 1/94-1/04)
20
Other *
0
1997-I
Exhibit 10
Source: Bureau of Economic Analysis. * Includes
communications equipment.)
Dollar prices for many primary commodities also
moved sharply higher in recent months. The World
Bank’s dollar index of non energy commodity prices
began rising at modest rates from early 2002, followed by
a sharply accelerated increase from the middle of 2003.
The non energy index jumped some 23 percent between
July 2003 and February 2004, led by a 39 percent gain in
metals and minerals prices and a 26 percent rise in food
prices. Industrial metals like copper, lead and nickel were
up by 70-90 percent over this period. Rubber and
agricultural raw materials also rose around 30 percent.
(Table 4). Among foodstuffs of significance among East
Asian exports, prices for edible oils like coconut and palm
oil, rose by 25-50 percent, while rice prices rose around 7
percent.. (It should be noted, though, that the recent price
increases for non energy primary commodities generally
do not make up for even larger price declines from 1996
to 2000-01. The main sub-indexes in February 2004 were
not far distant from their average values for the whole
period 1980-2003).
Several demand and supply factors are
contributing to the recent strength in commodity prices.
The fall in the US dollar against other major currencies
reduces the prices of commodities expressed in those
currencies, increasing demand for commodities by
holders of those currencies, pushing up the dollar price of
commodities. Low international interest rates reduce the
carrying cost of commodity inventories while increasing
speculative investment demand. Demand for industrial
commodities is also being pulled higher by the powerful
economic boom in China, as well as by the recovery in
the United States and Japan. As Exhibit 12 indicates,
China’s fast growth makes it a voracious consumer of all
kinds of raw materials.
China’s consumption of
commodities like copper, primary aluminum, cotton and
East Asia Update
13
soybeans has surged by near 10 percentage points of
global consumption in just the last 5 years. Viewed
another way, the increase in China’s consumption of
copper in 2003 represented over 60 percent of the
increase in total world consumption.
Finally the
sharpness of recent price increases also reflects unusually
low inventories across many commodities, as well as
weather-related and other supply disruptions in some
cases, for example unfavorable production conditions for
edible oils.
Table 4. Commodity prices
(US Dollar - % Change from year ago)
All non oil
Rice
C’nut Oil
Palm oil
Rubber
Logs
Copper
Oil
1999
2000
2001
2002
2003
-11.2
-18.3
12.0
-35.0
-12.9
15.2
-4.9
38.3
-1.3
-18.5
-38.9
-28.9
6.2
1.5
15.3
56.2
-9.1
-14.6
-29.3
-7.8
-13.8
-16.3
-13.0
-13.7
5.1
-11
32.4
36.6
33.0
2.7
-1.2
2.4
10.0
3.0
11.0
13.6
41.5
14.5
14.1
15.9
2004
m1-2
16.5
6.6
26.1
12.5
35.5
6.3
55.6
-1.5
Edible Metals Rubber Total
Oils
**
China
-1.2
0.0
-0.1
-0.4
-0.1
-1.8
Indonesia
3.1
-0.2
1.5
1.0
0.5
5.9
Korea
-4.9
0.0
-0.1
-0.4
0.0
-5.4
Mongolia
-13
-0.3
-0.5
14.5
0.0
0.8
Malaysia
4.7
-0.1
4.6
0.0
0.5
9.5
Philippines
-3.6
-0.3
0.4
-0.3
0.0
-3.8
PNG
14.1
-1.4
4.4
6.6
0.1
23.8
Thailand
-4.8
1.4
0.0
0.0
1.1
-2.3
Vietnam
4.2
1.8
-0.2
0.1
0.4
6.3
Source: COMTRADE for 2002, or latest available. * Oil and natural
gas. ** Includes aluminum, copper, iron, nickel, lead.
China - Consumption of Raw Materials
(% of World Consumption)
Copper
Oil
Cotton
30.0
Aluminum
Soybeans
25.0
20.0
15.0
10.0
5.0
0.0
Sources: International Cotton Advisory Committee; International Energy
Agency; Metallgesellschaft; US Department of AgricultureA
1998
1999
2000
2001
Table 5. Net Exports of Selected Commodities
(As % of GDP)
Oil *
Exhibit 12
35.0
inventories and more generalized concerns about
terrorism have supported intense speculative demand, as
has OPEC’s announced intention to cut back production
by 1 mbd from April, and the knowledge that the U.S. is
also replenishing its Strategic Petroleum Reserve. After 3
years in which oil prices have generally stayed above $25,
some analysts argue that a long period of high oil prices at
or above $30 lies ahead. They point in particular to fast
and potentially underestimated oil demand growth from
large developing economies like China and India, as well
as to possible supply constraints to non-OPEC oil
production. Other analysts argue that the recent high
prices are mainly a near term phenomenon, observing that
the supply responses to higher prices can be delayed by
short run production constraints like difficulties with new
field startups, labor strife or bad weather, but that over the
longer term continued advances in oil exploration and
production technologies will continue to ensure expansion
in non-OPEC production and market share, leading to
lower oil prices. However, in the near term at least, oil
prices look set to remain both high and volatile.
2002
2003
Oil prices have also surged in recent months.
After dipping in the wake of the Iraq war, the average
price of various major crudes once more headed higher in
the latter part of 2003 and averaged well over $31 in the
first quarter of 2004 – substantially above the upper $28
bound of OPEC’s target price range – with prices for an
individual crude such as West Texas intermediate
touching as high as $38. Extremely low commercial
Rice
The increases in oil and non-oil commodity
prices over the last few years could have a significant
macroeconomic impact on some of the economies in East
Asia, especially some smaller economies. The impacts of
course vary according to whether countries are net
importers or exporters of the various commodities. Table
5 shows East Asian economies’ net exports of selected
commodities whose prices have recently increased, as a
percent of GDP. Some economies like China, Korea and
Philippines which are net importers of both oil and (at
least some) non-oil primary commodities are estimated to
have experienced relatively modest national income
losses due to higher prices in 2003, and may experience
some further small losses in 2004. (Exhibit 13). Other
economies like Mongolia and Thailand are oil importers
but significant exporters of non oil primary commodities,
so that higher oil and non oil prices tended to have
offsetting effects on national income in 2003. In 2004,
however, Mongolia could experience a substantial income
gain of around 5 percent of GDP due to soaring copper
East Asia Update
14
prices (given consensus expectations of oil averaging
around $28 or $29 in 2004, which while high by recent
standards, would be roughly flat as compared to 2003).
Finally countries like Indonesia, Malaysia, Papua New
Guinea and Vietnam that export both oil and a variety of
other commodities should experience significant gains in
2003-04. Papua New Guinea in particular is experiencing
hefty income gains that could be worth a cumulative 7
percent of GDP or more in 2003-04, due to price
increases for exports like oil, copper, gold, palm oil, copra
and rubber.
Exhibit 13
Income gains/losses due to selected commodity
price changes (as % of GDP)
Surging portfolio flows and asset prices
5.0
4.0
3.0
2.0
Actual and Assumed
Price Changes (%):
2003 2004
Oil
15.9 0.0
Rice
3.0 3.7
Edible Oils 12.3 15.7
Iron Ore
9.0 18.6
Copper
14.1 34.9
Rubber
41.5 1.8
2003
2004
1.0
Th
ail
an
d
Vie
tna
m
PN
G
Mo
ng
o li
a
Ma
lay
si a
Ph
i lip
pin
es
Ko
re
a
Ch
in a
In d
on
es
ia
0.0
-1.0
98.4 Most of the increase in private flows in 2003 was
contributed by a surge in portfolio equity and bond flows,
most of it in the latter part of the year. Factors supporting
the recovery in portfolio flows include greater confidence
about the recovery in the developed world and the
international environment for developing countries,
improved perceptions of generally sound macroeconomic
and structural reform policies in many emerging markets
(reflected in improved credit ratings), and the very low
level of interest rates in developed countries. In East Asia
an added positive have been the large current account
surpluses most economies have run for several years,
leading to less foreign debt and a growing buffer of
reserves.
In principle such large windfall gains in small,
low income economies like Mongolia and Papua New
Guinea could substantially bolster the resources available
for the purpose of economic development and poverty
reduction. In practice, though, countries rich in oil and
mineral resources have tended to under perform those
without such wealth, and mismanagement of windfall
gains has often left poor countries even poorer after the
boom than before it. Countries like Mongolia and Papua
New Guinea therefore face an important challenge in
appropriate management of their recent income gains.
International capital markets and flows
2003 saw international capital markets take a
much sunnier view of emerging markets, finally
shrugging off the gloom about these economies that had
lingered since the financial crises of the late 1990s. Initial
estimates by the Institute of International Finance are that
net private capital flows to emerging market economies
jumped from $124 billion in 2002 to $188 billion in 2003,
the highest since the East Asian financial crises of 1997-
East Asian economies were at the forefront of
the revival of portfolio flows, garnering well over half of
the increase in flows to emerging markets as a whole. Net
portfolio flows to six large regional economies (China and
the 5 post-crisis economies, Indonesia, Korea, Malaysia,
Philippines and Thailand) are estimated to have jumped to
around $33 billion (based on incomplete 2003 data for
some countries) from a net outflow of $9 billion in 2002.
Korea alone secured nearly $18 billion (the majority in
equity flows). Investors are evidently looking beyond the
near term weakness of the economy to factors like
relatively cheap equity valuations, the rising trend of the
won against the dollar and, perhaps most important,
Korea’s progress on corporate restructuring and on
strengthening the institutional framework for business
activity, which has generally gone further than in most
other Asian countries, including in such areas as corporate
governance, shareholder protection, the insolvency
regime and financial supervision. Portfolio flows to
China are also estimated to have swung to net inflows of
around $13 billion from substantial net outflows in earlier
years. Portfolio inflows are also estimated to have picked
up in the other main East Asian economies, with the
exception of the Philippines.
The
improved
outlook
for
economic
fundamentals and the associated upturn in market
sentiment quickly translated into large gains in East Asian
(and other emerging market) asset prices. Stock market
prices in Thailand doubled over the course of 2003, rose
60-70 percent in Indonesia and by 30-40 percent in most
other economies (Exhibits 14 and 15). Almost inevitably
after such a rapid run-up, stock prices in the early months
of 2004 have leveled out or even backed away a little, but
generally not by much.
4
IIF (January 2004). Capital Flows to Emerging Market
Economies. The World Bank’s Global Development
Finance report (April 2004) documents the same trends
for a slightly different set of developing countries.
East Asia Update
15
Exhibit 15
Exhibit 14
1.7
1.6
1.5
Stock market indices (Jan.1 2003=1)
Japan
Philippines
Singapore
Hong Kong
1.4
Stock market indices (Jan.1 2003=1)
2.1
1.9
Indonesia
Malaysia
Thailand
Korea
1.7
1.5
1.3
1.2
1.3
1.0
0.9
0.9
0.7
Exhibit 16
1400
1200
Eurobond Spreads 1/99 - 3/04
Korea
Indonesia
Philippines
EMBI - Latin Amer.
1000
800
600
400
200
0
19
99
M
19 01
99
M
19 06
99
M
20 11
00
M
20 04
00
M
20 09
01
M
20 02
01
M
20 07
01
M
20 12
02
M
20 05
02
M
20 10
03
M
20 03
03
M
20 08
04
M
01
Spreads on emerging market debt had risen with
the onset of recession in late 2000 and 2001, but began
falling back in late 2002 and continued to fall through
2003, as the global recovery emerged, risk perceptions
defused and very low interest rates in developed countries
encouraged a search for higher yielding assets - resulting
in the largest ever rally in this market. Spreads on
emerging market debt fell from a peak of around 950 in
September 2002 to 400 by December 2003. In East Asia
spreads for most countries had fallen back in late 1998
and early 1999 from the highs seen during the financial
crisis, and have trended lower since then. Spreads for
Korea and Malaysia had fallen to only 75-80 basis points
by March 2004, while for China and Thailand they had
dropped to 30-60 basis points. Indonesian spreads also
dropped from around 800 basis points in mid 2001 to 200
basis points by March 2004 (Exhibits 16 and 17). The
only significant East Asian economy not to participate in
the rally was the Philippines, where spreads of around 410
basis points in March were about the same as two years
earlier, reflecting the slow pace of improvement in the
country’s fiscal problems. Spreads have stabilized and
backed up a little in early 2004. Some further pickup in
spreads could occur when interest rates in the developed
countries finally turn higher, but the extent of such a
reversal would likely be limited in most cases by the
improvement in macroeconomic fundamentals in the
region, steady current account surpluses and large foreign
exchange reserves.
Ja
n-0
1
Ap
r-0
1
Ju
l-0
1
Oc
t-0
1
Ja
n02
Ap
r-0
2
Ju
l-0
2
Oc
t-0
2
Ja
n-0
3
Ap
r-0
3
Ju
l-0
3
Oc
t-0
3
Ja
n-0
4
1.1
Ja
n01
Ap
r-0
1
Ju
l-0
1
Oc
t -0
1
Ja
n02
Ap
r-0
2
Ju
l-0
2
Oc
t -0
2
Ja
n03
Ap
r-0
3
Ju
l-0
3
Oc
t -0
3
Ja
n04
1.1
East Asia Update
16
Exhibit 17
350
Exhibit 19
Eurobond Spreads 1/99 - 3/04
China
Malaysia
Thailand
250
Current and Capital Account* Balances
(As % GDP)
10.0
----China----
----Korea----
---Thailand---
8.0
6.0
4.0
2.0
50
19
99
M
19 01
99
M
19 06
99
M
20 11
00
M
20 04
00
M
20 09
01
M
20 02
01
M
20 07
01
M
20 12
02
M
20 05
02
M
20 10
03
M
20 03
03
M
20 08
04
M
01
-50
-10.0
0.9
5.0
6.2
6.7
3
200
200
1 -0
2
9 -0
0
199
3
2.8
4.2
-0.2
3.3
0.0
* Capital Account includes errors and omissions.. Source: IMF IFS.
Exhibit 20
East Asia - Foreign Reserves
1100
900
700
500
(US$ Bill.)
China
Malaysia
Korea
Singapore
Indonesia
Philippines
Taiwan (China)
Thailand
Increase in reserves:
2000: $35 bn
2001: $65 bn
2002: $153 bn
2003: $227 bn
300
100
-100
Ja
n1
Ju 996
l-1
Ja 996
n1
Ju 997
l-1
Ja 997
n1
Ju 998
l-1
Ja 998
n1
Ju 999
l-1
Ja 999
n2
Ju 000
l-2
Ja 000
n2
Ju 001
l-2
Ja 001
n2
Ju 002
l-2
Ja 002
n2
Ju 003
l-2
Ja 003
n20
04
In the case of China, for example, net capital
inflows of various kinds (FDI, portfolio, bank loans) rose
to an estimate of over 4 percent of GDP in 2003, up from
2.9 percent in 2001-02, and net outflows before that.
(Exhibit 19). China’s current account surplus has been
fairly stable, averaging around 2 percent of GDP over the
last five years, so that it is the capital account that has
contributed all of the net increase in the balance of
payments. Since China’s policy is in effect to maintain
the exchange rate in a narrow band against the dollar, the
central bank is obliged to purchase foreign assets using
local currency, a process reflected in an increase in
foreign exchange reserves, as well as in higher central
bank liabilities to the commercial banking system.
Reserves in fact surged by $117 billion to reach $408
billion at the end of 2003 and $440 billion in March 2004
(Exhibit 20). The authorities have made strenuous efforts
to sterilize the impact of the rise in foreign reserves on
domestic base money. Nevertheless base money growth
did pick up to 17-18 percent in the second half of 2003.
Commercial bank credit growth also accelerated to over
20 percent in the second half of 2003.
200
Change in
Reserves =
Balance of payments
The resurgence of capital flows has also
contributed to balance of payments surpluses in most East
Asian economies. Because East Asian countries maintain
a variety of exchange rate regimes – including a currency
board in Hong Kong, a fixed exchange rate peg to the
dollar in Malaysia, and managed floating rate regimes in
others - this pressure has been expressed in different
ways, including explicit appreciation of currencies,
burgeoning foreign exchange reserves and , to some
extent, more rapid growth in domestic credit aggregates.
1 -0
2
9 -0
0
Capital A/C
Current A/C
-6.0
-8.0
200
-4.0
199
200
1 -0
2
200
199
-2.0
3
0.0
9 -0
0
150
Most other East Asian countries have managed
floating exchange rate regimes, and here currency market
pressures are being reflected in a combination of both
currency appreciation and foreign reserve accumulation.
Reserves among major economies other than China
increased by $110 billion to reach nearly $600 billion at
the end of 2003, most of that accumulation occurring in
Korea and Taiwan (China). As for explicit currency
movements, most East Asian currencies with some form
of floating rate regime have seen an appreciation against
the dollar of varying amounts since the start of 2002, the
East Asia Update
17
same period over which the dollar has declined against
major currencies like the euro and the yen. As Exhibit 21
shows, East Asian currencies have appreciated less than
the 40 percent rise of the euro against the dollar between
the start of 2002 and the end of 2003. However Japan and
Indonesia did see appreciations against the dollar of over
20 percent over this period, while Korea and Thailand
appreciated a little over 10 percent. At the other end of
the spectrum Taiwan (China) saw only a modest 5 percent
rise, China and Malaysia maintained their value, while the
Philippines, where concerns about the slow pace of fiscal
adjustment continue, even saw a depreciation against the
dollar over this period.
Viewed from the perspective of the other East
Asian economies, growth in exports to China and Hong
Kong contributed around 50 percent of overall 2003
export growth in Korea, and 66 percent in Taiwan
(China). (Exhibit 22). In Malaysia and Thailand exports
to China and Hong Kong contributed about a quarter of
overall export growth in the year. As a result of the
growth of recent years, exports to China and Hong Kong
now comprise about 25 percent of Korea’s total exports,
and about 35 percent of Taiwan (China)’s, compared to
18 percent going to the U.S. For Malaysia and Thailand,
about 12-13 percent of their exports now go to China and
Hong Kong, as compared to 17-18 percent to the U.S.
Exhibit 21
Exhibit 22
Exchange Rates vs. US$
(Rise=appreciation. Jan.2002=1)
1.4
1.3
Indonesia
Korea
Philippines
Thailand
Yen/S
Euro/$
Taiwan (China)
150
Foreign market contribution to 4 East
Asian countries' total export growth (%)*
* Contributions sum to 100%
100
1.2
50
1.1
1.0
Ja
n02
M
ar
-0
2
M
ay
-0
2
Ju
l-0
2
Se
p02
No
v-0
2
Ja
n03
M
ar
-0
3
M
ay
-0
3
Ju
l-0
3
Se
p03
No
v-0
3
Ja
n04
M
ar
-0
4
0.9
The Chinese locomotive – how much longer?
Rampant growth in Chinese imports continued to
provide a major engine for export growth in the rest of
East Asia during 2003. The country’s imports surged by
40 percent in dollar terms in 2003, well above the 29
percent growth in its exports and double the pace of
import growth in 2002. Import demand was fueled by
the exceptional strength of investment spending in
China, as well as by demand for inputs used in China’s
exports. By the first quarter of 2004, China had moved
into a trade deficit position. Imports from emerging East
Asian countries increased by just over 40 percent in 2003,
after rising over 30 percent in 2002. Imports from Korea,
Singapore and Thailand rose by 50 percent or more, while
those from Philippines almost doubled, albeit from a
smaller starting base.
With China’s imports from
emerging East Asia rising rather faster than its exports to
them, its trade deficit with the rest of the region
burgeoned to around $70 billion in 2003, up from $47
billion in 2002 and $34 billion in 2001.
0
2002 2003 2002 2003 2002 2003 2002 2003
-50
Korea
Taiwan
(China)
Thailand
China+HK
Other Asia
Japan
Malaysia
USA
Other
Short term regional risks of a slowdown in China
Monthly data for early 2004 suggest continued
strength in China’s import demand. Overall merchandise
imports rose 42 percent in dollar terms in the first quarter,
handily outpacing export growth of 34 percent. However
efforts by the Chinese authorities to avert overheating and
slow economic growth to a more sustainable pace in 2004
would likely also result in a slower pace of import
growth, including from East Asia. Our current baseline
projections assume that, as a result of the counter-cyclical
policy measures, China will achieve a ‘soft-landing’, with
GDP growing 7.7 percent this year.
Some analysts also consider the possibility that
given the bluntness of available policy instruments and
the extraordinary strength of the boom, the downturn,
when it comes, could also be severe – a so-called ‘hardlanding’ scenario. The impact of this scenario on some
other Asian economies could be quite severe in the short
run. Assume – purely for the sake of illustration – that in
such a scenario China’s imports were to be 10 percent
East Asia Update
lower than in the baseline, and that other East Asian
economies maintained a constant share in this market.
The impact in the year of the shock on economies like
Korea and Taiwan (China) which have a relatively high
fraction of their exports going to China could be to reduce
their GDP growth by up to 1 percentage point. The
impact on economies like Thailand with a relatively lower
export dependence on China might be to reduce growth
by a little under 0.5 percentage point.
A few nuances can be added to this rather simple
picture of the link between China’s imports and East
Asian exports, most of them tending to moderate potential
impacts on the other Asian economies. First, developed
regions like the U.S., Japan and Europe are all in a
cyclical upswing to a greater or lesser degree, and this
should cushion the size of any potential export shock.
Second, China sends about 55 percent of its own exports
to the United States, Europe and Japan, and it has been
estimated that about half of China’s imports are inputs
and raw materials that feed into its exports. Thus reviving
developed country demand will help other East Asian
countries not only directly, but also via exports to China
which are then processed into that country’s own exports
to the rest of the world. Third, East Asian countries have
been gaining market share in China’s markets over time,
suggesting the emergence of long-term structural
complementarities. Continued increases in market share
would help offset the impact of slower overall Chinese
import growth. Fourth, since East Asian countries tend to
export more than the world average to China, a slowdown
in China would likely induce some depreciation of East
Asian currencies on a trade weighted basis, providing an
element of competitive offset.
Lastly, there is the potential impact of a China
slowdown on primary commodity prices, a channel which
will have a mixed impact on the rest of the region. As
noted in the last section, strong demand from China has
contributed to the recent strength of commodity prices,
and a slowdown would obviously contribute to lower
prices. By how much is an uncertain matter. Some initial
work with a global model suggests that 2 percentage
points lower growth in China might reduce prices by 2
percent, but this likely underestimates the volatility of
prices at the margin. Following the discussion in the last
section, however, it is likely that lower prices would
provide some terms of trade and income gains for the
industrially developed, commodity importing countries of
the region, while tending to hurt the net exporters,
including several of the small low-income exporters.
18
tech” - have been amongst the most rapidly growing of all
its imports, rising from 39 percent of total imports in 1996
to 46 percent in 2002. As Table 6 indicates, all of this
increase in the share of machinery and transport
equipment was contributed by imports from the emerging
East Asian economies, especially in such sub-sectors as
electrical machinery, parts and components. This trend is
generally taken to reflect the emergence of more closely
intertwined regional production networks in the East Asia
region, with other emerging Asian economies
increasingly supplying capital equipment, parts and
components for use in final assembly operations in China.
Table 6. China: Imports of Machinery & Transport
Equipment . (Total and by source country)
(As % of China’s total imports)
M&T Equipment
Japan
USA
Emerging East Asia
Korea
Singapore
Taiwan (China)
Indonesia
Malaysia
Philippines
Thailand
1996
39.4
11.3
5.1
8.2
2.3
1.0
4.2
0.0
0.4
0.0
0.2
2002
46.4
10.6
4.6
15.5
4.1
1.2
6.1
0.3
1.9
0.9
0.8
Change
7.0
-0.8
-0.5
7.3
1.8
0.2
1.9
0.3
1.6
0.9
0.6
Source:World Bank calculations based on COMTRADE data
Interestingly, it is not only the industrially
developed high income economies in East Asia like Korea
and Taiwan (China) that are succeeding in supplying
China’s equipment and component demands. Several
middle income countries in South East Asia like
Malaysia, Philippines and Thailand have also succeeded
in boosting their competitiveness in China’s machinery
and transport equipment imports, reflected in a rise in
their Revealed Comparative Advantage (RCA) indexes to
a value greater than 1, while, on the other hand,
comparative advantage in some – though not all traditional primary commodity sectors has fallen.5
(Table 7).
Emergence of long run complementarities in trade
However these short run cycles may turn out, it
would not do to forget the underlying longer run trend
towards greater economic integration in the East Asia
region. Viewed in terms of commodity composition,
China’s imports of machinery and transport equipment – a
sector that includes most of what is referred to as “high
5
In this case the RCA for – say - Thailand’s chemical
sector is measured as the share of Thailand in China’s
imports of chemicals divided by Thailand’s share in
China’s imports of all goods. An RCA greater than 1
indicates a revealed comparative advantage in that sector.
East Asia Update
19
Indonesia
1990 2002
Malaysia
Philippines
1990 2002 1990 2002
Food
0.29 0.70 0.18 0.21 0.99 1.24
Crude Materials
0.58 2.77 3.55 0.74 2.03 0.09
Edible Oils
0.25 10.00 20.00 13.89 3.83 0.95
Chemicals
0.62 1.14 0.19 0.76 2.41 0.09
Manufactures
2.19 1.27 0.72 0.37 1.51 0.25
Mach.& Tran. Eqpt
0.36 0.37 0.22 1.32 0.04 1.85
Source:World Bank calculations based on COMTRADE data.
Indonesia is something of an outlier in this
respect, gaining competitiveness in the Chinese market in
several commodity or natural resource related sectors
while not showing gains in the machinery sector. The
latter fact may in part to reflect concerns about
weaknesses in Indonesia’s investment climate, especially
among the high tech multinationals that spearhead the
region’s production and trade networks. The relevant
point from the perspective of policy makers is not that
they need to promote growth in one sector over another.
Rather it is to ensure a policy and institutional
environment in which firms can make the best use of a
country’s comparative advantages to seek out and satisfy
specific profitable niches in the varied demands of the
Chinese or the global market place. As the experience of
high income countries like Australia, Canada, New
Zealand or Norway - or middle income economies like
Chile, Malaysia or Thailand - shows, it is quite possible to
remain a world class producer and exporter of primary
commodities while also developing a diversified and
sophisticated modern economy.
that a significant appreciation is needed to reduce large
and chronic trade surpluses. Indeed the pace of domestic
demand in China is so strong at present that import
growth is outpacing exports – rising 40 percent in 2003
against a 36 percent export increase (in dollar terms).
Second, China is in the midst of a major trade opening
under its accession to the WTO, which should further
boost imports. Further, while it is true that China’s close
link to the dollar has led to its currency depreciating by
around 10 percent over the last two years on a real
effective basis, that follows a 10 percent real effective
appreciation between the start of 2000 and the end of
2001, when the yuan was rising against other currencies
alongside the dollar. As Exhibit 23 indicates, the real
effective value of the yuan at the end of 2003 was still 510 percent higher than its average during the 1990s.
Exhibit 23
Trends in real effective exchange rates
25.0
(Rise = appreciation)
% Diff. End 2003 vs.1990s Avg.
15.0
% Diff End 2003 vs. Jan.02
5.0
-5.0
Ch
in
a
M
al
ay
sia
Ph
i lip
Ta
pin
iw
es
an
(C
hin
a)
Ja
pa
n
Ko
re
a
Th
ai
la
nd
In
do
ne
sia
Table 7. S.E. Asia - Revealed Comparative Advantages in
China’s import market
-15.0
Understanding exchange rate options
The growing intensity of intra-regional trade
among East Asian countries and the recent sharp fall in
the dollar have both increased interest in the exchange
rate options facing the region – in particular what the
appropriate level of East Asian currencies ought to be,
and also what type of exchange rate regime they ought to
implement. The debate over these questions has been
most animated about China’s currency. It is crucial to
stress that the question of the right level of the exchange
rate and the question of the right exchange rate regime are
distinct. If China’s currency today is undervalued relative
to some fundamental equilibrium value, as it is sometimes
argued, then the needed adjustment could occur as a onetime adjustment of the peg under a fixed exchange rate
regime, as well as under a flexible regime.
We do not try to make a formal estimate of the
‘right’ level for China’s exchange rate in this report. But
one can make some broad observations. First, China’s
current account surplus averaged a relatively modest 2
percent of GDP over the last 5 years and is projected to
fall to around 1 percent in 2004, so it is not easy to argue
-25.0
The considerations in determining the choice of
exchange rate regime are different. The main advantage
of a flexible exchange rate regime is not that it
automatically restores current account balance but that it
allows an independent monetary policy. (Note that China
with its quasi-fixed exchange rate had a smaller current
account surplus in 2003 than Singapore with its floating
rate.) In the case of flexible rate country that suffers a
negative shock to demand, for example, monetary policy
can be loosened to prevent a significant loss of output and
employment. In the case of China at present, on the other
hand, its exchange rate regime limits its ability to tighten
monetary policy as a way of cooling the present boom.
Instead China “imports” the stimulative stance of U.S.
monetary policy, which today is designed for the very
different cyclical task of helping the U.S. economy move
out of recession.
East Asia Update
How do these considerations apply to China and
East Asian economies? As a general point fixed rate
regimes are likely to be more appropriate for small or
highly open economies where the economic costs of high
volatility on trade and investment would be more
significant.
When considering with which specific
country or countries to fix the exchange rate or form a
currency area, these considerations suggest countries
which have a high intensity of bilateral trade. The lower
axis of Exhibit 24 shows an index of bilateral trade
intensity between various pairs of countries, including
East Asian countries.7 From this perspective the intensity
of China-U.S. trade is considerably less than the intensity
of China-Japan or China-Korea trade. Looked at purely
from the perspective of trade, then, a fixed rate regime or
currency area between China and other East Asian
economies like Japan and Korea would be more
appropriate than the present tight link to the U.S. dollar.
As noted, a disadvantage of fixed exchange rates
is that they entail loss of control over domestic monetary
policy. However, if two economies tend to experience the
same kinds of shocks and share the same economic
cycles, then they are able to share a common monetary
policy and the loss of monetary independence is less
significant. The vertical axis of Exhibit 24 presents a
rough measure of common shocks and cycles by using the
6
Guillermo Calvo and Carmen Reinhart. (2000). Fear of
floating. NBER Working Paper 7993, and Calvo and
Reinhart (2000) Fixing for your life. NBER Working
Paper 8006. See also Jeffrey Frankel. (1999). No single
currency regime is right for all countries or at all times.
NBER Working paper 7338.
7
The trade intensity index is measured as the ratio of, say,
China’s exports to Korea to China’s total exports, divided
by world exports to the Korea. as a ratio of total world
exports. An index greater than 1 shows that exports to
Korea. are more important for China’s exports than are
exports to Korea. in world trade as a whole. The bilateral
index in Exhibit 24 is the average of the index for China’s
Korea. exports and Korea’s China exports.
correlation of GDP growth rates between various pairs of
countries. This shows that the correlation between China
and U.S. growth is rather low (less than 0.2), but that the
correlation between China-Korea and China-Japan was
even lower – zero with Korea and negative 0.3 with
Japan. In other words, at any given time there would be a
significant probability that the appropriate monetary
policies for China and Japan would be at cross purposes.
Exhibit 24
Criteria for Optimum Currency Area
0.90
0.80
Correlation of GDP Growth 1990-02
The main advantages cited in favor of fixed rate
regimes are in a sense the opposite side of the coin to the
advantages for floating rates. Exchange rate volatility can
increase transactions costs and exchange rate risk
(especially in developing countries where markets for
hedging may be limited), and so discourages welfare
improving trade and investment flows between countries.
While evidence for this proposition among developed
countries is mixed, it is stronger for developing countries,
and is particularly relevant where there are major regional
supply chains, as in East Asia.6 It is also argued that fixed
rates can avoid the large, extended speculative swings that
can affect floating rates in countries with shallow
financial markets, weak banks and other institutional
weaknesses, and that these swings can be especially
damaging to developing countries.
20
France-Germany
Canada-USA
0.70
0.60
Japan-Korea
0.50
0.40
0.30
China-Thailand
0.20
0.10
0.00
-0.100.00
-0.20
-0.30
China-USA
China-Korea
1.00
2.00
3.00
Japan-USA
4.00
5.00
6.00
Korea-USA
China-Japan
-0.40
Bilateral Trade Intensity Index 2000-02
Taking the trade and income correlation criteria
together, countries with high values of both (in the upper
right hand or north-east corner of Exhibit 24) would seem
the most suited to an exchange rate peg or currency area.
These include France and Germany, which do in fact
share a common currency, the U.S. and Canada, and, to
some extent, Japan and Korea. As noted, in other intraAsian relationships like China-Japan or China-Korea,
trade relationships are high, but at present income
correlations are low.
Turning finally to the China-US relationship
both trade intensities and income correlation are relatively
modest. Thus from the long run structural perspective of
the real economy, the benefits of a stable yuan/$ exchange
rate are likely to be relatively limited. On there are also
dangers of floating while banks are weak and the foreign
exchange market infrastructure is underdeveloped. This
seems to be the conclusion of the Chinese authorities,
who have announced a desire to move towards a more
flexible exchange rate regime at some time in the future
of their own choosing, after the appropriate development
and strengthening of relevant currency and financial
market institutions.8
8
This still leaves open a choice between various forms of
more flexible or floating rate regimes. An interesting
East Asia Update
Domestic trends and policy challenges
The investment cycle and FDI
21
creditor regimes and the legal and judicial framework, as
well as efforts to strengthen infrastructure and the
provision of other key public services.
Earlier sections noted that higher 2003 growth in
many countries of the region was fueled primarily by
growth in exports and consumer spending. Performance
on fixed investment spending has been much more
disparate however. In China investment spending
reached nearly 50 percent of GDP – so aggressive that
reducing investment to more sustainable rates is one of
the main objects of policy. Investment spending in
Vietnam has also been strong, as both the booming
domestic private enterprise sector and foreign direct
investment continue to respond to opportunities created
by ongoing economic reforms. Among the post-financial
crisis countries, however, 2003 fixed investment growth
was less than 1 percent in Indonesia and the Philippines,
and 3-4 percent in Korea and Malaysia, with only
Thailand achieving a robust increase close to 12 percent.
proposal by Goldstein (2002) argues that a system of
“managed floating plus” is best for emerging market
economies that are heavily involved in international
private capital markets. This proposal would aim to get
some of the benefits of both monetary independence and
reduced volatility through managed floating, together
with a system of explicit inflation targeting to provide a
credible nominal anchor, and aggressive measures to
reduce excessive currency mismatches in borrowing (for
example through stronger prudential regulation of banks,
better public sector debt management practices,
development of hedging markets and greater
transparency). See Morris Goldstein. (2002). Managed
floating plus. Institute for International Economics.
Capacity Utilization/Operating Ratio
1996 Q1-2003 Q4
85.0
Korea
75.0
65.0
55.0
Thailand
45.0
19
96
19 1
96
19 3
97
19 1
97
19 3
98
19 1
98
19 3
99
19 1
99
20 3
00
20 1
00
20 3
01
20 1
01
20 3
02
20 1
02
20 3
03
20 1
03
3
With the exception of Thailand, then, 2003
investment in the post-crisis countries continued the
relatively weak and directionless trend of recent years.
Nevertheless, there are a number of factors that should
help foster recovery in investment spending going
forward. Industrial capacity utilization rates are rising in
a number of countries, as increasing production presses
on a capital stock that has grown but slowly in recent
years. (Exhibit 25). If the present export and consumption
led recovery continues, firms will have a growing
incentive to ease capacity constraints by undertaking new
investment. As the last East Asian Regional Overview
documented, both cyclical factors and corporate
restructuring efforts are fostering an improvement in East
Asian firms’ profitability and balance sheets, with income
to sales and interest coverage ratios trending higher, while
debt-equity rations have fallen, all of which should be
supportive of new investment activity. The availability of
external financing has also improved as interest rates have
fallen and credit flows from banks pick up. Looking
forward, the investment climate in the region should also
benefit from continued reform efforts in such areas as
corporate governance. investment regulation, debtor-
Exhibit 25
…and what about foreign investment?
Net foreign direct investment (FDI) inflows to
seven East Asian economies are estimated at about $62
billion in 2003, about $1.5 billion higher than in 2002.9
Of this total about $53.5 billion went to China and only
about $8 billion to the other six economies (Indonesia,
Korea, Malaysia, Philippines, Thailand, Vietnam). In
addition, when viewed over the longer period since the
1997 regional financial crisis, while FDI inflows to the
region have averaged around $58 billion a year, the share
going to China has risen, while that to most of the other
six economies has fallen – the FDI inflows to these
economies fell from an average of around $16.5 billion a
year in 1998-2000 to the recent trend of around $7.5
billion in 2001-03. FDI was also lower in each of these
economies individually, except in Vietnam – an
interesting exception where an acceleration in the pace of
economic reforms appears to have been successful in
attracting higher inflows in the recent period. (Table 8).
These trends have provoked concern among
policy makers in the rest of East Asia that FDI to these
economies has fallen because it is being diverted to
China, and that because of China’s increasing industrial
development and low labor costs, this might be a
9
In this discussion Singapore and Hong Kong, which also
receive substantial FDI inflows, are included in the group
of developed economies. For some countries the estimate
for 2003 FDI is based on three quarters of data.
East Asia Update
permanent change. It is true that China’s accession to the
WTO in particular further enhanced the country’s
attraction as a production base for export to global
markets, widened access for FDI inflows, improved
investor protection and, in general, deepened China’s
integration into a rule based global trading and investment
system. This large improvement in the policy
environment has no doubt increased the desired stock of
capital that foreign firms wish to locate in China, leading
to higher inflows of FDI for a time, some of which would
at the margin have otherwise gone to other countries.10
Table 8. FDI Inflows (Annual averages, US$ Bill.)
1990-97
1998-00
2001-03
World
277.1
1053.7
738.5 *
All developed
185.0
850.7
552.9 *
All developing
83.5
177.3
157.7 *
East Asia (7)
39.4
58.1
58.5
China
25.1
41.6
51.0
Other
14.3
16.5
7.5
Korea
1.4
8.0
3.0
Indonesia
3.0
-2.6
-1.8
Malaysia
5.2
3.5
1.9
Philippines
1.1
1.2
0.9
Thailand
2.3
5.6
2.1
Vietnam
1.3
0.8
1.4
Source: UNCTAD and national sources. * For 2001-02
However, it is likely that FDI to the rest of Asia
has also been driven by a number of global and domestic
factors quite other than China. A simple piece of
evidence for this is that, while FDI in China has been
remarkably stable at around 4 percent of GDP over the
last 10-15 years, FDI-GDP ratios in the rest of Asia have
shown quite large swings. (Exhibit 26). Among other
factors, note first that East Asia is not alone in
experiencing less FDI over the last three years. Global
FDI is correlated with cycles in the world economy. It
fell sharply during the global slowdown that began in
2001, slipping from 3.5 percent of world GDP in 19982000 to 2.3 percent in 2001-2. FDI outflows from Europe
and the United States in particular saw a 35 percent fall
between the two periods, and it was precisely inflows
from these two sources that have seen the biggest recent
declines in countries like Indonesia, Malaysia and
Thailand (Table 9). From this perspective it is more the
continued high growth and FDI in China even during a
period of global downturn that is exceptional, rather than
10
In theory China’s market opening under the WTO could
also lead to less FDI, as foreign firms can export directly
to China rather than having to invest there as a
precondition for accessing the domestic market. This
effect has clearly not predominated in practice.
22
the downturn in flows in the rest of East Asia.
Conversely, the ongoing revival in world growth,
corporate profits and other factors conducive to
investment should promote a revival in world FDI going
forward, including in flows from the U.S. and Europe to
East Asia.
Exhibit 26
FDI Inflows as % GDP
8.0
6.0
China
Korea
Indonesia
Malaysia
Philippines
Thailand
World
Vietnam
4.0
2.0
0.0
1990-97
1998-00
2001-03
-2.0
Table 9. FDI Inflows by Origin (As % of Total)
Origin:
US+EU
Japan
East Asia
1998-00 2001-03 1998-00 2001-03 1998-00 2001-03
China
20.5
17.8
7.3
8.6
57.8
52.8
Indonesia
24.7
10.9
8.4
6.7
30.8
44.6
Korea
57.6
64.8
11.9
10.5
16.1
11.7
Malaysia
55.9
38.6
20.6
16.4
14.2
23.5
Philippines 39.6
47
12.6
30.1
20.2
12.4
Thailand
46.3
-8.8
24.7
42
25.6
65.4
Vietnam
31.0
24.5
4.9
6.5
36.1
54.7
Source: national agencies; registrations or approvals in some cases.
Second, world FDI in the late 1990s was
exceptionally high because of the boom (or “bubble”) in
investment in high tech and telecommunications sectors,
fuelled by wildly inflated valuations for equities in these
sectors, an event that is unlikely to be repeated anytime
soon. Thus the fall in world (and East Asian) FDI can to
some extent be seen as a return to more normal trends
after the high tech bubble. Inflows to East Asia in the late
1990s were also boosted by a wave of policy reforms,
corporate restructuring and mergers and acquisitions
(M&A) in the immediate aftermath of the 1997 financial
crisis, notably in Korea and Thailand, the volume of
which has eased as economies recovered from the crisis.
As Exhibit 26 above indicates, FDI inflows as a share of
East Asia Update
GDP in Korea and Thailand in 2001-03 were about the
same as in 1990-97. And while FDI flows to Malaysia
have fallen sharply over the 1990s, the fall was from an
extraordinarily high and probably unsustainable level
around 7 percent of GDP in 1990-97 to around 2 percent
of GDP in 2001-03, about the world average.
Third, in some cases East Asian FDI has also
been affected by a perceived worsening in the domestic
investment climate in the wake of the 1997 financial
crisis.. In Indonesia, for example uncertainty about
proceedings in the legal and judicial system or in dealings
with decentralized levels of government, corruption and
labor union militancy are likely to have contributed to
lower inflows or net outflows by foreign direct investors .
According to official statistics net outflows averaged 1-2
percent of GDP in the years since the financial crisis
(although,
fortunately, the pace of outflows is
diminishing, falling to $1.5 billion in 2002 and an
estimated $500 million in 2003).11 Conversely, then,
policy reforms to improve the investment climate should
also be able over time to foster greater FDI flows.
As noted, policy reforms after the crisis helped
stimulate a wave of M&A related FDI, especially in
Korea and Thailand, and, although the volume of M&A
related flows has fallen in 2001-03, the proportion of
M&A in total inflows to the 5 post-crisis economies has
remained high, at around 70 percent, compared to only
around 16 percent in the first part of the 1990s. Recent
empirical research suggests that M&A investment (i.e.
FDI to acquire existing assets from local firms) is also a
good predictor of greenfield investment (i.e. FDI in new
assets). A 1 percent of GDP gain in M&A investment is
typically followed by a 1-1.5 percent of GDP gain in
greenfield investment. This research also confirms that
higher economic growth, as the most important indicator
of rates of return, is a statistically significant predictor of
both higher M&A and greenfield FDI. This year’s
recovery in regional growth and past years’ M&A activity
should therefore be favorable for higher FDI going
forward. 12
Finally note that, over time, China’s
development could also encourage more FDI in the other
Asian economies. As the earlier discussion of trade
11
The official methodology for FDI statistics in Indonesia
has at times differed from international standards in ways
that have tended to overstate the extent of net outflows.
Thus the actual picture may not be as dire as official
statistics suggest. But the conclusion that FDI inflows are
significantly lower than before the crisis is likely to
remain valid.
12
Cesar Calderon, Norman Loayza and Luis Serven.
(2004).: Greenfield Foreign Direct Investment and
Mergers and Acquisitions: Feedback and Macroeconomic
Effects. World Bank Policy Research Working Paper
3192. January.
23
patterns indicated, the emergence of China is creating
substantial new opportunities for producers in the rest of
Asia. How far countries are able to exploit these
opportunities will depend in part on the flexibility of their
economies – how quickly resources can move out of old
industries that have become uncompetitive and into new
ones with growing opportunities. Given an open and
adaptable investment climate, it is likely that FDI will be
drawn into East Asian countries in future precisely to
exploit these new trading opportunities with China. This
process will be encouraged as China completes its free
trade agreements with ASEAN countries.
Financial sector trends and reforms
Banking sector performance
Recent indicators suggest a continuing gradual
improvement in the asset quality and capital adequacy of
commercial banks in the formerly crisis affected East
Asian countries. (Exhibit 27, Appendix table 9). Nonperforming loans as a proportion of all commercial bank
loans generally declined over the course of 2003 with the
partial exception of Korea, where, due to the SK
Networks (formerly SK Global) and household credit
defaults—the commercial banks’ NPL ratio increased
between the end of 2002 and September 2003, before
falling again in the last quarter. With an NPL ratio of
only 2.7 percent at the end of 2003, the Korean
commercial banks’ balance sheet remains quite strong,
however. The improvement in bank asset quality reflects
factors such as strengthening balance sheets of corporate
borrowers—due to higher growth and lower interest
rates—a pickup in new loan demand and continued
restructuring of bad debts. Bank profitability has also
gradually improved, aided in some cases by the ability of
banks to maintain significant or rising spreads between
bank deposit and lending rates even as both types of rates
have generally fallen (Exhibit 28)13 Improving asset
quality and bank profitability have in turn helped
strengthen capital adequacy, with capital adequacy ratios
standing above 10 percent in all the post-crisis countries.
While there has been substantial progress in
strengthening banking systems in the post-crisis countries,
a few caveats should however be noted. In several
countries, parts of bank portfolios not formally designated
as NPLs still retain a degree of potential vulnerability. In
Thailand, about 35 percent of banks’ portfolios comprise
restructured loans (loans that were mostly rescheduled but
are classified as performing) and around 2.5 percent is
comprised of foreclosed assets. In Indonesia, part of the
recent rapid decline in the NPL ratio reflects the asset
13
Trends in East Asian bank profitability were covered in
more detail in the World Bank’s October 2003 East Asian
Regional Overview, and will be revisited in the October
2004 edition of this report.
East Asia Update
24
management company IBRA’s aggressive disposal
through auctions of NPLs that remain un-restructured.
Some of these have gone back on the banks’ books at
significantly discounted values and—since central bank
regulations allow forbearance in classifying such NPLs
for one year—most of these loans are not fully reflected
in banks’ NPL ratios. In the Philippines, reserves for non
performing assets (NPAs) cover less than a third of those
in the system. It was hoped that the enactment of the SPV
Law would speed up the resolution of NPAs, but this has
not yet happened. Although several SPVs have been
approved, no major transactions have taken place so far
given the significant differences in prices that the banks
are willing to sell at and investors to buy at.
senior managers from undue legal prosecution. However,
legal enactment of the proposals continues to face delays.
In the meantime though the two bodies are working on a
second memorandum to help strengthen their relationship
in handling problem banks.
Exhibit 28
10
8
Spreads between bank deposit and
lending rates
Indonesia
Korea
Malaysia
Philippines
Thailand
14
Exhibit 27
6
Non performing loans in commercial banks
(As % of total loans)
4
Thailand
2
Dec-98
Dec-00
Dec-01
Malaysia
0
Source: IMF IFS
20
00
20 M01
00
20 M04
00
20 M07
00
20 M10
01
20 M01
01
20 M04
01
20 M07
01
20 M10
02
20 M01
02
20 M04
02
20 M07
02
20 M10
03
20 M01
03
20 M04
03
20 M07
03
20 M10
04
M
01
Philippines
-2
Dec-02
Dec-03
Korea
Restructuring, privatization and consolidation of financial
institutions
Indonesia
0
10
20
30
40
50
Banking regulation and supervision
Progress in strengthening bank regulation and
supervision around the region also continues at varying
rates. In Indonesia new banking regulations cover the fit
and proper tests for shareholders and managers of banks.
In Thailand tighter provisioning rules (to be effective by
year end) aim to expedite the resolution of remaining
NPLs. Important steps in the Philippines include progress
towards consolidated and risk-based supervision,
amendments to anti-money laundering legislation and
regulation concerning large exposures and credit risk
concentrations. Amendments to the charters of the central
bank and the deposit insurance corporation have been
proposed to enhance compliance and the ability to take
prompt corrective action by protecting supervisors and
14
Note NPL ratio series for Malaysia differs from that
published by Bank Negara, which excludes interest-insuspense and special provisions.
Restructuring, privatization and consolidation of
the financial sector continues across the countries. In
Indonesia public sector control of the banking system
continues to be reduced, although state owned banks still
account for the largest portion of the banking sector.
IBRA has sold off its majority stake in several banks,
retaining majority ownership in only Bank Permata. The
government has also reduced its stake in the largest bank
in the country—Bank Mandiri—selling 20 percent of its
equity through an initial public offering. Bank Rakyat
Indonesia (BRI)—the fourth largest bank in the country—
also had an IPO disposing of 40 percent of its equity. In
Korea, Kookmin Bank, the nation’s largest lender, was
fully privatized in December 2003. The Shinhan Financial
Group also purchased an 80 percent stake in Chohung
Bank from the Korea Deposit Insurance (KDIC). In the
non-bank sector, Prudential Financial completed its
acquisition of an 80 percent stake in Hyundai Investment
and Securities, and its subsidiary Hyundai Investment
Trust Management in February 2004 (with an option to
buy the remaining 20 percent from state-run KDIC within
three to six years after closing). This transaction marked
the first purchase of a domestic asset management
company by a foreign strategic investor. In Thailand
progress in consolidation was seen with Thai Military
Bank, which the MOF is its major shareholder, signing a
East Asia Update
memorandum of understanding to merge with DBS Thai
Dhanu Bank, a foreign majority owned bank, and the
Industrial Finance Corporation of Thailand, a state
specialized bank.
In China, two of the country’s state owned
commercial banks, the Bank of China (BOC) and the
China Construction Bank (CBC), were recapitalized to the
tune of $45 billion in December 2003. The
recapitalization is being interpreted as a precursor to
attracting strategic investors and/or listing on capital
markets. However, to be effective, it will need to be
accompanied by improvements in corporate governance
structures and practices. The way in which the
Government exercises its ownership function will thus be
a key factor in determining eventual success. While these
issues are known to the authorities and to the senior
management of the banks, an action plan and stronger
evidence of implementation is still to be seen.
Corporate Sector restructuring and reforms
The extent of corporate debt restructuring in East
Asia varies across countries, although all have continued
to make progress. The government-supervised voluntary
corporate debt restructuring frameworks that had been set
up in the aftermath of the crisis have now closed in
Indonesia, Malaysia and Thailand. This makes the
efficacy of restructuring through the courts and through
market mechanisms of increasing importance.
In Malaysia, which is arguably the furthest
along, the CDRC closed in September 2002 having
resolved all its cases. Danaharta, the asset management
company, has also largely completed its mission. It has
resolved all its NPLs and is on track with cash collections
to repay its bonds before it unwinds in 2005. Korea has
also made very substantial progress with the adoption in
March 2001 of the Corporate Credit Risk Assessment
System and the implementation of the Corporate
Restructuring Promotion Act, which have set the basis for
financial institutions to promote corporate restructuring
on an on-going basis. Recognizing that corporate reform
will need to become increasingly market- driven, the
Government has also focused on strengthening courtsupervised insolvency, and a new bill consolidating three
separate bankruptcy codes is awaiting approval from the
National Assembly. The Act on Class Action Lawsuits
was passed at the end of 2003, and other measures to
strengthen accounting and auditing practices for listed
companies have been taken.
In Indonesia and Thailand, the government
supervised voluntary frameworks, the Jakarta Initiative
Task Force (JITF) and the Corporate Debt Restructuring
Advisory Committee (CDRAC) respectively, closed
during 2003 without having resolved all the cases under
their mediation. In both countries new voluntary
frameworks have been introduced. In Indonesia some
25
functions of the JITF will continue to be undertaken by
the newly formed National Mediation Center (NMC),
which is expected to work closely with the judiciary and
which will provide mediation services for interested
parties as well as mediation training for judicial and nonjudicial personnel. In Thailand, the CDRAC closed
having resolved 49 percent of its cases (by credit value).
Of the unresolved cases $4 billion were transferred for
resolution to the Thai Asset Management Company
(TAMC) and $31 billion to the civil courts. The Bank of
Thailand has introduced an out-of court mediation
framework for private banks and AMCs. However, so far,
creditors have only selected 5.3 percent of total target
debtors by credit value, and only 1.7 percent of those
selected have agreed to participate in the program. As a
result, the completion rate as of now is a low 0.64 percent
of the total target debtors.
IBRA, the Indonesian asset management
company, also closed in February 2004. The Ministry of
Finance now holds IBRA’s remaining unsold assets,
about Rupiah 260 trillion, and the asset management
company (PPA) is responsible for the sales of the assets.
In Thailand, the TAMC continues to make progress in
resolving its assets. As of end 2003, TAMC had approved
the resolution of about 94 percent of the book value of
total transferred assets, mostly covering the larger
accounts. TAMC has outsourced management of the
smaller cases and plans to foreclose remaining cases using
its special power. Only three cases have been foreclosed
via the civil courts.
Progress in corporate restructuring in these
countries—as in the other East Asian countries—will
increasingly depend on the effective functioning of the
courts. The perceived low credibility of Indonesian courts
remains an issue. Although much of the credibility
problem stems from weakness in enforcement, improving
the clarity of the law and enhancing the effectiveness of
bankruptcy proceedings also remain desirable objectives.
In its recent White paper the government undertook to
revise the blueprint for the court and to adopt the draft
Law on Revisions to the Bankruptcy Law, which includes
a set of definitions, further standardizes time lines, boosts
commercial court jurisdiction, and clarifies restructuring
procedures and the position of both creditors and debtors.
In Thailand, the difficulty with the civil courts
has been the backlog of cases. Civil courts are now
required to implement continuous hearings, which should
reduce the customary four to six month period between
hearings. However the limited number of days available
for continuous scheduling has been a constraint. Remedial
actions—establishing special hours for trial and
increasing budgetary resources—are now awaiting
approval from the National Judicial Committee. Although
the commercial bankruptcy court continues to function
effectively, the average credit value per case suggests that
the bankruptcy regime continues to be used primarily as a
debt collection mechanism.
East Asia Update
15
Population data and projections are from United
Nations World Population Projections, Population
Database (2002 Revision, http://esa.un.org/unpp/ and
World Bank: Population Projections Tables. See also
Andrew Mason, ed., 2001. Population Change and
Economic Development in East Asia. Stanford University
Press.
Thailand: Changes in Age Distribution
1950-2090
80
Working Age: 15-64
60
40
Young: 0-15
20
Old: 65 and older
2090
2080
2070
2060
2050
2040
2030
2020
2010
2000
1990
0
1980
The approaching social developments reflect the
playing out of the so-called demographic transition – a
series of events affecting all countries and regions,
although at different time and with varying speeds. In
most East Asian countries the first stage of the
demographic transition took hold in the late 1940s with
Exhibit 29
1970
Over the course of the next 10-20 years changing
population trends will begin to profoundly alter the
economic landscape of East Asia. Population growth will
fall well below 1 percent, with the level of the regional
population stabilizing at around 2.4 billion in the latter
part of the century, compared to around 1.9 billion today.
In most countries the share of the population of working
age – which has been rising steadily since the late 1960s
or early 1970s – will begin falling after 2015 or 2020,
while the proportion of people older than 65 will steadily
rise. All countries in the region will ultimately be
affected by these trends, although the timing and speed of
the changes will differ. The coming demographic shifts
are – other things remaining equal – expected to lead to a
slowing in the region’s rate of per capita GDP growth,
together with lower rates of savings and investment. With
increasingly old populations, the development and
financing of pension and health care systems will take on
greater importance than ever before. However, while
there is a fair amount of certainty about the coming
demographic changes, their economic consequences may
depend to a considerable degree on the policies that are
put in place to deal with them.15
1960
Asian demographic trends – older, slower, wiser?
the start of marked declines in mortality rates, due to a
greatly increased availability of modern medicines (for
example the powerful antibiotic drugs discovered in
developed countries over the preceding twenty years),
better sanitation and public health conditions (for example
the availability of DDT to fight malaria), and improved
nutrition in general. Infant mortality rates fell earliest and
particularly quickly. Infant mortality in China and
Indonesia, for example, was around 195-200 per thousand
in 1950-55, but had fallen by half by 1965-70 in the case
of China, and by 1975-80 in the case of Indonesia.
Fertility and birth rates did not fall for some time after the
fall in infant and overall mortality rates, however, leading
to both a rise in population growth rates and in the share
of young people in the population till the first or second
half of the 1960s. The second phase of the demographic
transition arrived when fertility rates (the average number
of children born to a woman) began falling sharply,
generally some 15-25 years after the fall in infant
mortality. East Asian fertility rates ranged from 5.5 to
over 7 children per woman in 1950-55, and in most cases
were still in that range in 1965-70. By 1995-2000,
however, fertility had fallen to 2 or less in China, Korea,
Taiwan (China) and Thailand, and 2.5–3.5 in Indonesia,
Malaysia, Philippines and Vietnam.
1950
Legal and tax reforms to strengthen the corporate
restructuring framework in Thailand have been quite
slow. The Secured Transactions Act—which would
provide greater flexibility in the collateralization of other
assets besides real estate—has been awaiting
Parliamentary consideration for the past two years.
Similarly, the tax code on M&A remains unreformed.
And although significant progress has been made in
strengthening financial reporting and disclosure for listed
companies, important elements to strengthen corporate
governance remain at various stages in the pipeline. These
include the draft Security and Exchange Commission Act
to enhance the fiduciary duties of directors and the rules
governing related- party transactions, and the amendment
of the Public Company Act to provide legal channels for
shareholders seeking redress and to provide protection for
minority shareholders.
26
The net results of these demographic changes
were, first, as noted, a “bulge” in the youth age bracket of
the population during the 1950s and 1960s, which has
been traveling through the age structure of the population
ever since. (Exhibit 29 displays the resulting changes in
population age structure in the case of Thailand). From
the late 1960s and early 1970s these young people began
entering the adult work force, while the numbers of new
East Asia Update
This occurred through several mechanisms.
First, the growth in the 15-64 age group (and increasing
entry of women into the work force as family size fell) led
to a rapid increase in the available labor supply, while
policies intended to foster export-oriented labor intensive
manufacturing industries were able to generate
employment for the new workers.16 The increase in the
number of productive workers per head of population
pushed up per-capita incomes. Second, people in the
working age groups tend to consume less and save more
than do the young and the old. Abundant domestic
savings in East Asia eased access to finance for high
levels of investment without over-reliance on foreign
borrowing. Third, rising life expectancies and falling
family size tend to go hand in hand with a marked
improvement in the status of women and a growing
emphasis on investing in the education of children,
including girls. Strong support for basic education by
East Asian governments helped translate these desires
into reality, vastly improving the education and
capabilities of the work force and helping accomplish a
virtual social revolution in the status of women. Some
studies of the quantitative impact of the demographic
dividend on growth in East Asia estimate that it
contributed about 1.4-1.9 percentage points, or one third
of East Asia’s rapid per-capita income growth between
1965 and 1990. Estimating East Asia’s long run ‘steady
state’ per-capita growth rate at 2.6 percent, the same work
calculates that the demographic dividend contributed over
16
Today the East Asian economy needs to – and generally
succeeds in – creating jobs for a labor force increasing by
about 19 million every year.
Exhibit 30
Working Age Population 1950-2090
(15-64 age group as % of population)
75
70
65
60
55
2090
2080
2070
2050
2040
2030
2020
2010
2000
1990
1980
1970
45
2060
China
Malaysia
Philippines
Japan
50
1960
Such enormous shifts in the age composition of
populations have had and will continue to have large
effects on economic and social outcomes in all countries.
What is distinctive about East Asia, however, is how it
was able to provide a policy and institutional environment
in which the demographic transition became an important
engine for more rapid growth from the early 1970
onwards – a so-called “demographic dividend” – rather
than one for growing unemployment, frustration and
socio-political instability, as it has in some other regions.
half of the amount by which actual East Asian growth
exceeded steady state growth..17
1950
entrants to the young age group (i.e. via new births) also
began to fall. As a result, the share of people in the 0-14
age group has fallen steadily since the early 1970s, while
the share of people in the working age group has risen.
For East Asia in aggregate the working age population
rose from around 56 percent of the population in 1965 to
66 percent in 2000. It is expected to reach about 70
percent by 2015-20, but thereafter, as the original East
Asian ‘baby-boomers’ start to retire, the share of working
age population will see a long, steady decline, while the
share of the old age population will steadily rise. For East
Asia in aggregate the old age share of the population is
expected to rise from about 6 percent in 2000 to around
20 percent in the latter part of this century.
27
As noted, East Asia’s demographic dividend is
expected to draw to an end in the next few decades, as the
share of the 15-64 age group peaks and begins to fall.
With a fall in the number of workers per head of
population, the pace of per-capita income is also likely to
slow. Bloom and Williamson suggest that the rate of per
capita income growth in East Asia could fall by 0.6
percent a year as a result of the demographic shift. One
point to note though is that the timing and pace of the
demographic change is expected to vary a good deal
across countries. Countries like China, Korea and
Thailand are projected to reach peak working age share in
the next 5-10 years, and to see a quite rapid fall thereafter.
Others like Indonesia, Malaysia, Philippines and Vietnam
should see a peak in working age population 5-10 years
later and a more gradual pace of decline after. (Exhibits
30 and 31). The proportion of working age population in
these 4 countries is projected to be remain at or above 65
percent of the population as far away as 2040. Thus the
potential slowdown in growth due to demographic factors
is likely to be more muted in much of South East Asia.
Many of the small island economies of the Pacific are at
even earlier stages of the demographic transition. In
Papua New Guinea and the Solomon Islands, for
example, the young still make up 40-45 percent of the
population, compared to 25 percent in East Asia as a
whole. Here the share of the working age populations is
17
David E. Bloom and Jeffrey G. Williamson, 1997.
Demographic Transitions and Economic Miracles in East
Asia. NBER Working Paper 6268 and Bloom and
Williamson, 2001. Economic Growth and the
Demographic Transition. NBER Working Paper 8685.
East Asia Update
28
expected to keep rising till about 2050. In these
economies for a long time to come the problem will
remain one of creating enough jobs for bodies, rather than
finding bodies to fill jobs.
Just it as it took good policies and institutions to
translate the potential demographic dividend of recent
decades into actual faster growth, so good policies also
have a major role to play in actual economic and social
outcomes during the coming decades of declining
workforce share and older populations. Inward migration
of young workers can help offset the effects of a more
slow growing or declining labor force, but governments
will need to design migration policies that help migrants
assimilate and minimize potential stress on the host
population. Economic growth is of course also affected
by factors other than demographics, including the
efficiency of resource allocation and use, the growth of
scientific knowledge and its application in the economy,
the investment climate and the security of individual
rights and of private property, among many others. Thus
much can be done to offset the negative impact of future
demographics on growth by continued reform of
economic policies and institutions.
Exhibit 31
Working Age Population 1950-2090
(15-64 age group as % of population)
75
70
65
60
55
50
Indonesia
Korea
Thailand
Vietnam
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
20
80
20
90
45
The aging of populations will also create specific
new strains and challenges for governments in addressing
problems of social security, pensions and the income
security of the aged and health care systems. Cultural
values have placed the primary responsibility for
providing a safety net and helping the vulnerable on the
family and on community ties. Government expenditure
on social protection in the newly industrialized or middle
income economies remains well below averages in other
regions. However, with rising numbers of old people and
changes in traditional family structures, governments will
need to determine how far in what form traditional
approaches need to be complemented by formal systems
of pensions and social security. Financing pressures on
health care systems will also increase with population
aging and the growing importance of non-epidemiological
diseases such as diabetes, heart disease and cancer among
older populations.
East Asia Update
29
COUNTRY SECTIONS
Major Economies18
China
Despite SARS, which lowered the second
quarter GDP growth rate to 6.5 percent, China ended
2003 at full tilt, growing by 10.4 percent in the fourth
quarter to give a whole year increase of 9.1 percent. As in
the recent past, China continues to be a preferred
destination for the relocation of global manufacturing
facilities, chiefly, but not exclusively, in the low
technology segment. Its strength as an export platform
contributed to incomes and jobs; urban employment rose
by a buoyant 8.6 million jobs, although registered
unemployment also increased. At the same time, imports
rose by nearly 40 percent, making China a locomotive for
growth in the Asian region.
While a significant portion of imports fed into
exports and domestic consumption, the sizzling pace of
domestic investment was the prime mover. In 2003, the
fixed asset investment-to-GDP ratio (admittedly an
imperfect measure of investment in the Chinese economy)
reached an unprecedented high of 47 percent. Price
increases have accelerated as well. Despite a slight
deceleration in the growth of the money supply in
December 2003 and January 2004, the recent rate of
growth of about 20 percent per year is stoking the price
rise. The relatively easy availability of credit is an
additional element in this picture, although its effects are
complex—facilitating persistent price-cutting, even by
weak firms; permitting over-expansion of capacity in
others; and undermining efforts to rein in the volume of
non-performing assets in the banking system.
As indicated in the Premier’s work report that
was presented to the National People’s Congress on
March 5, bringing the economy back on track is at the top
of the Government’s policy agenda. Avoiding excessive
investment has become a daunting policy task. So far, the
Government has taken several measures to cope with
current and prospective macro-stability concerns. They
include a consolidation of Central Government spending,
with the intention to squeeze the primary (that is, noninterest expenditure) budget deficit during 2004,
administrative guidance coupled with changes in bank
reserve policies to slow and redirect lending, borrowing
operations to sterilize foreign currency inflows and
measures to slow inflows while promoting outflows. The
speed and effectiveness of stabilization policy measures
18
More detailed individual Country Briefs for the major
economies can be found at the World Bank website:
http://www.worldbank.org/eapupdate/
depends on the sometimes competing need to maintain the
pace of job-creation and structural reform, and the ability
to coordinate macroeconomic policies among various
agencies.
The three underlying tendencies in the Chinese
economy—modernization, urbanization and globalization,
all of which contain forces for both the convergence and
divergence of incomes—provide the context for the
stronger policy emphasis on “growth with equity” that
became evident over the past year. Rural development is a
special focus in this regard, as rural poverty is large, ruralurban income and non-income disparities continue to
widen, and the orderly management of out-migration from
rural areas is seen as the key to managing the productivity
and “livability” of China’s growing urban areas. In
addition, at long last the Government is able to tackle the
problem of weak banks, where the ability to make
headway depended greatly on the progress of reforms in
housing, social security and state enterprise performance.
During 2003 and early 2004 the Government has also
been able to articulate a clearer, although still partial,
development strategy—one that gives equal importance to
the use of physical/financial, human and natural resources
in the generation of growth, rather than excessive focus
on the first. A package of measures presented on
February 8, 2004 is the latest evidence of the
Government’s
determination
to
promote
rural
development. Actions have been proposed in three
areas—the increases in fiscal resources for rural areas,
access to finance, and improvements in the provision of
public goods and services.
Indonesia
An
improving
international
economic
environment and lower domestic interest rates supported
by continued strong macroeconomic policies are among
the factors expected that contribute to higher growth in
Indonesia. The World Bank’s forecast for GDP growth in
2004 is now 4.5 percent, assuming no major disturbance
during the elections this year. The parliamentary election
in early April went by smoothly. The PDI-P party of
President Megawati Soekarnoputri is expected to incur
significant losses, and is expected to slip behind the
former ruling Golkar Party, which lost less. Some new
parties, including that of former coordinating Minister and
presidential candidate Yudhoyono are likely to do well.
The presidential election will take place in July, and could
be followed by a run-off in September.
The outturn of 2003 GDP growth rate was above
expectations at 4.1 percent.
Consumption remains the
East Asia Update
30
driver of growth: private consumption on durable goods
and spending by regional governments were especially
strong in the second half of 2003. Meanwhile, inflation
continues to decline, falling to 4.6 percent in February
2004. Food prices, important for the poor who spend half
of their income on it, remained stable in light of a good
2003 harvest. The decline in inflation rate has enabled
Bank Indonesia, the central bank, to reduce policy interest
rates, although lending rates continue to be high. On the
back of a stronger Rupiah and higher GDP, the external
debt to GDP ratio declined from 76 percent at end-2002 to
65 percent at end-2003. Government debt to GDP ratio
declined to below 70 percent at end-2003. Building on
the strong macroeconomic numbers, the Government
successfully floated a $1 billion global bond in early
March. Market confidence was also reflected in the stock
market index, which, boosted by foreign buying,
exceeded pre-crisis highs in February,
creation. The package has been important in maintaining
confidence in the transition out of an IMF supported
program, and a majority of the announced measures was
implemented, including passage of a new treasury law,
new rules on government procurement, and establishment
of an anti-corruption commission. Various initiatives to
improve the country’s infrastructure were also announced,
although the fiscal implications of these initiatives are still
unclear.
Outstanding issues under debate include
investment laws and regulation, tax and tax
administration, and labor regulations. And a pending
Social Security bill, which was not included in the White
Paper, has raised concerns in the business community and
labor movement alike. The Government’s key challenge
going forward is to remain focused on the priority issues
and substance of the White Paper measures in an election
year.
Current growth is not enough to make a dent in
unemployment.19 The unemployment rate increased from
8.1 percent in November 2002 to 8.5 percent in August
2003, the latest available number. Youth unemployment
also shows a rising trend, whereas new jobs are
increasingly created in the informal sector, while
employment in the formal sector is in decline. Higher
growth will have to increasingly come from investment
and exports—two areas in which Indonesia has not done
well compared to neighboring countries. Fixed capital
formation grew by a meager 1.4 percent in 2003, and it is
now below 20 percent of GDP, over ten percentage points
below the pre-crisis level. Exports are doing better in
dollar terms because of the strong international
commodity prices. But while performance varies per
industry, manufacturing exports are stagnant, and exports
as a share of GDP are still below pre-crisis levels.
Indonesia’s exports to China are doing well, growing by
28 percent in 2003, but other countries performed even
better: Indonesia’s share in the Chinese market among 5
Asian countries (Indonesia, Korea, Malaysia, the
Philippines and Thailand) dropped from 11.2 percent in
2000 to 7.4 percent in 2003. Indonesia’s competitiveness
has suffered from past strong wage increases in the formal
sector, and the stronger Rupiah. Fortunately, more recent
wage settlements and minimum wage agreements have
started to take account of the lower rates of inflation.
Korea
The Government’s White Paper, a package of
policy measures announced six months ago, includes a
range of actions that can improve the investment climate
and competitiveness, and therefore boost growth and jobs
Labor market indicators were persistently weak.
Unemployment hit a 34-month high of 3.9 percent in
February 2004. The youth jobless rate also reached a
three-year high of 9.1 percent in February. There is
increasing concern that employment may not improve
much despite the expected economic pick-up in 2004
because of structural change in industry, labor market
inflexibilities, increasing overseas production and a more
diversified employment base. Despite the sluggish
economy, consumer price inflation averaged 3.6 percent,
19
There is some debate as to the reliability of unemployment
data. Since 2002, BPS is publishing both annual and quarterly
data consistent with ILO standards. In addition, the Household
Survey, SUSENAS includes questions on employment. While
the level of unemployment may differ among these surveys, the
trends point in the same direction.
Macroeconomic Developments: Korea’s GDP
grew by only 3.1 percent in 2003, due to persistent
weakness in domestic demand. This was far below the
robust growth of 7 percent in 2002 and is the lowest since
1998. However, the economy picked up towards the end
of 2003 based on strong exports and a recovery in fixed
investment.
Private consumption has remained weak,
contracting by 1.4 percent as households strove to reduce
heavy personal debt burdens. Gross fixed capital
formation was also weak, recording 3.6 percent growth,
down from 6.6 percent in 2002. Although construction
remained active thanks to brisk building construction,
investment in plant and equipment fell 1.5 percent. On a
more positive note, investment activity in the fourth
quarter showed signs of improvement reflecting robust
export and industrial production and improving business
sentiment. Export of goods showed a strong performance
especially from August onwards, registering double-digit
year-on-year increases, thanks to brisk shipments of key
items such as semiconductors, automobiles, wireless
communication equipment, computers and ships (these
five products accounted for 43 percent of Korea’s total
export in 2003). China emerged as Korea’s largest export
market, accounting for 18.1 percent of the nation’s total
export.
East Asia Update
up from 2.8 percent in 2002. Recently, there has been
more upward price pressure mainly driven by cost shocks
from overseas such as the rally in prices of oil and raw
materials. However, core inflation, which excludes food
and energy costs, remained stable, averaging 3.1 percent
in 2003, compared to 3 percent in 2002.
Korea has posted a trade surplus for six straight
years since 1998. The current account surplus expanded
to $12.3 billion in 2003, surpassing the previous year’s
$5.4 billion. FDI inflows increased to $3.2 billion from
$2.4 billion in 2002. With surging foreign investment in
stocks and bonds, the capital account recorded a net
inflow of $13.1 billion in 2003 compared with the
previous year’s $6.3 billion—the largest net inflow in
more than seven years. Official foreign reserves
(excluding gold) increased by $33.9 billion to $152.28 at
the end of 2003. Korea holds the fourth largest reserves
globally after Japan, China and Taiwan.
Monetary and fiscal policies: Korea’s
consolidated budget recorded a deficit of 0.5 percent of
GDP due to two supplementary budgets worth won 7
trillion to response to the economic weakness in 200320.
General government debt stood at 22.4 percent of GDP in
2002, and at 39.6 percent of GDP when including
government guarantees of Won 102 trillion. The BOK has
maintained its policy rate at 3.75 percent since July, given
its assessment that so far domestic demand remains
sluggish and that inflation is not being driven by excess
demand.
Financial sector performance: The Korean
banking sector underperformed, primarily owing to loan
defaults by SK Networks and increases in overdue
consumer loans and credit card debt. The net income of
14 commercial banks declined sharply by 75.2 percent to
Won 848 billion, down from Won 3.42 trillion a year
earlier. The BIS capital adequacy ratio also dropped to
10.45 percent and the NPL ratio rose to 2.7 percent.
However, helped by a bullish stock market last year, pretax income of domestic securities companies registered a
sharp increase to Won 1,035.9 billion in the first three
quarters, ended December 2003.
Restructuring and re-privatization of financial
institutions: In 2003, 151 financial companies were closed
and a merchant corporate bank and two credit unions
were merged with other institutions. During this process,
the government used Won2.17 trillion of public funds for
deposit repayment, loss compensation and recapitalization
of financial firms and purchase of bad debts. In the
banking sector, the Shinhan Financial Group purchased
Chohung Bank, and Kookmin Bank, the nation’s largest
lender, was fully privatized. Citigroup announced that it
will acquire KorAm Bank, Korea’s seventh-largest lender.
20
The 2004 consolidated budget is also projected to record a
slight deficit of 0.5 percent (Won -3.5 trillion) of GDP to
support the full recovery of economy.
31
Hyundai Investment & Securities Co. has been sold to
U.S.-based Prudential Financial. Regarding the ailing LG
Card, A Won5 trillion bailout package has been arranged
for the troubled LG credit card company by its creditors
and parent, the LG Group. .
Corporate
sector
performance
and
restructuring: With sluggish economic growth in 2003,
corporate performance deteriorated: both operating
income to sales and ordinary income to sales fell to 8.2
and 7.4 percent respectively for the nine months of 2003.
However, in part reflecting progress with restructuring,
the debt/equity ratio fell to 99.0 percent, the lowest since
1978, and interest coverage ratio increased to 445 percent
for the nine months of 2003. There has, though, been an
increasing divergence in performance among firms—a
trend evident since 2001—with the performance of the
weaker firms having deteriorated further in 2003.
The adoption in 2001 of the Corporate Credit
Risk Assessment (CCRA) System and the Corporate
Restructuring Promotion Act has laid the basis for
corporate restructuring on an on-going basis. Financial
institutions conducted five rounds of credit risk
assessments through the first half of 2003, on the basis of
which 285 debtor companies were subject to a clean up
process. Recognizing that Korea’s corporate restructuring
needs to be increasingly market-driven, the government
has also continued to focus on strengthening courtsupervised insolvency.
Macroeconomic outlook and policy issues:
Given the relatively optimistic global growth outlook,
Korea’s economic growth is expected to pick up in 2004
and average around 5.3 percent, as export growth
strengthens further and feeds through to a more visible
domestic demand recovery. Macroeconomic policies are
expected to remain supportive. However, much will
depend on Korea’s success in resolving its internal
structural overhangs such as household debt and
remaining weak corporates, as well as resolving social
disputes and political uncertainty. Though the aftereffects
of the parliament’s impeachment of President Roh Moohyun appears limited, political uncertainty may linger
longer than expected depending upon the outcomes of
National Election and the final judgment of the
Constitutional Court on the impeachment.
Malaysia
Malaysia sustained a robust broad-based
growth driven by strong domestic demand and a
sturdy export performance in 2003. Real gross
domestic product (GDP) grew by 5.2 percent in 2003, up
from 4.1 percent in 2002. Strong economic fundamentals
as well as supportive fiscal and monetary policy
measures, including an economic stimulus package in
May 2003, helped the economy overcome the impact of
the Severe Acute Respiratory Syndrome (SARS)
East Asia Update
epidemic on growth and global political uncertainties
emerging in the first half of 2003. The Malaysian
economy continued to gain momentum over the course of
the year and accelerated in the second-half of the year,
recording quarterly growth rates of 5.2 percent in the
third, and a robust 6.4 percent in the fourth quarter of
2003.
From the supply side, all sectors of the
economy expanded in 2003. The manufacturing sector
improved to 8.2 percent growth in constant prices
compared to 4.0 percent in 2002, with all major groups
registering positive growths. The larger sub-sector growth
rates recorded were by industrial chemicals, products of
chemicals, plastic, and rubber (13.3 percent), basic metal
industries (11.4 percent), and food, beverages, and
tobacco (10.9 percent). In 2003, the services sector
recorded a 4.1 percent broad-based growth, while the
agriculture sector recorded the strongest growth in 11
years, recording 5.5 percent growth. This growth was
driven mainly by higher production of rubber and palm
oil which registered double-digit growths of 18.4 and 11.9
percent, respectively. In 2003, the mining sector recorded
growth of 4.8 percent in real terms compared to 3.7
percent in 2002, reflecting increased production capacity
from new oil and gas fields.
From the demand side, final consumption
expenditure achieved a 5.7 percent growth in constant
prices in 2003, up from 4.6 percent in 2002. This
increase was attributed primarily to a 7.9 percent growth
in real government expenditure, although this is down
from 12.2 percent in 2002 and 17.0 percent in 2001. Real
private final consumption expenditure was also strong and
grew by 5.1 percent, up from 4.4 percent in 2002. Both
the household and corporate sectors benefited from rising
disposable income, the improving terms of trade for
commodities, and strengthening external demand. In
2003, fixed capital formation rose 2.7 percent in real
terms, compared to a marginal increase of 0.3 percent
a year ago. A significant development in 2003 has
been the turnaround in private investment, which
increased 1.1 percent after 2 years of contraction. In
the external sector, exports continued to expand in 2003,
registering an increase of 6.3 percent in real terms, up
from 4.5 percent in 2002. Exports grew faster as 2003
progressed, posting a robust growth of 10.9 percent in the
fourth quarter. Imports in 2003 grew by 5.0 percent in real
terms, down from 6.3 percent in 2002. The increase in
imports for 2003 was largely attributed to significant
growth in the fourth quarter with imports expanding by
15.9 percent. The main impetus for stronger export
performance was from the manufacturing sector,
particularly electrical and electronic products and the
primary commodities of palm oil, crude petroleum, and
liquefied natural gas.
32
Prospects for the next two years are
promising for Malaysia. The economy is projected to
grow at 6% in 2004 and 2005. The optimistic forecasts
are grounded on a robust gain in private sector
expenditures. Private consumption is expected to rise by
8.1% this year, compared with 5.1% in 2003. Private
investment is projected to grow by 11.5% in 2004,
substantially higher than the 1.1% in 2003. In addition,
Malaysia is well placed to profit more this year from the
global recovery. Higher demand for electronics and
electrical products, combined with an upturn in the global
electronics prices are likely to boost Malaysian
manufacturing growth in 2004. Also, firm prices for crude
palm oil as well as crude oil provide grounds for a solid
export-led growth. In addition, since taking over on
October 31, 2003, Prime Minister Abdullah Ahmad
Badawi has brought in a strong wind of change in
substance and style. The focus of the new Prime Minister
on issues of Rural Development, Governance and AntiCorruption, Human and Social Dimension of
Development have resonated very well with the public.
The Barisan Nasional, the governing coalition, has
obtained a large victory at the March 22, 2004 snap
election, giving Abdullah a fresh and strong mandate and
a huge impetus for change. The notable defeat of the PAS
(the Islamist opposition party), has conferred a high
degree of freedom to the new Government inaugurated on
March 28, 2004.
The sliding US Dollar has reinforced
Malaysian export competitiveness in 2003. The
combination of a weak US Dollar and increasing demand
helped boost electrical and electronic products exports.
These products netted receipts amounting to RM194.8
billion (US$51.3 billion) or 50.9 percent of the country’s
total export revenue. Malaysia enjoys a large current
account surplus (US$13.4 billion), a comfortable level of
reserves (US$44.9 billion, or about 7 months of retained
imports and 5 times the value of short-term external debt),
very low inflation (1.2%), a relatively sound financial
system, and a manageable external debt (total external
public debt declined to 9.5% of GDP).
The structural agenda includes enhancing
competitiveness and resilience of the economy. The
Government has taken great strides at providing a
business friendly environment in which firms can flourish
and prosper. Other ongoing actions include: a) reviewing
and rationalizing the incentive structure, b) reducing the
regulatory burden and improving the delivery system, c)
improving the labor market and ensuring the supply of a
skilled workforce able to keep up with technology, d)
promote greater usage of ICT by firms, especially SMEs,
and increase their ability to innovate. These measures are
key to attracting new investments, both from foreign and
domestic
sources,
and
to
country’s
overall
competitiveness.
East Asia Update
Philippines
GDP growth in 2003 was 4.5%, higher than the
government’s low-end forecast and most analysts’
expectations. Consumption was the main driver of growth
increasing by 5.1% and contributing 4% to output growth.
Investment spending was weak with fixed capital
formation growing by 0.8% and construction decelerating
by 6.6%. Export growth was also fragile with
merchandise exports in dollar terms increasing by only
1.5% -- much less than the rate registered in the rest of the
region. Exports also became more diversified with the
share of exports going to Asia rising to 42%. Imports on
the other hand rose 5.7% and contributed to the
deterioration in the trade balance.
Recent data indicate that the non-financial public
sector (NFPS) deficit fell as a share of GDP (from 6.7
percent to 6.3 percent) due to the compression of capital
expenditures both by the National Government and by
key GOCC’s (e.g. the National Power Corporation and
the National Food Authority). The NG deficit alone
actually fell to 4.6 percent of GDP in 2003 from 5.2
percent in 2002. The recent slide in tax revenue as a
share of GDP was halted with the tax to GDP ratio
remaining constant at 12.3 percent.
Despite the reduction in the NFPS deficit as a
share of GDP, fiscal vulnerabilities remain substantial.
NFPS debt at 107% of GDP is high, increasing the risk
that adverse developments could raise the cost of
borrowing, weaken the peso and lower growth. While
output growth has been steady, borrowing costs have
increased as evident from the 191 basis points increase in
the yield of one-year treasury bill between January to
March 2004, and the 450 basis points spreads for ROP8
(i.e., RP bonds maturing in 2008) in March. The peso has
also grown weaker with the 90-day peso forward rate
selling at more than a peso premium. The January to
February cumulative balance of payments shifted to a
deficit of USD822mn from a surplus of USD111mn
registered in 2003, in part reflecting weak export growth
(4.1%) and the slower growth of worker remittances
(1.2%). Central bank interventions and NG debt servicing
have also lowered gross reserves to USD15.8bn in
February.
Corporate and banking sector performance has
been relatively robust. Based on the January 2004 Makati
Business Club survey, 66% and 58% of its members
reported average gross revenues and net income growth
for their companies of 16 percent and 24 percent,
respectively. For the banks, end-2003 net interest margins
and growth of net income after tax was 4% and 53%
respectively.
Modest recovery in per capita GNP has likewise
improved the quality of social outcomes. In particular,
estimates for the incidence of Filipinos living on less than
USD 1 per day (USD 2 per day) has been reduced from
33
13.5% (47.1%) in 2000 to 9.6% (41.8%) in 2003. Most of
the MDG targets including poverty reduction, primary
school completion, and child mortality are on track, those
for child malnutrition and immunization for measles are
not.
Thailand
Real GDP in 2003 grew at 6.7 percent, the
highest rate since the crisis driven by private
consumption, private investment, and net exports. SARS
impact on growth was minimal, shaving GDP growth by
approximately 0.3 percent. Private consumption
continued to grow from 2002 by 6.3 percent supported by
the exceptional rise in farm incomes by 25 percent,
continued expansion in consumer credit, low interest
rates, and supportive Government measures. As in 2002,
sales
of
automobiles,
mobile
phones,
and
telecommunication services remained strong. Private
investment’s contribution to GDP growth in 2003
increased from 2002, with its share in GDP rising to 15
percent, though this is still well below the 1980s level.
Net exports of goods and services in real terms grew by
3.5 percent, compared to 7.3 percent in 2002. This is the
result of a decline in net exports of services stemming
from the fall in tourism receipts during the SARS
outbreak in the first half of 2003.
Growth in 2004 is expected to be higher than last
year. Public investment, which has been retrenching for
the past 5 years, is budgeted to grow at around 10 percent
this year. Government consumption growth is also
expected to accelerate from last year. This could help
raise real GDP growth in 2004 by around 0.5 percent.
Public spending could also help boost growth of private
consumption. This could help offset slightly slower
growth in private consumption this year due to slower
growth in farm incomes. (While international crop prices
are expected to rise in 2004, production of rice,
Thailand’s key crop, is expected to see zero growth, as a
result of drought late last year. Private investment is
expected to grow at a similar double-digit rate as last
year. Capacity utilization, though rising, is still roughly
10 percentage points below pre-crisis years (66 percent at
end of 2003 as compared to 75 percent in 1995-1996).
Import growth is expected to accelerate with increased
public investment and export growths.
External vulnerability continues to be reduced.
The current account surplus of US$8 billion in 2003
contributed to rising foreign reserves, which reached
US$42 billion or five times imports plus short-term debt.
External debt declined by US$10 billion from 2002 to
US$37 billion at the end of 2003, as compared to almost
US$60 billion pre-crisis. In 2004 the current account
surplus is expected to decline to 3.8 percent of GDP,
compared to 5.6 percent last year as the trade surplus
decrease this year.
East Asia Update
Last year, export values and volumes grew by 17
and 10 percent, respectively. Exports are expected to
continue robust this year, with value growth targeted at 15
percent and volume growth of about 12 percent, as the
world economy and world trade recover, though export
prices are projected to grow at a slower rate than last year,
in line with the slower world inflation and growth of nonoil commodity prices. Traditional markets (Japan, USA,
and EU) as well as China and ASEAN, which had
contributed equally to export growth last year, will
continue to drive export growth this year. Machinery and
equipment, rubber, and vehicles will continue to be key
export products to these markets.
Investment in equipment picked up in 2003,
contributing to an acceleration in private investment
growth to 18 percent. Private investment was supported
by continuing gross FDI inflows of around US$7.0 billion
in 2002-2003 (relative to pre-crisis levels of US$3.5
billion. On a balance of payments basis net FDI inflows
ran at $1-2 billion, since gross inflows were partly offset
by various asset sales by foreign investors.) FDI gross
inflows were led by larger firms with export links, which
could mobilize bank loans as well as increasingly finance
their capacity expansions through the capital and bond
markets. This year private investment will likely take
place in sectors in which capacity utilization has exceeded
those in the pre-crisis period. Currently, there are 10 such
sectors, and they account for about 6.5 percent of total
value-added. Investment will also likely increase in
sectors with interests by foreign investors, particularly,
the automotive and parts and the electronic parts sectors.
Direct government spending will help support
growth this year and next. Unlike in 2003 where most
Government stimulus measures were credit-based and
financed mainly by the Government’s specialized
financial institutions (SFIs), direct government spending
will help support growth in 2004 and 2005. In FY2003
(Oct 02–Sept 03), government’s fiscal balance was in
surplus by Bt 24 billion or 0.4 percent of GDP as a result
of the sharp rise in revenues. Public debt has been on a
decline from 53 percent of GDP in 2002 to 49 percent at
the end of 2003. A Bt135 billion supplementary budget
was approved in February for FY2004 and will be fully
financed from estimated additional revenues collection.
Roughly half of the supplementary budget has been
allocated for current expenditures and the remaining for
capital expenditures. However, only 30 percent of the
capital expenditures are expected to be disbursed this
fiscal year as the allocation of the funds has not been
approved, leaving less than 6 months for the projects be
executed. Thus the fiscal deficit this year will be roughly
1 percent of GDP, less than planned by 0.5 percentage
points. The undisbursed amounts will be carried over to
FY2005. As a result, fiscal balance in FY2005 will be
similar to that of FY2004.
Structural reform continue to progress in some
areas. There was progress in tariff reforms with tariff
34
reductions in October last year and January this year. As a
result, more than half of the total tariff lines are now in
either the 0, 1, 5, or 10 percent band. The average tariff
rate fell to 12 percent compared to 23 percent in 1995.
Progress was also seen in the financial sector with the
Financial Sector Master Plan endorsed by Cabinet in
January. Measures have been taken to accelerate debt
restructuring: The decree to streamline the property
auction processes for foreclosed properties over 10 years
old has been passed and amendments to the Civil
Commercial Code on legal execution to reduce the
property auction fees have been made. Public sector
reform continued, particularly in the area of public
administration, focusing on results-based management
and enhancing the coordination of government agencies
Vietnam
Vietnam’s economy grew by 7.2 percent in 2003
despite challenges from SARS and a lackluster global
economy. Export growth, in value terms, accelerated
from about 11 percent in 2002 to reach 21 percent in
2003.
Industrial production remained strong and
investment solid. The government’s GDP growth target
for 2004 is around 8 percent.
In the first quarter of 2004, the economy faced
the challenge posed by the avian flu. For the second year
running, Vietnam has had to contend with a disease
outbreak that threatened not only the lives of its
population, but also particular economic activities. While
the worst case scenario of a mutating virus spreading
rapidly to humans appears to have been avoided, the avian
flu has had a devastating impact on the poultry sector.
Around 38 million out of a total of about 258 million
heads of poultry have had to be culled. The Ministry of
Agricultural and Rural Development values the associated
loss at just under 0.5 percent of GDP. So far, the overall
economic impact of the avian influenza epidemic remains
relatively negligible and disruptions to the general
economy have been avoided. Foreign arrivals increased
four percent in March compared to the same time last year
In 2003, as in previous years, the main
contribution to growth came from the industrial sector
which grew 16 percent. The emergent role of the nonstate sector in the economy is being gradually cemented
with this sector continuously outperforming the SOE
sector. Private foreign and domestic industrial production
expanded by 14 and 22 percent respectively, compared to
the state-owned sector’s 12 percent growth.
The remarkable export growth in 2003, was in
good part due to the strong performance of exports to the
US market which grew by over 60 percent. However,
garment exports to the US, comprising more than 50
percent of total exports to this market, hit its quota limit
last year. This means that certain categories of these
exports will be capped by a maximum of 7 percent annual
East Asia Update
increase in 2004, compared to last year when garment
exports to the US doubled in value. Further friction for
Vietnam’s exports is likely to emanate from the antidumping actions initiated by US on shrimp exports.
Seafood exports amount to an annual US$ 2.2 billion,
equivalent to 11 percent of non-oil exports. Coffee and
rubber export prices increased by 50 and 46 last year,
providing a boost to the value of commodity exports.
Export growth is likely to slow somewhat in 2004 with
the Government expecting an increase of 12-15 percent
for the year.
Despite strong exports, the trade deficit rose to
nearly 7 percent of GDP in 2003 from 2.6 percent in
2002. The current account deficit is estimated to have
widened to about 4 percent of GDP in 2003 from 1.1
percent in 2002. Meanwhile, gross international reserves
increased to US$ 5.6 billion (equivalent to 10 weeks of
imports) on the back of rising ODA and FDI flows.
According to the State Bank of Vietnam, actual inflows of
FDI continued to increase in 2003, to reach US$ 1.5
billion for the year. Remittances from Vietnamese living
overseas and expatriate workers, through official
channels, amounted to a record US$ 2.6 billion last year.
A significant part of the rising import bill can be
related to robust domestic investment as well as imports
needed as inputs for exports production. Investment rose
more than one percentage point to reach 35.6 percent of
GDP in 2003, with imports of capital goods (20 percent of
all imports) growing by 41 percent. Increasing reserves
combined with investment driven imports mean that the
current account deficit should not be a major concern at
this juncture.
Throughout 2003 more than 30,000 private
enterprises applied for business registration, reflecting the
growing role of the private sector in domestic investment.
On average these enterprises had a registered capital of
around VND 2.1 billion, exceeding the 2002 average of
VND 1.5 billion.
The budget deficit rose to 2.2 percent in 2003
partly due to pressure from a 38 percent increase in wages
and pensions. Budget revenues have been maintained at
around 21-22 percent of GDP in the last few years. The
deficit estimate for 2003 does not, however, include other
debt creating flows for the government such as on-lending
operations (estimated to be around 3 percent of GDP) and
the cost of re-capitalizing the state owned banks, which
amounted to around 1.2 percent of GDP. The deficit is
expected to widen to 2.3 percent of GDP in 2004 as major
public investment projects are implemented. Capital
spending is budgeted to rise by nearly 20 percent in 2004,
but revenues are also projected to remain strong with a
budgeted increase of about 10 percent.
Monetary aggregates have been growing rapidly,
reflecting the robust pace of economic expansion,
ongoing monetization of the economy, and strong credit
demand. Broad money rose by around 20 percent in 2003
35
while credit expanded by about 28 percent in 2003, with
faster growth in credit to the non-SOE sector. The share
of bank credit going to the non-state sector remained
above 60 percent for the third year in a row in 2003, and
is now close to 2/3 of all credit extended. The quality of
lending of the State-owned banks is a concern however,
and the fraction of NPLs in total bank credit remains
difficult to assess. By September 2003, nearly 60 percent
of the NPLs that had been officially identified in 2000 had
been resolved. At the same time these banks had received
capital injections of about VND 7.7 trillion, out of a total
planned injection of VND 10.9 trillion. However, the
current capital adequacy ratio of the banks (under 4
percent) is still low by generally accepted standards.
Inflation had come down steadily in 2003,
averaging about 3 percent for the year, but rose in the first
two months of 2004. The rise in the CPI of 5 percent early
in the year, though not large in absolute terms, has
generated inflationary expectations. The main reasons
have been a rise in food prices following the avian
influenza outbreak, poor weather conditions, an increase
in the price for petroleum products, and a rise in the price
of key imports such as steel, fertilizer and plastics. The
depreciation of the US dollar to which the dong is closely
aligned has contributed in part as well. While the increase
in food prices may be temporary, the rise in oil prices of
7.4 percent is likely have knock-on effects. Expectations
that inflation may accelerate has forced the government to
cut the tariff on steel in a bid to bring down prices, and
hikes in power and water tariffs have been delayed by
public utilities. Some commercial banks have either
increased or have hinted at increasing deposit rates in
response to the price rise, a move that has been
discouraged by the central bank, citing ample liquidity in
banks and fearing a rate race.
On the reform agenda, while SOE and Stateowned Commercial Bank (SOCB) reform has been slower
than expected, recent announcements from the Party and
the Government have given indications of major shifts in
government
policy
regarding
the
ownership
transformation of large SOEs and SOCBs. The sectors
likely to be covered include electricity, post and
telecommunications, chemicals, metallurgy, and banking
and insurance. Outsiders will be able to buy shares in
these entities, and valuations of the enterprises’ assets is
to be based on market values. Whether the equitization of
these larger SOEs and banks will actually lead to better
governance and accountability will depend crucially on
the legal and regulatory framework for these entities,
which is also undergoing change. This will be especially
important from the perspective of smaller investors and
minority shareholders.
Steps have been taken to give a boost to the
fledgling securities market. In November, 2003 the
Government issued Decision 144 that eased the listing
requirements for firms. In order to encourage smaller
East Asia Update
firms to list, the minimum capitalization requirement was
halved to VND 5 billion. Recently, a number of joint
stock banks have expressed an interest to list on the stock
exchange, a move for which the central bank has signaled
its support and is in the process of issuing regulations to
that effect. In-principle approval has been granted to
Vietnam’s first investment fund, a foreign affiliated firm,
to list on the stock exchange. Additionally, the
Government is currently contemplating a removal of the
foreign ownership limit on foreign investors’ interests in
listed companies. The foreign ownership limit is expected
to be increased to 49 percent from the current 30 percent
by the end of this year. The Vietnamese market has been
the best performing in Asia so far this year with a 66
percent gain.
Smaller Economies
Cambodia
Cambodia’s growth was lower than expected in 2003—
4.8 percent compared to 5.5 percent in 2002. Growth was
adversely affected by the anti-Thai riots and the SARS
outbreak in the first part of the year, both of which hurt
tourism, which fell by 11 percent from 2002. On the
positive side, growth in 2003 was supported by a solid 23
percent gain in goods exports, underpinned by the
continued strength of garment and footwear exports,
which surpassed US$1.6 billion, representing nearly 80
percent of total exports. At the same time prudent
monetary policy contributed to continued expansion of
net foreign assets, a stable exchange rate and a low
inflation rate (0.5 percent).
On the fiscal side a number of factors, including
the gridlock resulting from the July 2003 elections, the
anti-Thai riots, and SARS, had a negative impact. Total
revenue reached only 85 percent of the budget target,
which contributed to an increase in the overall budget
deficit to 7.1 percent of GDP, up from 6.8 percent in
2002. The revenue shortfall led to a reduction in priority
sector spending21 in 2003, with estimated spending at 3.0
percent of GDP, well below the budgeted 3.8 percent. In
response, the government increased pressure on
delinquent and non-compliant taxpayers, for example, by
increasing the collection of arrears. The government also
reduced the import tax on luxury vehicles from 230% to
50% beginning January 1, 2004 on the expectation that
the reduced rate would encourage greater collections.
Cambodia achieved a major accomplishment
with its accession to the WTO in September 2003.
However, the absence of a new National Assembly meant
that Cambodia had to request a six month extension for
ratification of its membership protocol (the original
21
The priority sectors are health, education, agriculture,
and rural development.
36
deadline for ratification was March 31, 2004). On the
structural reform front progress has been made mainly in
the financial and monetary sectors. Specific
accomplishments include the introduction of on-site
inspections and a uniform chart of accounts for
commercial banks to reduce the risk of mismanagement
and boost public confidence in the banking system. Public
financial management reform holds promise in 2004 with
the formation of a sector wide approach, supported by ten
donor partners, to support the government’s reform
program. On the other hand, there has been little progress
on the anti-corruption agenda, military demobilization, or
civil service reform, due, in part, to the electoral gridlock.
Economic prospects for 2004 are positive, with
an expected recovery (growth is projected at 5.5 percent)
driven by construction, the fledgling tourism sector, and
urban-based garment industries. Nevertheless, the
scheduled phasing out of the textile and apparel quotas
(under the Agreement in Textile and Clothing) on January
1, 2005 will pose a significant risk to Cambodia’s growth
prospects since the bulk of exports to the US and the EU
are channeled through the quota and special preferences
system. This risk can be managed if the government takes
decisive action to: (i) improve the investment climate to
boost competitiveness (and yield the 6-7 percent growth
rates targeted in the 2003-2005 National Poverty
Reduction Strategy); (ii) mitigate constraints and develop
new opportunities in the rural business environment; and
(iii) cultivate new sources of growth, including export
diversification. A concrete reform agenda is needed to
restore momentum in the medium-term and improve the
quality of growth through greater poverty alleviation.
Democratic Republic of Timor Leste
Timor-Leste became independent on May 20,
2002, following 25 years of conflict, a violent transition
from Indonesian rule in September 1999 and two and half
years of United Nations administration. The country now
faces the challenges of nation-building with very limited
human resources, embryonic institutions, a stagnant
economy, high levels of poverty and unemployment.
The gradual winding down of the international
presence following independence and slow-down in
reconstruction programs has led to some contraction in
economic activity, particularly in urban areas and in
services that catered to expatriates. Data deficiencies
preclude accurate quantification of the decline in output.
Non-oil exports, amounted to just $7 million in 2003 of
which $6 million consisted of coffee, while “Timor Sea
revenue” accruing to the budget in FY03 amounted to just
under $30 million. Imports are estimated to have fallen to
$168 million in 2003 from a peak of $248 million in 2001
reflecting the falling presence of expatriates
East Asia Update
Inflationary pressures have abated: inflation
remained at 8-10 percent through mid-2003 due to a
drought induced scarcity of agricultural goods, but by
January 2004 was reported at 4 percent. Private sector
wages have started to fall—one of the largest employers
reduced pay for unskilled workers by 25% to $80 dollars
a month. Nevertheless, the overall wage level remains
relatively high in comparison with neighboring countries,
undermining competitiveness. A fifth of the working age
population in Dili/Baucau was unemployed in late 2001.
Unemployment is highest among the youth and declines
sharply with age.
While some interest has been shown in
concessions for exploitation of natural resources, such as
fisheries and forestry so far there has been little new
investment. During 2003, bank deposits increased from
$55 million to $72 million, and domestic bank lending
increased from $5 million to $22 million, but the bulk of
deposits continue to be invested abroad.
Ratification of the Timor Sea Treaty in March
2003 provides assurance that the planned development of
the Bayu-Undan oil and gas field will proceed.
Production of liquids at this field began in February 2004
and is expected to reach its design daily production rate
during the third quarter of 2004. The second phase,
scheduled to begin in 2006, entails piping of dry gas to
Darwin, Australia, for recovery as liquefied natural gas.
Although there may be some opportunities for service
activities in Timor, the principal benefit will be from the
$3 billion in revenues that the project is expected to
generate over a twenty-year period beginning in 2004.
The National Development Plan, prepared
shortly before Independence, outlines Government’s
development and poverty reduction objectives. A Stability
Program announced by Government in January 2003, in
the aftermath of the December 2002 riots, focuses on
three areas of the longer-term program where
Government intends to have immediate impact:
governance, job creation and service delivery for poverty
reduction, particularly in education and health.
Fiji
The Fiji Supreme Court is expected to rule in
May on the composition of the government cabinet and
power sharing arrangements. Last year the Court had
ruled on the legality of the Qarase government, requiring
that the prime minister include the Indo-Fijian dominated
Fiji Labour Party (FLP) in his cabinet. Under the power
sharing provisions of the Constitution the FLP, which
won 27 out of 71 seats, should have been included in the
Cabinet, but had thus far been excluded. The PM in
response announced an increase in Cabinet members from
22 to an unwieldy 36 to accommodate the FLP, rather
than asking current members to step down. This parties
then returned to the Supreme Court to arbitrate over the
37
exact number of seats to which the FLP is entitled. In
addition, there have been claims of tokenism in regard to
offered appointments, which the FLP claims will have
responsibility for only 2.5 per cent of total budgeted
expenditure.
Despite these political uncertainties, the real
economy is estimated to have grown by 5 per cent in
2003, driven by buoyant consumer demand.
The
government is forecasting a slight decrease in 2004, with
projected real GDP growth of 4.1 per cent. Inflation fell
to 4.2 per cent in December, down from 5.3 per cent the
previous month. The underlying measure of inflation was
also down on the month, to 3.1 from 3.3 per cent. The
year-end inflation forecast for 2004 is 3.0 per cent, largely
reflecting the base effects of the January 2003 VAT
increase falling out of calculations.
The tourism sector is on target for a record in
visitor arrivals in 2003, with tourist numbers cumulative
to November up 7 per cent to 393,000. This represents a
strong recovery from the lows seen around the 2000 coup
of only 294,070. However, some other industries have
had a disappointing year, and many face ongoing issues.
Sugar production was down by 7 per cent, which has been
blamed on the late start to the season, milling
inefficiencies, adverse weather conditions and
transportation problems. While there are some hopes for
an improvement in 2004, with the government due to
commence a restructuring program, some of the issues
facing the industry are deep-rooted and are reflected in
the wider disputes between Fijian and Indo-Fijian
political interests. While the garment industry performed
well over the period, with export receipts to November up
4 per cent on the same period in 2002, there are serious
risks hanging over the medium term prospects for the
industry as a result of preferential agreements with
Australia and the US due to expire by the start of 2005.
Gold production was down 6 per cent on 2002, copra
production down 33 per cent due to the impact of Cyclone
Ami, and total fish exports were almost 5 per cent lower
due to over-fishing, climatic conditions and industrial
disputes.
The actual budget deficit was 6.1 per cent of
GDP in 2003, overshooting the projected deficit of 5.3 per
cent. Reasons for the overspend included rehabilitation
work after Cyclone Ami, and a shortfall in investment
revenue due to the non-sale of government-held shares.
For 2004 the government has announced a projected
deficit of 3.9 per cent of GDP, which is expected to be
realized from a marginal reduction in overall expenditure
and higher revenue collections.
On the external front, merchandise exports to
November rose by about 12 per cent compared to the
same period last year. This increase was attributed to
increases in garments and sugar exports (despite weaker
overall production figures), which more than offset lower
receipts from gold, timber and fish. Over the same period
East Asia Update
imports rose by 5 per cent in response to stronger growth.
At the end of 2003 foreign reserves were FJ$727 million
(US$422 million), which is equivalent to 3.0 months of
imports of goods and non-factor services. On foreign
exchange markets the Fiji dollar reached a six-year high
against the US dollar, but weakened against the
Australian and New Zealand dollars. The real effective
exchange rate rose by 3 per cent over the year, indicating
a
slight
deterioration
in
Fiji’s
international
competitiveness. Emigration of skilled workers continued
to be an issue in 2003, with emigration up 6 per cent
cumulative to October to 4,800, which on an annualized
basis was equivalent to 0.7 per cent of the population.
Lao PDR
In recent years Lao PDR has achieved robust
growth of a little under 6 percent a year, supported by
higher aid inflows, private investment (namely, a pick-up
in small-scale construction), and foreign investment,
prompted in part by ongoing reforms in the foreign
investment framework (above all, streamlined approval
procedures). GDP is estimated to have grown by 5.3
percent in 2003, down a little from 5.9 percent in 2002.
Growth was reasonably well balanced, with relatively
strong increases in both industrial production and
agriculture (despite a few floods). Rural consumer
demand picked up, as the agricultural sector grew and
prices for key commodities remained firm. Among factors
dampening growth somewhat was the impact of more
cautious bank lending policies on credit and private
investment and weakness in tourism (due to the outbreaks
of SARS and bird flu, and regional tensions). Public
investment was constrained by weak revenue collection.
In 2004, real GDP is expected to grow at 5.8
percent, as a result of increased private investment, a
modest recovery in tourism, and higher exports (due to
faster world trade growth and improved access to US
markets). Projected stronger growth in Vietnam,
Thailand, and the EU - which together account for the
majority of Lao exports – could play an important role.
The Government has continued efforts to improve the
operating environment for businesses and the foreign
investment framework, including streamlining the
investment approvals process for both domestic and
foreign investors, including allowing provinces to
approve investment programs worth less than US$2m. In
2004-05 the government is planning further changes to
ease the investment environment, including developing a
special economic zone in Savannakhet province and
reducing the barriers to the leasing of land by foreigners.
Sectoral. Agriculture. In 2003, growth in the agricultural
sector was steady at 4 percent. Poultry farmers have been
hit by the regional outbreak of bird flu. The main wetseason rice crop harvest – having avoided major flood and
38
drought damage - has exceeded government expectations,
but coffee producers have been hit by bad weather. To
foster agricultural growth, needed changes are the
development of rural infrastructure and easier access to
rural credit for farmers. While illegal logging remains a
problem, opium production has fallen. Exports of
agricultural and forest products to neighbors have
increased. The government has signed an agriculture
agreement with Vietnam.
Industry. Growth in the industrial sector has run
in a 6-10 percent range in recent years and continued at
expand at a fast pace in 2003. Industrial growth is
expected to continue to benefit from higher growth in the
world economy and faster world trade growth in 2004-05.
The garment manufacturing sector is growing in line with
increased orders from the EU, and should also benefit
from greater access to the US market once normal trade
relations (NTR) status is granted (expected in 2004).
Construction activity is being boosted by the rising
number of infrastructure development projects,
particularly road- and bridge-building and power
generation. The future of the proposed Nam Theun 2
hydroelectricity project (NT2) is clearer with: 1) the
return of Electricité de France (EdF), a French stateowned energy company and a key developer; and 2) the
agreement of the Thai state-owned energy company,
Electricity Generating Authority of Thailand (EGAT) to
buy electricity from NT2 from 2009. Mining has
benefited from the success of foreign-invested mining
projects: new commercial interest in gold mining has
surged following the success of the Sepon mine, an
Australian-backed project.
Services. Service sector growth increased from
4.9 percent in 2000, to 5.7 percent in 2001, and to 8.3
percent in 2002. Except for financial services, where
growth has been slow owing to the continued weakness of
the banking sector, almost all key service sub-sectors are
growing at above 7 percent. In 2003 the regional
downturn in tourism due to the outbreak of SARS and
bird flu was also felt in Lao PDR, where security
concerns in some areas also hinder the sector from
achieving its full potential. However tourism is recovering
and is expected to grow faster in 2004. The telecom
sector continues to grow as telephone penetration rates
rise. Air travel with Vietnam, Myanmar and Cambodia
has been liberalized. Transport links with Thailand have
been liberalized in a bid to increase trade, and the Thai
government is to finance the construction of two bridges.
Structural agenda:
The Government initiated a
program of reforms in late 2001 to improve the
management of public expenditures, state-enterprises
(SOEs), state-owned banks (SCBs) and natural resources,
with the aim of reducing waste, enhancing efficiency and
increasing the transparency and accountability of public
East Asia Update
resource use. If future increases in revenue from mining
and hydro-power are to be used to improve social
outcomes instead of financing losses of SCBs and SOEs,
such improvements in use of public resources will be
critical. In addition, the Government is continuing trade
and private sector development reforms aimed at
completing the transition to a market-economy.
Encouraging recent policy developments include: a)
streamlining the investment approvals process for both
domestic and foreign investors; b) introducing phased
increases in electricity, water and air travel prices - to
bring tariffs more in line with production costs; c) starting
the reform of the banking sector and hiring international
advisors to audit the SCBs; and d) planning to restructure
the most important SOEs. Also, the Government plans to
attract investors from Japan and China. However the pace
of reforms remains slow. Macroeconomic stability
remains fragile due weak revenue mobilization.
Implementation has been difficult and slow, and there
remains considerable ambivalence about reforms in stateenterprises and public financial management.
Mongolia
A recovery in the agricultural sector due to
improved weather conditions and continued robust growth
in the industrial and service sectors helped raise GDP in
2003 to an estimated 5.3 percent compared to 3.9 percent
in 2002. Inflation continued to edge downwards in 2003.
The inflation rate was estimated at 4.7 percent in 2003,
despite a surge in June 2003 (6.5 percent) due to large
seasonal increases in food prices. Keeping inflation under
control was helped by the reversion of domestic food
supplies to a normal level following the drought and dzud
of 2000-2002, the stability of the Togrog vis a vis the U.S.
dollar and a monetization process. Indeed, monetary and
credit aggregates have risen sharply over the last two
years, on average by 46 percent and 84 percent
respectively, reflecting the combined effects of an
increase in real money demand and a reintermediation
process following structural reforms in the banking
system.
Exports earnings grew significantly in 2003 due
to renewed strong demand for copper, gold and cashmere.
Imports grew by 9 percent while exports grew by over 19
percent. Overall the trade deficit decreased from 20.6
percent of GDP to 16.7 percent of GDP, and this,
combined with buoyant emigrants’ remittances, led to
slight improvements in the current account deficit which
decreased from 9.5 percent of GDP including transfers to
9.2 percent. The capital account benefited from sustained
donor support and private capital inflows. The togrog/US
dollar exchange rate remained stable in 2002-2003 and so
did the nominal effective exchange rate. In 2004, the
projected corporate income tax (CIT) to be paid by the
state owned copper company Erdenet could double from
39
about US$ 23.8 million to over US$50 million if copper
prices increase as expected by 35 percent.
Total
contribution to GDP in 2004 will increase from 2.4 in
2003 percent of GDP to over 4.3 percent of GDP
(including royalties and dividends ,0.8 and 0.2 percent of
GDP respectively). The Government has been advised
to use any additional revenue from increased copper
prices for deficit reduction. The current account deficit in
2004 is projected to drop slightly from 15.2 percent to 13
percent. A 15 percent growth in exports is projected for
2004, mainly due to the increase in copper prices,
however imports will continue to grow at over 9 percent.
Official external debt remains manageable and is
on highly concessional terms. On December 30, 2003,
Mongolia reached an agreement with Russia after several
years of negotiation to settle its 11.4 billion Transferable
Rubles (TR) valuated at US$11.4 billion. The agreement
consists of a 98 percent up front debt forgiveness, with a
US$250 cash settlement. At the end of 2003, Mongolia’s
total stock of public debt was estimated at US$1.4 billion,
equivalent to 118.7 percent of GDP, or 85.8 percent in net
present value terms and 170 percent of exports of goods
and services. This includes debt of US$ 212 contracted to
settle TR ( pre-Transition Russian debt) debt obligations.
(US$100 million from the Central Bank and US$75
million on commercial basis, and US$37 short term loan
from the Central Bank). The settlement of the Russian
debt is a welcome event as it provides international
investors with more certainty regarding Mongolia’s credit
standing. With projected strong growth in the medium
term the debt to GDP in NPV terms is expected to
decrease incrementally to about 58 percent in 2010.
The overall government deficit was 5.9 percent
of GDP in 2003, thanks to the government decision to
freeze civil service wages. Revenues as a proportion of
GDP continued to increase in 2003 to 38.5 percent of
GDP more than offsetting the increase in current
expenditures from 38.7 percent in 2002. (total expenditure
was 44.2 percent in 2002 and 45 percent in 2003)
However, there are concerns about the sustainability of
the revenue effort and the impact of high levels of
taxation on private sector activities. On expenditures the
main source of pressure is the wage bill at 8.5 percent of
GDP in 2003. The government’s efforts to transform the
public administration into a more market-oriented
institution with limited reach and scope have met with
mixed success. The composition, and pay policies, in the
Mongolian civil service remain a source of substantial
pressure on the budget. The Government is developing a
comprehensive civil service reform strategy to address
this issue.
On the structural front, in the area of public enterprise
reform and bank restructuring, the authorities have made
good progress, but important challenges remain. The
privatization of the Trade and Development Bank (TDB)
and the Agricultural Bank were finalized in December,
2002 and March, 2003 respectively. The petroleum
East Asia Update
import company NIC and the monopoly insurance
company Mongol Daatgal were sold to the foreign
investors in July 2003 and February 2004 respectively,
the Government rescinded the sale of GOBI cashmere due
to the questionable The privatization of other large
enterprises such as the Gobi cashmere factory which are
still carrying out loss-making activities has been delayed,
and the energy sector’s persistent financial imbalances
continue to pose a threat to medium-term fiscal and
external sustainability.
Papua New Guinea
Political Developments Responding to a request
from PNG during the second half of 2003, Australia
announced an Enhanced Cooperation Package to assist
the country cope with the long term deterioration in the
law and order situation and to strengthen economic
management. The package will deploy about three dozen
Australian public servants into line positions in the PNG
public service and over 200 police and other legal/judicial
personnel to underpin improvements in law and order.
Implementation details are being worked out in early
2004.
In January 2004 after failing to muster the
required support to pass a constitutional amendment
which would have secured its term in office by a further
18 months, the government adjourned Parliament to
end-June 2004. A challenge to declare the adjournment
unconstitutional emerged in late March 2004.
Economic Developments In 2003 real GDP
expanded at an estimated 2.7 percent. The turnaround in
the economy is attributed to the strong and continued
improvement in commodity prices for both agricultural
commodities and minerals as well as increased production
as rural producers returned to farming, following the
distraction of the national elections in 2002. In addition
the Moran oil field finally came into production, a year
later than anticipated and the Napa Napa oil refinery also
commenced production, which boosted real GDP. Future
economic prospects remain uncertain given slow progress
on the reform agenda, especially with regard to public
sector reform and structural impediments could re-emerge
leading to a reversal of the improvements in GDP
experienced in 2003.
Budgetary performance improved over the
second half of the year buoyed by sharply higher revenues
from the mineral sector which resulted in a budget
balance for the second half that was adequate to make up
for the deficit generated during the first half. The overall
outcome for the year was a deficit estimated at 2 percent
of GDP, in line with the budget.
On the external front the balance of payments
performed well in 2003 with the current account
recording an estimated surplus of 10 percent of GDP.
40
The currency appreciated by 20 percent against the U.S.
dollar during the year, reflecting in part the fall of the
U.S. dollar against all major currencies including the
Australian dollar, which the PNG Kina tracks closely.
A tightening of monetary policy facilitated this
outcome as Treasury bill yields rose from around 13
percent to just over 20 percent over the first three quarters
of 2003, before declining, reflecting an easing of policy.
As of end-February 2004 Treasury bill yields stood at 16
percent. These developments facilitated an easing of
inflation which had exceeded 20 percent in the year to
March 2003, to 8.4 percent over the year to December
2003. Reflecting these improvements in macroeconomic
circumstances, external reserves also increased
significantly—gross external reserves increased from
US$343 million at the beginning of 2003 to nearly
US$400 million at year end. That trend has continued
into 2004, with gross reserves at US$532 million at endFebruary, equivalent to 6 months of non-mineral imports.
The outlook for production and the balance of
payments in 2004 is expected to be favorable due to the
continued buoyancy in global commodity process and
positive developments in the minerals sector. The latter
are related to adjustments made to the fiscal regime for
mining which have boosted exploration applications.
Concerns remain, however, about the budgetary situation
in the absence of strong policy measures to address public
sector reform.
Solomon Islands
A regional assistance mission (RAMSI) was
dispatched to the country in July 2003, following an
appeal by the Prime Minister for external assistance to
help end the ethnic conflict which had escalated over the
previous three years. This assistance included military
support, a police presence, technical assistance for public
finance administration, development assistance to
underpin peace and reconciliation, and financial support.
Following this intervention, real GDP has grown
for the first time in five years, at 3.8 per cent, after having
fallen by a cumulative total of almost 28 per cent between
1998 to 2002. Real growth is expected to continue, with a
forecast for 2004 of around 4.7 per cent. In addition to
the increases in output, price level increases have been
much more subdued, with inflation falling back to 4.1 per
cent in the three months to December 2003, compared to
over 15 per cent the previous year, and gross official
reserves virtually doubled to around US$34 million
(which is equivalent to 3.3 months of imports of goods
and non-factor services). Of course, serious issues still
remain. Real growth in 2003 was partly generated by
unsustainably high levels of logging, debt and expenditure
arrears have continued to increase, and private sector
activity remains subdued.
East Asia Update
On an accruals basis the budget deficit fell to 5.4
per cent of GDP in 2003, compared to 10.6 per cent the
previous year. On a cash basis the budget was in surplus,
at around 2.2 per cent of GDP, despite total expenditures
being almost 30 per cent higher than the original full-year
Budget estimate. The biggest offenders in this regard
were the Police, National Security and Justice, which
overspent by almost 200 per cent compared to Budget,
and the Prime Minister and Cabinet, which saw an
overspend of around 84 per cent. However, domestically
sourced revenue was up 44 per cent over Budget, and an
additional SI$14.3 million was provided in the form of
Budget support by the Australian government.
As a result of this relative restraint, public sector
debt fell to 92.3 per cent, compared to its peak of 96 per
cent of GDP (US$152 million) at the end of 2002. On the
external front, the current account swung into surplus in
2003, at 8.9 per cent of GDP, after deficits of 2.4 and 11.9
per cent in the previous two years. The US$ exchange
rate ended the year virtually unchanged at around 7.5,
which can be compared with a 34 per cent fall in 2002. In
real effective terms, 2003 saw a 16 per cent improvement
in international competitiveness.
With the US$3 million that was owed to the
World Bank and the Asian Development Bank having
been paid by the Australian government, the multilateral
institutions are able to reengage in the Solomon Islands.
Aid flows have increased since RAMSI’s intervention.
Donors have plans to make available, almost entirely as
grants, between US$99-118 million in 2004.
41
East Asia Update
42
APPENDIX TABLES
Appendix Table 1. Quarterly Real GDP Growth - % Change Year Ago
China Hong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand
Kong
(China)
Q4 1998
7.8
-5.3
-18.3
-5.9
Q1 1999
8.3
-2.7
-6.1
5.8
Q2 1999
7.6
1.9
1.8
11.2
Q3 1999
7.8
4.6
2.8
13.0
Q4 1999
6.8
9.3
5.4
13.0
Q1 2000
8.1
13.6
4.1
13.1
Q2 2000
8.3
10.1
5.1
10.2
Q3 2000
8.2
10.3
4.0
10.0
Q4 2000
7.3
7.2
6.4
5.0
Q1 2001
8.1
2.3
4.1
3.8
Q2 2001
7.8
1.5
4.3
3.0
Q3 2001
7
-0.5
3.8
2.1
Q4 2001
6.6
-1.1
1.7
3.5
Q1 2002
7.6
-0.6
2.4
6.2
Q2 2002
8
0.8
4.1
6.6
Q3 2002
8.1
3.4
4.6
5.8
Q4 2002
8.1
5.1
3.6
6.8
Q1 2003
9.9
4.5
4.5
3.7
Q2 2003
6.7
-0.5
3.6
1.9
Q3 2003
9.6
4.0
4.0
2.3
Q4 2003
10.3
5.0
4.4
3.9
Source: Haver Analytics and national sources.
-11.2
-1.0
4.8
9.1
11.7
11.5
8.3
8.1
6.7
2.9
0.4
-1.0
-0.8
1.3
4.0
5.8
5.4
4.6
4.5
5.2
6.4
-2.4
0.7
3.8
3.8
5.1
5.3
6.1
7.2
5.3
2.3
3.1
2.5
3.8
3.8
4.1
3.8
5.8
4.5
4.0
5.1
4.5
-2.9
2.1
6.6
8.4
8.6
9.6
8.2
10.0
9.7
4.1
-1.3
-5.6
-6.1
-1.5
3.8
3.8
3.0
1.6
-3.7
1.7
4.9
3.4
4.1
6.4
4.7
6.4
7.9
5.1
6.7
3.8
0.6
-3.3
-4.4
-1.6
0.9
3.7
5.2
4.5
3.5
-0.1
4.2
5.2
-7.2
-0.2
3.4
8.4
6.4
6.5
6.1
2.3
3.8
1.6
1.9
1.8
2.5
3.9
5.1
5.8
6.2
6.7
5.8
6.5
7.8
East
Asia
-0.6
3.9
6.4
7.4
7.7
8.6
7.5
7.4
5.8
4.5
3.5
2.6
2.9
4.4
5.5
5.9
6.0
6.0
3.4
5.6
6.6
Appendix Table 2. East Asia: Merchandise Export Growth
(US $; % change from year ago)
2002 2003 2003 Q1 2003 Q2 2003 Q3 2003 Q4 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04
East Asia (9)
9.6
SE Asia
5.1
Indonesia
1.5
Malaysia
6.0
Philippines
7.8
Thailand
5.7
China
22.4
NIEs
5.7
Hong Kong
5.4
Korea
8.0
Singapore
2.8
Taiwan (China) 6.3
19.1
11.2
6.6
12.5
3.4
17.1
34.7
14.2
11.6
19.5
15.2
10.4
20.9
13.0
15.8
7.8
4.9
22.2
33.6
18.2
17.6
20.7
23.0
11.4
16.6
10.1
4.7
10.8
6.2
15.6
34.3
10.2
12.2
14.4
8.7
3.6
15.0
5.9
1.8
7.8
-2.6
11.3
29.7
10.6
7.0
16.0
10.9
9.6
23.6
14.0
3.6
19.4
4.8
19.9
40.5
18.0
11.3
26.2
18.9
16.8
20.7
10.5
-6.3
16.6
6.3
18.4
36.7
16.5
9.4
25.6
19.0
14.0
18.4
8.7
11.2
7.4
-0.6
13.2
33.8
13.7
9.0
21.9
8.0
15.9
31.8
23.6
7.5
35.5
9.0
29.1
50.7
24.0
15.8
31.3
30.8
20.5
14.0
8.2
0.7
7.8
4.1
16.6
19.9
13.1
0.2
32.7
4.7
17.5
30.8
12.4
-1.6
16.7
7.5
21.2
39.7
34.4
28.2
45.0
28.5
34.6
#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
42.9
#N/A
#N/A
39.5
#N/A
17.2
East Asia Update
43
Appendix Table 3. East Asia and the Pacific: GDP Growth Projections
Actual
1997
6.4
6.9
3.4
4.7
7.3
5.2
-1.4
East Asia
Developing E. Asia
South East Asia
Indonesia
Malaysia
Philippines
Thailand
Transition
China
8.8
Vietnam
8.2
1.4
Small Economies
Cambodia
6.8
Lao PDR
7.0
Mongolia
4.0
Fiji
-0.9
Marshall Islands
-10.1
Micronesia, Fed. Sts. -5.2
Papua New Guinea -4.9
Samoa
0.8
Solomon Islands
-2.3
Tonga
0.2
Vanuatu
1.5
5.7
East Asia NIEs
Hong Kong (SAR)
5.1
Korea
4.7
Singapore
8.5
Taiwan (China)
6.7
Japan
1.8
2003
5.7
7.6
5.1
4.1
5.2
4.5
6.7
Forecast Forecast
2004
2005
6.3
5.9
6.9
6.5
5.4
5.4
4.5
5.0
5.5
5.5
4.2
4.1
7.2
6.5
1998
-0.1
1.7
-9.3
-13.1
-7.4
-0.6
-10.5
1999
6.2
5.7
3.3
0.8
6.1
3.4
4.4
2000 2001 2002
7.4 3.8 5.9
7.0 5.7 6.7
5.7 2.4 4.4
4.9 3.5 3.7
8.5 0.3 4.1
4.4 3.0 4.4
4.8 2.1 5.4
7.8
4.0
0.9
3.7
4.0
3.5
1.4
0.8
-2.3
-2.8
2.4
1.1
1.6
2.2
-2.7
-5.0
-6.9
-0.9
4.6
7.1
4.5
8.1
10.8
7.3
3.3
9.6
0.6
1.1
7.6
2.1
-0.5
3.1
-2.5
7.0
3.4
9.5
6.4
5.4
8.0
5.5
2.6
7.0
5.8
1.1
-3.2
0.9
2.5
-1.2
4.4
-14.2
6.2
3.7
8.1
10.2
8.5
9.4
5.9
7.5
6.9
1.7
5.7
5.8
1.0
4.0
-1.3
1.1
-2.3
8.6
-9.0
0.5
-1.9
1.0
0.5
3.8
-1.8
-2.2
8.0
7.0
2.7
5.5
5.9
3.9
3.8
4.0
0.8
-0.6
1.9
-2.7
1.6
-0.3
4.9
2.3
7.0
2.7
3.6
9.1
7.2
3.9
4.8
5.3
5.0
5.5
2.0
2.4
2.5
3.1
3.8
2.5
2.0
3.0
3.3
3.1
1.1
3.2
7.7
7.0
4.2
5.5
5.8
6.0
4.1
1.5
2.0
2.3
3.2
4.7
-0.5
2.8
5.4
6.0
5.3
5.6
5.1
0.5
3.3
4.9
4.6
5.3
4.5
4.5
-1.2
0.2
2.8
0.4
-0.3
2.7
3.1
1.4
7.2
7.2
4.2
4.2
6.3
5.5
4.0
3.1
3.2
Source: World Bank data and staff estimates. East Asia is sum of Developing East Asia and Newly Industrialized
Economies.
East Asia Update
44
Appendix Table 4: Primary Commodity Prices
(US Dollars - % change from year ago)
Actual
1980- 199190
98
1999 2000 2001 2002
Commodity
Crude oil, average
0.0
-5.7
38.3 56.2
-0.8
0.4
-11.2 -1.3
-1.9
0.8
-13.9 -5.5
-7.3
4.0
-32.3 -20.2
-3.6
12.6 -23.2 -16.2
-1.4
10.6
12.0 -38.9
-3.0
12.3 -35.0 -28.9
0.8
2.1
-18.3 -18.5
16.4
-2.8
-29.8 30.6
1.9
3.4
15.2 1.5
4.1
-0.1
24.1 -0.7
-1.7
0.5
-12.9 6.2
2.9
-2.6
-2.3 12.6
-6.7
-0.7
-2.5 0.6
4.3
-4.1
-4.9 15.3
Source: World Bank DEC Prospects Group. Projections as 2/24/04
Non-Energy Commodities
Agriculture
Cocoa
Coffee, arabica
Coconut oil
Palm oil
Rice, Thai, 5%
Sugar, world
Logs, Malaysia
Sawnwood, Malaysia
Rubber, RSS1, Malaysia
Metals and minerals
Tin
Copper
Projections
2003 2004 2005
-13.7 2.4
-9.1
5.1
-9.1
8.4
18.0 66.4
-28.5 -1.2
-29.3 32.4
-7.8 36.6
-14.6 11.0
5.5 -20.3
-16.3 2.7
-19.3 9.4
-13.8 33.0
-9.6 -3.1
-17.5 -9.5
-13.0 -1.2
15.9
10.0
9.3
-1.5
4.3
11.0
13.6
3.0
3.0
14.5
4.6
41.5
12.7
20.5
14.1
-10.0
10.4
5.1
-1.8
5.9
17.7
12.8
3.7
-4.0
6.9
1.6
1.8
26.2
32.8
34.9
-11.5
-2.9
-1.5
-2.9
5.9
-4.5
-10.0
1.0
3.3
2.5
7.1
-6.0
-2.3
-11.5
-8.3
Appendix Table 5. East Asia: Exchange Rates (LCU/$)
China Indonesia Korea
Malaysia Philippines Singapore Taiwan,
China
Mar-2003
Apr-2003
May-2003
Jun-2003
Jul-2003
Aug-2003
Sep-2003
Oct-2003
Nov-2003
Dec-2003
Jan-2004
Feb-2004
Mar-2004
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8.28
8908
8675
8279
8326
8548
8578
8442
8495
8537
8465
8441
8447
8587
1232.40
1232.82
1199.80
1194.00
1181.60
1178.40
1153.00
1166.30
1184.90
1193.00
1184.30
1166.70
1166.34
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
3.8
54.59
52.81
52.51
53.40
53.71
54.99
55.20
54.95
55.37
55.45
55.53
56.07
56.33
1.753
1.777
1.734
1.734
1.755
1.754
1.746
1.733
1.729
1.711
1.699
1.686
1.6997
34.72
34.82
34.72
34.62
34.42
34.00
34.00
33.90
34.05
34.06
33.69
33.23
33.22
2006-10
-3.0
0.0
0.1
-0.8
3.4
-1.0
-1.4
1.2
4.2
3.6
3.1
-3.2
-2.2
-1.2
-1.8
Thailand
42.75
42.88
42.15
41.65
41.78
41.67
40.11
39.73
39.90
39.71
39.09
39.10
39.45
Yen
118.6
119.8
117.4
118.3
118.7
118.8
115.0
109.50
109.18
107.82
106.41
106.48
108.56
Appendix Table 6. Foreign Reserves Minus Gold (US$ Billion)
China
Indonesia
Dec-1996
107.0
Dec-1997
142.8
Dec-1998
149.2
Dec-1999
157.7
Dec-2000
168.3
Dec-2001
215.6
Dec-2002
291.1
Dec-2003
408.2
Jan-2004
420.6
Feb-2004
431.5
Source: Haver Analytics
18.3
16.6
22.7
26.4
28.5
27.2
30.5
35.0
34.7
34.7
Malaysia
Philippines
Korea
27.0
20.8
25.6
30.6
29.5
30.5
34.2
44.6
47.4
48.9
10.0
7.3
9.2
13.2
13.1
13.4
13.1
13.3
12.7
12.5
34.0
20.4
52.0
74.0
96.1
102.8
121.3
155.3
157.4
162.9
Taiwan,
(China)
88.0
83.5
90.3
106.2
106.7
122.2
161.7
206.6
214.9
224.8
Singapore
Thailand
76.8
71.3
74.9
76.8
80.1
75.4
82.0
95.7
98.4
100.9
37.7
26.2
28.8
34.1
32.0
32.4
38.0
41.1
41.2
41.9
Total
398.9
388.8
452.8
519.1
554.4
619.5
772.1
999.8
1027.3
1058.3
East Asia Update
45
Appendix Table 7: Regional Aggregates for Poverty Measures in East Asia
$1 –a-day
$2-a-day
Mean
Consumption
(1993
PPP$/month)
Headcount
Index (%)
Number
of Poor
(mill.)
Headcount Number
Population
Index of Poor
(mill.)
(%)
(mill.)
EAP
1990
67.95
28.9
457.9
1996
99.80
14.8
253.0
1999
101.85
15.6
276.9
2000
112.83
14.0
250.1
2001
120.81
13.0
234.9
2002
133.82
11.7
212.4
2003
144.38
10.4
191.7
2004
152.97
9.7
179.0
2005
161.97
9.0
167.9
EAP less China
1990
96.33
22.1
97.3
1996
136.33
10.7
52.2
1999
123.34
11.4
58.5
2000
130.19
10.6
55.3
2001
133.27
9.8
51.9
2002
142.36
8.7
46.5
2003
148.07
7.6
41.1
2004
153.63
7.0
38.8
2005
159.70
6.5
36.5
S.E.Asia 4
1990
82.29
17.8
55.7
1996
111.29
7.8
27.2
1999
97.26
10.1
36.9
2000
102.85
9.2
34.3
2001
105.16
8.3
31.2
2002
111.92
6.8
25.9
2003
117.24
5.8
22.3
2004
121.43
5.4
21.1
2005
126.12
5.0
19.8
Lower Income East Asia (Cambodia, Laos, PNG, Vietnam)
1990
43.79
49.9
41.6
1996
63.62
26.1
24.9
1999
66.19
21.5
21.6
2000
68.52
20.5
20.9
2001
70.53
19.9
20.7
2002
74.13
19.6
20.6
2003
78.45
17.5
18.7
2004
81.49
16.2
17.7
2005
84.84
15.1
16.7
See Note at end of Appendix Table 8
67.0
49.6
50.0
45.9
43.2
39.7
36.7
34.6
32.6
1,059.9
850.4
885.6
820.6
779.8
722.3
673.6
640.9
608.9
1582.7
1713.1
1771.9
1788.9
1805.0
1820.7
1836.0
1851.3
1866.7
59.3
44.7
51.0
48.6
47.3
44.0
41.3
39.6
37.7
260.3
218.9
262.0
253.2
250.2
236.0
224.3
218.2
210.5
439.4
489.2
514.0
521.5
528.7
536.2
543.7
551.3
558.8
60.3
43.6
52.8
49.9
48.4
44.5
41.4
39.6
37.6
188.8
151.6
193.6
185.5
182.7
170.4
160.9
156.2
150.3
313.1
348.0
366.5
372.0
377.2
382.8
388.3
393.9
399.5
85.7
70.3
68.0
66.2
65.0
62.2
59.2
57.0
54.4
71.5
67.2
68.4
67.7
67.5
65.7
63.4
62.1
60.2
83.4
95.7
100.6
102.2
103.9
105.5
107.2
108.9
110.6
East Asia Update
46
Appendix Table 8: Poverty in East Asia – Country Estimates
$1 –a-day
Mean
Headcount Number of
Consumption
Index
Poor
(1993
(%)
(mill.)
PPP$/month)
Cambodia
1990
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
China
1990
1993
1996
1998
1999
2000
2001
2002
2003
2004
2005
Indonesia
1984
1987
1990
1993
1996
1999
2000
2001
2002
2003
2004
2005
$2-a-day
Headcount Number of
Gini
Population
Index
Poor
Coefficient (mill.)
(%)
(mill.)
48.29
57.77
56.95
55.97
55.48
55.72
57.01
56.68
58.41
59.88
61.32
48.3
36.7
38.4
39.4
41.5
43.4
43.0
45.5
45.5
45.0
44.0
4.4
4.0
4.2
4.4
4.8
5.1
5.2
5.6
5.8
5.8
5.8
83.7
76.9
78.0
78.6
79.3
79.4
78.6
79.0
78.3
77.7
76.9
7.7
8.4
8.5
8.8
9.1
9.3
9.5
9.8
9.9
10.1
10.2
41.6
41.6
41.6
41.4
42.3
43.9
44.6
46.2
47.4
48.1
48.5
9.1
10.5
10.9
11.2
11.5
11.8
12.1
12.4
12.7
13.0
13.3
57.05
67.24
85.20
91.32
93.07
105.69
115.65
130.26
142.83
152.69
162.93
31.5
29.0
16.4
16.1
17.4
15.4
14.3
12.9
11.7
10.8
10.0
360.6
343.9
200.8
201.2
218.4
194.8
183.0
165.9
150.6
140.2
131.4
69.9
65.0
51.6
49.8
49.6
44.8
41.5
37.9
34.8
32.5
30.5
799.6
769.8
631.6
620.8
623.6
567.4
529.6
486.3
449.3
422.7
398.4
36.0
41.2
39.3
41.0
42.6
43.9
44.9
46.1
46.7
47.0
47.2
1,143
1,185
1,224
1,248
1,258
1,267
1,276
1,285
1,292
1,300
1,308
49.80
55.63
61.58
68.54
86.62
66.80
72.53
73.44
81.72
85.88
88.82
92.21
36.7
25.7
20.6
14.8
7.8
12.0
9.9
9.2
7.2
6.2
5.8
5.4
58.7
43.4
36.7
27.8
15.4
24.9
20.9
19.7
15.5
13.6
12.9
12.3
80.0
74.2
71.1
61.6
50.5
65.1
59.5
58.7
53.5
50.1
48.1
46.0
128.1
125.4
126.7
115.5
99.4
135.0
125.3
125.2
115.6
109.9
107.2
104.0
30.3
33.1
28.9
31.7
36.5
31.0
32.2
32.1
34.3
34.8
35.4
36.0
160.1
169.0
178.2
187.6
196.8
207.4
210.5
213.2
216.2
219.4
222.7
226.1
East Asia Update
47
Appendix Table 8: Poverty in East Asia (Continued)
$1 –a-day
$2-a-day
Mean
Headcount Number of
Consumption
Index
Poor
(1993
(%)
(mill.)
PPP$/month)
Headcount Number of
Gini
Population
Index
Poor
Coefficient (mill.)
(%)
(mill.)
Laos
1990
1992
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Malaysia
1984
1987
1989
1990
1992
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
PNG
1990
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
39.16
41.35
48.27
50.35
49.53
51.49
52.66
55.46
56.67
57.05
59.01
61.29
53.0
48.8
41.3
38.4
39.6
36.7
35.1
31.3
29.9
29.3
27.0
24.4
2.2
2.1
2.0
1.9
2.0
1.9
1.9
1.7
1.7
1.7
1.6
1.5
89.6
88.1
83.1
81.3
81.8
80.5
79.8
77.4
76.5
76.3
74.9
73.0
3.7
3.9
4.1
4.1
4.2
4.2
4.3
4.3
4.3
4.4
4.4
4.4
32.7
32.7
36.5
36.5
36.5
36.5
36.5
36.5
36.5
36.5
36.5
36.5
4.2
4.4
4.9
5.0
5.1
5.3
5.4
5.5
5.7
5.8
5.9
6.1
172.09
170.88
176.21
195.32
219.48
253.64
261.87
315.95
269.00
271.52
303.31
303.46
305.14
316.58
328.80
342.18
8.9
4.8
3.2
2.0
1.5
1.0
0.8
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
1.4
0.8
0.6
0.4
0.3
0.2
0.2
----------
29.5
25.0
22.4
18.5
17.6
14.0
13.1
8.8
12.9
12.6
9.8
9.8
9.6
8.7
7.9
7.0
4.5
4.2
4.0
3.4
3.4
2.9
2.8
1.9
2.9
2.9
2.3
2.3
2.3
2.2
2.0
1.8
50.5
47.0
46.2
46.2
47.7
48.5
48.5
49.1
49.1
49.1
49.1
49.1
49.1
49.1
49.1
49.1
15.3
16.6
17.7
18.2
19.1
20.6
21.1
21.7
22.2
22.7
23.3
23.8
24.3
24.7
25.1
25.5
72.95
93.15
88.62
83.15
78.37
71.89
66.41
63.41
63.64
63.51
63.63
35.4
24.6
25.6
27.8
30.7
35.3
38.0
39.2
39.4
40.0
40.0
1.4
1.1
1.2
1.4
1.5
1.8
2.0
2.1
2.2
2.3
2.3
64.3
54.4
56.0
59.0
61.6
65.0
69.2
70.4
70.3
70.5
70.1
2.5
2.5
2.7
2.9
3.1
3.3
3.6
3.8
3.9
4.0
4.1
48.4
48.4
47.5
47.7
47.8
47.6
47.8
47.5
47.5
47.5
47.5
3.9
4.6
4.7
4.9
5.0
5.1
5.3
5.4
5.6
5.7
5.9
East Asia Update
48
Appendix Table 8: Poverty in East Asia (Continued)
$1 –a-day
Mean
Consumption
(1993
PPP$/month)
Philippines
1985
1990
1991
1994
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Korea
1990
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Thailand
1988
1990
1992
1996
1998
1999
2000
2001
2002
2003
2004
2005
$2-a-day
Headcount
Number of
Index
Poor (mill.)
(%)
Headcount
Index (%)
Number
Gini
Population
of Poor
Coefficient (mill.)
(mill.)
74.92
82.77
90.32
87.75
89.10
107.15
110.21
108.77
107.20
107.03
110.61
113.32
118.10
121.26
22.8
18.3
19.1
19.8
18.4
14.8
12.1
13.7
13.5
13.5
11.9
11.1
9.6
8.9
12.4
10.7
11.7
12.3
12.3
10.4
8.6
10.0
10.1
10.3
9.3
8.8
7.7
7.3
61.3
55.6
53.5
55.0
53.1
46.5
45.2
46.6
46.9
47.1
45.3
44.1
41.8
40.4
33.3
32.4
32.6
34.3
35.5
32.5
32.3
34.1
35.0
35.9
35.3
35.0
33.9
33.4
41.0
40.7
43.8
43.8
42.9
46.2
46.0
46.7
46.2
46.2
46.0
45.9
45.9
45.9
54.2
58.3
61.0
62.4
66.8
69.9
71.5
73.1
74.7
76.3
77.9
79.5
81.1
82.6
301.09
330.38
362.09
383.03
411.09
440.03
480.46
483.84
400.86
450.06
478.67
492.54
535.38
550.92
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
---------------
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
< 0.5
---------------
29.9
29.9
29.9
29.4
29.4
29.1
29.7
29.0
29.4
30.0
30.0
30.0
30.0
30.0
42.9
43.3
43.7
44.1
44.5
45.0
45.5
46.0
46.4
46.9
47.3
47.6
48.0
48.2
90.42
102.88
129.75
143.92
121.73
123.50
125.42
131.21
139.40
147.03
153.97
162.48
17.9
12.5
6.0
2.2
3.3
3.1
5.2
3.6
2.4
1.6
1.3
0.9
9.6
7.0
3.5
1.3
2.0
1.9
3.2
2.2
1.5
1.0
0.8
0.6
54.1
47.0
37.5
28.2
34.1
33.6
35.6
32.0
27.7
23.7
21.4
17.9
29.0
26.1
21.7
17.0
21.0
20.7
22.0
19.9
17.4
15.0
13.6
11.4
43.8
43.8
46.2
43.4
40.6
40.7
43.2
42.4
42.2
41.4
41.4
40.9
53.7
55.6
57.8
60.1
61.5
61.7
61.9
62.3
62.8
63.1
63.4
63.7
East Asia Update
49
Appendix Table 8: Poverty in East Asia (Continued)
$1 –a-day
Mean
Consumption
(1993
PPP$/month)
Vietnam
1990
1993
1996
1998
1999
2000
2001
2002
2003
2004
2005
41.73
48.85
63.66
68.54
67.96
71.26
73.84
78.67
83.99
87.62
91.63
$2-a-day
Headcount
Number of
Index
Poor (mill.)
(%)
50.8
39.9
23.6
16.4
16.9
15.2
14.6
13.6
10.9
9.5
8.2
33.6
28.3
17.7
12.8
13.4
12.1
11.8
11.2
9.1
8.0
7.0
Headcount
Index (%)
87.0
80.5
69.4
65.4
65.9
63.5
61.8
58.2
54.3
51.7
48.5
Number
Gini
Population
of Poor
Coefficient (mill.)
(mill.)
57.6
57.2
52.2
50.9
52.0
50.7
50.1
47.8
45.2
43.5
41.4
35.0
35.0
36.3
35.4
35.4
35.9
36.8
37.5
37.5
37.6
37.7
66.2
71.0
75.2
77.7
78.9
79.9
81.0
82.1
83.2
84.3
85.4
Note:
The poverty lines in Tables 8 and 9 are set at $1.08 and $2.15 per person per day (in 1993 PPP$) for all countries. For most
countries, 1993 World Bank PPP estimates are used. The PPP for the Philippines is from the Penn World Tables, while that
for PNG is the 1996 World Bank PPP. PPPs for Vietnam, Lao PDR and Cambodia have been further adjusted using a calorie
price ratio between Indonesia and Vietnam. Projections are based on World Bank growth rate forecasts for 2003-2004.
Wherever possible, the projections utilize information on sectoral GDP growth rates, changes in the food CPI relative to the
general CPI, changes in the GDP deflator relative to the CPI, and changes in the consumption-income ratio. The projections
assume that there is no change in relative inequalities within sectors. For China, the projections are done separately for rural
and urban China, and then aggregated using population shares. Estimates for all countries except Malaysia and China are
based on surveys of household consumption. The estimates for Malaysia and China use income surveys. For China, a
survey-based estimate of mean consumption is used in conjunction with the income Lorenz curves to derive poverty
estimates. These poverty estimates differ from those commonly found in national poverty assessments for two main reasons.
First, country assessments use national poverty lines that differ from the uniform international poverty lines used here.
Second, national poverty lines also typically allow for spatial cost of living differentials within countries, but such
adjustments are omitted here to maintain a consistent methodology across countries. For instance, in the case of Thailand,
these differences explain why the above estimates indicate a small increase in poverty between 1998 and 2000 (in spite of
adjusting the CPI by the change in the national poverty lines over this period), while national poverty line-based estimates
indicate a decline. Also for Thailand, the 2002 estimate is based on a longer consumption module, which could lead to a
small overestimation of consumption relative to 2000.
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Appendix Table 9. NPLs in the commercial banking system of the crisis-affected countries
(percent of total loans)
1997 1998 1999
2000
Dec
Dec
Dec
Indonesia (a)
--
--
excl. IBRA
Korea (b)
excl. KAMCO & KDIC
7.2
8.0
6.0
48.6 32.9 18.8 18.1 17.6 14.7 12.1 12.8 11.8 10.5
17.2 23.2 14.0 12.9 10.5 9.6 7.4 6.6 5.0 4.8
7.3 13.6 8.8 7.6 5.6 5.1 3.3 2.9 2.5 2.5
Malaysia
excl. Danaharta
Philippines (c)
Dec
2001
Mar
Jun
Sept
2002
Dec
Mar
Jun
Sept
2003
Dec
Mar
Jun
Sept
Dec
64.0 57.1 54.4 52.6 50.5 48.8 50.3 48.5 40.7 31.1
30.3
28.0
24.0
..
7.5
4.1
2.4
7.6
4.2
2.6
7.1
4.7
3.2
6.7
4.9
3.3
4.4
2.7
-4.7
21.1 23.4 22.5 23.2 23.9 23.0 24.4 24.6 23.7 23.1 22.4
16.7 16.7 13.4 14.3 15.5 16.5 16.3 16.7 15.7 15.3 14.7
10.4 12.3 15.1 16.6 17.0 17.9 17.3 18.0 18.1 16.5 15.0
22.1
14.6
15.5
21.3
13.9
15.2
..
13.3
14.5
..
13.1
14.1
Thailand (d)
--
45.0 41.5 29.7 29.3 28.9 29.3 29.6 29.7 29.9 29.6 34.2
34.1
34.1
33.5
30.9
Excl. AMCs
Memo: Malaysia (e)
excl. Danaharta
--
45.0 39.9 19.5 19.2 13.9 14.1 11.5 11.4 11.3 11.7 18.1
10.6 10.6 8.3 9.3 10.3 10.7 10.5 10.6 10.0 9.6 9.3
17.8
9.1
17.6
8.8
16.8
8.3
14.0
8.3
Notes
a) Only includes IBRA’s AMC; b) The NPL ratio increased in 1999 due to the introduction of stricter asset classification criteria
(forward looking criteria) ; c) From September 2002 onwards, the NPLs ratios are based on the new definition of NPLs (as per
BSP Circular 351) which allows banks to deduct bad loans with 100 percent provisioning from the NPL computations; d)
Includes transfers to AMCs but excludes write-offs. (Note that the jump in headline NPLs in December 2002 was a one-off
increase, reflecting a change in definition and did not affect provisioning requirements). The June 2003 figure is preliminary and
was estimated using transfers to AMCs and lending to AMCs as of March 2003; e) NPL series used by Bank Negara Malaysia,
which is net of provisions and excludes interest in suspense.
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