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 sprawling archipelago. The elections saw the emergence of a variety of political parties and the maturing of a more East Asian economies mounted an unexpectedly issues-based politics, and resulted in President vigorous recovery in the second half of 2003.1 Growth in Megawati's PDI-P party slipping behind the former ruling many economies accelerated so quickly at this time that - Golkar party, while some new parties gained ground. In despite the shock of the SARS epidemic in the April-June Korean parliamentary elections the Uri party of President quarter of last year - regional output for the year as a Roh Moo Hyun increased its seats from 49 to over 150, to whole increased by 5.7 percent. This was not much win a majority in the national assembly. Whatever the below the 5.9 percent seen in 2002 and a good deal higher specific party outcomes in the elections so far, the results than the 5 percent growth projected for 2003 in our last appear to reflect the strengthening of a broad political Regional Overview. Partly in consequence, the numbers consensus that favors continued pro-growth, outward- of people living below the $2 a day poverty line in East oriented and socially balanced reforms. Attention now Asia are estimated to have fallen by almost 50 million turns to the closely fought presidential elections in the during 2003 ­ up from our estimate of 33 million six Philippines. months ago. This report looks at three sets of issues Early data suggest that, if anything, the pace of underlying the present cyclical moment and the outlook expansion accelerated in the first quarter of 2004: at the for East Asia. level of city-states, Singapore's GDP increased 7.3 percent from a year earlier, while ­ at the continental First, the evolution of the world economy is scale ­ China grew 9.7 percent over the same period. It is always relevant in as open and globally integrated a true that not all parts of the region are growing at such region as East Asia. Japan's economy seems to have fierce rates, although, even here, the trend towards finally returned to broad-based and sustainable growth, improvement is widespread. In Indonesia, for example, while the U.S. economy is growing at 4-5 percent. Global growth has moved up to a 4-5 percent range, and is high technology industries appear to have returned to a expected to gradually rise further, supported by prudent phase of multi-year expansion (no doubt with quarter to macroeconomic policies and continuing efforts on quarter fluctuations). Rising world demand has helped investment climate and institutional reforms. Inevitably, pull primary commodity prices sharply higher, a boon to though, the development that is dominating regional some of the low-income, commodity exporters in the attention is the trajectory of the economic boom in the region, if not to their more industrially developed, largest and fastest growing economy, China, its impact on commodity importing neighbors. Large scale portfolio and the potential risks it may pose for East Asia. capital flows returned to the region in 2003, helping fuel a surge in equity and other asset prices. Protectionism and This year is seeing a wave of legislative and/or macro imbalances remain a key global risk, however. The presidential elections across East Asia, including in setback at last September's Cancun multilateral trade Cambodia, Malaysia, Indonesia, Korea, Philippines, talks has slowed momentum on global trade liberalization. Taiwan (China) and Thailand. The successful conduct of In places, special interests have been emboldened and so many elections and the associated transitions of power politicians have taken to protectionist rhetoric for under rule of law mark an important consolidation in the electoral purposes. If notable fiscal and external legitimacy, institutions and procedures of representative imbalances (for example those in the U.S. economy) lead government in the region. In the Malaysian general to a loss of confidence and a premature end to the global election in March, the ruling Barisan Nasional coalition recovery, protectionism could gain further ground. led by PM Badawi won a landslide victory, which is seen as a vote of confidence in a program of economic reform The second set of issues centers on the and anti-corruption, and a rejection of extremism. In emergence of China as the economic powerhouse of the Indonesia parliamentary elections were held at the start of region, its rapid integration with other Asian economies April, a mammoth and largely peaceful undertaking in and the region wide opportunities, risks and policy which nearly 150 million went to the polls across the 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 1 East Asia comprises Developing East Asia (China, sophisticated production networks between countries. For Indonesia, Malaysia, Philippines, Thailand, Vietnam and two years now the boom in the Chinese economy has some smaller economies) and four Newly Industrialized contributed around half the export growth in many other Economies or NIEs (Hong Kong, Korea, Singapore and East Asian economies. Surging raw material demand in Taiwan, China). China has also materially contributed to recent global East Asia Update 2 commodity price increases. The Chinese authorities are top policy priority. In most of the rest of the region aiming to eliminate overheating by slowing growth to a exports and personal consumption have been the more sustainable pace of around 7 percent, but their task mainstays of the recovery so far, but conditions may is complicated by the limited range and bluntness of now be in place to support a stronger flow of private macroeconomic policy instruments available. A key risk at investment spending as well. In South East Asia, the regional level is that attempts to slow China's growth is expected to be most robust in Vietnam, economy could overshoot ­ a so-called "hard-landing Thailand and Malaysia, with Indonesia also expected to scenario" - with obvious implications for regional trade achieve some modest strengthening of activity. Perhaps and growth. The report looks at a key policy issue with the strongest rebound is expected in the newly global and regional implications, the choice of the industrialized economies such as Hong Kong (China), appropriate exchange rate regime for China, another Korea, Singapore and Taiwan (China), where 2003 question brought to the forefront by the country's rapid growth had languished at around 3 percent or less, but integration into the world and regional economies. The where consensus projections expect activity to pick up report also analyzes and rejects the contention that high to a 5-6 percent range in 2004.. Higher growth is also FDI flows to China have diverted flows from other Asian expected in many of the smaller, low income or island economies. economies ­ several of which are benefiting from a A third set of issues in this report are the policy large influx of foreign exchange due to higher efforts undertaken by countries to address domestic commodity prices, or from more stable political and challenges as well as international and regional ones. security conditions. While domestic and foreign direct investment is booming Table 1. East Asia Economic Growth in economies like China and Vietnam, it has only just 2002 2003 2004 2005 begun to recover in Thailand, and remains weak in several East Asia 5.9 5.7 6.3 5.9 of the other economies hit by the 1997-98 financial crisis. Develop. E. Asia 6.7 7.6 6.9 6.5 Efforts to improve the investment climate are a key S.E. Asia 4.4 5.1 5.4 5.4 element of the regional policy agenda. The report also Indonesia 3.7 4.1 4.5 5.0 highlights demographic trends such as population aging Malaysia 4.1 5.2 5.5 5.5 and the slowdown and approaching decline in the share of Philippines 4.4 4.5 4.2 4.1 the working age population, which are already starting to Thailand 5.4 6.7 7.2 6.5 Transition Econ. play a role in the development of major economies in China 8.0 9.1 7.7 7.2 North Asia, and will become ever more important in the Vietnam 7.0 7.2 7.0 7.2 future. Small Countries 2.7 3.9 4.2 4.2 Developments at the country level are discussed Newly Ind. Econ. 4.9 3.0 5.4 4.9 Korea 7.0 3.1 5.3 5.3 in the "Country Sections" towards the back of the report, 3 other NIEs 3.1 2.9 5.5 4.5 while fuller Country Briefs are also available at the website associated with this report.2 Japan -0.3 2.7 3.1 1.4 The report closes World Bank East Asia Region; April 2004. 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" · Poverty. The number of East Asians living below Conference to be held in Shanghai on May 25-27, 2004. $2 a day is estimated to have fallen by around 50 It discusses lessons on successful poverty reduction million to reach 674 million, or from 39.7 to 36.7 emerging from the development experience of China, percent of the population. Of these about 190 million Indonesia, Korea and Malaysia. 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 Cyclical recovery gains strength East Asia's poor live, $2 a day poverty fell to an estimated 34.8 percent (450 million) from 37.9 in 2002, · Economic growth in East Asia is expected to reach which was about the same as the rest of developing 6.3 percent in 2004, the strongest since the start of the East Asia, despite China's growth being much higher global and regional recession in late 2000 (Table 1, than elsewhere. The discrepancy partly reflects the Exhibit 1). Growth is expected to rise in most slower rate of rural than of urban income growth in individual economies as well ­ with one large China, and illustrates a wider point about the exception, China. Such has been the scale of importance of sectoral and geographical considerations investment spending in the country in 2003 that policy in poverty reduction. Vietnam, Thailand, Philippines makers have made stopping economic overheating and and Indonesia also registered important reductions in slowing economic growth to a more sustainable pace a poverty. This report presents for the first time Poverty Maps which disaggregate poverty in East Asia down to 2 the provincial level. A number of policy implications http://www.worldbank.org/eapupdate/ . East Asia Update 3 emerge from the spatial view of poverty. For example more developed industrial economies in the region will remote or mountainous areas tend to combine high suffer some income losses, though, on current poverty incidence with low absolute numbers of poor, projections, not by enough to seriously derail the requiring specific tailoring of poverty reduction recovery. On the other hand the run up in commodity policies. Areas that combine large absolute numbers of prices will significantly boost national income in some poor with high poverty incidence, on the other hand, of the small low income economies in the region like benefit most from general high growth strategies and Mongolia and Papua New Guinea, as well as in some are especially attractive for targeting of public of the larger economies like Vietnam and Indonesia. resources. 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 The international and regional environment economies with very large commodity windfall gains relative to GDP will face an important challenge in · Developed world recovery. The strength of cyclical properly managing these sudden riches. recovery in the United States and Japan in the latter part of 2003 has led to forecasts for 2004 growth in · Capital Markets. 2003 marked a decisive return of these two important export markets for East Asia being portfolio capital flows to emerging markets, and to East boosted by 1-2 percentage points. Of special Asia in particular, the first time since the financial importance for East Asia, which has suffered from the crises of the late 1990s. Net portfolio flows to six large more than decade long stagnation of the Japanese economies in the region are estimated to have jumped economy, there is now increasing confidence that the to around $33 billion in 2003 from a net $9 billion recovery in Japan will be sustained, backed as it is by a outflow in 2002. The surge of portfolio inflows has credible expansionary monetary policy and a contributed to sharp gains in East Asian equity and dissipation of deflationary expectations. other financial asset prices, and has also magnified upward pressure on most East Asian exchange rates. Exhibit 1 There is of course a risk of things going too well: a East Asia: Real GDP Growth 1990-05 period of sustained capital inflows, high domestic 15.0 credit growth and speculative increases in asset prices S. E. Asia could lead to excessive borrowing by firms or NIEs households (as recently occurred with credit card China East Asia borrowing in Korea) and to a weakening of the 10.0 financial sector. This is a current concern of policy makers in China. As the report notes, progress on recapitalizing banks, reducing non performing loans 5.0 and better regulation and supervision have helped strengthen East Asian financial systems in recent years, which should help. 0.0 · The Chinese locomotive. For two years now the boom in the Chinese economy has contributed around 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 half the export growth in many other East Asian economies. Efforts by the Chinese authorities to -5.0 S.E.Asia: Indonesia, Malaysia, Philippines, Thailand. eliminate overheating and slow economic growth have NIEs: Hong Kong (SAR), Korea, been more pronounced recently, but with first quarter Singapore, Taiwan (China). growth of 9.7 percent already achieved, it is doubtful -10.0 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 · Commodity Demands. Global investment in 2004, before settling on a trajectory close to 7 percent information and communications technology and high in 2005. Indeed the first signs of a slowing trend are tech electronics has come out of deep recession and is already showing up in domestic credit and retail sales finally growing, supporting sharp gains in East Asian data. Any growth slowdown would likely result in a high tech production and exports. Oil and other slower pace of import growth, including from East primary commodity prices ran up by 10-20 percent in Asia. In a "hard-landing" scenario where China's 2003 and have continued to rise in early 2004. imports turn out 10 percent lower than assumed in the Demand for commodities is being pulled higher by the baseline, economies with a high share of exports to powerful economic boom in China, as well as by the China like Korea and Taiwan (China) could experience developed world recovery. This is by no means an somewhat under 1 percent lower growth, while others unmixed benefit for East Asia ­ in fact several of the like Thailand could experience a little under 0.5 East Asia Update 4 percent lower growth. Fortunately the fact that the developed countries are in recovery should help cushion the shock to regional exports. And whatever · East Asian demographics. Over the course of the the short run cyclical impacts of a slowdown in China, next 10-20 years changing population trends will begin there is also a longer run structural trend towards to profoundly alter the economic landscape of East growing specialization, complementarity and Asia.. Population growth will fall well below 1 integration between the economies of the region, based percent, with the level of the regional population on the development of closely linked production stabilizing at around 2.4 billion in the latter part of the networks across countries. The growing integration of century, compared to around 1.9 billion today. In most the region has inevitably tended to bring to the countries the share of the population of working age ­ forefront discussion about the right level for China's which has been rising steadily since the late 1960s or currency and the appropriateness of its exchange rate early 1970s ­ will begin falling after 2015 or 2020, regime. The report reviews some of the relevant while the proportion of people older than 65 will evidence which suggests the tentative conclusion that, steadily rise. All countries in the region will ultimately given the structure of China's economy and its be affected by these trends, although the timing and relationships with other economies, a well-prepared speed of the changes will differ. The coming long term move to some form of flexible exchange rate demographic shifts are ­ other things remaining equal regime would best serve China's ability to manage its ­ expected to lead to a slowing in the region's rate of own economy and enhance long run growth prospects, per capita GDP growth, together with lower rates of once its banking sector and foreign exchange market savings and investment. With increasingly old infrastructure have been strengthened. 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 Domestic trends and policy challenges amount of certainty about the coming demographic changes, their economic consequences may depend to a · The investment cycle and FDI. Fixed investment considerable degree on the policies that are put in place spending has boomed in China and Vietnam and 2003 to deal with them. Inward migration of young workers also saw a return to solid growth in Thailand, but can help offset the effects of a more slow growing or remains weak elsewhere. Looking forward, a declining labor force, but governments will need to combination of relatively low interest rates, greater design migration policies that help migrants assimilate credit availability, corporate profits, capacity utilization and minimize potential stress on the host population. 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. East Asia Update 5 EAST ASIA AND PACIFIC REGIONAL OVERVIEW Cyclical recovery gains strength portfolio quality of already weak banks - have made policy actions to cool growth a top priority, while still A widespread acceleration in regional growth aiming to achieve growth strong enough to maintain East Asian growth accelerated sharply in the employment and facilitate structural reforms. The second half of 2003. Overcoming the hard but short-lived government aims to achieve a `soft landing' mainly by blow of the SARS epidemic, which had depressed growth tightening fiscal policy and through various to only about 3.4 percent in the second quarter of the year, administrative restrictions on domestic lending and regional economic activity expanded at an estimated year investment, as well as on certain capital inflows. on year pace of 5.6 percent in the third quarter, rising to Although the official target is to slow growth to 7 percent 6.6 percent in the fourth - which was in fact the most in 2004, a sizzling 9.7 percent growth rate in the first rapid quarterly growth in East Asia since the start of the quarter of 2004 indicates this may not be easy to achieve. global economic downturn in the latter part of 2000. Exhibit 3 (Exhibit 2). The rebound in activity was also wide spread: virtually all the main economies shared in the acceleration China- Real Estate Price Index for 35 Cities of growth through the third and fourth quarters. (% Change Year Ago) 10.0 Exhibit 2 East Asia - Quarterly GDP Growth 8.0 (% Change Year Ago) 12.0 6.0 9.0 4.0 6.0 2.0 3.0 House Selling Price Index Land Rent Price Index 0.0 0.0 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 Q11999 Q3 Q1 Q3 Q12001 Q3 Q1 Q3 Q1 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1999 2000 2000 2001 2002 2002 2003 2003 -3.0 E.Asia NIEs Vietnam's economy achieved the next most SE Asia China robust performance after China's, growing 7.2 percent in -6.0 2003 despite being affected by the SARS driven downturn in regional tourism. Exports increased over 20 percent, China continues to dominate the regional scene led by a 60 percent surge in exports to the U.S. Domestic in terms of sheer economic size, pace of growth and its investment increased to near 36 percent of GDP, locomotive effect on activity in the rest of the region. supported by capital spending in the fast growing Despite the disruption caused by SARS, the economy Vietnamese private sector and continued increases in ended 2003 at full tilt, growing by 10.4 percent in the foreign direct investment inflows. Vietnam was one of fourth quarter, to give a whole year increase of 9.1 the countries most seriously affected by the avian flu percent. Output growth has been fuelled by both exports outbreak at the start of the year. Initial analysis suggested and domestic demand, especially investment, which is that - depending on how seriously the outbreak hurt the estimated to have surged to record levels close to 50 poultry sector and the number of tourist arrivals ­ it could percent of GDP. The scale and impact of the investment reduce growth by 0.3-0.9 percent of GDP. So far in 2004, boom are reflected in the emergence of overcapacity in a though, the overall economic impact of the outbreak has number of sectors, rapid bank credit and money supply remained relatively negligible. After dipping in February, growth and a pickup in the pace of land, rental, producer foreign tourist arrivals increased four percent in March and consumer price inflation. (Exhibit 3). Policy makers ­ compared to the same time last year. Growth is expected concerned about the dangers of a sharp cyclical downturn to reach around 7 percent for the year. following the boom and possible deterioration in the loan East Asia Update 6 In the middle income economies of South East striking divergence from the regional pattern of Asia the 2003 acceleration of growth was most marked in accelerating growth in 2003 ­ growth fell to 3.1 percent Thailand and Malaysia, increasing by over one percentage from 7 percent in 2002, mainly because of a fall in point from 2002 to reach 6.7 percent in the one case and personal consumption, which was depressed by tighter 5.2 percent in the other. In both economies export growth credit policies and the efforts of households to restructure ­ dominated by growth in exports to China and the rest of their balance sheets and reduce excessive debt. However, East Asia - was the largest contributor to growth in here too, signs of recovery amplified in the fourth quarter, overall final demand, with healthy household led by solid gains in exports and fixed investment. consumption growth the second largest. (Exhibit 4). Growth in Thailand was also fuelled by reviving fixed Finally, 2003 also saw a welcome alleviation of investment growth, which reached its fastest pace since economic conditions in some of the smaller economies of the crisis, led by an 18 percent increase in private the region, partly because of higher primary commodity investment. Growth also picked up, though less prices for their exports and, in some cases, improvements markedly, to reach 4.1 percent in Indonesia and 4.5 in political conditions. Papua New Guinea saw mildly percent in the Philippines. positive growth after three years of contraction, as prices for a wide array of its mineral and agricultural exports Exhibit 4 increased, while growth also accelerated in Mongolia, prices for whose copper exports have surged. Growth Contributions to 2003 Growth in Final Demand also improved among several of the Pacific Island 8.0 economies. In the Solomon Islands the entry of a regional Exports Inventories assistance mission helped stop ethnic violence - GDP Fixed Investment grew for the first time in five years, at 3.8 per cent, after Govt. Consump. 6.0 Private Consump. having fallen by a cumulative 28 per cent between 1998 to 2002. A special and unpredictable event that countries 4.0 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 2.0 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 0.0 transmitted from birds to humans, resulting in 23 deaths Indonesia Korea Malaysia Philippines Thailand 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, -2.0 (Final demand is the sum of domestic consumption, investment and exports.) which in itself is a fairly small part of the economy, ranging from 0.5 to 1.5 percent of GDP in various Among the Newly Industrialized Economies countries. So far, however, the impact of the epidemic on (NIEs), growth in Hong Kong, Singapore and Taiwan the overall economy in affected countries appears to have (China) had been especially hard hit by SARS in early remained relatively small. 2003, but also saw an energetic rebound in the third and fourth quarters. In Singapore, for example, GDP in the Poverty reduction ­ in time and space second half of 2003 was up at an annualized pace of 13.7 percent on the first half of the year, while in Taiwan As noted, growth in the low and middle income (China) output was up an annualized 10.2 percent over the countries of the region accelerated from a solid 6.7 same period. Some of this was of course a rebound from percent in 2002 to 7.6 percent in 2003, the strongest since SARs, but there are also signs of a more sustained before the financial crisis, with growth accelerating in recovery: exports are strong, supported by demand from most of the countries in this group individually. Solid China and the recovery in global high tech demand. output and income expansion in Developing Asia are one Fixed investment spending also began to strengthen in principal reason for expecting poverty in the region to several of the NIEs in the latter part of the year, growing have seen a further substantial decline over the last two at over 30 percent seasonally adjusted annual rates in years, although it will take a little while for analysis of Taiwan (China) for example. Singapore is seeing strong household income and expenditure survey data to confirm growth in its pharmaceuticals sector, indicating growing 2003 outcomes. In specific areas and sectors, small success in its effort to restructure its economy away from farmers in the region should also experience income gains lower end electronics sectors which face severe because of higher international prices for agricultural competition from China. The Korean economy was one East Asia Update 7 exports that they produce. The numbers of people living Poverty rates are also estimated to have below the $2 a day poverty line in East Asia are estimated continued to fall in the countries containing the other to have fallen by around 49 million during 2003, to major concentrations of poor people in East Asia. In around 674 million by year end. The headcount index or Indonesia $2 a day poverty is estimated to have fallen proportion of the population living below $2 a day is from 58.7 percent in 2001 to 50.1 in 2003, which means estimated to have fallen from 39.7 to 36.7 percent. last year was the first when the poverty rate fell below (Exhibit 5; Appendix Tables 7 and 8). This compares to a what it was in 1996, before the financial crisis. The situation in 1990 when two thirds of East Asia lived recent fast pace of poverty reduction has benefited from a below the $2 a day poverty line. The Millennium fall in the relative price of food, which comprises a large Development Goals for income poverty have already been share in the budgets of the poor: in 2003 food prices achieved in East Asia. increased less than 4 percent compared to over 8 percent for prices of non-food items. Poverty rates also showed Exhibit 5 sharp declines in Vietnam and Thailand. In Thailand the Poverty - Headcount Index government launched a drive to eradicate mass poverty by the end of the decade, starting with a national poverty ($2 a day poverty line. Percent) 90 registration program at the start of 2004. The registered Vietnam S.E. Asia (4) East Asia China poor cited personal debt and lack of adequate access to Other Small * land and housing as by far the most important problems they face. Thailand's regional economic development 75 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 60 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. 45 Understanding the geography of poverty East Asia's impressive achievement in reducing poverty in recent years (and decades) masks large * Cambodia, Lao PDR, Papua New Guinea 30 continuing disparities within countries and regions. The 1990 1996 1999 2000 2001 2002 2003 2004 2005 effectiveness of poverty reduction policies can be raised if they are based on good information about the spatial In China, where two thirds of East Asia's poor distribution of poverty. This Regional Overview presents live, the last two years' splendid growth of 8-9 percent a for the first time poverty maps which disaggregate year are estimated to have reduced the headcount index at absolute poverty in the East Asia region to the province the $2 a day line from 41.5 to 34.8 percent between 2001 level for the year 2002. Exhibit 6 shows a map of how and 2003. Large as it is, what is most striking about this poverty incidence or the headcount index ­ that is the fall in Chinese poverty, however, is that it is not much proportion of the population living below (say) $2 a day ­ larger than that estimated in the rest of Developing East varies over the provinces of countries in East Asia. The Asia, where GDP growth was several percentage points accompanying Exhibit 7 shows the absolute number of less than in China. This discrepancy highlights the poor below $2 dollar a day in the various provinces, each importance of sectoral and geographical considerations in dot on the map representing 10,000 poor people. determining poverty outcomes. In the case of China Mapping poverty at the province level about 90 percent of the poor live in the rural areas, where underlines three features. First, national averages hide income growth during the 1990s has been significantly large differences within countries. Low income countries lower than in urban. In 2003, for example, urban include provinces with low incidence, and middle income disposable income per capita rose 9 per cent, but rural net countries include provinces with high incidence. There income per capita by only 4.3 per cent. The government are some regularities across the region. Poverty incidence introduced a new package of measures to promote rural tends to be higher in the remote rural upland areas (for development in February 2004, including an increase in example, Vietnam, Laos and China's Yunnan province), fiscal resources for rural areas, access to finance, and in areas with a weak natural resource base, as the improvements in the provision of public goods and Northeast of Thailand, and in areas far from major urban services. In the longer run policies and investments to centers. Conversely, poverty headcounts are generally smooth the migration of workers from rural areas to the lower in urban agglomerations and surrounding areas. burgeoning opportunities in fast growing urban areas will remain the most effective approach to reducing poverty. 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# # # # # # # ## ## # ############################################################################################################################################################# ######### # # # # # # # # # # ##### # ## # #### ## # # # # ################## # ############### ### # ## # # # # # ##### # ##### # #### ############# # ## # ### # # # ### ### # ##### # ##### # # ## ####### #################################### ######## # ###### ################# ############## ###### ################# # ######################### #### ################### ######### ########## ### # # #### # ## # #### # ## ######### ## ## ## # # ########### ########## ## # ### # # ## ### # ########## ## # # ############ # # ## #### ####### # ## # # # # # ########## ####### ##### #### #### # # # ## ### # ########### # ## # # # ############## ## # ###### #### # # # # ### ## #### # # ## ### ####### #### ######## # #### ################## ## # # # # # # # ### # # # # # # # # # ## ##### # # East Asia Update 9 Second, poverty incidence tends to be spatially reaching 35 and 20 percent respectively. Export growth clustered, and the clustering can transcend national among the other South East Asian and the Newly borders. This suggests an important role for geography in Industrialized economies hit something of a `soft spot' in determining poverty, which goes beyond the influence of the middle part of 2003, but then rebounded powerfully in national history, policies and institutions. The sub-region most countries in the last quarter of the year, with the year with the most significant cross-border spillovers of on year pace for the region as a whole topping 30 percent poverty incidence is the Greater Mekong sub-region, in December (Exhibit 8). For the second year in which includes Yunnan province in China, Laos, succession, growth in exports to China contributed 50 Vietnam, Cambodia and Thailand. percent or more of overall export growth in a number of Third, in comparing the incidence of poverty other East Asian economies, such as Korea and Taiwan with the number of the poor, it is notable that areas with (China), while recovering growth in the rest of East Asia high poor incidence are more often than not sparsely and Japan also contributed to the buoyancy of intra- populated. For example, areas with high poverty regional trade. incidence and low population density include the western Exhibit 8 provinces of China (Xinjiang and Tibet), the Northern Mountains areas of Vietnam, the upland areas of Laos and East Asia - Export Growth the eastern provinces of Indonesia and Papua New 50.0 (US$ - % Change Year Ago) Guinea. At the other end of the spectrum, low-incidence and high-population density areas include the Mekong China River and Red River delta areas in Vietnam, Vientiane 40.0 plain and Mekong River Corridor in Lao PDR, and Luzon island in the Philippines. However, some areas are 30.0 characterized by both high poverty incidence and a large number of poor. Poverty incidence and number of poor E.Asia overlap in the eastern provinces of Philippines, on Java, in 20.0 Yunnan province of China and the Northeast region of Thailand. 10.0 A number of policy implications emerge from SE Asia the spatial view of poverty. First, economic policies need 0.0 to recognize the inter-linkage of geography and poverty. Adverse environmental circumstances breed poverty, and Oct-00Jan-01 Apr-01Jul-01 Oct-01Jan-02 Apr-02 Jul-02Oct-02Jan-03Apr-03Jul-03 Oct-03Jan-04 lack of resources prevents effective responses to difficult -10.0 conditions. Second, the targeting of public resources to NIEs poor areas is attractive if high poverty incidence coincides -20.0 with a large number of poor. However, more typical is the situation where there is a trade-off between reaching the East Asian export growth dipped in January largest number of the poor ­ who may live in an overall 2004, but ­ having fallen mainly for technical reasons to relatively prosperous province - and reaching the poorest, do with the timing of the Chinese New Year ­ growth who may live in a sparsely populated province. Third, the rebounded to 31 percent in February. Partial data for cross-border clustering of poverty suggests an important China and Korea show solid 40 percent export growth in role for cross-country collaboration and regional March. Prospects for East Asian export growth in 2004 integration and trade in reducing poverty. For example, remain favorable, given the solid recovery in the U.S. the poor mountain areas in Lao PDR may benefit from and Japanese economies, the recovery in world trade, and improved road infrastructure investments between in global high tech industrial and consumer demand more Yunnan province in China and ports in Thailand, and the particularly, with an unexpectedly sharp downturn in poor in the Northeast of Thailand and Cambodia can China posing the most obvious risk to the outlook. 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 Growth resurgent in (two thirds of) the developed endowing people with human capital, a mobile asset, can world contribute to poverty reduction. Forecasts for global growth in 2004 have been The international environment revised up to 3.7 percent from 3 percent six months ago. (Table 2). Much of the improvement comes from stronger East Asian export growth in dollar terms almost expected growth in the OECD, especially in the US and doubled, from 9.6 percent in 2002 to 19.1 percent in 2003. Japan, where growth projections for 2004 have been Export growth was especially robust in China and Korea, East Asia Update 10 boosted by over 1 and nearly 2 percentage points vulnerabilities. Household savings remain low, respectively. indebtedness is high, while the value of household assets is increasingly dependent on the high recent levels of Table 2. International Economic Environment housing prices, creating the risk of a pullback in consumer 2002 2003 2004 2005 spending once monetary policy is tightened and interest % Change from previous year, except interest rates rates rise. Concerns about fiscal deterioration and the GDP Growth sustainability of the large U.S. current account deficit World 1.8 2.6 3.7 3.1 could push long term interest rates significantly higher, OECD 1.4 2.0 3.2 2.6 while the resulting slowdown in economic growth could United States 2.2 3.2 4.6 3.2 encourage a greater turn towards protectionism. Japan -0.3 2.7 3.1 1.4 Euro Area 0.9 0.4 1.7 2.3 Exhibit 9 World Trade (Volume) 3.5 4.6 8.7 7.9 Labor Productivity Growth in U.S. Non Farm CPI Inflation - G7 a/ 1.3 2.0 1.4 1.7 Oil Price - $/bbl 24.9 28.9 26 23 Business Sector 1951-2003 - % Ch. Year Ago - % Change 2.4 16.0 -10.0 -11.5 6.0 Non-oil Commodity 5.1 10.0 10.4 -2.9 Prices LIBOR (US$. 6 Mo.) 1.8 1.2 1.5 3.5 Source: World Bank DEC Prospects Group update March 2004. 4.0 a/ In local currency, aggregated using 1995 weights. Trend (*) The recovery of the United States economy 2.0 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 0.0 productivity, very low interest rates, higher household 9511 9541 9571 9601 9631 9661 9691 9721 9751 9781 9811 9841 9871 9901 9931 9961 9991 0022 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 -2.0 (* Trend using Hodrick-Prescott Filter). 2004. Among these factors the strength of productivity growth is especially important in molding the distinctive However there are also somewhat less well features of this recovery. As Exhibit 9 indicates, U.S. known "upside risks". The rise in U.S. productivity labor productivity growth has been trending higher since growth since 1995 provides increasingly convincing 1995, and reached a 4-5 percent annual pace in both 2002 evidence that the long run productivity trend over the next and 2003, among the highest in the last 50 years, pushing several decades may remain significantly higher than in unit labor costs lower and boosting corporate profits at a the two decades before 1995, principally as a result of 15-20 percent year on year rate during these two years. continued rapid technological innovation and diffusion Burgeoning profits have finally helped stimulate a and the new capital investment they stimulate. A detailed rebound in business fixed investment, which rose at an study of this issue by Gordon (2003) arrives at a central annualized pace of around 11 percent in the second half of projection of 2.5 percent annual growth in U.S. non-farm 2003, after falling or stagnating for three years. business productivity over the next couple of decades, a Of course it is true that high labor productivity full percentage point higher than the trend in 1973-1995.3 growth is also the principal reason for the unusually slow Higher long run growth would of course increase the recovery in U.S. employment. The sluggishness in the manageability of long run fiscal and external current labor market, if long continued, would tend to undermine account challenges in the U.S. From the viewpoint of household confidence and consumer spending, which East Asia these considerations suggest that the region's remains the dominant source of demand in the U.S. longstanding and deep symbiotic relationship with the economy. However several indicators ­ including higher U.S. economy might also be sustainable for quite a while working hours, rising temporary employment and longer, with the U.S. continuing to provide a dynamic and surveyed hiring intentions, and a jump in March employment - suggest that employment growth should be 3 Robert J. Gordon. (2003). "Exploding Productivity finally rebounding in coming months. The near term Growth: Context, Causes, and Implications". Brookings prospects for the U.S. economy are therefore good, but Papers on Economic Activity, 2:2003. See also J. there are also a number of well known risks or 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 more structural reforms going forward. A revitalized destination for investment of its abundant savings, as Japan would mark a major improvement in the East Asian well as a leading source for technological innovation and regional economic environment in the 2000s, as well as in scientific knowledge. the world outlook as a whole. The Japanese economy also enjoyed an In the Euro Area, growth was only 0.4 percent in unexpectedly robust 2.7 percent real growth in 2003, with 2003, although it had picked up to quarterly annualized fourth quarter GDP jumping by 6.4 percent (saar) from rates of 1-1.5 percent in the second half of the year. Mild the third, the fastest quarterly growth in 13 years. The increases in exports and corporate investment were recovery is broad-based, rests mainly on stronger private among the contributors to this slow recovery. Growth was sector demand rather than fiscal stimulus and is backed by also held back by a persistent weakness in consumer a resolute and increasingly credible expansionary confidence and private consumption. Household monetary policy by the Bank of Japan, as well as by the spending continues to be restrained by prevailing high global upturn. levels of unemployment, among other factors. Monthly Among the main contributors to the recovery, indicators for output, orders and employment all indicated Japan's 2003 exports surged 10 percent in real terms, some weakening in activity in early 2004, even before the helped by booming demand for capital equipment in horrific terrorist attacks in Madrid. Euro-zone area China, as well as rising exports to Europe in the wake of a growth is projected at a modest 1.7 percent for 2004 as a lower yen-euro exchange rate. The largest contribution to whole, and at 2-2.5 percent in 2005.. 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, All round higher commodity demand saar). Corporate profits rose at double digit rates in the The impact of the global recovery on East Asia last three quarters of 2003 reaching a 30 percent depends not just on broad macroeconomic growth trends annualized quarterly increase in the fourth quarter, but also on developments in specific global industrial benefiting from several years of efforts by firms to cut sectors, and how the region participates in these sectors, costs, restructure and pay down debt. (Corporate debt has whether as producer or consumer. The present recovery fallen from 125 percent of GDP in 1996 to about 90 is seeing significant boosts in demand and prices for percent today.) While private consumption was only up several key sectors affecting the East Asian economy 1.1 percent in 2003, Japanese households have become more confident in recent months as employment growth Trends in the global "high tech", electronics or has picked up and rising equity prices have boosted information and communications technology (ICT) household wealth. Retail sales in January 2004 rose by industries are of key importance for East Asia, which has their strongest pace in several years. become an increasingly dominant production platform for servicing global markets in many of these sectors. Global As noted, monetary policy appears to have demand in many of these sectors plunged after the played a key role in fostering the recovery. Enormous bursting of the "high tech bubble" in 2000 and only began open market purchases of Japanese government bonds by a modest and somewhat erratic recovery in 2002. The the Bank of Japan over the last two years helped boost recovery strengthened in 2003, especially with the long commercial bank reserves at the central bank by 165 awaited upturn in overall fixed investment spending in the percent in 2002 and 71 percent in 2003, while base money U.S. and Japan in the second half of 2003. Responding to rose 26 and 16 percent respectively. Base money growth these trends, high tech industrial production in East Asia has also been supported by the central bank's efforts to in the latter part of the year picked up to a quarter on hold down the yen's appreciation against the dollar quarter pace of over 20 percent (seasonally adjusted through huge purchases of dollar assets, which have been annual rate), from only 2-3 percent in the first half of the only partly sterilized ­ the central bank spent around 20 year. (Table 3). trillion yen for this purpose in 2003 and another 10 trillion in the first two months of 2004 alone. The robustly World sales of semiconductors ­ a basic input in expansionary monetary policy appears to be working by ­ all high tech industries ­ surged over 50 percent between in effect ­ setting a credible positive inflation target and their recession low in early 2002 and January 2004 defusing the deflationary expectations that have depressed (Exhibit 10). Semiconductor average selling prices also domestic spending in recent years (for example by rose about 20 percent over this period. With the increasing the real burden of corporate debt). Actual increasing relocation of electronics production to East deflation has also eased. Producer prices, which were Asia, most notably to China, the share of world falling by 2-3 percent in 2001 and 2002, are in recent semiconductor sales occurring in East Asia continues to months roughly the same as a year earlier. As a result rise, reaching 39 percent in Asia excluding Japan (and there is now more of an expectation that, despite several over 60 percent including it). `false dawns' over the past decade, the present Japanese recovery could be sustained, especially if it is backed by East Asia Update 12 Table 3. Exhibit 11 East Asia: High Tech Production and Exports US real investment in information 2003 2003 2003 2003 processing equipment and software Change % (saar) 2002 Q1 Q2 Q3 Q42003Latest (%Ch. from year ago) Production /1 6.2 1.6 2.6 22.1 25.0 6.1 11.0 60 Korea 2.9 -19.1 -0.4 23.4 -3.2 -0.1 -14.9 Computers & peripherals Taiwan (China) 10.6 8.8 -7.5 40.5 23.0 7.1 10.9 Singapore 4.4 10.4 -19.4 28.9 45.3 5.3 20.4 40 Malaysia 8.1 12.2 15.0 13.8 50.9 9.6 46.5 Thailand 24.2 2.1 100.6 -1.3 100.8 23.1 52.5 Software Indonesia -7.1 46.4 -11.9 7.5 -11.2 3.7 -5.4 Exports (US$) 6.8 -0.7 9.4 12.6 20.3 6.4 20.3 20 Source: Datastream and Haver Analytics. Note: \1 Export weights Exhibit 10 Other * 0 I I I I I I I I I I I I I I World Semiconductor Billings (Bill US$. 3 Mo.Mov.Averages. 1/94-1/04) 20 990-1 991-1 992-1 993-1 994-1 995-1 996-1 997-1 998-1 999-1 000-2 001-2 002-2 003-2 Asia ex Japan as % of World Sales: Asia x. JP Source: Bureau of Economic Analysis. * Includes December 1995: 20.0% -20 communications equipment.) December 1998: 23.4% Japan 16 October 2000: 24.7% Europe December 2000: 33.3% Americas Dollar prices for many primary commodities also January 2004: 39.0% moved sharply higher in recent months. The World 12 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. 8 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 4 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. 0 (Table 4). Among foodstuffs of significance among East 49-n 59-n 69-n 79-n 89-n 99-n 00-n 10-n 20-n 30-n 40-n Asian exports, prices for edible oils like coconut and palm oil, rose by 25-50 percent, while rice prices rose around 7 Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja percent.. (It should be noted, though, that the recent price increases for non energy primary commodities generally An early 2004 downtick in U.S. orders for do not make up for even larger price declines from 1996 computers and electronic equipment and in world to 2000-01. The main sub-indexes in February 2004 were semiconductor sales and prices has raised some concern not far distant from their average values for the whole that the current semiconductor and overall high tech cycle period 1980-2003). may already have peaked. After the sharp rise in demand Several demand and supply factors are over the past 1-2 years, it is quite likely that year on year contributing to the recent strength in commodity prices. rates of growth will dip for a time. However, as Exhibit The fall in the US dollar against other major currencies 11 indicates, in the present recovery U.S. investment on reduces the prices of commodities expressed in those ICT equipment and software has been rising for only currencies, increasing demand for commodities by about 2 years (well in advance of other sectors of business holders of those currencies, pushing up the dollar price of investment), while the previous cycle of expansion began commodities. Low international interest rates reduce the in 1991 and extended through 2000, though with ups and carrying cost of commodity inventories while increasing downs. Given that the investment cycles in Japan and speculative investment demand. Demand for industrial Europe are only now starting to gather momentum, it commodities is also being pulled higher by the powerful seems reasonable to expect that global investment economic boom in China, as well as by the recovery in spending on ICT should continue in an expansion phase the United States and Japan. As Exhibit 12 indicates, for some years, though, no doubt, with cyclical ups and China's fast growth makes it a voracious consumer of all downs. 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 inventories and more generalized concerns about global consumption in just the last 5 years. Viewed terrorism have supported intense speculative demand, as another way, the increase in China's consumption of has OPEC's announced intention to cut back production copper in 2003 represented over 60 percent of the by 1 mbd from April, and the knowledge that the U.S. is increase in total world consumption. Finally the also replenishing its Strategic Petroleum Reserve. After 3 sharpness of recent price increases also reflects unusually years in which oil prices have generally stayed above $25, low inventories across many commodities, as well as some analysts argue that a long period of high oil prices at weather-related and other supply disruptions in some or above $30 lies ahead. They point in particular to fast cases, for example unfavorable production conditions for and potentially underestimated oil demand growth from edible oils. 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 Table 4. Commodity prices prices are mainly a near term phenomenon, observing that (US Dollar - % Change from year ago) the supply responses to higher prices can be delayed by 1999 2000 2001 2002 2003 2004 short run production constraints like difficulties with new m1-2 field startups, labor strife or bad weather, but that over the All non oil -11.2 -1.3 -9.1 5.1 10.0 16.5 longer term continued advances in oil exploration and Rice -18.3 -18.5 -14.6 -11 3.0 6.6 production technologies will continue to ensure expansion C'nut Oil 12.0 -38.9 -29.3 32.4 11.0 26.1 in non-OPEC production and market share, leading to Palm oil -35.0 -28.9 -7.8 36.6 13.6 12.5 lower oil prices. However, in the near term at least, oil Rubber -12.9 6.2 -13.8 33.0 41.5 35.5 prices look set to remain both high and volatile. Logs 15.2 1.5 -16.3 2.7 14.5 6.3 Copper -4.9 15.3 -13.0 -1.2 14.1 55.6 Oil 38.3 56.2 -13.7 2.4 15.9 -1.5 Table 5. Net Exports of Selected Commodities (As % of GDP) Exhibit 12 Oil * Rice Edible Metals Rubber Total Oils ** China - Consumption of Raw Materials 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 (% of World Consumption) 35.0 Korea -4.9 0.0 -0.1 -0.4 0.0 -5.4 Copper Aluminum Mongolia -13 -0.3 -0.5 14.5 0.0 0.8 Oil Soybeans Malaysia 4.7 -0.1 4.6 0.0 0.5 9.5 30.0 Cotton 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 25.0 Vietnam 4.2 1.8 -0.2 0.1 0.4 6.3 Source: COMTRADE for 2002, or latest available. * Oil and natural 20.0 gas. ** Includes aluminum, copper, iron, nickel, lead. 15.0 The increases in oil and non-oil commodity prices over the last few years could have a significant 10.0 macroeconomic impact on some of the economies in East Asia, especially some smaller economies. The impacts of 5.0 course vary according to whether countries are net Sources: International Cotton Advisory Committee; International Energy importers or exporters of the various commodities. Table Agency; Metallgesellschaft; US Department of AgricultureA 5 shows East Asian economies' net exports of selected 0.0 commodities whose prices have recently increased, as a 1998 1999 2000 2001 2002 2003 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 Oil prices have also surged in recent months. have experienced relatively modest national income After dipping in the wake of the Iraq war, the average losses due to higher prices in 2003, and may experience price of various major crudes once more headed higher in some further small losses in 2004. (Exhibit 13). Other the latter part of 2003 and averaged well over $31 in the economies like Mongolia and Thailand are oil importers first quarter of 2004 ­ substantially above the upper $28 but significant exporters of non oil primary commodities, bound of OPEC's target price range ­ with prices for an so that higher oil and non oil prices tended to have individual crude such as West Texas intermediate offsetting effects on national income in 2003. In 2004, touching as high as $38. Extremely low commercial 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 98.4 Most of the increase in private flows in 2003 was around $28 or $29 in 2004, which while high by recent contributed by a surge in portfolio equity and bond flows, standards, would be roughly flat as compared to 2003). most of it in the latter part of the year. Factors supporting Finally countries like Indonesia, Malaysia, Papua New the recovery in portfolio flows include greater confidence Guinea and Vietnam that export both oil and a variety of about the recovery in the developed world and the other commodities should experience significant gains in international environment for developing countries, 2003-04. Papua New Guinea in particular is experiencing improved perceptions of generally sound macroeconomic hefty income gains that could be worth a cumulative 7 and structural reform policies in many emerging markets percent of GDP or more in 2003-04, due to price (reflected in improved credit ratings), and the very low increases for exports like oil, copper, gold, palm oil, copra level of interest rates in developed countries. In East Asia and rubber. 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 Exhibit 13 reserves. Income gains/losses due to selected commodity Surging portfolio flows and asset prices price changes (as % of GDP) 5.0 East Asian economies were at the forefront of the revival of portfolio flows, garnering well over half of Actual and Assumed the increase in flows to emerging markets as a whole. Net Price Changes (%): 4.0 2003 2004 portfolio flows to six large regional economies (China and Oil 15.9 0.0 2003 the 5 post-crisis economies, Indonesia, Korea, Malaysia, Rice 3.0 3.7 2004 Philippines and Thailand) are estimated to have jumped to 3.0 Edible Oils 12.3 15.7 around $33 billion (based on incomplete 2003 data for Iron Ore 9.0 18.6 some countries) from a net outflow of $9 billion in 2002. Copper 14.1 34.9 Korea alone secured nearly $18 billion (the majority in 2.0 Rubber 41.5 1.8 equity flows). Investors are evidently looking beyond the near term weakness of the economy to factors like 1.0 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 0.0 strengthening the institutional framework for business -1.0 China Indonesia KoreaMongolia MalaysiaPhilippines activity, which has generally gone further than in most PNG Thailand Vietnam other Asian countries, including in such areas as corporate governance, shareholder protection, the insolvency regime and financial supervision. Portfolio flows to In principle such large windfall gains in small, China are also estimated to have swung to net inflows of low income economies like Mongolia and Papua New around $13 billion from substantial net outflows in earlier Guinea could substantially bolster the resources available years. Portfolio inflows are also estimated to have picked for the purpose of economic development and poverty up in the other main East Asian economies, with the reduction. In practice, though, countries rich in oil and exception of the Philippines. mineral resources have tended to under perform those The improved outlook for economic without such wealth, and mismanagement of windfall fundamentals and the associated upturn in market gains has often left poor countries even poorer after the sentiment quickly translated into large gains in East Asian boom than before it. Countries like Mongolia and Papua (and other emerging market) asset prices. Stock market New Guinea therefore face an important challenge in prices in Thailand doubled over the course of 2003, rose appropriate management of their recent income gains. 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 International capital markets and flows of 2004 have leveled out or even backed away a little, but generally not by much. 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 4 IIF (January 2004). Capital Flows to Emerging Market net private capital flows to emerging market economies Economies. The World Bank's Global Development jumped from $124 billion in 2002 to $188 billion in 2003, Finance report (April 2004) documents the same trends the highest since the East Asian financial crises of 1997- for a slightly different set of developing countries. East Asia Update 15 Exhibit 14 Exhibit 15 Stock market indices (Jan.1 2003=1) Stock market indices (Jan.1 2003=1) 1.7 2.1 Japan Philippines Indonesia Malaysia 1.6 1.9 Singapore Hong Kong Thailand Korea 1.5 1.7 1.4 1.5 1.3 1.3 1.2 1.1 1.1 1.0 0.9 0.9 0.7 -01 Oct-01 Jan -02 Oct-02 Jan -03 Oct-03 Jan -04 Jan Apr-01Jul-01 Apr-02Jul-02 Apr-03Jul-03 Jan-01Apr-01 Jul-01Oct-01 Jan-02Apr-02 Jul-02 Oct-02 Jan-03Apr-03 Jul-03Oct-03 Jan-04 Spreads on emerging market debt had risen with Exhibit 16 the onset of recession in late 2000 and 2001, but began falling back in late 2002 and continued to fall through Eurobond Spreads 1/99 - 3/04 2003, as the global recovery emerged, risk perceptions 1400 defused and very low interest rates in developed countries Korea encouraged a search for higher yielding assets - resulting Indonesia 1200 Philippines in the largest ever rally in this market. Spreads on EMBI - Latin Amer. emerging market debt fell from a peak of around 950 in 1000 September 2002 to 400 by December 2003. In East Asia spreads for most countries had fallen back in late 1998 800 and early 1999 from the highs seen during the financial crisis, and have trended lower since then. Spreads for 600 Korea and Malaysia had fallen to only 75-80 basis points by March 2004, while for China and Thailand they had 400 dropped to 30-60 basis points. Indonesian spreads also dropped from around 800 basis points in mid 2001 to 200 200 basis points by March 2004 (Exhibits 16 and 17). The only significant East Asian economy not to participate in 0 the rally was the Philippines, where spreads of around 410 basis points in March were about the same as two years 1 06 1 04 09 2 7 2 5 0 3 8 earlier, reflecting the slow pace of improvement in the 1999M01999M1999M12000M2000M2001M02001M02001M12002M02002M12003M02003M02004M01 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. East Asia Update 16 Exhibit 17 Exhibit 19 Current and Capital Account* Balances Eurobond Spreads 1/99 - 3/04 (As % GDP) 10.0 350 ----China---- ----Korea---- ---Thailand--- China 8.0 Malaysia Thailand 6.0 250 4.0 2.0 150 0.0 -2.0 1999-00 2001-02 2003 1999-00 2001-02 2003 1999-00 2001-02 2003 -4.0 50 Capital A/C -6.0 Current A/C Change in -8.0 Reserves = 1999 19 -50M0199M0699M1100M0400M0901M0201M0701M1202M0502M1003M0303M0804M01 0.9 5.0 6.2 6.7 2.8 4.2 -0.2 3.3 0.0 19 20 20 20 20 20 20 20 20 20 20 -10.0 * Capital Account includes errors and omissions.. Source: IMF IFS. Balance of payments Exhibit 20 The resurgence of capital flows has also East Asia - Foreign Reserves contributed to balance of payments surpluses in most East Asian economies. Because East Asian countries maintain 1100 (US$ Bill.) a variety of exchange rate regimes ­ including a currency China Indonesia board in Hong Kong, a fixed exchange rate peg to the Malaysia Philippines dollar in Malaysia, and managed floating rate regimes in 900 Korea Taiwan (China) others - this pressure has been expressed in different Singapore Thailand ways, including explicit appreciation of currencies, 700 Increase in reserves: burgeoning foreign exchange reserves and , to some 2000: $35 bn extent, more rapid growth in domestic credit aggregates. 2001: $65 bn 2002: $153 bn In the case of China, for example, net capital 500 2003: $227 bn inflows of various kinds (FDI, portfolio, bank loans) rose to an estimate of over 4 percent of GDP in 2003, up from 300 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 100 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 -10096 96 7 97 98 98 9 99 0 00 1 01 02 02 3 03 the exchange rate in a narrow band against the dollar, the Jan-19Jul-19Jan-199Jul-19Jan-19Jul-19Jan-199Jul-19Jan-200Jul-20Jan-200Jul-20Jan-20Jul-20Jan-200Jul-20Jan-2004 central bank is obliged to purchase foreign assets using local currency, a process reflected in an increase in Most other East Asian countries have managed foreign exchange reserves, as well as in higher central floating exchange rate regimes, and here currency market bank liabilities to the commercial banking system. pressures are being reflected in a combination of both Reserves in fact surged by $117 billion to reach $408 currency appreciation and foreign reserve accumulation. billion at the end of 2003 and $440 billion in March 2004 Reserves among major economies other than China (Exhibit 20). The authorities have made strenuous efforts increased by $110 billion to reach nearly $600 billion at to sterilize the impact of the rise in foreign reserves on the end of 2003, most of that accumulation occurring in domestic base money. Nevertheless base money growth Korea and Taiwan (China). As for explicit currency did pick up to 17-18 percent in the second half of 2003. movements, most East Asian currencies with some form Commercial bank credit growth also accelerated to over of floating rate regime have seen an appreciation against 20 percent in the second half of 2003. the dollar of varying amounts since the start of 2002, the East Asia Update 17 same period over which the dollar has declined against Viewed from the perspective of the other East major currencies like the euro and the yen. As Exhibit 21 Asian economies, growth in exports to China and Hong shows, East Asian currencies have appreciated less than Kong contributed around 50 percent of overall 2003 the 40 percent rise of the euro against the dollar between export growth in Korea, and 66 percent in Taiwan the start of 2002 and the end of 2003. However Japan and (China). (Exhibit 22). In Malaysia and Thailand exports Indonesia did see appreciations against the dollar of over to China and Hong Kong contributed about a quarter of 20 percent over this period, while Korea and Thailand overall export growth in the year. As a result of the appreciated a little over 10 percent. At the other end of growth of recent years, exports to China and Hong Kong the spectrum Taiwan (China) saw only a modest 5 percent now comprise about 25 percent of Korea's total exports, rise, China and Malaysia maintained their value, while the and about 35 percent of Taiwan (China)'s, compared to Philippines, where concerns about the slow pace of fiscal 18 percent going to the U.S. For Malaysia and Thailand, adjustment continue, even saw a depreciation against the about 12-13 percent of their exports now go to China and dollar over this period. Hong Kong, as compared to 17-18 percent to the U.S. Exhibit 21 Exhibit 22 Exchange Rates vs. US$ Foreign market contribution to 4 East (Rise=appreciation. Jan.2002=1) Asian countries' total export growth (%)* 150 Indonesia 1.4 * Contributions sum to 100% Korea Philippines Thailand 1.3 Yen/S 100 Euro/$ Taiwan (China) 1.2 50 1.1 1.0 0 2002 2003 2002 2003 2002 2003 2002 2003 0.9 Korea Taiwan Thailand Malaysia Jan-02 Mar-02May-02Jul-02Sep-02 Nov-02Jan-03 Mar-03 May-03Jul-03Sep-03 Nov-03Jan-04 Mar-04 -50 (China) China+HK Other Asia Japan USA Other Short term regional risks of a slowdown in China The Chinese locomotive ­ how much longer? Monthly data for early 2004 suggest continued Rampant growth in Chinese imports continued to strength in China's import demand. Overall merchandise provide a major engine for export growth in the rest of imports rose 42 percent in dollar terms in the first quarter, East Asia during 2003. The country's imports surged by handily outpacing export growth of 34 percent. However 40 percent in dollar terms in 2003, well above the 29 efforts by the Chinese authorities to avert overheating and percent growth in its exports and double the pace of slow economic growth to a more sustainable pace in 2004 import growth in 2002. Import demand was fueled by would likely also result in a slower pace of import the exceptional strength of investment spending in growth, including from East Asia. Our current baseline China, as well as by demand for inputs used in China's projections assume that, as a result of the counter-cyclical exports. By the first quarter of 2004, China had moved policy measures, China will achieve a `soft-landing', with into a trade deficit position. Imports from emerging East GDP growing 7.7 percent this year. Asian countries increased by just over 40 percent in 2003, after rising over 30 percent in 2002. Imports from Korea, Some analysts also consider the possibility that Singapore and Thailand rose by 50 percent or more, while given the bluntness of available policy instruments and those from Philippines almost doubled, albeit from a the extraordinary strength of the boom, the downturn, smaller starting base. With China's imports from when it comes, could also be severe ­ a so-called `hard- emerging East Asia rising rather faster than its exports to landing' scenario. The impact of this scenario on some them, its trade deficit with the rest of the region other Asian economies could be quite severe in the short burgeoned to around $70 billion in 2003, up from $47 run. Assume ­ purely for the sake of illustration ­ that in billion in 2002 and $34 billion in 2001. such a scenario China's imports were to be 10 percent East Asia Update 18 lower than in the baseline, and that other East Asian tech" - have been amongst the most rapidly growing of all economies maintained a constant share in this market. its imports, rising from 39 percent of total imports in 1996 The impact in the year of the shock on economies like to 46 percent in 2002. As Table 6 indicates, all of this Korea and Taiwan (China) which have a relatively high increase in the share of machinery and transport fraction of their exports going to China could be to reduce equipment was contributed by imports from the emerging their GDP growth by up to 1 percentage point. The East Asian economies, especially in such sub-sectors as impact on economies like Thailand with a relatively lower electrical machinery, parts and components. This trend is export dependence on China might be to reduce growth generally taken to reflect the emergence of more closely by a little under 0.5 percentage point. intertwined regional production networks in the East Asia A few nuances can be added to this rather simple region, with other emerging Asian economies picture of the link between China's imports and East increasingly supplying capital equipment, parts and Asian exports, most of them tending to moderate potential components for use in final assembly operations in China. 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 Table 6. China: Imports of Machinery & Transport should cushion the size of any potential export shock. Equipment . (Total and by source country) Second, China sends about 55 percent of its own exports (As % of China's total imports) to the United States, Europe and Japan, and it has been 1996 2002 Change estimated that about half of China's imports are inputs M&T Equipment 39.4 46.4 7.0 and raw materials that feed into its exports. Thus reviving Japan 11.3 10.6 -0.8 developed country demand will help other East Asian USA 5.1 4.6 -0.5 countries not only directly, but also via exports to China which are then processed into that country's own exports Emerging East Asia 8.2 15.5 7.3 to the rest of the world. Third, East Asian countries have Korea 2.3 4.1 1.8 been gaining market share in China's markets over time, Singapore 1.0 1.2 0.2 suggesting the emergence of long-term structural Taiwan (China) 4.2 6.1 1.9 complementarities. Continued increases in market share Indonesia 0.0 0.3 0.3 would help offset the impact of slower overall Chinese Malaysia 0.4 1.9 1.6 import growth. Fourth, since East Asian countries tend to Philippines 0.0 0.9 0.9 export more than the world average to China, a slowdown Thailand 0.2 0.8 0.6 in China would likely induce some depreciation of East Source:World Bank calculations based on COMTRADE data Asian currencies on a trade weighted basis, providing an element of competitive offset. Lastly, there is the potential impact of a China Interestingly, it is not only the industrially slowdown on primary commodity prices, a channel which developed high income economies in East Asia like Korea will have a mixed impact on the rest of the region. As and Taiwan (China) that are succeeding in supplying noted in the last section, strong demand from China has China's equipment and component demands. Several contributed to the recent strength of commodity prices, middle income countries in South East Asia like and a slowdown would obviously contribute to lower Malaysia, Philippines and Thailand have also succeeded prices. By how much is an uncertain matter. Some initial in boosting their competitiveness in China's machinery work with a global model suggests that 2 percentage and transport equipment imports, reflected in a rise in points lower growth in China might reduce prices by 2 their Revealed Comparative Advantage (RCA) indexes to percent, but this likely underestimates the volatility of a value greater than 1, while, on the other hand, prices at the margin. Following the discussion in the last comparative advantage in some ­ though not all - section, however, it is likely that lower prices would traditional primary commodity sectors has fallen.5 provide some terms of trade and income gains for the (Table 7). industrially developed, commodity importing countries of the region, while tending to hurt the net exporters, including several of the small low-income exporters. 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 5 towards greater economic integration in the East Asia In this case the RCA for ­ say - Thailand's chemical region. Viewed in terms of commodity composition, sector is measured as the share of Thailand in China's China's imports of machinery and transport equipment ­ a imports of chemicals divided by Thailand's share in sector that includes most of what is referred to as "high China's imports of all goods. An RCA greater than 1 indicates a revealed comparative advantage in that sector. East Asia Update 19 Table 7. S.E. Asia - Revealed Comparative Advantages in that a significant appreciation is needed to reduce large China's import market and chronic trade surpluses. Indeed the pace of domestic Indonesia Malaysia Philippines demand in China is so strong at present that import 1990 2002 1990 2002 1990 2002 growth is outpacing exports ­ rising 40 percent in 2003 against a 36 percent export increase (in dollar terms). Food 0.29 0.70 0.18 0.21 0.99 1.24 Second, China is in the midst of a major trade opening Crude Materials 0.58 2.77 3.55 0.74 2.03 0.09 under its accession to the WTO, which should further Edible Oils 0.25 10.00 20.00 13.89 3.83 0.95 boost imports. Further, while it is true that China's close Chemicals 0.62 1.14 0.19 0.76 2.41 0.09 link to the dollar has led to its currency depreciating by Manufactures 2.19 1.27 0.72 0.37 1.51 0.25 around 10 percent over the last two years on a real Mach.& Tran. Eqpt 0.36 0.37 0.22 1.32 0.04 1.85 effective basis, that follows a 10 percent real effective Source:World Bank calculations based on COMTRADE data. 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 Indonesia is something of an outlier in this effective value of the yuan at the end of 2003 was still 5- respect, gaining competitiveness in the Chinese market in 10 percent higher than its average during the 1990s. several commodity or natural resource related sectors while not showing gains in the machinery sector. The Exhibit 23 latter fact may in part to reflect concerns about Trends in real effective exchange rates weaknesses in Indonesia's investment climate, especially (Rise = appreciation) among the high tech multinationals that spearhead the 25.0 region's production and trade networks. The relevant % Diff. End 2003 vs.1990s Avg. point from the perspective of policy makers is not that they need to promote growth in one sector over another. % Diff End 2003 vs. Jan.02 15.0 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 5.0 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 -5.0 Japan KoreaThailanIndonesia d Chile, Malaysia or Thailand - shows, it is quite possible to remain a world class producer and exporter of primary China laysia lippinesn (China) Ma commodities while also developing a diversified and Phi sophisticated modern economy. -15.0 Taiwa Understanding exchange rate options The growing intensity of intra-regional trade -25.0 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 The considerations in determining the choice of appropriate level of East Asian currencies ought to be, exchange rate regime are different. The main advantage and also what type of exchange rate regime they ought to of a flexible exchange rate regime is not that it implement. The debate over these questions has been automatically restores current account balance but that it most animated about China's currency. It is crucial to allows an independent monetary policy. (Note that China stress that the question of the right level of the exchange with its quasi-fixed exchange rate had a smaller current rate and the question of the right exchange rate regime are account surplus in 2003 than Singapore with its floating distinct. If China's currency today is undervalued relative rate.) In the case of flexible rate country that suffers a to some fundamental equilibrium value, as it is sometimes negative shock to demand, for example, monetary policy argued, then the needed adjustment could occur as a one- can be loosened to prevent a significant loss of output and time adjustment of the peg under a fixed exchange rate employment. In the case of China at present, on the other regime, as well as under a flexible regime. hand, its exchange rate regime limits its ability to tighten monetary policy as a way of cooling the present boom. We do not try to make a formal estimate of the Instead China "imports" the stimulative stance of U.S. `right' level for China's exchange rate in this report. But monetary policy, which today is designed for the very one can make some broad observations. First, China's different cyclical task of helping the U.S. economy move current account surplus averaged a relatively modest 2 out of recession. 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 East Asia Update 20 The main advantages cited in favor of fixed rate correlation of GDP growth rates between various pairs of regimes are in a sense the opposite side of the coin to the countries. This shows that the correlation between China advantages for floating rates. Exchange rate volatility can and U.S. growth is rather low (less than 0.2), but that the increase transactions costs and exchange rate risk correlation between China-Korea and China-Japan was (especially in developing countries where markets for even lower ­ zero with Korea and negative 0.3 with hedging may be limited), and so discourages welfare Japan. In other words, at any given time there would be a improving trade and investment flows between countries. significant probability that the appropriate monetary While evidence for this proposition among developed policies for China and Japan would be at cross purposes. countries is mixed, it is stronger for developing countries, and is particularly relevant where there are major regional Exhibit 24 supply chains, as in East Asia.6 It is also argued that fixed rates can avoid the large, extended speculative swings that Criteria for Optimum Currency Area can affect floating rates in countries with shallow 0.90 financial markets, weak banks and other institutional 0.80 France-Germany Canada-USA weaknesses, and that these swings can be especially 20 0.70 damaging to developing countries. 0.60 Japan-Korea How do these considerations apply to China and 1990- ht 0.50 East Asian economies? As a general point fixed rate wor 0.40 regimes are likely to be more appropriate for small or G highly open economies where the economic costs of high 0.30 P China-Thailand volatility on trade and investment would be more D Gfo 0.20 significant. When considering with which specific China-USA 0.10 country or countries to fix the exchange rate or form a noitalerro China-Korea 0.00 currency area, these considerations suggest countries 1.00 2.00 3.00 4.00 5.00 6.00 which have a high intensity of bilateral trade. The lower -0.100.00 Japan-USA axis of Exhibit 24 shows an index of bilateral trade -0.20 Korea-USA intensity between various pairs of countries, including C -0.30 China-Japan East Asian countries.7 From this perspective the intensity -0.40 of China-U.S. trade is considerably less than the intensity of China-Japan or China-Korea trade. Looked at purely Bilateral Trade Intensity Index 2000-02 from the perspective of trade, then, a fixed rate regime or currency area between China and other East Asian Taking the trade and income correlation criteria economies like Japan and Korea would be more together, countries with high values of both (in the upper appropriate than the present tight link to the U.S. dollar. right hand or north-east corner of Exhibit 24) would seem the most suited to an exchange rate peg or currency area. As noted, a disadvantage of fixed exchange rates These include France and Germany, which do in fact is that they entail loss of control over domestic monetary share a common currency, the U.S. and Canada, and, to policy. However, if two economies tend to experience the some extent, Japan and Korea. As noted, in other intra- same kinds of shocks and share the same economic Asian relationships like China-Japan or China-Korea, cycles, then they are able to share a common monetary trade relationships are high, but at present income policy and the loss of monetary independence is less correlations are low. significant. The vertical axis of Exhibit 24 presents a rough measure of common shocks and cycles by using the Turning finally to the China-US relationship both trade intensities and income correlation are relatively modest. Thus from the long run structural perspective of 6 Guillermo Calvo and Carmen Reinhart. (2000). Fear of the real economy, the benefits of a stable yuan/$ exchange floating. NBER Working Paper 7993, and Calvo and rate are likely to be relatively limited. On there are also Reinhart (2000) Fixing for your life. NBER Working dangers of floating while banks are weak and the foreign Paper 8006. See also Jeffrey Frankel. (1999). No single exchange market infrastructure is underdeveloped. This currency regime is right for all countries or at all times. seems to be the conclusion of the Chinese authorities, NBER Working paper 7338. who have announced a desire to move towards a more 7 The trade intensity index is measured as the ratio of, say, flexible exchange rate regime at some time in the future China's exports to Korea to China's total exports, divided of their own choosing, after the appropriate development by world exports to the Korea. as a ratio of total world and strengthening of relevant currency and financial exports. An index greater than 1 shows that exports to market institutions.8 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 8This still leaves open a choice between various forms of Korea. exports and Korea's China exports. more flexible or floating rate regimes. An interesting East Asia Update 21 Domestic trends and policy challenges creditor regimes and the legal and judicial framework, as well as efforts to strengthen infrastructure and the The investment cycle and FDI provision of other key public services. Earlier sections noted that higher 2003 growth in Exhibit 25 many countries of the region was fueled primarily by growth in exports and consumer spending. Performance Capacity Utilization/Operating Ratio on fixed investment spending has been much more 1996 Q1-2003 Q4 disparate however. In China investment spending 85.0 reached nearly 50 percent of GDP ­ so aggressive that reducing investment to more sustainable rates is one of Korea the main objects of policy. Investment spending in Vietnam has also been strong, as both the booming 75.0 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 65.0 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. 55.0 With the exception of Thailand, then, 2003 investment in the post-crisis countries continued the Thailand relatively weak and directionless trend of recent years. 45.0 Nevertheless, there are a number of factors that should help foster recovery in investment spending going 19961199631997119973199811998319991199932000120003200112001320021200232003120033 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 ...and what about foreign investment? led recovery continues, firms will have a growing incentive to ease capacity constraints by undertaking new Net foreign direct investment (FDI) inflows to investment. As the last East Asian Regional Overview seven East Asian economies are estimated at about $62 documented, both cyclical factors and corporate billion in 2003, about $1.5 billion higher than in 2002.9 restructuring efforts are fostering an improvement in East Of this total about $53.5 billion went to China and only Asian firms' profitability and balance sheets, with income about $8 billion to the other six economies (Indonesia, to sales and interest coverage ratios trending higher, while Korea, Malaysia, Philippines, Thailand, Vietnam). In debt-equity rations have fallen, all of which should be addition, when viewed over the longer period since the supportive of new investment activity. The availability of 1997 regional financial crisis, while FDI inflows to the external financing has also improved as interest rates have region have averaged around $58 billion a year, the share fallen and credit flows from banks pick up. Looking going to China has risen, while that to most of the other forward, the investment climate in the region should also six economies has fallen ­ the FDI inflows to these benefit from continued reform efforts in such areas as economies fell from an average of around $16.5 billion a corporate governance. investment regulation, debtor- 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 proposal by Goldstein (2002) argues that a system of interesting exception where an acceleration in the pace of "managed floating plus" is best for emerging market economic reforms appears to have been successful in economies that are heavily involved in international attracting higher inflows in the recent period. (Table 8). private capital markets. This proposal would aim to get These trends have provoked concern among some of the benefits of both monetary independence and policy makers in the rest of East Asia that FDI to these reduced volatility through managed floating, together economies has fallen because it is being diverted to with a system of explicit inflation targeting to provide a China, and that because of China's increasing industrial credible nominal anchor, and aggressive measures to development and low labor costs, this might be a reduce excessive currency mismatches in borrowing (for example through stronger prudential regulation of banks, better public sector debt management practices, 9In this discussion Singapore and Hong Kong, which also development of hedging markets and greater receive substantial FDI inflows, are included in the group transparency). See Morris Goldstein. (2002). Managed of developed economies. For some countries the estimate floating plus. Institute for International Economics. for 2003 FDI is based on three quarters of data. East Asia Update 22 permanent change. It is true that China's accession to the the downturn in flows in the rest of East Asia. WTO in particular further enhanced the country's Conversely, the ongoing revival in world growth, attraction as a production base for export to global corporate profits and other factors conducive to markets, widened access for FDI inflows, improved investment should promote a revival in world FDI going investor protection and, in general, deepened China's forward, including in flows from the U.S. and Europe to integration into a rule based global trading and investment East Asia. system. This large improvement in the policy environment has no doubt increased the desired stock of Exhibit 26 capital that foreign firms wish to locate in China, leading FDI Inflows as % GDP to higher inflows of FDI for a time, some of which would 8.0 at the margin have otherwise gone to other countries.10 China Korea Indonesia Malaysia Philippines Thailand 6.0 Table 8. FDI Inflows (Annual averages, US$ Bill.) World Vietnam 1990-97 1998-00 2001-03 World 277.1 1053.7 738.5 * 4.0 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 2.0 Other 14.3 16.5 7.5 Korea 1.4 8.0 3.0 Indonesia 3.0 -2.6 -1.8 0.0 Malaysia 5.2 3.5 1.9 1990-97 1998-00 2001-03 Philippines 1.1 1.2 0.9 Thailand 2.3 5.6 2.1 -2.0 Vietnam 1.3 0.8 1.4 Source: UNCTAD and national sources. * For 2001-02 Table 9. FDI Inflows by Origin (As % of Total) However, it is likely that FDI to the rest of Asia has also been driven by a number of global and domestic Origin: US+EU Japan East Asia factors quite other than China. A simple piece of 1998-00 2001-03 1998-00 2001-03 1998-00 2001-03 evidence for this is that, while FDI in China has been China 20.5 17.8 7.3 8.6 57.8 52.8 remarkably stable at around 4 percent of GDP over the Indonesia 24.7 10.9 8.4 6.7 30.8 44.6 last 10-15 years, FDI-GDP ratios in the rest of Asia have Korea 57.6 64.8 11.9 10.5 16.1 11.7 shown quite large swings. (Exhibit 26). Among other Malaysia 55.9 38.6 20.6 16.4 14.2 23.5 factors, note first that East Asia is not alone in Philippines 39.6 47 12.6 30.1 20.2 12.4 experiencing less FDI over the last three years. Global FDI is correlated with cycles in the world economy. It Thailand 46.3 -8.8 24.7 42 25.6 65.4 fell sharply during the global slowdown that began in Vietnam 31.0 24.5 4.9 6.5 36.1 54.7 2001, slipping from 3.5 percent of world GDP in 1998- Source: national agencies; registrations or approvals in some cases. 2000 to 2.3 percent in 2001-2. FDI outflows from Europe and the United States in particular saw a 35 percent fall Second, world FDI in the late 1990s was between the two periods, and it was precisely inflows exceptionally high because of the boom (or "bubble") in from these two sources that have seen the biggest recent investment in high tech and telecommunications sectors, declines in countries like Indonesia, Malaysia and fuelled by wildly inflated valuations for equities in these Thailand (Table 9). From this perspective it is more the sectors, an event that is unlikely to be repeated anytime continued high growth and FDI in China even during a soon. Thus the fall in world (and East Asian) FDI can to period of global downturn that is exceptional, rather than 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, 10In theory China's market opening under the WTO could corporate restructuring and mergers and acquisitions also lead to less FDI, as foreign firms can export directly (M&A) in the immediate aftermath of the 1997 financial to China rather than having to invest there as a crisis, notably in Korea and Thailand, the volume of precondition for accessing the domestic market. This which has eased as economies recovered from the crisis. effect has clearly not predominated in practice. As Exhibit 26 above indicates, FDI inflows as a share of East Asia Update 23 GDP in Korea and Thailand in 2001-03 were about the patterns indicated, the emergence of China is creating same as in 1990-97. And while FDI flows to Malaysia substantial new opportunities for producers in the rest of have fallen sharply over the 1990s, the fall was from an Asia. How far countries are able to exploit these extraordinarily high and probably unsustainable level opportunities will depend in part on the flexibility of their around 7 percent of GDP in 1990-97 to around 2 percent economies ­ how quickly resources can move out of old of GDP in 2001-03, about the world average. industries that have become uncompetitive and into new Third, in some cases East Asian FDI has also ones with growing opportunities. Given an open and been affected by a perceived worsening in the domestic adaptable investment climate, it is likely that FDI will be investment climate in the wake of the 1997 financial drawn into East Asian countries in future precisely to crisis.. In Indonesia, for example uncertainty about exploit these new trading opportunities with China. This proceedings in the legal and judicial system or in dealings process will be encouraged as China completes its free with decentralized levels of government, corruption and trade agreements with ASEAN countries. 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 Financial sector trends and reforms percent of GDP in the years since the financial crisis Banking sector performance (although, fortunately, the pace of outflows is diminishing, falling to $1.5 billion in 2002 and an Recent indicators suggest a continuing gradual estimated $500 million in 2003).11 Conversely, then, improvement in the asset quality and capital adequacy of policy reforms to improve the investment climate should commercial banks in the formerly crisis affected East also be able over time to foster greater FDI flows. Asian countries. (Exhibit 27, Appendix table 9). Non- performing loans as a proportion of all commercial bank As noted, policy reforms after the crisis helped loans generally declined over the course of 2003 with the stimulate a wave of M&A related FDI, especially in partial exception of Korea, where, due to the SK Korea and Thailand, and, although the volume of M&A Networks (formerly SK Global) and household credit related flows has fallen in 2001-03, the proportion of defaults--the commercial banks' NPL ratio increased M&A in total inflows to the 5 post-crisis economies has between the end of 2002 and September 2003, before remained high, at around 70 percent, compared to only falling again in the last quarter. With an NPL ratio of around 16 percent in the first part of the 1990s. Recent only 2.7 percent at the end of 2003, the Korean empirical research suggests that M&A investment (i.e. commercial banks' balance sheet remains quite strong, FDI to acquire existing assets from local firms) is also a however. The improvement in bank asset quality reflects good predictor of greenfield investment (i.e. FDI in new factors such as strengthening balance sheets of corporate assets). A 1 percent of GDP gain in M&A investment is borrowers--due to higher growth and lower interest typically followed by a 1-1.5 percent of GDP gain in rates--a pickup in new loan demand and continued greenfield investment. This research also confirms that restructuring of bad debts. Bank profitability has also higher economic growth, as the most important indicator gradually improved, aided in some cases by the ability of of rates of return, is a statistically significant predictor of banks to maintain significant or rising spreads between both higher M&A and greenfield FDI. This year's bank deposit and lending rates even as both types of rates recovery in regional growth and past years' M&A activity have generally fallen (Exhibit 28)13 Improving asset should therefore be favorable for higher FDI going quality and bank profitability have in turn helped forward.12 strengthen capital adequacy, with capital adequacy ratios Finally note that, over time, China's standing above 10 percent in all the post-crisis countries. development could also encourage more FDI in the other While there has been substantial progress in Asian economies. As the earlier discussion of trade 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 11The official methodology for FDI statistics in Indonesia as NPLs still retain a degree of potential vulnerability. In has at times differed from international standards in ways Thailand, about 35 percent of banks' portfolios comprise that have tended to overstate the extent of net outflows. restructured loans (loans that were mostly rescheduled but Thus the actual picture may not be as dire as official are classified as performing) and around 2.5 percent is statistics suggest. But the conclusion that FDI inflows are comprised of foreclosed assets. In Indonesia, part of the significantly lower than before the crisis is likely to recent rapid decline in the NPL ratio reflects the asset remain valid. 12 Cesar Calderon, Norman Loayza and Luis Serven. (2004).: Greenfield Foreign Direct Investment and 13Trends in East Asian bank profitability were covered in Mergers and Acquisitions: Feedback and Macroeconomic more detail in the World Bank's October 2003 East Asian Effects. World Bank Policy Research Working Paper Regional Overview, and will be revisited in the October 3192. January. 2004 edition of this report. East Asia Update 24 management company IBRA's aggressive disposal senior managers from undue legal prosecution. However, through auctions of NPLs that remain un-restructured. legal enactment of the proposals continues to face delays. Some of these have gone back on the banks' books at In the meantime though the two bodies are working on a significantly discounted values and--since central bank second memorandum to help strengthen their relationship regulations allow forbearance in classifying such NPLs in handling problem banks. for one year--most of these loans are not fully reflected in banks' NPL ratios. In the Philippines, reserves for non Exhibit 28 performing assets (NPAs) cover less than a third of those Spreads between bank deposit and in the system. It was hoped that the enactment of the SPV Law would speed up the resolution of NPAs, but this has lending rates not yet happened. Although several SPVs have been 10 approved, no major transactions have taken place so far Indonesia Korea given the significant differences in prices that the banks 8 Malaysia Philippines are willing to sell at and investors to buy at. Thailand Exhibit 2714 6 Non performing loans in commercial banks (As % of total loans) 4 Thailand 2 Philippines Source: IMF IFS Dec-98 0 Dec-00 -2 000M2000M2000M2001M2001M2001M2001M2002M2002M2002M2002M2003M2003M2003M2003M2004M01 01 04 07 10 01 04 07 10 01 04 07 10 01 04 07 10 Malaysia Dec-01 2000M2 Dec-02 Dec-03 Korea Restructuring, privatization and consolidation of financial institutions Indonesia Restructuring, privatization and consolidation of the financial sector continues across the countries. In Indonesia public sector control of the banking system 0 10 20 30 40 50 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, Banking regulation and supervision retaining majority ownership in only Bank Permata. The government has also reduced its stake in the largest bank Progress in strengthening bank regulation and in the country--Bank Mandiri--selling 20 percent of its supervision around the region also continues at varying equity through an initial public offering. Bank Rakyat rates. In Indonesia new banking regulations cover the fit Indonesia (BRI)--the fourth largest bank in the country-- and proper tests for shareholders and managers of banks. also had an IPO disposing of 40 percent of its equity. In In Thailand tighter provisioning rules (to be effective by Korea, Kookmin Bank, the nation's largest lender, was year end) aim to expedite the resolution of remaining fully privatized in December 2003. The Shinhan Financial NPLs. Important steps in the Philippines include progress Group also purchased an 80 percent stake in Chohung towards consolidated and risk-based supervision, Bank from the Korea Deposit Insurance (KDIC). In the amendments to anti-money laundering legislation and non-bank sector, Prudential Financial completed its regulation concerning large exposures and credit risk acquisition of an 80 percent stake in Hyundai Investment concentrations. Amendments to the charters of the central and Securities, and its subsidiary Hyundai Investment bank and the deposit insurance corporation have been Trust Management in February 2004 (with an option to proposed to enhance compliance and the ability to take buy the remaining 20 percent from state-run KDIC within prompt corrective action by protecting supervisors and three to six years after closing). This transaction marked the first purchase of a domestic asset management 14Note NPL ratio series for Malaysia differs from that company by a foreign strategic investor. In Thailand published by Bank Negara, which excludes interest-in- progress in consolidation was seen with Thai Military suspense and special provisions. Bank, which the MOF is its major shareholder, signing a East Asia Update 25 memorandum of understanding to merge with DBS Thai functions of the JITF will continue to be undertaken by Dhanu Bank, a foreign majority owned bank, and the the newly formed National Mediation Center (NMC), Industrial Finance Corporation of Thailand, a state which is expected to work closely with the judiciary and specialized bank. which will provide mediation services for interested In China, two of the country's state owned parties as well as mediation training for judicial and non- commercial banks, the Bank of China (BOC) and the judicial personnel. In Thailand, the CDRAC closed China Construction Bank (CBC), were recapitalized to the having resolved 49 percent of its cases (by credit value). tune of $45 billion in December 2003. The Of the unresolved cases $4 billion were transferred for recapitalization is being interpreted as a precursor to resolution to the Thai Asset Management Company attracting strategic investors and/or listing on capital (TAMC) and $31 billion to the civil courts. The Bank of markets. However, to be effective, it will need to be Thailand has introduced an out-of court mediation accompanied by improvements in corporate governance framework for private banks and AMCs. However, so far, structures and practices. The way in which the creditors have only selected 5.3 percent of total target Government exercises its ownership function will thus be debtors by credit value, and only 1.7 percent of those a key factor in determining eventual success. While these selected have agreed to participate in the program. As a issues are known to the authorities and to the senior result, the completion rate as of now is a low 0.64 percent management of the banks, an action plan and stronger of the total target debtors. evidence of implementation is still to be seen. IBRA, the Indonesian asset management company, also closed in February 2004. The Ministry of Finance now holds IBRA's remaining unsold assets, Corporate Sector restructuring and reforms about Rupiah 260 trillion, and the asset management company (PPA) is responsible for the sales of the assets. The extent of corporate debt restructuring in East In Thailand, the TAMC continues to make progress in Asia varies across countries, although all have continued resolving its assets. As of end 2003, TAMC had approved to make progress. The government-supervised voluntary the resolution of about 94 percent of the book value of corporate debt restructuring frameworks that had been set total transferred assets, mostly covering the larger up in the aftermath of the crisis have now closed in accounts. TAMC has outsourced management of the Indonesia, Malaysia and Thailand. This makes the smaller cases and plans to foreclose remaining cases using efficacy of restructuring through the courts and through its special power. Only three cases have been foreclosed market mechanisms of increasing importance. via the civil courts. In Malaysia, which is arguably the furthest Progress in corporate restructuring in these along, the CDRC closed in September 2002 having countries--as in the other East Asian countries--will resolved all its cases. Danaharta, the asset management increasingly depend on the effective functioning of the company, has also largely completed its mission. It has courts. The perceived low credibility of Indonesian courts resolved all its NPLs and is on track with cash collections remains an issue. Although much of the credibility to repay its bonds before it unwinds in 2005. Korea has problem stems from weakness in enforcement, improving also made very substantial progress with the adoption in the clarity of the law and enhancing the effectiveness of March 2001 of the Corporate Credit Risk Assessment bankruptcy proceedings also remain desirable objectives. System and the implementation of the Corporate In its recent White paper the government undertook to Restructuring Promotion Act, which have set the basis for revise the blueprint for the court and to adopt the draft financial institutions to promote corporate restructuring Law on Revisions to the Bankruptcy Law, which includes on an on-going basis. Recognizing that corporate reform a set of definitions, further standardizes time lines, boosts will need to become increasingly market- driven, the commercial court jurisdiction, and clarifies restructuring Government has also focused on strengthening court- procedures and the position of both creditors and debtors. supervised insolvency, and a new bill consolidating three separate bankruptcy codes is awaiting approval from the In Thailand, the difficulty with the civil courts National Assembly. The Act on Class Action Lawsuits has been the backlog of cases. Civil courts are now was passed at the end of 2003, and other measures to required to implement continuous hearings, which should strengthen accounting and auditing practices for listed reduce the customary four to six month period between companies have been taken. hearings. However the limited number of days available for continuous scheduling has been a constraint. Remedial In Indonesia and Thailand, the government actions--establishing special hours for trial and supervised voluntary frameworks, the Jakarta Initiative increasing budgetary resources--are now awaiting Task Force (JITF) and the Corporate Debt Restructuring approval from the National Judicial Committee. Although Advisory Committee (CDRAC) respectively, closed the commercial bankruptcy court continues to function during 2003 without having resolved all the cases under effectively, the average credit value per case suggests that their mediation. In both countries new voluntary the bankruptcy regime continues to be used primarily as a frameworks have been introduced. In Indonesia some debt collection mechanism. East Asia Update 26 Legal and tax reforms to strengthen the corporate the start of marked declines in mortality rates, due to a restructuring framework in Thailand have been quite greatly increased availability of modern medicines (for slow. The Secured Transactions Act--which would example the powerful antibiotic drugs discovered in provide greater flexibility in the collateralization of other developed countries over the preceding twenty years), assets besides real estate--has been awaiting better sanitation and public health conditions (for example Parliamentary consideration for the past two years. the availability of DDT to fight malaria), and improved Similarly, the tax code on M&A remains unreformed. nutrition in general. Infant mortality rates fell earliest and And although significant progress has been made in particularly quickly. Infant mortality in China and strengthening financial reporting and disclosure for listed Indonesia, for example, was around 195-200 per thousand companies, important elements to strengthen corporate in 1950-55, but had fallen by half by 1965-70 in the case governance remain at various stages in the pipeline. These of China, and by 1975-80 in the case of Indonesia. include the draft Security and Exchange Commission Act Fertility and birth rates did not fall for some time after the to enhance the fiduciary duties of directors and the rules fall in infant and overall mortality rates, however, leading governing related- party transactions, and the amendment to both a rise in population growth rates and in the share of the Public Company Act to provide legal channels for of young people in the population till the first or second shareholders seeking redress and to provide protection for half of the 1960s. The second phase of the demographic minority shareholders. 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 Asian demographic trends ­ older, slower, wiser? mortality. East Asian fertility rates ranged from 5.5 to over 7 children per woman in 1950-55, and in most cases Over the course of the next 10-20 years changing were still in that range in 1965-70. By 1995-2000, population trends will begin to profoundly alter the however, fertility had fallen to 2 or less in China, Korea, economic landscape of East Asia. Population growth will Taiwan (China) and Thailand, and 2.5­3.5 in Indonesia, fall well below 1 percent, with the level of the regional Malaysia, Philippines and Vietnam. population stabilizing at around 2.4 billion in the latter part of the century, compared to around 1.9 billion today. Exhibit 29 In most countries the share of the population of working age ­ which has been rising steadily since the late 1960s Thailand: Changes in Age Distribution or early 1970s ­ will begin falling after 2015 or 2020, 1950-2090 while the proportion of people older than 65 will steadily 80 rise. All countries in the region will ultimately be affected by these trends, although the timing and speed of Working Age: 15-64 the changes will differ. The coming demographic shifts are ­ other things remaining equal ­ expected to lead to a 60 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 40 financing of pension and health care systems will take on Young: 0-15 greater importance than ever before. However, while there is a fair amount of certainty about the coming demographic changes, their economic consequences may 20 depend to a considerable degree on the policies that are put in place to deal with them.15 Old: 65 and older The approaching social developments reflect the playing out of the so-called demographic transition ­ a 0 series of events affecting all countries and regions, although at different time and with varying speeds. In 9501 9601 9701 9801 9901 0002 0102 0202 0302 0402 0502 0602 0702 0802 0902 most East Asian countries the first stage of the demographic transition took hold in the late 1940s with The net results of these demographic changes were, first, as noted, a "bulge" in the youth age bracket of 15 Population data and projections are from United the population during the 1950s and 1960s, which has Nations World Population Projections, Population been traveling through the age structure of the population Database (2002 Revision, http://esa.un.org/unpp/ and ever since. (Exhibit 29 displays the resulting changes in World Bank: Population Projections Tables. See also population age structure in the case of Thailand). From Andrew Mason, ed., 2001. Population Change and the late 1960s and early 1970s these young people began Economic Development in East Asia. Stanford University entering the adult work force, while the numbers of new Press. East Asia Update 27 entrants to the young age group (i.e. via new births) also half of the amount by which actual East Asian growth began to fall. As a result, the share of people in the 0-14 exceeded steady state growth..17 age group has fallen steadily since the early 1970s, while the share of people in the working age group has risen. Exhibit 30 For East Asia in aggregate the working age population Working Age Population 1950-2090 rose from around 56 percent of the population in 1965 to 66 percent in 2000. It is expected to reach about 70 (15-64 age group as % of population) 75 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 70 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 65 20 percent in the latter part of this century. Such enormous shifts in the age composition of 60 populations have had and will continue to have large effects on economic and social outcomes in all countries. 55 What is distinctive about East Asia, however, is how it was able to provide a policy and institutional environment China in which the demographic transition became an important 50 Malaysia engine for more rapid growth from the early 1970 Philippines onwards ­ a so-called "demographic dividend" ­ rather Japan 45 than one for growing unemployment, frustration and socio-political instability, as it has in some other regions. 9501 9601 9701 9801 9901 0002 0102 0202 0302 0402 0502 0602 0702 0802 0902 This occurred through several mechanisms. As noted, East Asia's demographic dividend is First, the growth in the 15-64 age group (and increasing expected to draw to an end in the next few decades, as the entry of women into the work force as family size fell) led share of the 15-64 age group peaks and begins to fall. to a rapid increase in the available labor supply, while With a fall in the number of workers per head of policies intended to foster export-oriented labor intensive population, the pace of per-capita income is also likely to manufacturing industries were able to generate employment for the new workers.16 The increase in the slow. Bloom and Williamson suggest that the rate of per capita income growth in East Asia could fall by 0.6 number of productive workers per head of population percent a year as a result of the demographic shift. One pushed up per-capita incomes. Second, people in the point to note though is that the timing and pace of the working age groups tend to consume less and save more demographic change is expected to vary a good deal than do the young and the old. Abundant domestic across countries. Countries like China, Korea and savings in East Asia eased access to finance for high Thailand are projected to reach peak working age share in levels of investment without over-reliance on foreign the next 5-10 years, and to see a quite rapid fall thereafter. borrowing. Third, rising life expectancies and falling Others like Indonesia, Malaysia, Philippines and Vietnam family size tend to go hand in hand with a marked should see a peak in working age population 5-10 years improvement in the status of women and a growing later and a more gradual pace of decline after. (Exhibits emphasis on investing in the education of children, 30 and 31). The proportion of working age population in including girls. Strong support for basic education by these 4 countries is projected to be remain at or above 65 East Asian governments helped translate these desires percent of the population as far away as 2040. Thus the into reality, vastly improving the education and potential slowdown in growth due to demographic factors capabilities of the work force and helping accomplish a is likely to be more muted in much of South East Asia. virtual social revolution in the status of women. Some Many of the small island economies of the Pacific are at studies of the quantitative impact of the demographic even earlier stages of the demographic transition. In dividend on growth in East Asia estimate that it Papua New Guinea and the Solomon Islands, for contributed about 1.4-1.9 percentage points, or one third example, the young still make up 40-45 percent of the of East Asia's rapid per-capita income growth between population, compared to 25 percent in East Asia as a 1965 and 1990. Estimating East Asia's long run `steady whole. Here the share of the working age populations is state' per-capita growth rate at 2.6 percent, the same work calculates that the demographic dividend contributed over 17 David E. Bloom and Jeffrey G. Williamson, 1997. Demographic Transitions and Economic Miracles in East 16Today the East Asian economy needs to ­ and generally Asia. NBER Working Paper 6268 and Bloom and succeeds in ­ creating jobs for a labor force increasing by Williamson, 2001. Economic Growth and the about 19 million every year. Demographic Transition. NBER Working Paper 8685. East Asia Update 28 expected to keep rising till about 2050. In these changes in traditional family structures, governments will economies for a long time to come the problem will need to determine how far in what form traditional remain one of creating enough jobs for bodies, rather than approaches need to be complemented by formal systems finding bodies to fill jobs. of pensions and social security. Financing pressures on Just it as it took good policies and institutions to health care systems will also increase with population translate the potential demographic dividend of recent aging and the growing importance of non-epidemiological decades into actual faster growth, so good policies also diseases such as diabetes, heart disease and cancer among have a major role to play in actual economic and social older populations. 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 Indonesia 50 Korea Thailand Vietnam 45 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 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 East Asia Update 29 COUNTRY SECTIONS Major Economies18 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 China agencies. Despite SARS, which lowered the second The three underlying tendencies in the Chinese quarter GDP growth rate to 6.5 percent, China ended economy--modernization, urbanization and globalization, 2003 at full tilt, growing by 10.4 percent in the fourth all of which contain forces for both the convergence and quarter to give a whole year increase of 9.1 percent. As in divergence of incomes--provide the context for the the recent past, China continues to be a preferred stronger policy emphasis on "growth with equity" that destination for the relocation of global manufacturing became evident over the past year. Rural development is a facilities, chiefly, but not exclusively, in the low special focus in this regard, as rural poverty is large, rural- technology segment. Its strength as an export platform urban income and non-income disparities continue to contributed to incomes and jobs; urban employment rose widen, and the orderly management of out-migration from by a buoyant 8.6 million jobs, although registered rural areas is seen as the key to managing the productivity unemployment also increased. At the same time, imports and "livability" of China's growing urban areas. In rose by nearly 40 percent, making China a locomotive for addition, at long last the Government is able to tackle the growth in the Asian region. problem of weak banks, where the ability to make headway depended greatly on the progress of reforms in While a significant portion of imports fed into housing, social security and state enterprise performance. exports and domestic consumption, the sizzling pace of During 2003 and early 2004 the Government has also domestic investment was the prime mover. In 2003, the been able to articulate a clearer, although still partial, fixed asset investment-to-GDP ratio (admittedly an development strategy--one that gives equal importance to imperfect measure of investment in the Chinese economy) the use of physical/financial, human and natural resources reached an unprecedented high of 47 percent. Price in the generation of growth, rather than excessive focus increases have accelerated as well. Despite a slight on the first. A package of measures presented on deceleration in the growth of the money supply in February 8, 2004 is the latest evidence of the December 2003 and January 2004, the recent rate of Government's determination to promote rural growth of about 20 percent per year is stoking the price development. Actions have been proposed in three rise. The relatively easy availability of credit is an areas--the increases in fiscal resources for rural areas, additional element in this picture, although its effects are access to finance, and improvements in the provision of complex--facilitating persistent price-cutting, even by public goods and services. 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. Indonesia As indicated in the Premier's work report that was presented to the National People's Congress on An improving international economic March 5, bringing the economy back on track is at the top environment and lower domestic interest rates supported of the Government's policy agenda. Avoiding excessive by continued strong macroeconomic policies are among investment has become a daunting policy task. So far, the the factors expected that contribute to higher growth in Government has taken several measures to cope with Indonesia. The World Bank's forecast for GDP growth in current and prospective macro-stability concerns. They 2004 is now 4.5 percent, assuming no major disturbance include a consolidation of Central Government spending, during the elections this year. The parliamentary election with the intention to squeeze the primary (that is, non- in early April went by smoothly. The PDI-P party of interest expenditure) budget deficit during 2004, President Megawati Soekarnoputri is expected to incur administrative guidance coupled with changes in bank significant losses, and is expected to slip behind the reserve policies to slow and redirect lending, borrowing former ruling Golkar Party, which lost less. Some new operations to sterilize foreign currency inflows and parties, including that of former coordinating Minister and measures to slow inflows while promoting outflows. The presidential candidate Yudhoyono are likely to do well. speed and effectiveness of stabilization policy measures The presidential election will take place in July, and could be followed by a run-off in September. 18More detailed individual Country Briefs for the major The outturn of 2003 GDP growth rate was above economies can be found at the World Bank website: expectations at 4.1 percent. Consumption remains the http://www.worldbank.org/eapupdate/ East Asia Update 30 driver of growth: private consumption on durable goods creation. The package has been important in maintaining and spending by regional governments were especially confidence in the transition out of an IMF supported strong in the second half of 2003. Meanwhile, inflation program, and a majority of the announced measures was continues to decline, falling to 4.6 percent in February implemented, including passage of a new treasury law, 2004. Food prices, important for the poor who spend half new rules on government procurement, and establishment of their income on it, remained stable in light of a good of an anti-corruption commission. Various initiatives to 2003 harvest. The decline in inflation rate has enabled improve the country's infrastructure were also announced, Bank Indonesia, the central bank, to reduce policy interest although the fiscal implications of these initiatives are still rates, although lending rates continue to be high. On the unclear. Outstanding issues under debate include back of a stronger Rupiah and higher GDP, the external investment laws and regulation, tax and tax debt to GDP ratio declined from 76 percent at end-2002 to administration, and labor regulations. And a pending 65 percent at end-2003. Government debt to GDP ratio Social Security bill, which was not included in the White Paper, has raised concerns in the business community and declined to below 70 percent at end-2003. Building on labor movement alike. The Government's key challenge the strong macroeconomic numbers, the Government going forward is to remain focused on the priority issues successfully floated a $1 billion global bond in early and substance of the White Paper measures in an election March. Market confidence was also reflected in the stock year. market index, which, boosted by foreign buying, exceeded pre-crisis highs in February, Current growth is not enough to make a dent in Korea unemployment.19 The unemployment rate increased from Macroeconomic Developments: Korea's GDP 8.1 percent in November 2002 to 8.5 percent in August grew by only 3.1 percent in 2003, due to persistent 2003, the latest available number. Youth unemployment weakness in domestic demand. This was far below the also shows a rising trend, whereas new jobs are robust growth of 7 percent in 2002 and is the lowest since increasingly created in the informal sector, while 1998. However, the economy picked up towards the end employment in the formal sector is in decline. Higher of 2003 based on strong exports and a recovery in fixed growth will have to increasingly come from investment investment. and exports--two areas in which Indonesia has not done Private consumption has remained weak, well compared to neighboring countries. Fixed capital contracting by 1.4 percent as households strove to reduce formation grew by a meager 1.4 percent in 2003, and it is heavy personal debt burdens. Gross fixed capital now below 20 percent of GDP, over ten percentage points formation was also weak, recording 3.6 percent growth, below the pre-crisis level. Exports are doing better in down from 6.6 percent in 2002. Although construction dollar terms because of the strong international remained active thanks to brisk building construction, commodity prices. But while performance varies per investment in plant and equipment fell 1.5 percent. On a industry, manufacturing exports are stagnant, and exports more positive note, investment activity in the fourth as a share of GDP are still below pre-crisis levels. quarter showed signs of improvement reflecting robust Indonesia's exports to China are doing well, growing by export and industrial production and improving business 28 percent in 2003, but other countries performed even sentiment. Export of goods showed a strong performance better: Indonesia's share in the Chinese market among 5 especially from August onwards, registering double-digit Asian countries (Indonesia, Korea, Malaysia, the year-on-year increases, thanks to brisk shipments of key Philippines and Thailand) dropped from 11.2 percent in items such as semiconductors, automobiles, wireless 2000 to 7.4 percent in 2003. Indonesia's competitiveness communication equipment, computers and ships (these has suffered from past strong wage increases in the formal five products accounted for 43 percent of Korea's total sector, and the stronger Rupiah. Fortunately, more recent export in 2003). China emerged as Korea's largest export wage settlements and minimum wage agreements have market, accounting for 18.1 percent of the nation's total started to take account of the lower rates of inflation. export. The Government's White Paper, a package of Labor market indicators were persistently weak. policy measures announced six months ago, includes a Unemployment hit a 34-month high of 3.9 percent in range of actions that can improve the investment climate February 2004. The youth jobless rate also reached a and competitiveness, and therefore boost growth and jobs three-year high of 9.1 percent in February. There is increasing concern that employment may not improve 19There is some debate as to the reliability of unemployment much despite the expected economic pick-up in 2004 data. Since 2002, BPS is publishing both annual and quarterly because of structural change in industry, labor market data consistent with ILO standards. In addition, the Household inflexibilities, increasing overseas production and a more Survey, SUSENAS includes questions on employment. While diversified employment base. Despite the sluggish the level of unemployment may differ among these surveys, the economy, consumer price inflation averaged 3.6 percent, trends point in the same direction. East Asia Update 31 up from 2.8 percent in 2002. Recently, there has been Hyundai Investment & Securities Co. has been sold to more upward price pressure mainly driven by cost shocks U.S.-based Prudential Financial. Regarding the ailing LG from overseas such as the rally in prices of oil and raw Card, A Won5 trillion bailout package has been arranged materials. However, core inflation, which excludes food for the troubled LG credit card company by its creditors and energy costs, remained stable, averaging 3.1 percent and parent, the LG Group. . in 2003, compared to 3 percent in 2002. Corporate sector performance and Korea has posted a trade surplus for six straight restructuring: With sluggish economic growth in 2003, years since 1998. The current account surplus expanded corporate performance deteriorated: both operating to $12.3 billion in 2003, surpassing the previous year's income to sales and ordinary income to sales fell to 8.2 $5.4 billion. FDI inflows increased to $3.2 billion from and 7.4 percent respectively for the nine months of 2003. $2.4 billion in 2002. With surging foreign investment in However, in part reflecting progress with restructuring, stocks and bonds, the capital account recorded a net the debt/equity ratio fell to 99.0 percent, the lowest since inflow of $13.1 billion in 2003 compared with the 1978, and interest coverage ratio increased to 445 percent previous year's $6.3 billion--the largest net inflow in for the nine months of 2003. There has, though, been an more than seven years. Official foreign reserves increasing divergence in performance among firms--a (excluding gold) increased by $33.9 billion to $152.28 at trend evident since 2001--with the performance of the the end of 2003. Korea holds the fourth largest reserves weaker firms having deteriorated further in 2003. globally after Japan, China and Taiwan. The adoption in 2001 of the Corporate Credit Monetary and fiscal policies: Korea's Risk Assessment (CCRA) System and the Corporate consolidated budget recorded a deficit of 0.5 percent of Restructuring Promotion Act has laid the basis for GDP due to two supplementary budgets worth won 7 corporate restructuring on an on-going basis. Financial trillion to response to the economic weakness in 200320. institutions conducted five rounds of credit risk General government debt stood at 22.4 percent of GDP in assessments through the first half of 2003, on the basis of 2002, and at 39.6 percent of GDP when including which 285 debtor companies were subject to a clean up government guarantees of Won 102 trillion. The BOK has process. Recognizing that Korea's corporate restructuring maintained its policy rate at 3.75 percent since July, given needs to be increasingly market-driven, the government its assessment that so far domestic demand remains has also continued to focus on strengthening court- sluggish and that inflation is not being driven by excess supervised insolvency. demand. Macroeconomic outlook and policy issues: Financial sector performance: The Korean Given the relatively optimistic global growth outlook, banking sector underperformed, primarily owing to loan Korea's economic growth is expected to pick up in 2004 defaults by SK Networks and increases in overdue and average around 5.3 percent, as export growth consumer loans and credit card debt. The net income of strengthens further and feeds through to a more visible 14 commercial banks declined sharply by 75.2 percent to domestic demand recovery. Macroeconomic policies are Won 848 billion, down from Won 3.42 trillion a year expected to remain supportive. However, much will earlier. The BIS capital adequacy ratio also dropped to depend on Korea's success in resolving its internal 10.45 percent and the NPL ratio rose to 2.7 percent. structural overhangs such as household debt and However, helped by a bullish stock market last year, pre- remaining weak corporates, as well as resolving social tax income of domestic securities companies registered a disputes and political uncertainty. Though the aftereffects sharp increase to Won 1,035.9 billion in the first three of the parliament's impeachment of President Roh Moo- quarters, ended December 2003. hyun appears limited, political uncertainty may linger longer than expected depending upon the outcomes of Restructuring and re-privatization of financial National Election and the final judgment of the institutions: In 2003, 151 financial companies were closed Constitutional Court on the impeachment. 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 Malaysia deposit repayment, loss compensation and recapitalization of financial firms and purchase of bad debts. In the Malaysia sustained a robust broad-based banking sector, the Shinhan Financial Group purchased growth driven by strong domestic demand and a Chohung Bank, and Kookmin Bank, the nation's largest sturdy export performance in 2003. Real gross lender, was fully privatized. Citigroup announced that it domestic product (GDP) grew by 5.2 percent in 2003, up will acquire KorAm Bank, Korea's seventh-largest lender. from 4.1 percent in 2002. Strong economic fundamentals as well as supportive fiscal and monetary policy 20The 2004 consolidated budget is also projected to record a measures, including an economic stimulus package in slight deficit of 0.5 percent (Won -3.5 trillion) of GDP to May 2003, helped the economy overcome the impact of support the full recovery of economy. the Severe Acute Respiratory Syndrome (SARS) East Asia Update 32 epidemic on growth and global political uncertainties Prospects for the next two years are emerging in the first half of 2003. The Malaysian promising for Malaysia. The economy is projected to economy continued to gain momentum over the course of grow at 6% in 2004 and 2005. The optimistic forecasts the year and accelerated in the second-half of the year, are grounded on a robust gain in private sector recording quarterly growth rates of 5.2 percent in the expenditures. Private consumption is expected to rise by third, and a robust 6.4 percent in the fourth quarter of 8.1% this year, compared with 5.1% in 2003. Private 2003. investment is projected to grow by 11.5% in 2004, substantially higher than the 1.1% in 2003. In addition, From the supply side, all sectors of the economy expanded in 2003. The manufacturing sector Malaysia is well placed to profit more this year from the improved to 8.2 percent growth in constant prices global recovery. Higher demand for electronics and compared to 4.0 percent in 2002, with all major groups electrical products, combined with an upturn in the global registering positive growths. The larger sub-sector growth electronics prices are likely to boost Malaysian rates recorded were by industrial chemicals, products of manufacturing growth in 2004. Also, firm prices for crude chemicals, plastic, and rubber (13.3 percent), basic metal palm oil as well as crude oil provide grounds for a solid industries (11.4 percent), and food, beverages, and export-led growth. In addition, since taking over on tobacco (10.9 percent). In 2003, the services sector October 31, 2003, Prime Minister Abdullah Ahmad recorded a 4.1 percent broad-based growth, while the Badawi has brought in a strong wind of change in agriculture sector recorded the strongest growth in 11 substance and style. The focus of the new Prime Minister years, recording 5.5 percent growth. This growth was on issues of Rural Development, Governance and Anti- driven mainly by higher production of rubber and palm Corruption, Human and Social Dimension of oil which registered double-digit growths of 18.4 and 11.9 Development have resonated very well with the public. percent, respectively. In 2003, the mining sector recorded The Barisan Nasional, the governing coalition, has growth of 4.8 percent in real terms compared to 3.7 obtained a large victory at the March 22, 2004 snap percent in 2002, reflecting increased production capacity election, giving Abdullah a fresh and strong mandate and from new oil and gas fields. a huge impetus for change. The notable defeat of the PAS (the Islamist opposition party), has conferred a high From the demand side, final consumption degree of freedom to the new Government inaugurated on expenditure achieved a 5.7 percent growth in constant March 28, 2004. prices in 2003, up from 4.6 percent in 2002. This increase was attributed primarily to a 7.9 percent growth The sliding US Dollar has reinforced in real government expenditure, although this is down Malaysian export competitiveness in 2003. The from 12.2 percent in 2002 and 17.0 percent in 2001. Real combination of a weak US Dollar and increasing demand private final consumption expenditure was also strong and helped boost electrical and electronic products exports. grew by 5.1 percent, up from 4.4 percent in 2002. Both These products netted receipts amounting to RM194.8 the household and corporate sectors benefited from rising billion (US$51.3 billion) or 50.9 percent of the country's disposable income, the improving terms of trade for total export revenue. Malaysia enjoys a large current commodities, and strengthening external demand. In account surplus (US$13.4 billion), a comfortable level of reserves (US$44.9 billion, or about 7 months of retained 2003, fixed capital formation rose 2.7 percent in real imports and 5 times the value of short-term external debt), terms, compared to a marginal increase of 0.3 percent very low inflation (1.2%), a relatively sound financial a year ago. A significant development in 2003 has system, and a manageable external debt (total external been the turnaround in private investment, which increased 1.1 percent after 2 years of contraction. In public debt declined to 9.5% of GDP). the external sector, exports continued to expand in 2003, The structural agenda includes enhancing registering an increase of 6.3 percent in real terms, up competitiveness and resilience of the economy. The from 4.5 percent in 2002. Exports grew faster as 2003 Government has taken great strides at providing a progressed, posting a robust growth of 10.9 percent in the business friendly environment in which firms can flourish fourth quarter. Imports in 2003 grew by 5.0 percent in real and prosper. Other ongoing actions include: a) reviewing terms, down from 6.3 percent in 2002. The increase in and rationalizing the incentive structure, b) reducing the imports for 2003 was largely attributed to significant regulatory burden and improving the delivery system, c) growth in the fourth quarter with imports expanding by improving the labor market and ensuring the supply of a 15.9 percent. The main impetus for stronger export skilled workforce able to keep up with technology, d) performance was from the manufacturing sector, promote greater usage of ICT by firms, especially SMEs, particularly electrical and electronic products and the and increase their ability to innovate. These measures are primary commodities of palm oil, crude petroleum, and key to attracting new investments, both from foreign and domestic sources, and to country's overall liquefied natural gas. competitiveness. East Asia Update 33 Philippines 13.5% (47.1%) in 2000 to 9.6% (41.8%) in 2003. Most of the MDG targets including poverty reduction, primary GDP growth in 2003 was 4.5%, higher than the school completion, and child mortality are on track, those government's low-end forecast and most analysts' for child malnutrition and immunization for measles are expectations. Consumption was the main driver of growth not. 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 Thailand merchandise exports in dollar terms increasing by only Real GDP in 2003 grew at 6.7 percent, the 1.5% -- much less than the rate registered in the rest of the highest rate since the crisis driven by private region. Exports also became more diversified with the consumption, private investment, and net exports. SARS share of exports going to Asia rising to 42%. Imports on impact on growth was minimal, shaving GDP growth by the other hand rose 5.7% and contributed to the approximately 0.3 percent. Private consumption deterioration in the trade balance. continued to grow from 2002 by 6.3 percent supported by Recent data indicate that the non-financial public the exceptional rise in farm incomes by 25 percent, continued expansion in consumer credit, low interest sector (NFPS) deficit fell as a share of GDP (from 6.7 rates, and supportive Government measures. As in 2002, percent to 6.3 percent) due to the compression of capital sales of automobiles, mobile phones, and expenditures both by the National Government and by telecommunication services remained strong. Private key GOCC's (e.g. the National Power Corporation and investment's contribution to GDP growth in 2003 the National Food Authority). The NG deficit alone increased from 2002, with its share in GDP rising to 15 actually fell to 4.6 percent of GDP in 2003 from 5.2 percent, though this is still well below the 1980s level. percent in 2002. The recent slide in tax revenue as a Net exports of goods and services in real terms grew by share of GDP was halted with the tax to GDP ratio 3.5 percent, compared to 7.3 percent in 2002. This is the remaining constant at 12.3 percent. result of a decline in net exports of services stemming Despite the reduction in the NFPS deficit as a from the fall in tourism receipts during the SARS share of GDP, fiscal vulnerabilities remain substantial. outbreak in the first half of 2003. NFPS debt at 107% of GDP is high, increasing the risk Growth in 2004 is expected to be higher than last that adverse developments could raise the cost of year. Public investment, which has been retrenching for borrowing, weaken the peso and lower growth. While the past 5 years, is budgeted to grow at around 10 percent output growth has been steady, borrowing costs have this year. Government consumption growth is also increased as evident from the 191 basis points increase in expected to accelerate from last year. This could help the yield of one-year treasury bill between January to raise real GDP growth in 2004 by around 0.5 percent. March 2004, and the 450 basis points spreads for ROP8 Public spending could also help boost growth of private (i.e., RP bonds maturing in 2008) in March. The peso has consumption. This could help offset slightly slower also grown weaker with the 90-day peso forward rate growth in private consumption this year due to slower selling at more than a peso premium. The January to growth in farm incomes. (While international crop prices February cumulative balance of payments shifted to a are expected to rise in 2004, production of rice, deficit of USD822mn from a surplus of USD111mn Thailand's key crop, is expected to see zero growth, as a registered in 2003, in part reflecting weak export growth result of drought late last year. Private investment is (4.1%) and the slower growth of worker remittances expected to grow at a similar double-digit rate as last (1.2%). Central bank interventions and NG debt servicing year. Capacity utilization, though rising, is still roughly have also lowered gross reserves to USD15.8bn in 10 percentage points below pre-crisis years (66 percent at February. end of 2003 as compared to 75 percent in 1995-1996). Corporate and banking sector performance has Import growth is expected to accelerate with increased been relatively robust. Based on the January 2004 Makati public investment and export growths. Business Club survey, 66% and 58% of its members External vulnerability continues to be reduced. reported average gross revenues and net income growth The current account surplus of US$8 billion in 2003 for their companies of 16 percent and 24 percent, contributed to rising foreign reserves, which reached respectively. For the banks, end-2003 net interest margins US$42 billion or five times imports plus short-term debt. and growth of net income after tax was 4% and 53% External debt declined by US$10 billion from 2002 to respectively. US$37 billion at the end of 2003, as compared to almost Modest recovery in per capita GNP has likewise US$60 billion pre-crisis. In 2004 the current account improved the quality of social outcomes. In particular, surplus is expected to decline to 3.8 percent of GDP, estimates for the incidence of Filipinos living on less than compared to 5.6 percent last year as the trade surplus USD 1 per day (USD 2 per day) has been reduced from decrease this year. East Asia Update 34 Last year, export values and volumes grew by 17 reductions in October last year and January this year. As a and 10 percent, respectively. Exports are expected to result, more than half of the total tariff lines are now in continue robust this year, with value growth targeted at 15 either the 0, 1, 5, or 10 percent band. The average tariff percent and volume growth of about 12 percent, as the rate fell to 12 percent compared to 23 percent in 1995. world economy and world trade recover, though export Progress was also seen in the financial sector with the prices are projected to grow at a slower rate than last year, Financial Sector Master Plan endorsed by Cabinet in in line with the slower world inflation and growth of non- January. Measures have been taken to accelerate debt oil commodity prices. Traditional markets (Japan, USA, restructuring: The decree to streamline the property and EU) as well as China and ASEAN, which had auction processes for foreclosed properties over 10 years contributed equally to export growth last year, will old has been passed and amendments to the Civil continue to drive export growth this year. Machinery and Commercial Code on legal execution to reduce the equipment, rubber, and vehicles will continue to be key property auction fees have been made. Public sector export products to these markets. reform continued, particularly in the area of public Investment in equipment picked up in 2003, administration, focusing on results-based management contributing to an acceleration in private investment and enhancing the coordination of government agencies 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 Vietnam billion. On a balance of payments basis net FDI inflows Vietnam's economy grew by 7.2 percent in 2003 ran at $1-2 billion, since gross inflows were partly offset despite challenges from SARS and a lackluster global by various asset sales by foreign investors.) FDI gross economy. Export growth, in value terms, accelerated inflows were led by larger firms with export links, which from about 11 percent in 2002 to reach 21 percent in could mobilize bank loans as well as increasingly finance 2003. Industrial production remained strong and their capacity expansions through the capital and bond investment solid. The government's GDP growth target markets. This year private investment will likely take for 2004 is around 8 percent. place in sectors in which capacity utilization has exceeded those in the pre-crisis period. Currently, there are 10 such In the first quarter of 2004, the economy faced sectors, and they account for about 6.5 percent of total the challenge posed by the avian flu. For the second year value-added. Investment will also likely increase in running, Vietnam has had to contend with a disease sectors with interests by foreign investors, particularly, outbreak that threatened not only the lives of its the automotive and parts and the electronic parts sectors. population, but also particular economic activities. While the worst case scenario of a mutating virus spreading Direct government spending will help support rapidly to humans appears to have been avoided, the avian growth this year and next. Unlike in 2003 where most flu has had a devastating impact on the poultry sector. Government stimulus measures were credit-based and Around 38 million out of a total of about 258 million financed mainly by the Government's specialized heads of poultry have had to be culled. The Ministry of financial institutions (SFIs), direct government spending Agricultural and Rural Development values the associated will help support growth in 2004 and 2005. In FY2003 loss at just under 0.5 percent of GDP. So far, the overall (Oct 02­Sept 03), government's fiscal balance was in economic impact of the avian influenza epidemic remains surplus by Bt 24 billion or 0.4 percent of GDP as a result relatively negligible and disruptions to the general of the sharp rise in revenues. Public debt has been on a economy have been avoided. Foreign arrivals increased decline from 53 percent of GDP in 2002 to 49 percent at four percent in March compared to the same time last year the end of 2003. A Bt135 billion supplementary budget was approved in February for FY2004 and will be fully In 2003, as in previous years, the main financed from estimated additional revenues collection. contribution to growth came from the industrial sector Roughly half of the supplementary budget has been which grew 16 percent. The emergent role of the non- allocated for current expenditures and the remaining for state sector in the economy is being gradually cemented capital expenditures. However, only 30 percent of the with this sector continuously outperforming the SOE capital expenditures are expected to be disbursed this sector. Private foreign and domestic industrial production fiscal year as the allocation of the funds has not been expanded by 14 and 22 percent respectively, compared to approved, leaving less than 6 months for the projects be the state-owned sector's 12 percent growth. executed. Thus the fiscal deficit this year will be roughly The remarkable export growth in 2003, was in 1 percent of GDP, less than planned by 0.5 percentage good part due to the strong performance of exports to the points. The undisbursed amounts will be carried over to US market which grew by over 60 percent. However, FY2005. As a result, fiscal balance in FY2005 will be garment exports to the US, comprising more than 50 similar to that of FY2004. percent of total exports to this market, hit its quota limit Structural reform continue to progress in some last year. This means that certain categories of these areas. There was progress in tariff reforms with tariff exports will be capped by a maximum of 7 percent annual East Asia Update 35 increase in 2004, compared to last year when garment while credit expanded by about 28 percent in 2003, with exports to the US doubled in value. Further friction for faster growth in credit to the non-SOE sector. The share Vietnam's exports is likely to emanate from the anti- of bank credit going to the non-state sector remained dumping actions initiated by US on shrimp exports. above 60 percent for the third year in a row in 2003, and Seafood exports amount to an annual US$ 2.2 billion, is now close to 2/3 of all credit extended. The quality of equivalent to 11 percent of non-oil exports. Coffee and lending of the State-owned banks is a concern however, rubber export prices increased by 50 and 46 last year, and the fraction of NPLs in total bank credit remains providing a boost to the value of commodity exports. difficult to assess. By September 2003, nearly 60 percent Export growth is likely to slow somewhat in 2004 with of the NPLs that had been officially identified in 2000 had the Government expecting an increase of 12-15 percent been resolved. At the same time these banks had received for the year. capital injections of about VND 7.7 trillion, out of a total Despite strong exports, the trade deficit rose to planned injection of VND 10.9 trillion. However, the nearly 7 percent of GDP in 2003 from 2.6 percent in current capital adequacy ratio of the banks (under 4 2002. The current account deficit is estimated to have percent) is still low by generally accepted standards. widened to about 4 percent of GDP in 2003 from 1.1 Inflation had come down steadily in 2003, percent in 2002. Meanwhile, gross international reserves averaging about 3 percent for the year, but rose in the first increased to US$ 5.6 billion (equivalent to 10 weeks of two months of 2004. The rise in the CPI of 5 percent early imports) on the back of rising ODA and FDI flows. in the year, though not large in absolute terms, has According to the State Bank of Vietnam, actual inflows of generated inflationary expectations. The main reasons FDI continued to increase in 2003, to reach US$ 1.5 have been a rise in food prices following the avian billion for the year. Remittances from Vietnamese living influenza outbreak, poor weather conditions, an increase overseas and expatriate workers, through official in the price for petroleum products, and a rise in the price channels, amounted to a record US$ 2.6 billion last year. of key imports such as steel, fertilizer and plastics. The A significant part of the rising import bill can be depreciation of the US dollar to which the dong is closely related to robust domestic investment as well as imports aligned has contributed in part as well. While the increase needed as inputs for exports production. Investment rose in food prices may be temporary, the rise in oil prices of more than one percentage point to reach 35.6 percent of 7.4 percent is likely have knock-on effects. Expectations GDP in 2003, with imports of capital goods (20 percent of that inflation may accelerate has forced the government to all imports) growing by 41 percent. Increasing reserves cut the tariff on steel in a bid to bring down prices, and combined with investment driven imports mean that the hikes in power and water tariffs have been delayed by current account deficit should not be a major concern at public utilities. Some commercial banks have either this juncture. increased or have hinted at increasing deposit rates in response to the price rise, a move that has been Throughout 2003 more than 30,000 private discouraged by the central bank, citing ample liquidity in enterprises applied for business registration, reflecting the banks and fearing a rate race. growing role of the private sector in domestic investment. On average these enterprises had a registered capital of On the reform agenda, while SOE and State- around VND 2.1 billion, exceeding the 2002 average of owned Commercial Bank (SOCB) reform has been slower VND 1.5 billion. than expected, recent announcements from the Party and the Government have given indications of major shifts in The budget deficit rose to 2.2 percent in 2003 government policy regarding the ownership partly due to pressure from a 38 percent increase in wages transformation of large SOEs and SOCBs. The sectors and pensions. Budget revenues have been maintained at likely to be covered include electricity, post and around 21-22 percent of GDP in the last few years. The telecommunications, chemicals, metallurgy, and banking deficit estimate for 2003 does not, however, include other and insurance. Outsiders will be able to buy shares in debt creating flows for the government such as on-lending these entities, and valuations of the enterprises' assets is operations (estimated to be around 3 percent of GDP) and to be based on market values. Whether the equitization of the cost of re-capitalizing the state owned banks, which these larger SOEs and banks will actually lead to better amounted to around 1.2 percent of GDP. The deficit is governance and accountability will depend crucially on expected to widen to 2.3 percent of GDP in 2004 as major the legal and regulatory framework for these entities, public investment projects are implemented. Capital which is also undergoing change. This will be especially spending is budgeted to rise by nearly 20 percent in 2004, important from the perspective of smaller investors and but revenues are also projected to remain strong with a minority shareholders. budgeted increase of about 10 percent. Steps have been taken to give a boost to the Monetary aggregates have been growing rapidly, fledgling securities market. In November, 2003 the reflecting the robust pace of economic expansion, Government issued Decision 144 that eased the listing ongoing monetization of the economy, and strong credit requirements for firms. In order to encourage smaller demand. Broad money rose by around 20 percent in 2003 East Asia Update 36 firms to list, the minimum capitalization requirement was deadline for ratification was March 31, 2004). On the halved to VND 5 billion. Recently, a number of joint structural reform front progress has been made mainly in stock banks have expressed an interest to list on the stock the financial and monetary sectors. Specific exchange, a move for which the central bank has signaled accomplishments include the introduction of on-site its support and is in the process of issuing regulations to inspections and a uniform chart of accounts for that effect. In-principle approval has been granted to commercial banks to reduce the risk of mismanagement Vietnam's first investment fund, a foreign affiliated firm, and boost public confidence in the banking system. Public to list on the stock exchange. Additionally, the financial management reform holds promise in 2004 with Government is currently contemplating a removal of the the formation of a sector wide approach, supported by ten foreign ownership limit on foreign investors' interests in donor partners, to support the government's reform listed companies. The foreign ownership limit is expected program. On the other hand, there has been little progress to be increased to 49 percent from the current 30 percent on the anti-corruption agenda, military demobilization, or civil service reform, due, in part, to the electoral gridlock. by the end of this year. The Vietnamese market has been the best performing in Asia so far this year with a 66 Economic prospects for 2004 are positive, with percent gain. an expected recovery (growth is projected at 5.5 percent) driven by construction, the fledgling tourism sector, and urban-based garment industries. Nevertheless, the Smaller Economies scheduled phasing out of the textile and apparel quotas (under the Agreement in Textile and Clothing) on January Cambodia 1, 2005 will pose a significant risk to Cambodia's growth prospects since the bulk of exports to the US and the EU Cambodia's growth was lower than expected in 2003-- are channeled through the quota and special preferences 4.8 percent compared to 5.5 percent in 2002. Growth was system. This risk can be managed if the government takes adversely affected by the anti-Thai riots and the SARS decisive action to: (i) improve the investment climate to outbreak in the first part of the year, both of which hurt boost competitiveness (and yield the 6-7 percent growth tourism, which fell by 11 percent from 2002. On the rates targeted in the 2003-2005 National Poverty positive side, growth in 2003 was supported by a solid 23 Reduction Strategy); (ii) mitigate constraints and develop percent gain in goods exports, underpinned by the new opportunities in the rural business environment; and continued strength of garment and footwear exports, (iii) cultivate new sources of growth, including export which surpassed US$1.6 billion, representing nearly 80 diversification. A concrete reform agenda is needed to percent of total exports. At the same time prudent restore momentum in the medium-term and improve the monetary policy contributed to continued expansion of quality of growth through greater poverty alleviation. net foreign assets, a stable exchange rate and a low inflation rate (0.5 percent). On the fiscal side a number of factors, including Democratic Republic of Timor Leste the gridlock resulting from the July 2003 elections, the anti-Thai riots, and SARS, had a negative impact. Total Timor-Leste became independent on May 20, revenue reached only 85 percent of the budget target, 2002, following 25 years of conflict, a violent transition which contributed to an increase in the overall budget from Indonesian rule in September 1999 and two and half deficit to 7.1 percent of GDP, up from 6.8 percent in years of United Nations administration. The country now 2002. The revenue shortfall led to a reduction in priority faces the challenges of nation-building with very limited sector spending21 in 2003, with estimated spending at 3.0 human resources, embryonic institutions, a stagnant percent of GDP, well below the budgeted 3.8 percent. In economy, high levels of poverty and unemployment. response, the government increased pressure on The gradual winding down of the international delinquent and non-compliant taxpayers, for example, by presence following independence and slow-down in increasing the collection of arrears. The government also reconstruction programs has led to some contraction in reduced the import tax on luxury vehicles from 230% to economic activity, particularly in urban areas and in 50% beginning January 1, 2004 on the expectation that the reduced rate would encourage greater collections. services that catered to expatriates. Data deficiencies preclude accurate quantification of the decline in output. Cambodia achieved a major accomplishment Non-oil exports, amounted to just $7 million in 2003 of with its accession to the WTO in September 2003. which $6 million consisted of coffee, while "Timor Sea However, the absence of a new National Assembly meant revenue" accruing to the budget in FY03 amounted to just that Cambodia had to request a six month extension for under $30 million. Imports are estimated to have fallen to ratification of its membership protocol (the original $168 million in 2003 from a peak of $248 million in 2001 reflecting the falling presence of expatriates 21The priority sectors are health, education, agriculture, and rural development. East Asia Update 37 Inflationary pressures have abated: inflation exact number of seats to which the FLP is entitled. In remained at 8-10 percent through mid-2003 due to a addition, there have been claims of tokenism in regard to drought induced scarcity of agricultural goods, but by offered appointments, which the FLP claims will have January 2004 was reported at 4 percent. Private sector responsibility for only 2.5 per cent of total budgeted wages have started to fall--one of the largest employers expenditure. reduced pay for unskilled workers by 25% to $80 dollars Despite these political uncertainties, the real a month. Nevertheless, the overall wage level remains economy is estimated to have grown by 5 per cent in relatively high in comparison with neighboring countries, 2003, driven by buoyant consumer demand. The undermining competitiveness. A fifth of the working age government is forecasting a slight decrease in 2004, with population in Dili/Baucau was unemployed in late 2001. projected real GDP growth of 4.1 per cent. Inflation fell Unemployment is highest among the youth and declines to 4.2 per cent in December, down from 5.3 per cent the sharply with age. previous month. The underlying measure of inflation was also down on the month, to 3.1 from 3.3 per cent. The While some interest has been shown in year-end inflation forecast for 2004 is 3.0 per cent, largely concessions for exploitation of natural resources, such as reflecting the base effects of the January 2003 VAT fisheries and forestry so far there has been little new increase falling out of calculations. investment. During 2003, bank deposits increased from $55 million to $72 million, and domestic bank lending The tourism sector is on target for a record in increased from $5 million to $22 million, but the bulk of visitor arrivals in 2003, with tourist numbers cumulative deposits continue to be invested abroad. to November up 7 per cent to 393,000. This represents a strong recovery from the lows seen around the 2000 coup Ratification of the Timor Sea Treaty in March of only 294,070. However, some other industries have 2003 provides assurance that the planned development of had a disappointing year, and many face ongoing issues. the Bayu-Undan oil and gas field will proceed. Sugar production was down by 7 per cent, which has been Production of liquids at this field began in February 2004 blamed on the late start to the season, milling and is expected to reach its design daily production rate inefficiencies, adverse weather conditions and during the third quarter of 2004. The second phase, transportation problems. While there are some hopes for scheduled to begin in 2006, entails piping of dry gas to an improvement in 2004, with the government due to Darwin, Australia, for recovery as liquefied natural gas. commence a restructuring program, some of the issues Although there may be some opportunities for service facing the industry are deep-rooted and are reflected in activities in Timor, the principal benefit will be from the the wider disputes between Fijian and Indo-Fijian $3 billion in revenues that the project is expected to political interests. While the garment industry performed generate over a twenty-year period beginning in 2004. well over the period, with export receipts to November up 4 per cent on the same period in 2002, there are serious The National Development Plan, prepared risks hanging over the medium term prospects for the shortly before Independence, outlines Government's industry as a result of preferential agreements with development and poverty reduction objectives. A Stability Australia and the US due to expire by the start of 2005. Program announced by Government in January 2003, in Gold production was down 6 per cent on 2002, copra the aftermath of the December 2002 riots, focuses on production down 33 per cent due to the impact of Cyclone three areas of the longer-term program where Ami, and total fish exports were almost 5 per cent lower Government intends to have immediate impact: due to over-fishing, climatic conditions and industrial governance, job creation and service delivery for poverty disputes. reduction, particularly in education and health. The actual budget deficit was 6.1 per cent of Fiji GDP in 2003, overshooting the projected deficit of 5.3 per The Fiji Supreme Court is expected to rule in cent. Reasons for the overspend included rehabilitation May on the composition of the government cabinet and work after Cyclone Ami, and a shortfall in investment power sharing arrangements. Last year the Court had revenue due to the non-sale of government-held shares. ruled on the legality of the Qarase government, requiring For 2004 the government has announced a projected that the prime minister include the Indo-Fijian dominated deficit of 3.9 per cent of GDP, which is expected to be Fiji Labour Party (FLP) in his cabinet. Under the power realized from a marginal reduction in overall expenditure sharing provisions of the Constitution the FLP, which and higher revenue collections. won 27 out of 71 seats, should have been included in the On the external front, merchandise exports to Cabinet, but had thus far been excluded. The PM in November rose by about 12 per cent compared to the response announced an increase in Cabinet members from same period last year. This increase was attributed to 22 to an unwieldy 36 to accommodate the FLP, rather increases in garments and sugar exports (despite weaker than asking current members to step down. This parties overall production figures), which more than offset lower then returned to the Supreme Court to arbitrate over the receipts from gold, timber and fish. Over the same period East Asia Update 38 imports rose by 5 per cent in response to stronger growth. drought damage - has exceeded government expectations, At the end of 2003 foreign reserves were FJ$727 million but coffee producers have been hit by bad weather. To (US$422 million), which is equivalent to 3.0 months of foster agricultural growth, needed changes are the imports of goods and non-factor services. On foreign development of rural infrastructure and easier access to exchange markets the Fiji dollar reached a six-year high rural credit for farmers. While illegal logging remains a against the US dollar, but weakened against the problem, opium production has fallen. Exports of Australian and New Zealand dollars. The real effective agricultural and forest products to neighbors have exchange rate rose by 3 per cent over the year, indicating increased. The government has signed an agriculture a slight deterioration in Fiji's international agreement with Vietnam. competitiveness. Emigration of skilled workers continued to be an issue in 2003, with emigration up 6 per cent Industry. Growth in the industrial sector has run cumulative to October to 4,800, which on an annualized in a 6-10 percent range in recent years and continued at basis was equivalent to 0.7 per cent of the population. 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. Lao PDR The garment manufacturing sector is growing in line with increased orders from the EU, and should also benefit In recent years Lao PDR has achieved robust from greater access to the US market once normal trade growth of a little under 6 percent a year, supported by relations (NTR) status is granted (expected in 2004). higher aid inflows, private investment (namely, a pick-up Construction activity is being boosted by the rising in small-scale construction), and foreign investment, number of infrastructure development projects, prompted in part by ongoing reforms in the foreign particularly road- and bridge-building and power investment framework (above all, streamlined approval generation. The future of the proposed Nam Theun 2 procedures). GDP is estimated to have grown by 5.3 hydroelectricity project (NT2) is clearer with: 1) the percent in 2003, down a little from 5.9 percent in 2002. return of Electricité de France (EdF), a French state- Growth was reasonably well balanced, with relatively owned energy company and a key developer; and 2) the strong increases in both industrial production and agreement of the Thai state-owned energy company, agriculture (despite a few floods). Rural consumer Electricity Generating Authority of Thailand (EGAT) to demand picked up, as the agricultural sector grew and buy electricity from NT2 from 2009. Mining has prices for key commodities remained firm. Among factors benefited from the success of foreign-invested mining dampening growth somewhat was the impact of more projects: new commercial interest in gold mining has cautious bank lending policies on credit and private surged following the success of the Sepon mine, an investment and weakness in tourism (due to the outbreaks Australian-backed project. of SARS and bird flu, and regional tensions). Public investment was constrained by weak revenue collection. Services. Service sector growth increased from 4.9 percent in 2000, to 5.7 percent in 2001, and to 8.3 In 2004, real GDP is expected to grow at 5.8 percent in 2002. Except for financial services, where percent, as a result of increased private investment, a growth has been slow owing to the continued weakness of modest recovery in tourism, and higher exports (due to the banking sector, almost all key service sub-sectors are faster world trade growth and improved access to US growing at above 7 percent. In 2003 the regional markets). Projected stronger growth in Vietnam, downturn in tourism due to the outbreak of SARS and Thailand, and the EU - which together account for the bird flu was also felt in Lao PDR, where security majority of Lao exports ­ could play an important role. concerns in some areas also hinder the sector from The Government has continued efforts to improve the achieving its full potential. However tourism is recovering operating environment for businesses and the foreign and is expected to grow faster in 2004. The telecom investment framework, including streamlining the sector continues to grow as telephone penetration rates investment approvals process for both domestic and rise. Air travel with Vietnam, Myanmar and Cambodia foreign investors, including allowing provinces to has been liberalized. Transport links with Thailand have approve investment programs worth less than US$2m. In been liberalized in a bid to increase trade, and the Thai 2004-05 the government is planning further changes to government is to finance the construction of two bridges. ease the investment environment, including developing a special economic zone in Savannakhet province and Structural agenda: The Government initiated a reducing the barriers to the leasing of land by foreigners. program of reforms in late 2001 to improve the management of public expenditures, state-enterprises Sectoral. Agriculture. In 2003, growth in the agricultural (SOEs), state-owned banks (SCBs) and natural resources, sector was steady at 4 percent. Poultry farmers have been with the aim of reducing waste, enhancing efficiency and hit by the regional outbreak of bird flu. The main wet- increasing the transparency and accountability of public season rice crop harvest ­ having avoided major flood and East Asia Update 39 resource use. If future increases in revenue from mining about US$ 23.8 million to over US$50 million if copper and hydro-power are to be used to improve social prices increase as expected by 35 percent. Total outcomes instead of financing losses of SCBs and SOEs, contribution to GDP in 2004 will increase from 2.4 in such improvements in use of public resources will be 2003 percent of GDP to over 4.3 percent of GDP critical. In addition, the Government is continuing trade (including royalties and dividends ,0.8 and 0.2 percent of and private sector development reforms aimed at GDP respectively). The Government has been advised completing the transition to a market-economy. to use any additional revenue from increased copper Encouraging recent policy developments include: a) prices for deficit reduction. The current account deficit in streamlining the investment approvals process for both 2004 is projected to drop slightly from 15.2 percent to 13 domestic and foreign investors; b) introducing phased percent. A 15 percent growth in exports is projected for increases in electricity, water and air travel prices - to 2004, mainly due to the increase in copper prices, bring tariffs more in line with production costs; c) starting however imports will continue to grow at over 9 percent. the reform of the banking sector and hiring international Official external debt remains manageable and is advisors to audit the SCBs; and d) planning to restructure on highly concessional terms. On December 30, 2003, the most important SOEs. Also, the Government plans to Mongolia reached an agreement with Russia after several attract investors from Japan and China. However the pace years of negotiation to settle its 11.4 billion Transferable of reforms remains slow. Macroeconomic stability Rubles (TR) valuated at US$11.4 billion. The agreement remains fragile due weak revenue mobilization. consists of a 98 percent up front debt forgiveness, with a Implementation has been difficult and slow, and there US$250 cash settlement. At the end of 2003, Mongolia's remains considerable ambivalence about reforms in state- total stock of public debt was estimated at US$1.4 billion, enterprises and public financial management. equivalent to 118.7 percent of GDP, or 85.8 percent in net present value terms and 170 percent of exports of goods and services. This includes debt of US$ 212 contracted to Mongolia settle TR ( pre-Transition Russian debt) debt obligations. (US$100 million from the Central Bank and US$75 A recovery in the agricultural sector due to million on commercial basis, and US$37 short term loan improved weather conditions and continued robust growth from the Central Bank). The settlement of the Russian in the industrial and service sectors helped raise GDP in debt is a welcome event as it provides international 2003 to an estimated 5.3 percent compared to 3.9 percent investors with more certainty regarding Mongolia's credit in 2002. Inflation continued to edge downwards in 2003. standing. With projected strong growth in the medium The inflation rate was estimated at 4.7 percent in 2003, term the debt to GDP in NPV terms is expected to despite a surge in June 2003 (6.5 percent) due to large decrease incrementally to about 58 percent in 2010. seasonal increases in food prices. Keeping inflation under The overall government deficit was 5.9 percent control was helped by the reversion of domestic food of GDP in 2003, thanks to the government decision to supplies to a normal level following the drought and dzud freeze civil service wages. Revenues as a proportion of of 2000-2002, the stability of the Togrog vis a vis the U.S. GDP continued to increase in 2003 to 38.5 percent of dollar and a monetization process. Indeed, monetary and GDP more than offsetting the increase in current credit aggregates have risen sharply over the last two expenditures from 38.7 percent in 2002. (total expenditure years, on average by 46 percent and 84 percent was 44.2 percent in 2002 and 45 percent in 2003) respectively, reflecting the combined effects of an However, there are concerns about the sustainability of increase in real money demand and a reintermediation the revenue effort and the impact of high levels of process following structural reforms in the banking taxation on private sector activities. On expenditures the system. main source of pressure is the wage bill at 8.5 percent of Exports earnings grew significantly in 2003 due GDP in 2003. The government's efforts to transform the to renewed strong demand for copper, gold and cashmere. public administration into a more market-oriented Imports grew by 9 percent while exports grew by over 19 institution with limited reach and scope have met with percent. Overall the trade deficit decreased from 20.6 mixed success. The composition, and pay policies, in the percent of GDP to 16.7 percent of GDP, and this, Mongolian civil service remain a source of substantial combined with buoyant emigrants' remittances, led to pressure on the budget. The Government is developing a slight improvements in the current account deficit which comprehensive civil service reform strategy to address decreased from 9.5 percent of GDP including transfers to this issue. 9.2 percent. The capital account benefited from sustained On the structural front, in the area of public enterprise donor support and private capital inflows. The togrog/US reform and bank restructuring, the authorities have made dollar exchange rate remained stable in 2002-2003 and so good progress, but important challenges remain. The did the nominal effective exchange rate. In 2004, the privatization of the Trade and Development Bank (TDB) projected corporate income tax (CIT) to be paid by the and the Agricultural Bank were finalized in December, state owned copper company Erdenet could double from 2002 and March, 2003 respectively. The petroleum East Asia Update 40 import company NIC and the monopoly insurance The currency appreciated by 20 percent against the U.S. company Mongol Daatgal were sold to the foreign dollar during the year, reflecting in part the fall of the investors in July 2003 and February 2004 respectively, U.S. dollar against all major currencies including the the Government rescinded the sale of GOBI cashmere due Australian dollar, which the PNG Kina tracks closely. to the questionable The privatization of other large enterprises such as the Gobi cashmere factory which are A tightening of monetary policy facilitated this still carrying out loss-making activities has been delayed, outcome as Treasury bill yields rose from around 13 and the energy sector's persistent financial imbalances percent to just over 20 percent over the first three quarters continue to pose a threat to medium-term fiscal and of 2003, before declining, reflecting an easing of policy. external sustainability. 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 Papua New Guinea 2003. Reflecting these improvements in macroeconomic Political Developments Responding to a request circumstances, external reserves also increased from PNG during the second half of 2003, Australia significantly--gross external reserves increased from announced an Enhanced Cooperation Package to assist US$343 million at the beginning of 2003 to nearly the country cope with the long term deterioration in the US$400 million at year end. That trend has continued law and order situation and to strengthen economic into 2004, with gross reserves at US$532 million at end- management. The package will deploy about three dozen February, equivalent to 6 months of non-mineral imports. Australian public servants into line positions in the PNG The outlook for production and the balance of public service and over 200 police and other legal/judicial payments in 2004 is expected to be favorable due to the personnel to underpin improvements in law and order. continued buoyancy in global commodity process and Implementation details are being worked out in early positive developments in the minerals sector. The latter 2004. are related to adjustments made to the fiscal regime for In January 2004 after failing to muster the mining which have boosted exploration applications. required support to pass a constitutional amendment Concerns remain, however, about the budgetary situation which would have secured its term in office by a further in the absence of strong policy measures to address public 18 months, the government adjourned Parliament to sector reform. end-June 2004. A challenge to declare the adjournment unconstitutional emerged in late March 2004. Solomon Islands Economic Developments In 2003 real GDP expanded at an estimated 2.7 percent. The turnaround in A regional assistance mission (RAMSI) was the economy is attributed to the strong and continued dispatched to the country in July 2003, following an improvement in commodity prices for both agricultural appeal by the Prime Minister for external assistance to commodities and minerals as well as increased production help end the ethnic conflict which had escalated over the as rural producers returned to farming, following the previous three years. This assistance included military distraction of the national elections in 2002. In addition support, a police presence, technical assistance for public the Moran oil field finally came into production, a year finance administration, development assistance to later than anticipated and the Napa Napa oil refinery also underpin peace and reconciliation, and financial support. commenced production, which boosted real GDP. Future economic prospects remain uncertain given slow progress Following this intervention, real GDP has grown on the reform agenda, especially with regard to public for the first time in five years, at 3.8 per cent, after having sector reform and structural impediments could re-emerge fallen by a cumulative total of almost 28 per cent between leading to a reversal of the improvements in GDP 1998 to 2002. Real growth is expected to continue, with a experienced in 2003. forecast for 2004 of around 4.7 per cent. In addition to the increases in output, price level increases have been Budgetary performance improved over the much more subdued, with inflation falling back to 4.1 per second half of the year buoyed by sharply higher revenues cent in the three months to December 2003, compared to from the mineral sector which resulted in a budget over 15 per cent the previous year, and gross official balance for the second half that was adequate to make up reserves virtually doubled to around US$34 million for the deficit generated during the first half. The overall (which is equivalent to 3.3 months of imports of goods outcome for the year was a deficit estimated at 2 percent and non-factor services). Of course, serious issues still of GDP, in line with the budget. remain. Real growth in 2003 was partly generated by On the external front the balance of payments unsustainably high levels of logging, debt and expenditure performed well in 2003 with the current account arrears have continued to increase, and private sector recording an estimated surplus of 10 percent of GDP. activity remains subdued. East Asia Update 41 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. 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 East Kong (China) Asia Q4 1998 7.8 -5.3 -18.3 -5.9 -11.2 -2.4 -2.9 3.4 -7.2 -0.6 Q1 1999 8.3 -2.7 -6.1 5.8 -1.0 0.7 2.1 4.1 -0.2 3.9 Q2 1999 7.6 1.9 1.8 11.2 4.8 3.8 6.6 6.4 3.4 6.4 Q3 1999 7.8 4.6 2.8 13.0 9.1 3.8 8.4 4.7 8.4 7.4 Q4 1999 6.8 9.3 5.4 13.0 11.7 5.1 8.6 6.4 6.4 7.7 Q1 2000 8.1 13.6 4.1 13.1 11.5 5.3 9.6 7.9 6.5 8.6 Q2 2000 8.3 10.1 5.1 10.2 8.3 6.1 8.2 5.1 6.1 7.5 Q3 2000 8.2 10.3 4.0 10.0 8.1 7.2 10.0 6.7 2.3 7.4 Q4 2000 7.3 7.2 6.4 5.0 6.7 5.3 9.7 3.8 3.8 5.8 Q1 2001 8.1 2.3 4.1 3.8 2.9 2.3 4.1 0.6 1.6 4.5 Q2 2001 7.8 1.5 4.3 3.0 0.4 3.1 -1.3 -3.3 1.9 3.5 Q3 2001 7 -0.5 3.8 2.1 -1.0 2.5 -5.6 -4.4 1.8 2.6 Q4 2001 6.6 -1.1 1.7 3.5 -0.8 3.8 -6.1 -1.6 2.5 2.9 Q1 2002 7.6 -0.6 2.4 6.2 1.3 3.8 -1.5 0.9 3.9 4.4 Q2 2002 8 0.8 4.1 6.6 4.0 4.1 3.8 3.7 5.1 5.5 Q3 2002 8.1 3.4 4.6 5.8 5.8 3.8 3.8 5.2 5.8 5.9 Q4 2002 8.1 5.1 3.6 6.8 5.4 5.8 3.0 4.5 6.2 6.0 Q1 2003 9.9 4.5 4.5 3.7 4.6 4.5 1.6 3.5 6.7 6.0 Q2 2003 6.7 -0.5 3.6 1.9 4.5 4.0 -3.7 -0.1 5.8 3.4 Q3 2003 9.6 4.0 4.0 2.3 5.2 5.1 1.7 4.2 6.5 5.6 Q4 2003 10.3 5.0 4.4 3.9 6.4 4.5 4.9 5.2 7.8 6.6 Source: Haver Analytics and national sources. Appendix Table 2. East Asia: Merchandise Export Growth (US $; % change from year ago) 2002 2003 2003 Q12003 Q22003 Q3 2003 Q4 Oct-03Nov-03Dec-03Jan-04Feb-04Mar-04 East Asia (9) 9.6 19.1 20.9 16.6 15.0 23.6 20.7 18.4 31.8 14.0 30.8 #N/A SE Asia 5.1 11.2 13.0 10.1 5.9 14.0 10.5 8.7 23.6 8.2 12.4 #N/A Indonesia 1.5 6.6 15.8 4.7 1.8 3.6 -6.3 11.2 7.5 0.7 -1.6 #N/A Malaysia 6.0 12.5 7.8 10.8 7.8 19.4 16.6 7.4 35.5 7.8 16.7 #N/A Philippines 7.8 3.4 4.9 6.2 -2.6 4.8 6.3 -0.6 9.0 4.1 7.5 #N/A Thailand 5.7 17.1 22.2 15.6 11.3 19.9 18.4 13.2 29.1 16.6 21.2 #N/A China 22.4 34.7 33.6 34.3 29.7 40.5 36.7 33.8 50.7 19.9 39.7 42.9 NIEs 5.7 14.2 18.2 10.2 10.6 18.0 16.5 13.7 24.0 13.1 34.4 #N/A Hong Kong 5.4 11.6 17.6 12.2 7.0 11.3 9.4 9.0 15.8 0.2 28.2 #N/A Korea 8.0 19.5 20.7 14.4 16.0 26.2 25.6 21.9 31.3 32.7 45.0 39.5 Singapore 2.8 15.2 23.0 8.7 10.9 18.9 19.0 8.0 30.8 4.7 28.5 #N/A Taiwan (China) 6.3 10.4 11.4 3.6 9.6 16.8 14.0 15.9 20.5 17.5 34.6 17.2 East Asia Update 43 Appendix Table 3. East Asia and the Pacific: GDP Growth Projections Actual Forecast Forecast 1997 1998 1999 2000 2001 2002 2003 2004 2005 East Asia 6.4 -0.1 6.2 7.4 3.8 5.9 5.7 6.3 5.9 Developing E. Asia 6.9 1.7 5.7 7.0 5.7 6.7 7.6 6.9 6.5 South East Asia 3.4 -9.3 3.3 5.7 2.4 4.4 5.1 5.4 5.4 Indonesia 4.7 -13.1 0.8 4.9 3.5 3.7 4.1 4.5 5.0 Malaysia 7.3 -7.4 6.1 8.5 0.3 4.1 5.2 5.5 5.5 Philippines 5.2 -0.6 3.4 4.4 3.0 4.4 4.5 4.2 4.1 Thailand -1.4 -10.5 4.4 4.8 2.1 5.4 6.7 7.2 6.5 Transition China 8.8 7.8 7.1 8.0 7.5 8.0 9.1 7.7 7.2 Vietnam 8.2 4.0 4.5 5.5 6.9 7.0 7.2 7.0 7.2 Small Economies 1.4 0.9 8.1 2.6 1.7 2.7 3.9 4.2 4.2 Cambodia 6.8 3.7 10.8 7.0 5.7 5.5 4.8 5.5 4.2 Lao PDR 7.0 4.0 7.3 5.8 5.8 5.9 5.3 5.8 6.3 Mongolia 4.0 3.5 3.3 1.1 1.0 3.9 5.0 6.0 5.5 Fiji -0.9 1.4 9.6 -3.2 4.0 3.8 5.5 4.1 4.0 Marshall Islands -10.1 0.8 0.6 0.9 -1.3 4.0 2.0 1.5 Micronesia, Fed. Sts. -5.2 -2.3 1.1 2.5 1.1 0.8 2.4 2.0 Papua New Guinea -4.9 -2.8 7.6 -1.2 -2.3 -0.6 2.5 2.3 3.1 Samoa 0.8 2.4 2.1 4.4 8.6 1.9 3.1 3.2 3.2 Solomon Islands -2.3 1.1 -0.5 -14.2 -9.0 -2.7 3.8 4.7 Tonga 0.2 1.6 3.1 6.2 0.5 1.6 2.5 -0.5 0.5 Vanuatu 1.5 2.2 -2.5 3.7 -1.9 -0.3 2.0 2.8 3.3 East Asia NIEs 5.7 -2.7 7.0 8.1 1.0 4.9 3.0 5.4 4.9 Hong Kong (SAR) 5.1 -5.0 3.4 10.2 0.5 2.3 3.3 6.0 4.6 Korea 4.7 -6.9 9.5 8.5 3.8 7.0 3.1 5.3 5.3 Singapore 8.5 -0.9 6.4 9.4 -1.8 2.7 1.1 5.6 4.5 Taiwan (China) 6.7 4.6 5.4 5.9 -2.2 3.6 3.2 5.1 4.5 Japan 1.8 -1.2 0.2 2.8 0.4 -0.3 2.7 3.1 1.4 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 Projections Commodity 1980- 1991- 90 98 1999 2000 2001 2002 2003 2004 2005 2006-10 Crude oil, average 0.0 -5.7 38.3 56.2 -13.7 2.4 15.9 -10.0 -11.5 -3.0 Non-Energy Commodities -0.8 0.4 -11.2 -1.3 -9.1 5.1 10.0 10.4 -2.9 0.0 Agriculture -1.9 0.8 -13.9 -5.5 -9.1 8.4 9.3 5.1 -1.5 0.1 Cocoa -7.3 4.0 -32.3 -20.2 18.0 66.4 -1.5 -1.8 -2.9 -0.8 Coffee, arabica -3.6 12.6 -23.2 -16.2 -28.5 -1.2 4.3 5.9 5.9 3.4 Coconut oil -1.4 10.6 12.0 -38.9 -29.3 32.4 11.0 17.7 -4.5 -1.0 Palm oil -3.0 12.3 -35.0 -28.9 -7.8 36.6 13.6 12.8 -10.0 -1.4 Rice, Thai, 5% 0.8 2.1 -18.3 -18.5 -14.6 11.0 3.0 3.7 1.0 1.2 Sugar, world 16.4 -2.8 -29.8 30.6 5.5 -20.3 3.0 -4.0 3.3 4.2 Logs, Malaysia 1.9 3.4 15.2 1.5 -16.3 2.7 14.5 6.9 2.5 3.6 Sawnwood, Malaysia 4.1 -0.1 24.1 -0.7 -19.3 9.4 4.6 1.6 7.1 3.1 Rubber, RSS1, Malaysia -1.7 0.5 -12.9 6.2 -13.8 33.0 41.5 1.8 -6.0 -3.2 Metals and minerals 2.9 -2.6 -2.3 12.6 -9.6 -3.1 12.7 26.2 -2.3 -2.2 Tin -6.7 -0.7 -2.5 0.6 -17.5 -9.5 20.5 32.8 -11.5 -1.2 Copper 4.3 -4.1 -4.9 15.3 -13.0 -1.2 14.1 34.9 -8.3 -1.8 Source: World Bank DEC Prospects Group. Projections as 2/24/04 Appendix Table 5. East Asia: Exchange Rates (LCU/$) China Indonesia Korea Malaysia Philippines Singapore Taiwan, Thailand Yen China Mar-2003 8.28 8908 1232.40 3.8 54.59 1.753 34.72 42.75 118.6 Apr-2003 8.28 8675 1232.82 3.8 52.81 1.777 34.82 42.88 119.8 May-2003 8.28 8279 1199.80 3.8 52.51 1.734 34.72 42.15 117.4 Jun-2003 8.28 8326 1194.00 3.8 53.40 1.734 34.62 41.65 118.3 Jul-2003 8.28 8548 1181.60 3.8 53.71 1.755 34.42 41.78 118.7 Aug-2003 8.28 8578 1178.40 3.8 54.99 1.754 34.00 41.67 118.8 Sep-2003 8.28 8442 1153.00 3.8 55.20 1.746 34.00 40.11 115.0 Oct-2003 8.28 8495 1166.30 3.8 54.95 1.733 33.90 39.73 109.50 Nov-2003 8.28 8537 1184.90 3.8 55.37 1.729 34.05 39.90 109.18 Dec-2003 8.28 8465 1193.00 3.8 55.45 1.711 34.06 39.71 107.82 Jan-2004 8.28 8441 1184.30 3.8 55.53 1.699 33.69 39.09 106.41 Feb-2004 8.28 8447 1166.70 3.8 56.07 1.686 33.23 39.10 106.48 Mar-2004 8.28 8587 1166.34 3.8 56.33 1.6997 33.22 39.45 108.56 Appendix Table 6. Foreign Reserves Minus Gold (US$ Billion) China Indonesia Malaysia Philippines Korea Taiwan, Singapore Thailand Total (China) Dec-1996 107.0 18.3 27.0 10.0 34.0 88.0 76.8 37.7 398.9 Dec-1997 142.8 16.6 20.8 7.3 20.4 83.5 71.3 26.2 388.8 Dec-1998 149.2 22.7 25.6 9.2 52.0 90.3 74.9 28.8 452.8 Dec-1999 157.7 26.4 30.6 13.2 74.0 106.2 76.8 34.1 519.1 Dec-2000 168.3 28.5 29.5 13.1 96.1 106.7 80.1 32.0 554.4 Dec-2001 215.6 27.2 30.5 13.4 102.8 122.2 75.4 32.4 619.5 Dec-2002 291.1 30.5 34.2 13.1 121.3 161.7 82.0 38.0 772.1 Dec-2003 408.2 35.0 44.6 13.3 155.3 206.6 95.7 41.1 999.8 Jan-2004 420.6 34.7 47.4 12.7 157.4 214.9 98.4 41.2 1027.3 Feb-2004 431.5 34.7 48.9 12.5 162.9 224.8 100.9 41.9 1058.3 Source: Haver Analytics East Asia Update 45 Appendix Table 7: Regional Aggregates for Poverty Measures in East Asia $1 ­a-day $2-a-day Mean Consumption HeadcountNumber HeadcountNumberPopulation (1993 Index (%) of Poor Index of Poor (mill.) PPP$/month) (mill.) (%) (mill.) EAP 1990 67.95 28.9 457.9 67.0 1,059.9 1582.7 1996 99.80 14.8 253.0 49.6 850.4 1713.1 1999 101.85 15.6 276.9 50.0 885.6 1771.9 2000 112.83 14.0 250.1 45.9 820.6 1788.9 2001 120.81 13.0 234.9 43.2 779.8 1805.0 2002 133.82 11.7 212.4 39.7 722.3 1820.7 2003 144.38 10.4 191.7 36.7 673.6 1836.0 2004 152.97 9.7 179.0 34.6 640.9 1851.3 2005 161.97 9.0 167.9 32.6 608.9 1866.7 EAP less China 1990 96.33 22.1 97.3 59.3 260.3 439.4 1996 136.33 10.7 52.2 44.7 218.9 489.2 1999 123.34 11.4 58.5 51.0 262.0 514.0 2000 130.19 10.6 55.3 48.6 253.2 521.5 2001 133.27 9.8 51.9 47.3 250.2 528.7 2002 142.36 8.7 46.5 44.0 236.0 536.2 2003 148.07 7.6 41.1 41.3 224.3 543.7 2004 153.63 7.0 38.8 39.6 218.2 551.3 2005 159.70 6.5 36.5 37.7 210.5 558.8 S.E.Asia 4 1990 82.29 17.8 55.7 60.3 188.8 313.1 1996 111.29 7.8 27.2 43.6 151.6 348.0 1999 97.26 10.1 36.9 52.8 193.6 366.5 2000 102.85 9.2 34.3 49.9 185.5 372.0 2001 105.16 8.3 31.2 48.4 182.7 377.2 2002 111.92 6.8 25.9 44.5 170.4 382.8 2003 117.24 5.8 22.3 41.4 160.9 388.3 2004 121.43 5.4 21.1 39.6 156.2 393.9 2005 126.12 5.0 19.8 37.6 150.3 399.5 Lower Income East Asia (Cambodia, Laos, PNG, Vietnam) 1990 43.79 49.9 41.6 85.7 71.5 83.4 1996 63.62 26.1 24.9 70.3 67.2 95.7 1999 66.19 21.5 21.6 68.0 68.4 100.6 2000 68.52 20.5 20.9 66.2 67.7 102.2 2001 70.53 19.9 20.7 65.0 67.5 103.9 2002 74.13 19.6 20.6 62.2 65.7 105.5 2003 78.45 17.5 18.7 59.2 63.4 107.2 2004 81.49 16.2 17.7 57.0 62.1 108.9 2005 84.84 15.1 16.7 54.4 60.2 110.6 See Note at end of Appendix Table 8 East Asia Update 46 Appendix Table 8: Poverty in East Asia ­ Country Estimates $1 ­a-day $2-a-day Mean ConsumptionHeadcountNumber of HeadcountNumber of Gini Population (1993 Index Poor Index Poor Coefficient (mill.) PPP$/month) (%) (mill.) (%) (mill.) Cambodia 1990 48.29 48.3 4.4 83.7 7.7 41.6 9.1 1996 57.77 36.7 4.0 76.9 8.4 41.6 10.5 1997 56.95 38.4 4.2 78.0 8.5 41.6 10.9 1998 55.97 39.4 4.4 78.6 8.8 41.4 11.2 1999 55.48 41.5 4.8 79.3 9.1 42.3 11.5 2000 55.72 43.4 5.1 79.4 9.3 43.9 11.8 2001 57.01 43.0 5.2 78.6 9.5 44.6 12.1 2002 56.68 45.5 5.6 79.0 9.8 46.2 12.4 2003 58.41 45.5 5.8 78.3 9.9 47.4 12.7 2004 59.88 45.0 5.8 77.7 10.1 48.1 13.0 2005 61.32 44.0 5.8 76.9 10.2 48.5 13.3 China 1990 57.05 31.5 360.6 69.9 799.6 36.0 1,143 1993 67.24 29.0 343.9 65.0 769.8 41.2 1,185 1996 85.20 16.4 200.8 51.6 631.6 39.3 1,224 1998 91.32 16.1 201.2 49.8 620.8 41.0 1,248 1999 93.07 17.4 218.4 49.6 623.6 42.6 1,258 2000 105.69 15.4 194.8 44.8 567.4 43.9 1,267 2001 115.65 14.3 183.0 41.5 529.6 44.9 1,276 2002 130.26 12.9 165.9 37.9 486.3 46.1 1,285 2003 142.83 11.7 150.6 34.8 449.3 46.7 1,292 2004 152.69 10.8 140.2 32.5 422.7 47.0 1,300 2005 162.93 10.0 131.4 30.5 398.4 47.2 1,308 Indonesia 1984 49.80 36.7 58.7 80.0 128.1 30.3 160.1 1987 55.63 25.7 43.4 74.2 125.4 33.1 169.0 1990 61.58 20.6 36.7 71.1 126.7 28.9 178.2 1993 68.54 14.8 27.8 61.6 115.5 31.7 187.6 1996 86.62 7.8 15.4 50.5 99.4 36.5 196.8 1999 66.80 12.0 24.9 65.1 135.0 31.0 207.4 2000 72.53 9.9 20.9 59.5 125.3 32.2 210.5 2001 73.44 9.2 19.7 58.7 125.2 32.1 213.2 2002 81.72 7.2 15.5 53.5 115.6 34.3 216.2 2003 85.88 6.2 13.6 50.1 109.9 34.8 219.4 2004 88.82 5.8 12.9 48.1 107.2 35.4 222.7 2005 92.21 5.4 12.3 46.0 104.0 36.0 226.1 East Asia Update 47 Appendix Table 8: Poverty in East Asia (Continued) $1 ­a-day $2-a-day Mean ConsumptionHeadcountNumber of HeadcountNumber of Gini Population (1993 Index Poor Index Poor Coefficient (mill.) PPP$/month) (%) (mill.) (%) (mill.) Laos 1990 39.16 53.0 2.2 89.6 3.7 32.7 4.2 1992 41.35 48.8 2.1 88.1 3.9 32.7 4.4 1996 48.27 41.3 2.0 83.1 4.1 36.5 4.9 1997 50.35 38.4 1.9 81.3 4.1 36.5 5.0 1998 49.53 39.6 2.0 81.8 4.2 36.5 5.1 1999 51.49 36.7 1.9 80.5 4.2 36.5 5.3 2000 52.66 35.1 1.9 79.8 4.3 36.5 5.4 2001 55.46 31.3 1.7 77.4 4.3 36.5 5.5 2002 56.67 29.9 1.7 76.5 4.3 36.5 5.7 2003 57.05 29.3 1.7 76.3 4.4 36.5 5.8 2004 59.01 27.0 1.6 74.9 4.4 36.5 5.9 2005 61.29 24.4 1.5 73.0 4.4 36.5 6.1 Malaysia 1984 172.09 8.9 1.4 29.5 4.5 50.5 15.3 1987 170.88 4.8 0.8 25.0 4.2 47.0 16.6 1989 176.21 3.2 0.6 22.4 4.0 46.2 17.7 1990 195.32 2.0 0.4 18.5 3.4 46.2 18.2 1992 219.48 1.5 0.3 17.6 3.4 47.7 19.1 1995 253.64 1.0 0.2 14.0 2.9 48.5 20.6 1996 261.87 0.8 0.2 13.1 2.8 48.5 21.1 1997 315.95 < 0.5 -- 8.8 1.9 49.1 21.7 1998 269.00 < 0.5 -- 12.9 2.9 49.1 22.2 1999 271.52 < 0.5 -- 12.6 2.9 49.1 22.7 2000 303.31 < 0.5 -- 9.8 2.3 49.1 23.3 2001 303.46 < 0.5 -- 9.8 2.3 49.1 23.8 2002 305.14 < 0.5 -- 9.6 2.3 49.1 24.3 2003 316.58 < 0.5 -- 8.7 2.2 49.1 24.7 2004 328.80 < 0.5 -- 7.9 2.0 49.1 25.1 2005 342.18 < 0.5 -- 7.0 1.8 49.1 25.5 PNG 1990 72.95 35.4 1.4 64.3 2.5 48.4 3.9 1996 93.15 24.6 1.1 54.4 2.5 48.4 4.6 1997 88.62 25.6 1.2 56.0 2.7 47.5 4.7 1998 83.15 27.8 1.4 59.0 2.9 47.7 4.9 1999 78.37 30.7 1.5 61.6 3.1 47.8 5.0 2000 71.89 35.3 1.8 65.0 3.3 47.6 5.1 2001 66.41 38.0 2.0 69.2 3.6 47.8 5.3 2002 63.41 39.2 2.1 70.4 3.8 47.5 5.4 2003 63.64 39.4 2.2 70.3 3.9 47.5 5.6 2004 63.51 40.0 2.3 70.5 4.0 47.5 5.7 2005 63.63 40.0 2.3 70.1 4.1 47.5 5.9 East Asia Update 48 Appendix Table 8: Poverty in East Asia (Continued) $1 ­a-day $2-a-day Mean Consumption HeadcountNumber of Headcount Number Gini Population (1993 Index Poor (mill.) Index (%) of Poor Coefficient (mill.) PPP$/month) (%) (mill.) Philippines 1985 74.92 22.8 12.4 61.3 33.3 41.0 54.2 1990 82.77 18.3 10.7 55.6 32.4 40.7 58.3 1991 90.32 19.1 11.7 53.5 32.6 43.8 61.0 1994 87.75 19.8 12.3 55.0 34.3 43.8 62.4 1996 89.10 18.4 12.3 53.1 35.5 42.9 66.8 1997 107.15 14.8 10.4 46.5 32.5 46.2 69.9 1998 110.21 12.1 8.6 45.2 32.3 46.0 71.5 1999 108.77 13.7 10.0 46.6 34.1 46.7 73.1 2000 107.20 13.5 10.1 46.9 35.0 46.2 74.7 2001 107.03 13.5 10.3 47.1 35.9 46.2 76.3 2002 110.61 11.9 9.3 45.3 35.3 46.0 77.9 2003 113.32 11.1 8.8 44.1 35.0 45.9 79.5 2004 118.10 9.6 7.7 41.8 33.9 45.9 81.1 2005 121.26 8.9 7.3 40.4 33.4 45.9 82.6 Korea 1990 301.09 < 0.5 -- < 0.5 -- 29.9 42.9 1993 330.38 < 0.5 -- < 0.5 -- 29.9 43.3 1994 362.09 < 0.5 -- < 0.5 -- 29.9 43.7 1995 383.03 < 0.5 -- < 0.5 -- 29.4 44.1 1996 411.09 < 0.5 -- < 0.5 -- 29.4 44.5 1997 440.03 < 0.5 -- < 0.5 -- 29.1 45.0 1998 480.46 < 0.5 -- < 0.5 -- 29.7 45.5 1999 483.84 < 0.5 -- < 0.5 -- 29.0 46.0 2000 400.86 < 0.5 -- < 0.5 -- 29.4 46.4 2001 450.06 < 0.5 -- < 0.5 -- 30.0 46.9 2002 478.67 < 0.5 -- < 0.5 -- 30.0 47.3 2003 492.54 < 0.5 -- < 0.5 -- 30.0 47.6 2004 535.38 < 0.5 -- < 0.5 -- 30.0 48.0 2005 550.92 < 0.5 -- < 0.5 -- 30.0 48.2 Thailand 1988 90.42 17.9 9.6 54.1 29.0 43.8 53.7 1990 102.88 12.5 7.0 47.0 26.1 43.8 55.6 1992 129.75 6.0 3.5 37.5 21.7 46.2 57.8 1996 143.92 2.2 1.3 28.2 17.0 43.4 60.1 1998 121.73 3.3 2.0 34.1 21.0 40.6 61.5 1999 123.50 3.1 1.9 33.6 20.7 40.7 61.7 2000 125.42 5.2 3.2 35.6 22.0 43.2 61.9 2001 131.21 3.6 2.2 32.0 19.9 42.4 62.3 2002 139.40 2.4 1.5 27.7 17.4 42.2 62.8 2003 147.03 1.6 1.0 23.7 15.0 41.4 63.1 2004 153.97 1.3 0.8 21.4 13.6 41.4 63.4 2005 162.48 0.9 0.6 17.9 11.4 40.9 63.7 East Asia Update 49 Appendix Table 8: Poverty in East Asia (Continued) $1 ­a-day $2-a-day Mean Consumption Headcount Number of Headcount Number Gini Population (1993 Index Poor (mill.) Index (%) of Poor Coefficient (mill.) PPP$/month) (%) (mill.) Vietnam 1990 41.73 50.8 33.6 87.0 57.6 35.0 66.2 1993 48.85 39.9 28.3 80.5 57.2 35.0 71.0 1996 63.66 23.6 17.7 69.4 52.2 36.3 75.2 1998 68.54 16.4 12.8 65.4 50.9 35.4 77.7 1999 67.96 16.9 13.4 65.9 52.0 35.4 78.9 2000 71.26 15.2 12.1 63.5 50.7 35.9 79.9 2001 73.84 14.6 11.8 61.8 50.1 36.8 81.0 2002 78.67 13.6 11.2 58.2 47.8 37.5 82.1 2003 83.99 10.9 9.1 54.3 45.2 37.5 83.2 2004 87.62 9.5 8.0 51.7 43.5 37.6 84.3 2005 91.63 8.2 7.0 48.5 41.4 37.7 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. East Asia Update 50 Appendix Table 9. NPLs in the commercial banking system of the crisis-affected countries (percent of total loans) 1997 1998 1999 2000 2001 2002 2003 Dec Dec Dec Dec Mar Jun Sept Dec Mar Jun Sept Dec Mar Jun Sept Dec Indonesia (a) -- -- 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 .. excl. IBRA 7.2 48.6 32.9 18.8 18.1 17.6 14.7 12.1 12.8 11.8 10.5 7.5 7.6 7.1 6.7 Korea (b) 8.0 17.2 23.2 14.0 12.9 10.5 9.6 7.4 6.6 5.0 4.8 4.1 4.2 4.7 4.9 4.4 excl. KAMCO & KDIC 6.0 7.3 13.6 8.8 7.6 5.6 5.1 3.3 2.9 2.5 2.5 2.4 2.6 3.2 3.3 2.7 Malaysia - 21.1 23.4 22.5 23.2 23.9 23.0 24.4 24.6 23.7 23.1 22.4 22.1 21.3 .. .. excl. Danaharta -- 16.7 16.7 13.4 14.3 15.5 16.5 16.3 16.7 15.7 15.3 14.7 14.6 13.9 13.3 13.1 Philippines (c) 4.7 10.4 12.3 15.1 16.6 17.0 17.9 17.3 18.0 18.1 16.5 15.0 15.5 15.2 14.5 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 -- 45.0 39.9 19.5 19.2 13.9 14.1 11.5 11.4 11.3 11.7 18.1 17.8 17.6 16.8 14.0 Memo: Malaysia (e) 10.6 10.6 8.3 9.3 10.3 10.7 10.5 10.6 10.0 9.6 9.3 9.1 8.8 8.3 8.3 excl. Danaharta 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. East Asia Update 51 WB87803 WB87803 N:\Bi-Annual Report April 2004\Final Drafts\Overview\EAP Regional Overview Apr 2004 04-17-04 Final.doc April 19, 2004 9:45 AM