POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise JULY 2010 · Number 24 55945 East Asia and the Pacific Confronts the "New Normal" Vikram Nehru Developing East Asia is leading the global economic recovery, although performance varies across the region. In some countries, the monetary stance is already being tightened in light of emerging inflationary pressures; but it is premature to withdraw the fiscal stimulus until the global recovery is on a firmer footing. Fortunately, most countries in the region have adequate fiscal space and relatively low debt burdens. To ensure that the momentum of the recovery transitions into sustainable and inclusive growth over the medium term, the governments in the region must once again focus their attention on medium-term structural reforms. This means different policy priorities in different countries--especially given the diversity of the region. In addition, the region faces two common priorities-- regional economic integration and climate change. Making progress on both fronts will be critical to the region's medium-term prospects.1 From Crisis to Recovery well to maintain robust growth rates (see table 2). But the upper-middle-income economies of Malaysia and Thailand The developing countries of East Asia and the Pacific are and the low-income economies of Cambodia, Fiji, and Mon- leading the world out of the global economic and financial golia contracted in 2009. The Philippines barely registered crisis. Although the region's GDP growth slowed from 8.5 positive growth. percent in 2008 to 7.0 percent in 2009, the region is expect- ed to bounce back to 8.6 percent in 2010. But in an unusu- Table 1. Regional Year-on-Year Changes in GDP Growth ally diverse region, averages mask wide differences across Percent countries. China, boosted by its unprecedented fiscal and monetary stimulus package, registered 8.7 percent GDP Region/country group 2007 2008 2009 growth in 2009--down from 9.5 percent in 2010, but still Developing East Asia 11.4 8.5 7.0 an exceptional performance in a contracting global economy. Developing East Asia, excluding China 6.2 4.7 1.3 Remove China from the East Asia aggregate, however, and Europe and Central Asia 7.1 4.3 ­6.2 the rest of the region grew by only 1.3 percent in 2009, Latin America and the Caribbean 5.5 3.9 ­2.6 much lower than South Asia and just higher than Sub-Saha- Middle East and North Africa 5.3 5.8 2.9 ran Africa (table 1). South Asia 8.5 5.7 5.7 The reality is that East Asia's performance was decidedly Sub-Saharan Africa 6.5 4.9 1.1 mixed in 2009. Indonesia, the Lao People's Democratic Re- High-income countries 2.6 0.4 ­3.3 public, Papua New Guinea, Timor-Leste, and Vietnam did Sources: World Bank (2009); World Bank staff estimates and projections. 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Table 2. Year-on-Year and Forecast Changes in GDP Growth Rates (including East Asia), thereby providing much-needed ex- Percent ternal demand. By end-2009, China's import growth was an Forecasts astonishing 56 percent (year-on-year),2 helping lower the for 2009 trade balance to 4.0 percent of GDP (down from 6.7 per- Nov Dec cent of GDP in 2008) (CEIC databases). Fourth, remit- Region/country group 2008 2009 2010 a 2011a 2008 2009 tances to many countries in the region remained remarkably resilient. Developing East Asia 8.5 7.0 8.7 8.0 6.7 6.7 The crisis slowed the pace of poverty reduction in the re- Cambodia 6.7 ­2.0 4.0 6.0 4.9 ­2.2 China 9.6 8.7 9.5 8.7 7.5 8.4 gion, but did not stop it. Our simulations suggest that the Fiji ­0.1 ­2.5 2.0 2.2 1.1 ­0.3 number of poor people in the region increased by 9 million, Indonesia 6.1 4.5 5.6 6.2 4.4 4.3 compared with the counterfactual of continued trend Lao PDR 7.5 6.7 7.7 7.8 6.0 6.4 growth; but that still represents a decline in the number of Malaysia 4.6 ­1.7 5.7 5.3 3.7 ­2.3 poor people from an estimated 508 million in 2008 to 477 Mongolia 8.9 ­1.6 7.3 7.1 7.5 0.5 million in 2009 (in China alone, 200 million of the 477 mil- Papua New Guinea 6.6 4.5 6.8 5.1 5.0 3.9 lion).3 These aggregate numbers, however, underestimate the Philippines 3.8 0.9 3.5 3.8 3.0 1.4 welfare consequences of the crisis on the poor and near-poor Thailand 2.6 ­2.3 6.2 4.0 3.6 ­2.7 populations in the region. Evidence taken from surveys of Timor-Leste 12.8 7.4 7.5 7.4 1.4 7.4 households and firms from several countries shows that Vietnam 6.2 5.3 6.5 6.5 6.5 5.5 whereas formal wages and unemployment remained virtually Memoranda unchanged, furloughs and cuts in overtime reduced take- Developing East Asia Low-income home pay (especially in export firms and small and medium- countries 6.3 4.3 6.3 6.4 6.1 4.5 size enterprises), forcing labor to seek work in the informal Middle-income sector or in unskilled agriculture. Wages in the informal sector countries 8.6 7.2 8.7 8.0 6.8 6.9 inevitably declined--for example, construction wages in Excluding China Cambodia fell by a third and off-farm rural wages in China Developing East Asia 4.7 1.3 5.5 5.2 4.1 1.1 declined by approximately 13 percent (Huang et al. 2010). Middle-income countries 4.5 0.9 5.4 5.1 3.8 0.7 A Key Challenge in the Short Term G-3 countries 0.3 ­3.5 1.7 2.0 ­0.4 ­3.5 Global trade volumes 3.0 ­14.4 4.3 5.3 ­2.1 ­11.4 Now that the region's economies are moving at a rapid clip, Sources: Datastream; World Bank Development Economics Development the attention of policy makers is naturally turning toward Prospects Group ; World Bank staff estimates and projections. a. Forecast. tightening the monetary and fiscal policies that proved so ef- fective in boosting economic activity during the crisis. In- deed, signs of rising inflation in some countries have already Even so, most countries in the region had resumed robust prompted central banks to tighten credit growth. Indonesia growth by the end of 2009, and many had reached their pre- has raised reserve requirements, and Malaysia and Vietnam crisis peaks in industrial production and GDP. Strong growth have raised policy rates. in private consumption, resumption of export growth, and But the world's focus is on China's monetary policy. inventory accumulation drove GDP growth sharply upward There, a large part of the stimulus was delivered through a in the fourth quarter of 2009. Important to note, the 30 percent expansion in credit growth. The inflation rate be- economies of the region are emerging from the crisis with came positive in November 2009 and has been inching up manageable fiscal deficits, relatively low government and ex- since (reaching 2.7 percent in early 2010). More important, ternal debt burdens, and benign rates of inflation. property sales climbed 75 percent in value and 42 percent Helping this quick recovery were four factors. First, most in space during 2009. Urban property prices increased 10.7 East Asian economies entered the crisis from positions of percent (year-on-year) in end-February 2010, with prices ris- strength--rapid growth, low fiscal and external debt, exter- ing in all 70 cities and reaching 50 percent in Hainan Island. nal current account surpluses, large external reserves, low in- In response to these rising prices, construction activity flation, and well-capitalized banks with little or no exposure surged after September 2009; and in the first two months of to toxic assets. Second, policy makers took quick action to 2010, it climbed 37 percent (World Bank 2010a). counter the forces of contraction emanating from the ad- In October 2009, China's central bank started mopping vanced countries, with virtually every East Asian country in- up excess liquidity (through open-market operations and troducing fiscal and monetary stimulus packages. Third, Chi- foreign exchange swaps); raised the required reserve ratio na's rapid growth sucked in imports from around the world twice; and introduced selective credit controls, especially for 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 1. China's Year-on-Year Changes in Credit Growth Figure 2. Comparison of EAP's Fiscal Stimulus Measures with Those 40 of Selected Economies 35 4.0 30 3.5 25 percent percent of GDP 3.0 20 2.5 15 2.0 10 1.5 5 1.0 0 0.5 01 02 03 04 05 06 07 08 09 10 0 20 20 20 20 20 20 20 20 20 20 Euro G-20 East United Japan United year Area Asia States Kingdom square meters loan amount economy Source: CEIC Data Company. Source: Estimates from national authorities and World Bank staff. the real estate sector. As a result, credit growth is slowing, al- economies can resume the rapid growth rates they achieved though it still remains relatively high (figure 1). Further over the last three decades. We believe the answer is yes-- tightening is expected. but it depends on key structural reforms in countries and at The authorities in the region have been more reluctant to the regional level. tighten fiscal policy--and rightly so. Thanks to fiscal stimulus measures that compared favorably with even the advanced Country-Level Structural Reforms countries (figure 2), economic activity in East Asia moder- East Asia is the most diverse developing region in the ated by less than many other developing regions. Neverthe- world--whether measured by size, per capita income, or less, the pressure on labor markets remains high, and recov- production structures (figure 3). From China (2008 popu- ery in global markets is not ensured. Moreover, most lation 1.33 billion) to Palau (population 20,000),4 the region countries have the fiscal space to continue with expansion- includes areas with some of the highest population densities ary fiscal policy--at least through the remainder of 2010-- in the world (Java in Indonesia) and some of the lowest and then to assess the need for changes in the fiscal stance in (Mongolia); from manufacturing powerhouses to commod- light of domestic and global developments. At the same ity-dependent economies, the region includes the second- time, governments need to guard against the view that the highest number of fragile states in the world (after Africa). world soon will return to precrisis conditions and to design No common structural agenda could possibly fit such a their fiscal policies accordingly. The reality is that precrisis diverse group. But it does help to consider the key chal- growth in the global economy was unsustainable and that lenges confronting five subgroups: China, middle-income the "new normal" will be quite unlike the old. and low-income countries, commodity exporters, and the Pacific Islands. Confronting the New Normal: Structural Reforms for Rapid Growth in the Medium Term Figure 3. Relative Diversity of Developing Regions, by Size and Per Projections describing global economic conditions over the Capita Income, 2008 medium term--the new normal--have been revised down- 12,000 East Asia and the Pacific ward significantly since the crisis. The key reason is expect- 10,000 standard deviation of GDP per capita ed lower growth in the Euro Area, Japan, and the United Middle East and 8,000 North Africa States (which together account for three quarters of global Europe and GDP) as a result of high public debt burdens, continued re- 6,000 Central Asia Latin America and the Caribbean habilitation of bank balance sheets, increased risk aversion, 4,000 policy uncertainty about proposed financial reforms, and Sub-Saharan Africa 2,000 periodic macroeconomic aftershocks of the crisis. For the South Asia 0 developing countries, this will mean slower-growing export 0 20 40 60 80 100 120 140 markets, costlier international finance, and a difficult trading standard deviation of land area per capita environment. The most important question confronting East Asian Source: World Bank Development Data Portal, http://ddp.worldbank.org/ policy makers is whether, despite those conditions, their dp/home.do. 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise China (environment, health, education), other policy reforms in China deserves to be a subgroup all by itself. In China, the support of rebalancing have been delayed by the crisis--re- biggest reform challenge is "rebalancing"--and it is not sur- forms such as removing distortions in the tax structure and prising that doing so is identified as a central objective in the in the price of capital, energy, natural resources, land, and the country's 11th Five-Year Plan. It is now broadly accepted in environment; and scrapping regulatory barriers that impede China that although capital-intensive, industry-led, export- services development. It is important that these reforms are oriented growth has been spectacularly successful in increas- once again given the priority they deserve. ing incomes, the resulting pattern of production is energy in- tensive and environmentally unsustainable, does not create Middle-Income Countries enough jobs, has generated increased inequality, and is heav- The middle-income countries in East Asia--Indonesia, ily dependent on external demand (figure 4). To correct this Malaysia, the Philippines, and Thailand--face the medium- situation, China is seeking to rebalance its growth pattern, term challenge of raising investment in physical and human with domestic demand (especially consumption) as the capital, with the intention of moving up the value chain. Fol- main driver and services as the leading sector. This rebalanc- lowing initial export successes (Malaysia and Thailand more ing, in turn, is expected to better balance economic growth than Indonesia and the Philippines), the pattern of labor-inten- with resource conservation, energy efficiency, and environ- sive production and exports in these countries has remained mental protection; and to help mitigate the urban-rural di- broadly unchanged for two decades. With the rise of China and vide, promote more balanced regional development, and im- India as favored investment locations for labor-intensive man- prove basic public services (especially social protection, ufacturing, the middle-income countries of East Asia have to health, and education). reinvent themselves if they are to grow rapidly. Put simply, The critical nature of this transition toward a more bal- these countries could be caught in a middle-income trap--un- anced economy cannot be overemphasized. If recent energy able to remain competitive as high-volume, low-cost produc- consumption patterns continue for another 20 years, China ers, but unable to move up the value chain and achieve rapid will consume 87 percent of the present-day world energy growth by breaking into fast-growing markets for knowledge- output. The authorities have moved forcefully to boost en- and innovation-based products and services. ergy efficiency and improve environmental sustainability. Moving up the value chain requires investment--in infra- For example, about a third of the stimulus package is for structure, machinery and equipment, education, skills, infor- "green investments," a share three times larger than in the mation technology, and so on. But investment in all these United States. Similarly, in 2009 China doubled yet again its countries declined in the decade after the Asian financial cri- installed wind power capacity, a pace three times faster than sis; and it currently falls well short of levels that existed in the world as a whole. China now accounts for a third of Japan, the Republic of Korea, and Singapore when they were global capacity and is just behind the United States. at similar per capita income levels. The slowdown in invest- Although the stimulus package may have helped acceler- ment does not stem from a lack of savings--indeed, domes- ate public investments in areas important for rebalancing tic saving in all these countries exceeds domestic investment, resulting in external current account surpluses. According to CEIC Data Company, an extreme example is Malaysia, Figure 4. Share of Industry and Investment in GDP, Selected where the current account surplus was 17 percent GDP in Countries, 2001 unless otherwise indicated 2008 and 2009. 45 In fact, there is no single reason for low levels of private LCHN 40 KOR (2005) and public investment in middle-income countries. In investment-to-GDP ratio (%) (1990) Malaysia, rigidities in the labor market and entry barriers 35 MYS (1990) IND JPN (1990) tend to discourage private investors; in Indonesia, public in- JPN (1980) 30 (2005) KOR frastructure appears to be a binding constraint; in Thailand, MYS (1980) 25 JPN MYS internal political strife has raised risk and uncertainty; and in THA USA the Philippines, it is probably a combination of these reasons. 20 IDN MYS Resolving these problems is a priority for rapid growth to 15 (1970) be sustained over the medium term. The new economic 10 MYS (1960) model announced recently by Malaysia is representative of the reforms needed--empowerment of state and local au- 0 10 20 30 40 50 60 thorities, development of cluster- and corridor-based eco- share of industry in value added (%) nomic activities (to capture economies of scale), attraction Sources: World Development Indicators (various years); National Bureau of of local and foreign talent, removal of labor market restric- Statistics of China, World Bank staff estimates tions, creation of incentives supporting innovation and risk 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise taking, and a shifting of market orientation from the G-3 cilitate trade, such as efficient transit arrangements, common countries (the Euro Area, Japan, and the United States) to border regulations, national single-window facilities for im- Asia and the Middle East. In Indonesia, urgent attention is porters and exporters, and customs modernization. being given to the core issue of infrastructure connectivity to lower transport costs and crowd-in private investment. Commodity Exporters And in all countries, improving access to education and rais- The commodity exporters of the region--Mongolia, Papua ing its quality--particularly secondary and tertiary education New Guinea, and Timor-Leste--need to harness volatile ex- (because primary education is already universal)--will be port revenues for sustainable long-term growth. It is inter- central to developing the skilled labor force needed to move esting that two of the three (Papua New Guinea and Timor up the value chain. Leste) had adopted fiscal rules prior to the crisis, and so sus- tained rapid growth in 2009 despite the global downturn. Low-Income Countries Mongolia, on the other hand, implemented expansionary fis- The low-income countries of East Asia--Cambodia, Lao cal and monetary policies before the crisis on the back of the PDR, and Vietnam--are confronted with the task of "break- commodity boom. When the crisis hit in late-2008, its econ- ing into" the production networks of East Asia. They have al- omy went into a tailspin and encountered a severe fiscal and ready made a remarkably successful start. For their level of financial sector crisis. Mongolia's parliament is now consid- per capita income, they are among the countries with the ering a fiscal stability law, but the recent rise in commodity world's highest share of manufacturing relative to GDP. In prices (especially copper prices) may make political passage Cambodia, value added in industry almost tripled over the of the bill difficult. last two decades (albeit from a low base), and so did the The volatility of commodity prices increased substantially number of workers. And Vietnam is a favored destination of prior to the crisis and is unlikely to abate soon (figure 5). foreign investors seeking high returns from investments in This makes the adoption of fiscal rules and a robust fiscal labor-intensive production (10 percent of GDP in 2008) framework all the more important in these countries.5 Un- (CEIC Data Company). fortunately, the track record of countries in this regard has These countries undoubtedly will be helped by regional been mixed. Even Papua New Guinea, under pressure from and global forces in the future--a rapidly growing neighbor- the crisis, allowed a budget deficit greater than the limit set hood; a continued global trend toward specialization in tasks; by the fiscal rule. In doing so, the country was not unique. and quickly rising labor costs in middle-income countries, in- Governments invariably find reasons to abandon or circum- cluding China. Thus far, however, Vietnam alone has been vent fiscal rules as they become binding. able to link to production networks--and only in a limited Although difficult to maintain in good times and equally way. The challenges and opportunities confronting Cambodia difficult to defend in bad times, fiscal rules and a sound fiscal and Lao PDR will be to upgrade physical and human capital framework are essential prerequisites for transforming and embrace regional integration. The development of re- boom-bust cycles into sustainable revenue streams that can gional and national infrastructure to improve connectivity be used productively for long-term development. Recently and reduce transport costs across Southeast Asia is a critical emerging best practice in this regard is to combine a medi- step in this direction. This development will need to be com- um-term fiscal framework with a fiscal risk statement that plemented by "soft infrastructure"--namely, measures to fa- reveals the risks attached to particular fiscal trajectories and Figure 5. Twelve-Month Rolling Standard Deviation of Commodity Spot Prices, 1984­2010 140 standard deviation 120 100 rolling 80 60 40 20 0 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 January of year agricultural raw materials energy metals and minerals Source: World Bank staff estimates. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise flags the quantitative impact that known contingent liabili- The third challenge is the importance of subregional eco- ties will have. Such risk statements can be persuasive in con- nomic integration. Significant progress has been made in this vincing the authorities of the dangers of departing from a fis- regard, but much more can be done. Most important among cal rule. these are efforts to (1) implement subregional agreements on the management, conservation, and development of fish- The Pacific Islands eries; (2) develop regional arrangements for marine mineral The Pacific Islands face unusually difficult development and resource management; and (3) implement key regional policy challenges, given the small size of their economies and agreements to promote the freer movement of goods and populations, the significant distance to large markets, and the services. There is also considerable potential for deepening exceptionally high dependency of their economies on single integration with the nearest large market, which for the Pa- sectors. The Pacific Islands have a population of about 2 mil- cific Islands mostly means integration with Australia and lion--a tenth that of Jakarta--and yet stretch across an area New Zealand. Most recently, temporary migration schemes of ocean that covers one seventh of the world's surface with Australia and New Zealand have been at the forefront (World Bank 2010c). Not only do their small economies of this agenda. New Zealand now runs a Recognized Season- make them vulnerable to external economic shocks, but dis- al Employer Program that allows up to 8,000 temporary mi- economies of size make the unit cost of public service deliv- grants from the Pacific Islands to work in the country's hor- ery unusually high. As if that were not enough, the fact that ticulture sector.7 Such efforts can be expanded, particularly many are low-lying islands make them vulnerable to climate given Australia's need for large numbers of temporary agri- change, and their locations make them prime targets for nat- cultural laborers. ural disasters (earthquakes, tsunamis, and hurricanes). Finally, to make matters worse, several Pacific Island states are prone A Common Regional Agenda to conflict and political instability. Therefore, it is hardly sur- In addition to structural reforms needed at the country level prising that, despite being heavily dependent on aid to make (and in the case of the Pacific Islands, at the subregional lev- ends meet, most Pacific Island countries are off track in their el), there are many reforms and actions that cut across coun- quest to meet the Millennium Development Goals. tries and need to be taken at the regional level. Fortunately, Although there are many long-term challenges con- East Asia is served by two active and effective regional or- fronting this subregion, it is worth highlighting three chal- ganizations--the Association of Southeast Asian Nations lenges for which potential solutions are feasible. The first (ASEAN) and Asia-Pacific Economic Cooperation (APEC). challenge is aid coordination and predictability. The Cairns ASEAN, in its various manifestations (ASEAN+3, Compact on Strengthening Development Coordination in ASEAN+6, the East Asia Summit) covers most of East Asia, the Pacific is an important step toward implementing the and APEC broadens East Asia's partnership to the North Paris Declaration on Aid Harmonization and Effectiveness.6 American continent and Latin America. Highlighted here The compact calls for frequent collective review of progress are two high-priority items on the regional agenda that both in strengthening development coordination, regular peer re- these organizations are promoting--regional economic inte- view of national development plans and budget allocation gration and climate change. processes, and annual reports on efforts to reduce aid frag- Regional economic integration has been instrumental in mentation and lower administration costs. In addition, it is driving much of East Asia's growth over the last three important that aid is predictable if it is to support long-term decades. Intraregional trade has grown faster here than in development efforts, and that catastrophic risk insurance in- any other region in the world and is gradually approaching struments are available to provide resources when natural levels achieved in the European Union (figure 6). ASEAN disasters hit. member-countries have made significant progress in cutting The second challenge is to overcome the costs of distance tariff and other barriers at the border in line with the Com- and isolation by facilitating the quiet telecommunications mon Effective Preferential Tariff Scheme. However, per capi- revolution taking place in the Pacific, which is reducing costs ta income in East Asia is much more dispersed than in Eu- of transactions, information flows, and service delivery. Long- rope, suggesting that there remains considerable scope for distance learning through the Internet has taken off, enabling more integration (figure 7). students in the Pacific Islands to obtain degrees at a fraction The agenda for further economic integration can be ad- of the cost of attending in person. Similarly, medical diag- vanced along five fronts. First, improvements in logistics and noses can now be made on the basis of images transmitted behind-the-border reforms are a priority. Logistics in the re- from the islands to advanced hospitals around the world. Ac- gion cost twice as much as in the advanced countries. For ex- celerating this process requires additional investments in ample, in terms of averages for all products, logistics account telecommunications and greater coordination and integra- for about 8 percent of landed costs from East Asia, com- tion of national efforts within the subregion. pared with roughly 4 percent in the developed world 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 6. Intraregional Trade in EAP as a Share of Total Trade, ings for investments within the region; and support the 1962­2007 spread of new technologies, including green technologies. 65 Third, the region needs to promote trade in services. The 60 benefit of doing so could be many times that of reducing 55 barriers to trade in goods. For example, static gains from 50 trade arising from services trade liberalization for developing percent 45 East Asia and Korea are estimated at about US$270 billion 40 (10 percent of income) by 2015 (World Bank 2002). It is in- 35 30 teresting that gains in services trade liberalization tend to ac- 25 crue largely to the country implementing the reforms. This 20 is because improvements in the efficiency of the services sector not only promote growth in services, but also encour- 62 67 72 77 82 87 92 97 02 07 19 19 19 19 19 19 19 19 20 20 age growth in other sectors that use services as a key input. year As regional production networks become the basis for man- EAP EU-25 NAFTA ufacturing strength and competitiveness, weaknesses in the Source: Alavi, Nehru, and van Dorn 2008. availability of services can become a serious obstacle. Note: EAP = East Asia and the Pacific; EU = European Union; NAFTA = Fourth, the region is moving rapidly toward greater finan- North American Free Trade Agreement. cial integration. The launch of the Multilateralized Chiang Mai Initiative (CMIM) in March 2010 is a significant move toward addressing balance-of-payments and short-term liq- Figure 7. Income Disparity in East Asia and in Western Europe, uidity difficulties in the region, supplementing existing in- 1960­2008 ternational financing arrangements. The priority now is to es- Coefficient of variation in per capita income tablish an independent regional surveillance unit to monitor 0.30 2.5 and analyze member-economies and support CMIM deci- 0.27 2.0 sion making. Similarly, the Asian Bond Market Initiative 0.24 1.5 seeks to develop local currency-denominated bond markets 0.21 1.0 and thereby encourage private savings to be used for regional 0.18 0.5 development. The priority now is to promote the demand 0.15 0 and issuance of local currency-denominated bonds and de- 60 64 68 72 76 80 84 88 92 96 00 04 08 velop the associated infrastructure and regulatory frame- 19 19 19 19 19 19 19 19 19 19 20 20 20 year work. In addition, the ASEAN+3 Finance Ministers' Meeting Western Europe (left axis) East Asia (right axis) in Bali in May 2009 endorsed the establishment of the Cred- it Guarantee and Investment Mechanism as a means to fur- Source: Alavi, Nehru, and van Dorn 2008. ther encourage regional bond markets. Fifth, addressing key issues associated with intraregional migration could prove to be a win-win-win proposition. (ADB/JBIC/World Bank 2005). Similarly, behind-the- Host countries worry about the influx of unskilled migrants border procedures and rules need to be simplified and made potentially depressing effects on wages and employment op- more predictable. These efforts include streamlining docu- portunities and about the resulting burden on public finance mentary requirements for import and export transactions, and services. Source countries are concerned about brain reducing the number of border agencies with which firms drain, exploitation of workers, adverse cultural and social ef- must interact, and eliminating hidden trade barriers. Such re- fects, and growing dependence on remittance earnings. forms will increase predictability, reduce the cost of doing These issues reached a crescendo during the global crisis and business, lower export and import delays, remove uncertain- its immediate aftermath. Progress in resolving them should ty surrounding unofficial payments, and discourage fa- help contribute to regional integration and help reduce labor voritism in administrative decision making. shortages in some countries and excess labor supply in oth- Second, barriers to investment need to be lowered. Con- ers. And migrants in manufacturing, especially in companies trary to expectations, barriers to foreign direct investment in integrated within production networks, may learn valuable East Asia are the highest in the world. This outcome is sur- skills that are transferable home where production networks prising, given the role of foreign direct investment in advanc- may be making initial inroads. ing intraregional trade. Removing such barriers will enhance Climate change and environmental sustainability are competition and productivity gains from higher foreign di- global issues that must also be tackled at the regional (and rect investment; encourage the use of the region's large sav- country) level. East Asia's rapid economic development, in- 7 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise cluding its accelerating urbanization, has resulted in a clone Nargis in May 2008; and late in 2009, Cambodia, Lao tripling of energy consumption over the last three decades-- PDR, the Philippines, Thailand, and Vietnam were hit by Ty- with projections for a further doubling over the next two phoon Ketsana (named "Ondoy" in the Philippines), suffer- decades (World Bank 2010b). Unfortunately, the pattern of ing floods, landslides, and loss of life and property. Densely production and the technologies adopted for energy gener- populated coastal areas are susceptible to the adverse effects ation, transport, and infrastructure have resulted in sharp in- of climate-related events. The Irrawaddy, Mekong, and Red creases in greenhouse gas emissions. And although energy River delta regions, for example, and the urban centers of consumption and greenhouse gas emissions per capita are Bangkok, Jakarta, and Manila are extremely vulnerable and well below levels in advanced economies, developing East are designated as "climate hot spots." Asia has some of the world's most-polluted cities. Under un- Adaptation is about building resilience and reducing vul- changed policies, the World Bank projects that greenhouse nerability. To build resilience, development is an imperative. gas emissions and local air pollutants will double for all the In this sense, the rapidly growing economies of East Asia are larger countries in the region by 2030. At the same time, better positioned than are some other developing regions. these large increases in greenhouse gas emissions are accel- Not only does development make economies less reliant on erating global climate change, often with detrimental effects climate-sensitive sectors, such as agriculture; it also increases for the region. Whether associated with climate change or incomes; improves health and education; expands the capac- not, catastrophic events such as floods, droughts, and storms ity of households to adapt; improves institutional infrastruc- (especially for countries in Indonesia, the Mekong Delta of ture; and enhances the ability of governments to assist their Vietnam, the Pacific Islands, and the Philippines) appear to citizenry. Countries with high levels of investment also hold be growing in frequency and becoming more deadly. an advantage because adaptation requires new technologies, Mitigation and adaptation measures, therefore, are key such as drought- and flood-tolerant crops and climate-proof priorities for the medium term. Our proposition is that East infrastructure. Asia can make these measures work in support of sustain- When catastrophic natural disasters have struck the re- able growth--and the measures actually can help accelerate gion, countries have pulled together to help the devastated it. In other words, East Asian economies have an opportunity areas and subregions. But, in each case, support was coordi- to turn the challenge of climate change into growth. With nated in a relatively ad hoc fashion. Because such disasters investment rates in the region higher than in most developed may increase in intensity and frequency, regional coordina- countries and many developing ones, a significant portion of tion frameworks are necessary for responding to climate- the capital stock can embed green technologies within a few change effects and natural disasters. ASEAN is leading this years. Already there is growing evidence that although new process in East Asia, and it recently approved a declaration green technologies are being created in the advanced coun- on climate change that sets out a framework for internation- tries, they are being applied increasingly in developing coun- al cooperation. tries, especially in East Asia. Over a third of China's stimulus package was devoted to green investments, compared with Notes just 10 percent in the U.S. stimulus package. China is devot- ing US$88 billion to high-speed rail, compared with US$8 1. This note is a shortened version of World Bank (2010c). billion in the United States (Strand and Toman 2010). Chi- 2. Admittedly, imports were at their nadir in December na, Japan, Korea, and Singapore are already at the forefront 2008. of developing energy-efficient and renewable technologies 3. Numbers are calculated using the US$2-a-day (in and products, including photovoltaic cells, wind power, bio- terms of purchasing power parity) international poverty line. fuels, and hydroelectricity. With the right policies, applica- 4. World Bank Development Data Portal, http://ddp. tion of such technologies will gradually spread, leading also worldbank.org/dp/home.do. to familiarity and eventually mastery. Just as East Asia did in 5. A robust fiscal framework includes but is not limited to the application of other technologies (such as information a good taxation regime for the natural resource sector; com- and communications technology) [in the past, it has the ca- prehensive government budgets; thorough costing of all gov- pacity to do so now by leapfrogging over the advanced coun- ernment programs; budget and spending transparency; tries to reach the green-technology frontier quite quickly. stronger medium-term fiscal and expenditure frameworks; Such a move could give the region a competitive advantage and a healthy regime for public investment planning, execu- in a sector poised for rapid global growth. tion, and monitoring. Fiscal rules are an integral part of the Given the far-ranging adverse impacts of climate change, framework. adaptation must be an integral component of an effective 6. See the final communiqué of the 40th Pacific Islands strategy to address climate change--along with mitigation. Forum, held in Cairns, Australia, on August 5­6, 2009. The Irrawaddy Delta in Myanmar was devastated by Cy- 8 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise 7. Immigration New Zealand: Recognized Seasonal Em- Huang, Jikun, et al. 2010. "Impact of Global Financial Crisis on Off-Farm ployer Policy, http://www.immigration.govt.nz/communi- Employment and Earnings in Rural China." Unpublished manuscript. World Bank, Washington, DC. ty/stream/employ/rse/. Strand, Jon, and Michael Toman. 2010. "`Green Stimulus,' Economic Re- covery, and Long-Term Sustainable Development." Policy Research About the Author Working Paper 5163. World Bank, Washington, DC. World Bank. 2002. Global Economic Prospects and the Developing Countries 2002. Washington, DC. Vikram Nehru is the East Asia and Pacific regional chief econ- ------. 2009. Global Economic Prospects 2009: Commodities at the Cross- omist and the East Asia director for the Poverty Reduction and roads. Washington, DC. Economic Management Network and the Private Sector Devel- ------. 2010a. China Quarterly Update--March 2010. Beijing: World Bank opment, World Bank, Washington, DC. Office. ------. 2010b. "Winds of Change: East Asia's Sustainable Energy Future." World Bank, Washington, DC. References ------. 2010c. World Bank East Asia and Pacific Economic Update 2010, Vol- ume 1: Emerging Stronger from the Crisis. Washington, DC. http://web. ADB (Asian Development Bank)/JBIC (Japan Bank for International Co- worldbank.org/WBSITE/EXTERNAL/COUNTRIES/EASTASIAPACI- operation)/World Bank. 2005. Connecting East Asia: A New Framework FICEXT/EXTEAPHALFYEARLYUPDATE/0,,contentMDK:2027525 for Infrastructure. Washington, DC. 3~pagePK:64168427~piPK:64168435~theSitePK:550226,00.html. Alavi, Hamid, Vikram Nehru, and Ralph van Dorn. 2008. "Building a Neighborhood One Policy at a Time: The Case for Deeper Integration in East Asia." Unpublished manuscript. World Bank, Washington, DC. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. It is produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at www.worldbank.org/economicpremise.