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East Asian Economy Set to Grow by 6 Percent in 2005

East Asia's emerging economies are projected to grow by 6 percent this year, as policy makers face the delicate challenge of responding to a reduced pace of global trade expansion -- especially in electronics -- slowing growth in China, higher oil prices, and large dollar inflows to the region, according to the latest East Asia and Pacific Regional Update, the World Bank's twice-yearly look at the region's economies.

Despite the horrendous loss of life, the Regional Update notes the December 26 tsunami is expected to have a minor impact on overall economic growth in the two most seriously affected East Asian economies, Indonesia and Thailand. The 6 percent forecast growth for emerging East Asia, which includes the tsunami-affected countries, is slightly down from last year's cyclical peak of 7.2 percent, but should be more sustainable, with balanced contributions from exports, consumer spending, and investment.

"What is clear is that this kind of sustainable growth has the potential to bring poverty rates in developing East Asia down by as much as 5 or 6 percent, amounting to about 35 million people a year," said Jemal-ud-din Kassum, Regional Vice President for East Asia and Pacific. "We are seeing substantial reductions in poverty rates in China, Vietnam, Indonesia, and Thailand, and income gains in rural and urban areas, which are very promising." This is especially important as the world is focused this year on accelerating progress on the goal of halving extreme poverty by the year 2015.

Much of the region's expansion has been bolstered by robust global and regional demand growth, supported by low real interest rates. However, uneven growth across countries is also associated with the emergence of some sizable imbalances in the world economy, including rising oil prices and skewed balance of payments' positions.

Need for smart choices

Foreign exchange reserves in emerging East Asia increased by over US$300 billion in 2004, equivalent of over 9 percent of its gross domestic product (GDP), an unprecedented number.

"What we are seeing is an unusual situation where East Asian economies have large current account surpluses and large inflows of private capital at the same time, so dollars are being accumulated even faster than during the mid-1990's," said Homi Kharas, Chief Economist for East Asia and Pacific. "Policy makers will need to make some smart choices to manage these flows. In China, the authorities will need to find a way to make domestic assets more expensive for foreigners. In other countries, there is room to expand investment and consumption to counter slowing world demand." Global imbalances make it likely that more structural reforms will be needed in the region. This will be easier to implement because, in most countries, banks, companies, governments and households have strong financial positions thanks to rapid growth since 2001.

"It's important for governments to take advantage of this period of high growth to strengthen the financial sector and the capital markets since these are the institutions that channel foreign capital into the domestic economy," Milan Brahmbhatt, the principal author of the report, said.

China continues its expansion

China continues to expand at a rapid pace, recording 9.5 percent growth in 2004. Investment in China has reached a record estimate of 45 percent of GDP, as the Chinese authorities continue to take measures to cool down the economy, including a small rise in interest rates. "Domestic demand is slowing down, and investment growth is healthier than last year" said Bert Hofman, Chief of the World Bank Economics Unit in Beijing but it is now external demand that is leading growth."

"China's exports are benefiting from foreign investments in the past, notably in electronics, and from a weaker dollar to which the RMB is linked" said Brahmbhatt "but China exports of textiles, which has made the headlines, are actually growing slower than overall exports."

Women playing greater role in region's economy

In a special focus section of the report on the state of gender equality in the region ten years after the Beijing Summit for Women, the report notes that many countries have improved women's and girls' access to healthcare services and education. Women are playing a greater role in the economy, but not without risks as the majority of women workers are in the informal sector. Twenty million Asian migrant workers, many of them women, worked outside their home countries in 2000 -- the same year that migrant workers sent home US$6 billion to the Philippines, and US$1 billion to Indonesia. The contribution of women has played a key role in supporting economic and social stability, and making economies more resilient to change.

(China.org.cn April 27, 2005)

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