April 6, 2007

East Asia growth strongest in 10 years

However, the region faces challenges which could derail growth: World Bank report

By Aaron Chew

A DECADE after the Asian financial crisis rocked the region, East Asian economies are going strong, with more money, less poverty and a larger role in the global economy.

The World Bank reported in its six-monthly East Asia and Pacific update that the region recorded growth of 8.1 per cent last year - the strongest of the past 10 years.

The report on East Asia, the Asian continent less Japan and the Indian sub-continent, showed that the region's aggregate output was more than US$5 trillion (S$7.6 trillion) - double the dollar value before the crisis.

Not surprisingly, the main contributor to the region's robust showing was China. The economic giant now makes up more than half of East Asia's economic output. It grew 10.7 per cent last year - the fourth straight year of double-digit growth. This is largely due to buoyant levels of exports and investment.

In line with a cooling global economy, East Asian growth is expected to slow slightly this year to 7.3 per cent.

On the home front, Singapore's growth is expected to slow from 7.9 per cent last year to 5.5 per cent this year.

The anticipated slowdown in the region is largely due to the expected downturn in the United States economy and the slight easing of Chinese exports. However, recoveries in Japan and Europe, coupled with China's continued surge, should provide a cushion.

And while oil prices are still volatile, they are expected to fall from their peak levels of well over US$70 a barrel last year to an average of US$57 a barrel this year. This can be attributed to consumers responding to high prices by using oil more efficiently. High prices have also prompted non-Opec suppliers to step up production. Opec refers to the Organisation of Petroleum Exporting Countries.

This should provide a welcome boost for consumers and businesses in the non-oil segments of the economies, the report says.

Since 1997, poverty in the region has decreased significantly. The number of people living below the poverty line of US$2 a day has come down from 50 per cent of the population to 29 per cent today.

The World Bank expects more than 90 per cent of East Asians to be living in middle-income economies by 2010. Although the prospects look promising, the region also faces challenges which could derail growth if not properly dealt with. It risks being stuck in a 'middle-income trap' - the inability to move from middle-income territory to high-income ground.

The World Bank report addressed three key challenges.

First, countries must maintain high growth in a sustainable way. For China, that means looking at environmental concerns and moving towards more reliance on domestic demand.

The rest of the region has to strengthen the investment climate and improve their labour forces to find new competitive advantages as global competition intensifies.

Second, countries should look towards narrowing the income gap, which inevitably widens with economic growth.

This could become a problem as poor people without access to credit may be unable to exploit investment opportunities. It could also lead to political and social unrest.

Third, countries have to look into managing vulnerabilities and preventing new crises.

Since the 1997 crisis, East Asian countries have adopted two measures to reduce risks - building up large foreign reserves and strengthening their financial and banking sectors.

The level of foreign reserves is now beyond the optimal level and has brought with it unwanted side effects. Countries also have to step up their efforts to strengthen their institutions and make them more efficient.

Summing up, Mr Milan Brahmbhatt, the main author of the report and the World Bank's chief economist for the East Asia and Pacific region, said: 'We're looking at a pretty strong year, but there's more uncertainty in the mix about what will happen in the US and what will happen with oil prices.

'Overall, it's a positive picture.'

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