The report calleds for actions to: improve law and order and public security – essential for both economic development and the consolidation of more representative government; maintain prudent macroeconomic management of external and domestic fiscal positions; strengthen governance, administration and public financial accountability – especially in delivery of services; and, to encourage growth, continue to tap the energies of private individuals, entrepreneurs and firms. – which This means completing the restructuring agenda left over from the financial crisis, improving financial sector supervision and regulation, and undertaking broader reforms to strengthen the investment climate. Increasingly crowding the agenda are sSecurity concerns and political focus on upcoming elections in some countries, will increasingly crowd the policy agenda, along with economic and structural reforms, the report notes.

“Our previous Update, from April 2002, said that the region was rebounding, but asked ‘how far’?” said Jemal-ud-din Kassum, Vice President for East Asia and the Pacific, at the launch of the report today in Tokyo. “which This proved to be the right questions to ask, as we see East Asia’s recovery threatened? / affectedchallenged by a number of factors. The anticipated pace of global economic recovery – with heightened turmoil in emerging markets – has been slower than expected, demand for East Asian exports has slackened off, and the recent sharp fall in high tech demand suggests that the road to recovery in this critical sector might be a bumpy one. Furthermore, tThis year’s sharp rise in world oil prices will sap income in the majority of East Asian countries, while recent terrorist attacks in Bali and elsewhere will depress tourism and business confidence, at least for a time, taking a toll on the near term growth outlook for Indonesia in particular.”

He continued, “the external environment for East Asia is thus both weaker and more uncertain than it appeared six months ago. S; to sustaining adequate rates of economic and social development in this more complex and difficult environment will rely depend more than ever on the quality of countries’ own policies and institutions.”

Mr. Kassum noted that the recovery of earlier this year – powered by exports, private consumer spending, and, in some cases, fiscal stimulus was relatively broad-based, but that private investment spending has remained weak and that growth itself has not addressed problems of excessive corporate leverage and distressed debt. He commented, “debt-equity ratios, though they have fallen in some instances, remain high by international standards. Together, with low corporate profitability, they continue to depress the investment climate and undermine the prospects for accelerated medium term growth.”

Mr. Kassum continued, “The recent terrorismt attacks in the Philippines and Indonesia – in particular the horrific attack in Bali – underlines the urgency of fighting combating terrorism and political violence, and more generally, of strengthening law and order in the South East Asian countries. Governments in East Asia today must now grapple with the immense challenges of strengthening law and order and implementing a wide array of difficult structural and institutional reforms – often against vested interests – while meeting the public’s expectations of renewed gains in income and welfare – at a time when many countries are moving into the next turn of their electoral cycles. It’s important that countries not be distracted from their focus on development and reform priorities.”

There are some reasons for optimism, however, commented Homi Kharas, Chief Economist for the World Bank’s East Asia region. He noted that world trade and growth in the developed world is still expected to be stronger in 2003 than 2002. Further, China has seen an especially strong growth in exports to the U.S. and in high tech exports, continued high FDI flows, and build-up of manufacturing capacity and competence in an increasingly broad range of high tech sectors. As a powerful source of export demand for other countries in East Asia, exports to China from eight other East Asian economies jumped by around 50 percent from a year earlier in the first half of 2002.[1] “This extremely rapid rise in exports to China this year will clearly not be sustained, but the underlying trend in the importance of China as an export market for East Asia will continue, as it has for the last decade,” said Mr. Kharas. He noted that these gains in China have offset the loss of East Asian exports to Japan in 2001 and 2002 which reflects the continued weak performance of the Japanese macro economy and domestic demand. .

Another bright spot: poverty is at an all time low, expected to fall to around 41% of regional population in 2002 (at the $2 a day level) – down from around 50 percent in the wake of the regional financial crisis. Mr. Kharas noted, “poverty has been dropping across the region for a number of reasons: per capita income has been increasing since 1999, SME activity has been growing more buoyant, and commodity prices for goods produced by the rural poor have been rising – helping to distribute welfare gains in most countries throughout East Asia, which are expected to achieve all time lows in poverty rates this year, well below pre-crisis levels.” The main exceptions, he said, are are countries in South East Asia, where poverty is still estimated to be higher than 1996 levels in Thailand and Indonesia, and where the rate of decline remains fairly sluggish in the Philippines.

Addressing poverty in rural areas of East Asia and the Pacific is a particular challenge, notes the report’s special focus section on reducing rural poverty. With about 65 percent of its population living in rural areas, East Asia remains among the more rural of developing regions. Although rural poverty fell rapidly through the first two-thirds of the 1990s, several East Asian countries with large numbers of poor experienced a reversal in some of these gains in the latter part of the decade. The large declines in aggregate demand and supply disruptions caused by the regional financial crisis of 1997-98 clearly played an important part in pushing down rural incomes and raising rural poverty in countries like Indonesia, Philippines, and Thailand, but other factors such as domestic policies, international market trends, climatic shocks (like El Nino) and environmental constraints have also played a part. With the passing of the regional crisis, rural poverty in the region has begun to fall once more, although the pace is generally still modest.

“Since well over three quarters of the East Asian poor live in rural areas, reducing the overall numbers of poor in the region will be increasingly difficult in the years ahead, unless countries renew efforts to reduce rural poverty, either through improving incomes and opportunities in the rural areas themselves, or through people moving to better opportunities in urban areas,” said Mr. Kharas. To achieve reinvigorated rural growth, he recommended action on key agendas including: strengthening property rights, better public research and extension systems, better market access for farmers, expanding off-farm opportunities, improving rural financial markets, and increasing involvement of rural producer organizations and communities; and said that work at the sub-national government, national government, and international levels is needed.

The Regional Outlook Ahead

The report notes that recent steep falls in global equity markets and indications of renewed or continued weakness in major developed countries (the U.S., Japan, the Euro area) have heightened uncertainty about the global outlook - and with it for the export-oriented East Asia region.. Thus the World Bank’s expectation for 2003 growth in the high-income countries has been reduced to 2.1 percent from a projection of 3.3 percent earlier this year, with more downside risk of a greater slowdown or even a ‘double dip’. “Nevertheless,” said Mr. Kharas, “that would still be stronger than in 2002 – in short, things will still get better, just bymuch less than had been hoped.”

Output growth in developing East Asia is expected to rise to a little over 6 percent in 2002 from about 5.5 percent in 2001, led by China and Vietnam growing at 6-87 percent or more, with even post-crisis countries in South East Asia like Indonesia, Thailand and Philippines expected to grow around 3.5-4 percent. Including the four newly industrialized economies (NIEs), overall East Asian growth is expected to pickup from a depressed 3.5 percent in 2001 to around 5.5 percent in both 2002 and 2003. Such a pace of recovery, while exceeding other world regions, would be less than the 6.5-7.5 percent rate reached in the post-financial crisis recovery of 1999-2000.

(china.org.cn Novemebr 6, 2002 )