East Asian economies are expected to register their fifth consecutive year of strong growth in 2006,  backed up by a substantial decline in poverty, according to the World Bank's latest East Asia Update launched today. But on the horizon, growth rates in Transition Economies and Newly Industrialized Economies are expected to slow, reflecting a likely weakening in US growth in 2007 and a consequent drop in exports from East Asia.

Growth and Poverty Reduction. The Update shows that growth in the countries of Emerging East Asia* is likely to reach around 8 percent in 2006, the second strongest pace in the five-year long economic expansion underway in the region. Current estimates also suggest that the number of people in East Asia living on or below US$2 a day will fall to around 550 million (or 29.3 percent of the population) in 2006. This 1.5 percentage point drop in the past year means that around 25 million people in the region have emerged from severe poverty since 2005. 

A growth rate in China of more than 10 percent is underpinning the region's overall GDP growth. Strong export growth has been a common feature sustaining activity throughout the region. Domestic consumption and investment performance has been much more varied, reflecting the impact of higher oil prices and higher domestic interest rates in the first half of 2006, among other factors. Improved public finances and lower public debt also provides the fiscal space for higher public spending, if required, especially in infrastructure and social services.

"We may have seen the peak in oil prices and interest rates in the region," says Homi Kharas, the World Bank Chief Economist for East Asia and Pacific. "So the prospects are good for domestic demand to strengthen and to offset weaker exports."

China and Intra-Regional Trade. The Update finds that intra-regional trade is still growing more strongly, but much of this is still in parts and components. "Over the past decade, China has overtaken the US and Japan as a destination of East Asian exports," said Update author Milan Brahmbatt. "However, two-thirds of these exports are processed and re-exported to developed countries so it is premature to claim that China is more important for the region than global markets."

The Update also finds that foreign exchange reserves in Emerging East Asia continue to accumulate, rising to over 2 trillion dollars at present with China holding half of these reserves.  The region's rising current account surplus – up to over US$300 billion in the year to the second quarter of 2006 - continues to finance the lion's share of reserves growth. Net foreign direct investment inflows remain strong, totaling US$101 billion in the year to the second quarter of 2006. On the other hand there have been net outflows of portfolio and other financial capital flows from the region over recent quarters reflecting interest rates in the region that are now lower than in the US and growing acquisition of foreign assets by East Asian residents.

Longer Term Trends. The report notes that East Asia is increasingly a middle-income region.  Once Vietnam reaches middle income country levels, possibly as early as 2010, more than nine out of ten East Asians will live in a middle-income country. But as the report warns, this poses new challenges – especially in how this new wealth is managed.  Inequality in much of developing East Asia has risen, not just in income levels, but also in schooling and access to basic services. Despite successful global integration and increasing regional integration, many East Asian countries are falling behind in domestic integration. Addressing this challenge will also require attention to the problems of rapid urbanization, service delivery, social cohesion and corruption. 

Investing in the Young. The report also has a special focus on the 450 million youth in the region and discusses the challenge of how to prepare this group to become the drivers of future growth. It notes the high and rising return to higher skills and the importance of connecting school and work. The report noted that failure to seize this opportunity to train them more effectively for the workplace, and to be active citizens, could lead to widespread disillusionment and social tensions.

(China Development Gateway November 14, 2006)