38189 EAST ASIA UPDATE November 2006 ManagingThroughaGlobalDownturn Special Focus: Investing in Young People East Asia and Pacific Region CONTENTS East Asia and Pacific Regional Update ...................................................... 1. Summary ........................................................................................................ 1 2. East Asia regional outlook ............................................................................ 5 Growth ­ the cyclical outlook...................................................................... 5 Box 1. The Rise of Vietnam's Private Sector ....................................... 7 Poverty reduction and human development............................................... 10 Box 2. The dimensions of internal migration in China........................ 11 3. The international and regional environment ........................................... 14 Developed country growth ........................................................................ 14 China.......................................................................................................... 15 Box 3. Saving, Investment and Profits in China's Enterprises ........... 16 `Decoupling', Intra and Extra-regional Trade............................................ 18 Commodity markets................................................................................... 21 Balance of payments and financial markets .............................................. 24 4. Domestic trends and policy challenges....................................................... 28 Financial sector trends and issues.............................................................. 28 Towards "An East Asian Renaissance" ..................................................... 32 Country Sections ...............................................................................36 Appendix Tables......................................................................49 Special Focus: Investing in Young People ...................................................... 58 Key Indicators Tables...................................Visit www.worldbank.org/eapupdate This Regional Update was prepared by Milan Brahmbhatt, Lead Economist, East Asia PREM, with the assistance of Antonio Ollero and Taranaki Mailei, drawing on inputs and comments from country economists and sector specialists throughout the East Asia and Pacific Region of the World Bank. The report was prepared under the general guidance of Homi Kharas, Chief Economist, and James Adams, Regional Vice President, East Asia and Pacific Region. East Asia Update 1 EAST ASIA AND PACIFIC REGIONAL UPDATE Summary In some respects the forces expected to drive the Growth in Emerging East Asia is expected to outlook for 2007 are the converse of those that have reach close to 8 percent in 2006, the second strongest driven outcomes in 2006, with exports expected to slow pace in the five year long economic expansion underway (rather than accelerating), and with domestic demand in the region since 2001.1 Among the developing making a bigger contribution to growth than in 2006. economies of the region aggregate growth of 9.2 percent Growth in Emerging East Asia is expected to slow by would indeed be the highest in the last five years.2 about half a percentage point in 2007 to a little over 7 (Table 1.) Poverty at the $2 a day level is estimated to percent, and in Developing East Asia to a little over 8½ have fallen by around 1 ½ percentage points to a little percent, principally reflecting an expected weakening in over 29 percent of the population. As in recent years, US growth, and a consequent slowing in the region's high aggregate GDP growth in the region is dominated by export growth. It is true that intra-regional East Asian the fact that the region's largest economy, China, was also trade has grown strongly over the last decade (centered on its fastest growing, reaching over 10 percent, while the exports by other East Asian economies to China). other larger middle and high income economies of the However, something like two thirds of intra-Asian exports region grew in a range of 4-6 percent. Strong export are intermediate products used as inputs into exports growth was a common factor sustaining growth whose final markets lie outside Asia. Thus the region throughout the region this year. But domestic demand remains intimately linked to extra-regional global performance was more varied, continuing strong in China markets. Nevertheless, the extent of the expected export and Vietnam, but easing in several of the South East slowdown should be limited if, as forecast, the US Asian middle income economies and North Asian NIEs, economy achieves a soft-landing, and slower US growth reflecting adjustment to the impact of higher oil prices is accompanied by a rotation in relative growth and higher domestic interest rates, among other factors. momentum to other regions. Even as exports slow, though, there are a number Table 1. East Asia Economic Growth of factors that should support domestic consumption and 2004 2005 2006 2007 investment. World oil prices have fallen substantially since their summer highs and are forecast to stabilize and Emerging East Asia 8.0 7.5 7.8 7.3 then gradually decline over time, which should help Develop. E. Asia 9.1 9.0 9.2 8.7 bolster incomes in what is overall an oil importing region. S.E. Asia 6.0 5.1 5.2 5.6 Central banks in the region had tightened monetary policy Indonesia 5.1 5.6 5.5 6.2 since the middle of 2004 to curb a potential rise in Malaysia 7.2 5.2 5.5 5.5 inflation. With inflation stabilizing and turning lower Philippines 6.2 5.0 5.5 5.7 during 2006, central banks in the region have stopped Thailand 6.2 4.5 4.5 4.6 tightening or (as in Indonesia) started easing. By the Transition Econ. second quarter average short term rates in East Asia were China 10.1 10.2 10.4 9.6 lower than in the US. Most central banks should have Vietnam 7.8 8.4 8.0 7.5 room to ease monetary policy in 2007, helping bolster Small Economies 6.6 7.6 6.4 5.3 domestic demand in case of a significant export led Newly Ind. Econ. 6.0 4.7 5.1 4.5 slowdown. In addition, fiscal balances have improved Korea 4.7 4.0 5.1 4.5 and government debt has generally declined over the 3 other NIEs 7.2 5.4 5.1 4.4 course of the decade in most of the larger East Asian Japan 2.3 2.6 2.9 2.4 economies, thanks to fiscal consolidation efforts, World Bank East Asia Region; October 2006. Consensus relatively low interest rates and sustained economic Forecasts for NIEs.. growth since 2001. Except for the Philippines, central government debt levels are now generally less than 50 percent of GDP, leaving room for greater fiscal stimulus, 1 should that be needed, particularly spending on needed Emerging East Asia comprises Developing East Asia (China, Indonesia, Malaysia, Philippines, Thailand, Vietnam and some infrastructure, which would also ease capacity bottlenecks smaller economies) and four Newly Industrialized Economies or and constraints. Stronger domestic demand growth is NIEs (Hong Kong, Korea, Singapore and Taiwan, China). unlikely to face much of a balance of payments constraint 2 Regional and sub-regional GDPs are the sum of national GDPs in the larger economies of the region, given their current measured in 2000 US dollars. The resulting growth rates are account surplus and strong foreign reserve positions. higher than those shown in earlier editions of the East Asia Improvements in the balance sheets and profitability of Update (which used fixed GDP weights), principally because of the region's corporations and banks, and lower levels of a higher weight given to China. East Asia Update 2 spare capacity after several years of sustained growth in Indonesia, the first since the financial crisis. Poverty at many economies should provide a more favorable the national poverty line increased from 16 percent in environment for new investment spending. February 2005 to 17.8 percent in March 2006. Most of The rest of this summary provides further the increase resulted from a sharp rise in domestic rice information on the main cross-country trends and policy prices, partly due to shortages resulting from a ban on issues discussed in this report. Developments at the rice imports. In response the government reopened rice country level are discussed in the "Country Sections" at imports, helping stabilize prices. In much of the rest of the back of the report, while fuller Country Briefs are the region, though, 2006 is likely to see further available at the website associated with this report.3 The substantial declines in poverty. Poverty reduction has Special Focus in this report is on "Investing in Young been occurring at exceptionally rapid rates in Vietnam. People in East Asia and the Pacific", a study of the The current estimates now incorporate the results of lessons for East Asia from the World Bank's recent Vietnam's 2004 Household Survey, which suggest a World Development Report 2007: Development and the sharp acceleration in poverty reduction in 2002-04, Next Generation. almost all of it in rural areas, resulting from rapid productivity gains in agriculture, diversification to new crops and non-agricultural activities, hefty increases in East Asia Regional Outlook international prices for key exported crops, more · Growth. Robust aggregate East Asian growth in 2006 resources for targeted poverty reduction programs and a has been underpinned by growth of over 10 percent in more pro-poor focus in public investment and other the region's largest economy, China, supported by fiscal expenditure programs. With further buoyant strength in both exports and domestic demand. Growth growth, poverty rates in Vietnam are estimated to have has also been high in several low income transition now fallen below those in Indonesia and Philippines. countries, running at 7-9 percent in Vietnam, Cambodia, Lao PDR and Mongolia. The larger middle and high The international and regional environment income economies of the region are however likely to see more modest growth in a 4-6 percent range. Robust · Developed economies. Growth in OECD developed export growth has been a common feature sustaining economies is expected to have risen to 3 percent in 2006 activity throughout the region, underpinned by above- from 2.6 percent in 2005, the result of an unexpectedly trend growth of 3 percent in developed OECD strong and broad based recovery in the Euro Area that economies, as well as by strong growth in China and should bring that region's growth up from 1.4 percent in continued expansion in global electronic and other high 2005 to 2.3 percent in 2006. Second quarter Euro Area tech product markets. Domestic consumption and growth reached 3.8 percent, the strongest in six years. In investment performance was much more varied, though. the United States, on the other hand, growth decelerated Both continued to run at strong rates in economies like from an exceptionally strong 5.6 percent in the first China, Malaysia and Vietnam. On the other hand quarter of 2006 to 2.6 percent in the second and 1.6 consumption growth was particularly weak in Taiwan, percent in the third. Nine tenths of the slowdown in the China, where, a credit card bust left over-indebted third quarter reflected plunging residential investment consumers cutting back spending, and was also slowing and the ongoing slump in the housing sector. The sharp in Indonesia and Thailand in the first part of the year. slowdown has led to consensus forecasts for US growth Investment growth also slowed or became negative in the in 2007 being reduced by half a percentage point to latter three economies, as well as in Korea and the around 2 ½ percent ­ still a `soft-landing' scenario, Philippines. In addition to the adverse impact of higher although the likelihood of a `hard-landing' or recession oil prices and interest rates, domestic demand was has undoubtedly increased, as has overall uncertainty affected by tightness in fiscal policies in some about the outlook. Not all US data has been quite so economies, as well as a series of country-specific factors negative as in housing. Employment and wage gains such as political tensions and natural disasters. have been robust, as were consumption and business investment growth in the third quarter, adding some · Poverty. Current estimates suggest that the number of credibility to the consensus soft-landing view. In Japan East Asian poor at the $2 a day level is likely to have an unexpected dip to only 1 percent GDP growth in the fallen to some 550 million (or 29.3 percent of the second quarter of 2006 has also raised concerns about the population) in 2006, a drop of some 25 million (or over 1 outlook for the recovery there. Worrying signs of ½ percentage points) from 2005. The current estimates weakness also emerged in Europe when French growth are a little higher than in the last (March 2006) East Asia fell to zero in the third quarter. Overall OECD economy Update, because of an unexpected up tick in poverty in growth is expected to dip by over half a percentage point to under 2 ½ percent in 2007, with world trade growth expected to come down from 9.7 percent to 7.3 percent, 3 http://www.worldbank.org/eapupdate/. one of the lower rates in recent years. East Asia Update 3 · China. Growth in China accelerated to almost 11 amounts to some 14 percent of the total, with Japan, the percent in the first half of the year, reaching 11.3 percent US and Europe respectively comprising 14, 25 and 22 in the second quarter, the highest in a decade, before percent of East Asian exports. A generalized decline in decelerating modestly to 10.4 percent in the third quarter, extra-regional markets would certainly have a strong following tightening measures aimed at reducing impact on East Asian exports. The impact would investment growth. Investment and export growth have however be considerably softened if there was a rotation been the principal drivers of growth in the year. The of growth from the US towards Europe, Japan and East slowdown in investment growth in the third quarter was Asian domestic demand itself. partly offset by rising export growth, which picked up from round 22 percent in US dollar terms in the last · Oil. Crude oil prices have been on a highly volatile quarter of 2005 to 29 percent in the third quarter of 2006. path since our March 2006 East Asia Update, first With rising export growth outpacing imports by a running up to well over $70 in early August, before growing margin, the contribution of net trade to GDP falling to below $60 in early October. This large growth increased to almost 3 percentage points in the retracement in prices bolsters confidence in the view that third quarter, after 1.2 percentage point in the first and oil prices have seen their peak and are likely to decline 2.4 percentage points in the second. The trade surplus further over the next several years, albeit at a gradual rose to US$110 billion in the first three quarters of the pace. Nevertheless the underlying demand and supply year from US$ 69 billion in the same 2005 period. factors remain finely balanced, reflected in the unusually China's current account surplus is forecast to rise to $223 low level of spare production capacity in OPEC. Prices billion in 2006 (8.5 percent of GDP) from $160 billion in are currently projected to ease from $65 in 2006 to $60 2005. From the perspective of its trading partners in in 2007, which would be higher than prices in early Emerging East Asia, China's rapid growth continues to October 2006. On the supply side, high current prices provide an important locomotive for the region as a are expected to induce further significant investments whole. China's imports from the rest of emerging East and gains in production, which are expected by the IEA Asia were up about 20 percent in the first three quarters to reach 1.8 mb/d in 2007, led by increases in the FSU, of 2006, about the same pace as in 2005. Africa and North America. On the other hand, continued world economic growth at relatively robust rates over 3 · `Decoupling', Intra and Extra-regional trade. The percent is expected to induce stronger demand gains than rapid growth of intra-East Asian trade over the last in the last two years. Thus the margin of spare decade naturally raises the question how far such trade production capacity is expected to widen only gradually, may protect East Asia from a downturn in exports to the leaving prices vulnerable to unexpected supply US or other extra-regional markets. By 2005 32 percent disruptions and fears of disruptions. of Emerging East Asian exports went to other economies in the region, while another 11 percent went to Japan. · Balance of payments and financial market The first point to note is that it is East Asian economies developments. Emerging East Asian foreign exchange other than China that have experienced the fastest growth reserves continue to accumulate at a solid pace, rising to in intra-regional exports, principally to China. China, on $1938 billion by September 2006, of which $989 billion the other hand, has become the East Asian economy with were held by China alone. As in 2005, much the greater the highest orientation to the US market, while its intra- part of the region's reserve accumulation continues to be Asian exports have remained steady at around 16 financed by its rising current account surplus. Emerging percent. The rising export-orientation of other East East Asia's current account surplus in the year to the Asian economies towards China mainly reflects a second quarter of 2006 rose to an estimated $302 billion changing regional division of labor over the last decade, - around 6 percent of GDP - up from $266 billion in with the emergence of China as a central assembler and 2005, headed by the sharp rise in China's surplus. Private exporter of finished manufactures to global markets capital inflows to and outflows from East Asia remain outside Asia, and of other East Asian economies as buoyant, reflecting the growing integration of the region suppliers of specialized capital goods, parts, components into global financial markets. Net foreign direct and other intermediates to China. China's demand for investment inflows remain strong, totaling $101 billion these inputs from the rest of East Asia is therefore driven in the year to the second quarter of 2006, compared to to a large extent by demand for its exports to the major $112 billion in 2005. Gross financial capital inflows developed economy markets outside emerging East Asia. (mainly portfolio capital and bank lending) slackened Something like two thirds of intra-Asian trade gets somewhat during and after the global equity market incorporated into exports shipped to extra-regional correction in May-June of the year, but were reviving by markets. As a result the growth on intra-Asian trade September. East Asian equity prices also resumed tends to be highly correlated with that of extra-regional moving higher in the third quarter. However, while gross trade. A rough calculation suggests that net of such financial capital inflows of portfolio capital and loans intermediates trade East Asian intra-regional trade have remained healthy, one of the more notable balance East Asia Update 4 of payments developments in East Asia in the last 1-2 sell and exit easily when needed. Three key factors years has been that on a net basis the region is now affect liquidity and efficiency--and ultimately the role supporting large net outflows of these kinds of capital ­ that securities markets play in the region: (i) the residents are acquiring net foreign assets of portfolio and availability of good information to price securities other financial assets. Such net outflows are estimated at accurately. East Asian economies have made good $110 billion in the year to the second quarter of 2006. progress in establishing the legal framework for Among the main factors underpinning this change in net corporate governance, disclosure, accounting and financial capital flows is that there has been more auditing, but need to improve implementation; (ii) monetary policy tightening in the US than in East Asia. reducing transaction costs, in particular by fostering repo US short term interest rates were lower than average East (repurchase) markets, securities lending, margin trading Asian rates till recently; now they are higher. and derivatives, together with the strong regulatory and risk management frameworks needed for such markets; Domestic trends and policy issues (iii) development of a more diversified and deeper · Financial sector trends and issues. Over the last 5-6 institutional investor base, for example pension funds, years banks in the previously crisis-affected East Asian insurance and mutual funds. countries have achieved substantial improvements in · Towards "An East Asian Renaissance".5 Healthy capital adequacy, asset quality and profitability. There growth in the years since the financial crisis means that was something of a pause or slowing in the process of East Asia is increasingly a middle-income region. Once clearing up bad debts during the first half of 2006, Vietnam reaches middle income country levels, which though. In Indonesia the rate of non-performing loan could happen as early as 2010, more than nine out of ten (NPL) rate at commercial banks picked up from 7.6 East Asians will inhabit a middle income country. percent at the end of 2005 to 8.3 percent in June 2006 Middle-income status poses new and quite specific (and 8.4 percent in August), due in part to a change in development challenges. Research suggests that the rules for classification of assets at the two largest state sectoral pattern of growth changes as countries grow owned banks. In Thailand the NPL rate at 8.2 percent in through middle-income. On the one hand, there is a June 2006 was only slightly below the end-2005 rate. In demand for a greater variety of goods, many of which both cases the authorities announced steps to further can be produced domestically, so there is a force towards address NPL issues. Policy efforts to continue to address sectoral diversification. On the other, countries only get tasks of financial sector restructuring and consolidation richer if they specialize in what they do best. Although left over from the financial crisis, as well as longer term countries appear to initially diversify, at some point at financial sector strengthening and development remain middle income levels they begin to specialize, drawing important. NPL ratios in Emerging East Asia remain on economies of large scale production and greater rather higher than in other developing regions such as proficiency in innovation and knowledge based Latin America and Emerging Europe. production. This is the challenge that confronts East · Towards a More Resilient, Diversified Financial Asian countries today, especially those in South East Sector. The importance of diversified financial systems 4 Asia. But this development strategy has distributional is increasingly recognized in East Asia. Such systems consequences at the country level which need to be can serve to enhance efficiency by providing specialized managed. Inequality in much of developing East Asia resource mobilization, allocation and risk management has risen, not just in terms of income levels, but also in services. Although the region has traditionally had a terms of schooling and access to basic services. Despite bank-centered system, it has made much progress in the huge differences in income per head between East developing securities markets in recent years. Equity Asian countries, more than three-quarters of the markets in the region have tripled since the crisis--from inequality of living standards of East Asian citizens a market capitalization of US$ 0.8 trillion in 1997 to comes from within-country inequality. In short, despite almost US$ 2.9 trillion in 2005. The region's bond successful global integration and increasing regional markets have also seen sizable growth over the past nine integration, many East Asian countries are falling behind years, albeit with considerable variation across countries. in domestic integration. Addressing the challenge of For the region as a whole, bonds outstanding amounted domestic integration must entail managing problems of to US$1.5 trillion in 2005--up from US$ 0.4 trillion in rapid urbanization, service delivery, social cohesion and 1997. To foster further development of securities corruption. markets, a key constraint that needs to be addressed is limited liquidity. Investors are generally willing to invest in securities only if there is enough liquidity for them to 5This section of the report draws on Gill and Kharas: "An East 4This section of the report draws on Ghosh: "East Asian Asian Renaissance ­ Ideas for Economic Growth." World Bank Finance ­ the Road to Robust Markets." World Bank (2006). (2006). East Asia Update 5 EAST ASIA AND PACIFIC REGIONAL UPDATE East Asia Regional Outlook expected to fall by almost one percentage point to about 2 ½ Growth percent. Given this sort of `soft-landing', most analyses Growth in Emerging East Asia is expected to reach look to a fairly modest deceleration in East Asia, in this close to 8 percent in 2006, the second strongest pace in the report to a little over 7 percent. Indeed some slowing trends five year long economic expansion underway in the region were already emerging over the course of 2006. Third since 2001. Among the developing economies of the region quarter growth in China eased modestly to 10.4 percent aggregate growth of 9.2 percent would indeed be the highest from 11.3 percent in the second quarter. As Exhibit 2 in the last five years. (Table 1, Exhibit 1). Although there is likely to be a fairly wide range of outcomes across Exhibit 1 individual economies, this range itself is solidly positive ­ the slowest growth rate among the larger economies is a East Asia - Quarterly GDP Growth projected 4 percent in Taiwan (China), a high income (% Change Year Ago) economy with a per capita income of over $15000. At the 12.0 other end of the scale, growth is fastest in the region's largest economy, China, where it is expected to reach 10.4 9.0 percent, supported by strength in both exports and domestic demand. Growth has also been high in several low income countries that are making the transition to a market 6.0 economy, running at 7-9 percent in Vietnam, Cambodia, Lao PDR and Mongolia. These four economies and China have also seen the most rapid growth in the region over the 3.0 last five years. Growth in 2006 is projected to come in at somewhat more modest rates in the larger middle and high income economies of the region ­ 4 ½ - 5 ½ percent rates 0.0 among South East Asian economies like Indonesia, Malaysia, Philippines and Thailand, and 4-5 percent in the larger Newly Industrialized Economies (NIEs) such as -3.0 99911Q 99913Q 00021Q 00023Q 00121Q 00123Q 00221Q 00223Q 00321Q 00323Q 00421Q 00423Q 00521Q 00523Q 00621Q Korea and Taiwan (China). (Table 2). E. Asia NIEs SE Asia China Looking forward, East Asian growth is widely -6.0 expected to slow in 2007, principally the result of a significant slowing in the US economy, where growth is Table 2. Growth in Real GDP and Components of Aggregate Demand (% change year ago) Indonesia Malaysia Philippines Thailand Hong Kong Korea Singapore Taiwan, S.E. NIEs China Asia GDP 2004 5.1 7.2 6.2 6.2 8.6 4.7 8.7 6.1 6.0 6.0 2005 5.6 5.2 5.0 4.5 7.3 4.0 6.4 4.0 5.1 4.7 2005 H2 5.3 5.2 5.1 5.0 7.9 4.9 8.1 5.4 5.2 5.8 2006 H1 5.0 5.7 5.6 5.5 6.6 5.7 9.4 4.6 5.4 5.8 Consumption 2004 5.0 10.5 5.8 5.9 7.3 -0.3 5.9 3.9 6.5 2.6 2005 4.0 9.2 4.9 4.4 3.4 3.2 2.5 2.7 5.3 3.0 2005 H2 4.3 9.6 5.0 4.3 3.5 4.1 2.6 2.9 5.5 3.5 2006 H1 3.0 7.4 5.4 3.9 4.7 4.6 3.3 1.7 4.5 3.7 Investment 2004 14.6 3.1 1.3 13.8 3.0 2.1 10.2 17.5 9.9 7.4 2005 9.9 4.7 -3.9 11.4 4.1 2.3 -1.9 1.2 7.0 1.9 2005 H2 5.5 5.0 -2.4 8.3 5.5 3.1 3.4 -5.2 4.8 1.1 2006 H1 -0.1 9.4 -2.7 5.2 5.9 2.2 10.6 -4.5 2.8 1.5 Exports 2004 13.5 16.3 14.4 9.6 15.8 19.6 15.0 13.2 17.5 2005 8.6 8.6 4.2 4.3 10.7 8.5 7.3 6.7 8.5 2005 H2 6.1 7.7 6.5 7.8 11.5 10.8 11.5 6.9 11.1 2006 H1 11.1 5.4 17.5 11.3 9.8 13.7 13.0 11.1 12.8 Source: Haver Analytics, national data sources and World Bank staff estimates. Regional averages are 2000 US$ GDP weighted. East Asia Update 6 Exhibit 2 Exhibit 3 East Asia - Quarterly GDP Growth East Asia - Export Growth (US$ 3Mo. Mov. Averages - % Change Year Ago) (% Change Quarter Ago, SAAR) 18.0 NIEs SE Asia 15.0 40 12.0 9.0 20 6.0 3.0 0 0.0 01 -y p- 02 -y p- 03 -y p- 04 -y p- 05 -y p- 06 -y 20 Ma Se 20 Ma Se 20 Ma Se 20 Ma Se 20 Ma Se 20 Ma -3.0 n-aJ n-aJ n-aJ n-aJ n-aJ n-aJ E. Asia SE Asia -6.0 -20 China NIEs shows, annualized quarter on quarter growth in the NIEs ...but domestic demand trends diverge dipped from a little over 6 percent in the fourth quarter of 2005 to a little under 3 percent in the second quarter of Given robust and relatively uniform export growth 2006, principally due to slower growth in Korea and Taiwan across the region, it is generally differences in domestic (China). Third quarter growth in Korea also ran at 3-4 demand trends that have driven differences in economic percent in quarter on quarter terms (saar). But again, these growth outcomes across countries this year, as well as the signs of slower growth were not apparent everywhere. recent signs of slowing in individual economies noted Monthly indicators suggested a significant strengthening in above. In particular, it is much more robust domestic third quarter consumption and investment activity in demand growth in China and some of the smaller transition Indonesia. Interestingly, exports were not the explanation economies that principally explains their faster growth for these occasional signs of third quarter slowing (or performance this year as compared to the middle income acceleration). Although there may be concerns about an South East Asian economies and the large North Asian export slowdown in 2007, there has been little sign of it in NIEs like Korea and Taiwan (China). Thus nominal fixed 2006. asset investment (FAI) growth in China reached 31 percent in the first half of 2006, while per-capita consumption grew Strong exports drive growth everywhere... 8-9 percent in real terms. Monetary policy and Robust export growth has been a common feature administrative tightening measures slowed FAI growth to sustaining activity throughout the region, running at around 24 percent in the third quarter. Domestic consumption and 20 percent in US dollar terms and 10-15 percent in real investment growth also continue to grow rapidly in terms. (Exhibit 3 and Table 2). The buoyant export scene Vietnam. (Box 1 below on `The Rise of Vietnam's Private was underpinned by above-trend growth of 3 percent in Sector' outlines how policy reforms have unleashed a developed OECD economies, as well as continued powerful surge of investment and output growth by the expansion in global electronic and other high tech product country's emerging private sector.) markets. East Asian export growth was also underpinned by On the other hand, as Table 2 indicates, household continued strong growth in China, drawing in imports from consumption growth eased in several of the middle and high the rest of East Asia to meet domestic demand and, more income economies in the first half of 2006, including in importantly, imports of intermediates for use in China's Indonesia, Thailand and Taiwan, China. There was also a export production, which continued to grow at around 30 more widespread slowing of investment growth, which was percent in dollar terms. If anything, regional export growth running at year on year rates of only 1-3 percent in was accelerating in the third quarter of the year, picking up aggregate in the middle and high income economies in the to 21 percent year on year in the three months to August first half of 2006. Exhibits 4 and 5 show indexes of the from 16-17 percent at the start of the year, supported by level of real fixed investment in South East Asia and the acceleration in East Asian high tech exports and industrial NIEs. These suggest that investment spending has also been production growth. erratic over the past year. Take the four quarters from mid- East Asia Update 7 Exhibit 4 Exhibit 5 Real Fixed Investment Real Fixed Investment (Level. SA. 2002 Q1=1) (Level. SA. 2002 Q1=1) 1.6 1.6 Trend Growth 2002 Q1 - 2006 Q2 Trend Growth 2002 Q1 - 2006 Q2 Hong Kong, China Investment GDP Investment GDP Korea Indonesia 8.2% 5.1% Hong Kong 3.4% 6.7% Singapore Malaysia 4.5% 6.1% Korea 3.4% 4.5% 1.4 Taiwan, China Philippines 0.0% 5.7% 1.4 Singapore 2.6% 6.6% Thailand 11.7% 5.7% Taiwan, China 6.6% 4.6% 1.2 1.2 1.0 1.0 Malaysia Thailand Philippines Indonesia 0.8 0.8 2 2 2 2 3 3 3 3 4 4 4 4 5 5 5 5 6 6 0022-1 0022-2 0022-3 0022-4 0032-1 0032-2 0032-3 0032-4 0042-1 0042-2 0042-3 0042-4 0052-1 0052-2 0052-3 0052-4 0062-1 0062-2 -2001 -2002 -2003 -2004 -2001 -2002 -2003 -2004 -2001 -2002 -2003 -2004 -2001 -2002 -2003 -2004 -2001 -2002 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2005 through mid 2006: investment spending fell in three Box 1. The Rise of Vietnam's Private Sector of those four quarters in the Philippines, Thailand and Taiwan (China), and in two out of four quarters in The last ten years have witnessed the rise of a Indonesia. dynamic private sector in Vietnam. Registrations of private firms have doubled since the Enterprise Law of 2000, from The recent hesitation in domestic consumption and under-20,000 to nearly 40,000 in 2005. The share of the investment growth reflected a variety of factors. Consumers domestic private sector in investment rose from 23 percent and businesses have had to adjust to the impact of sharply to 32 percent. The turnover of domestic private firms in high oil prices and the reduction or removal of fuel manufacturing rose at nearly 22 percent per year and their subsidies in economies such as Indonesia and Thailand. exports grew by 28 percent per year. The sector's share of Economies in the region have also tightened monetary manufacturing production rose from 27 percent in 2000 to policies beginning in mid 2004 in some economies and 33 percent in 2005, while that in non-oil exports climbed continuing through early 2006, to avert a sustained rise in from 21 percent to 32 percent. inflation that could be sparked by rising oil prices and rising capacity utilization after several years of recovery and Part of this impressive performance is due to expansion. Short term interest rates around the region rose radical simplification of bureaucratic procedures, The on average by nearly 200 basis points between the end of Enterprise Law of 2000 protects the right of citizens to 2004 and the spring of 2006. A credit card bust has also left establish and operate private businesses without needless debt-constrained consumers cutting back spending in official intervention. Even more, it results from the Taiwan, China. fostering of competition across the board, from the abolition of foreign trading monopolies in the early 1990s to reforms In some economies fiscal policy also tightened, that have brought Vietnam to the doorstep of WTO whether by design or inadvertently. The Philippines accession. undertook a major fiscal consolidation, reducing its public sector deficit by 2 percentage points of GDP in 2005. The Vietnam did not choose mass privatization of state- removal of fuel subsidies transferred some $10 billion from owned enterprises as the path to private sector development. consumers and businesses to central and regional It let the private sector grow "on the side". The government governments in Indonesia. In a number of countries fiscal feared that mass privatization could disrupt economic policy was tighter than planned because of administrative activity. Without the right institutional framework, selling bottlenecks in actually disbursing budgeted spending. off state assets at bargain prices might well foster Political instability and tensions have also sapped consumer corruption. and business confidence in economies such as Thailand and Only now, after many years of experimentation Taiwan, China. Uncertainty about the future course of oil with small-scale equitization (the preferred term for prices and about the outlook for growth in the US and other privatization), is the government turning to large enterprises. developed economies may also have played a role in Equitization has itself undergone improvement, with dampening domestic demand. appraisals being conducted by outside evaluators, and share East Asia Update 8 issues taking place at market values through auctions. The considerable role in supporting growth, supported by factors percentage of shares sold to non-employees or to outsiders, such as stabilization and gradual decline in world oil prices, including foreigners, has increased. A recent survey shows easier domestic monetary policies, room for more expansive that almost 90 percent of enterprises had improved financial fiscal policies, the region's extremely strong balance of performance after equitization. More than 2,300 enterprises payments and foreign reserves position, improvements in were equitized in the last five years. the balance sheets and profitability of the region's A further boost has come from new Enterprise and corporations and banks, and running down of spare capacity Investment laws in 2005. Domestic and foreign enterprises after several years of sustained growth in many economies. will now be governed by the same laws and investment regime. Over the next four years all SOEs will be equitized Exhibit 6 or transformed to other corporate forms, and will be Correlation of Nominal GDP and Export governed by the new Enterprise Law. The ownership rights of the state will be transferred from line ministries and Growth 1990-2005 provinces to a profit-oriented State Capital Investment 1 Corporation. This move is expected to eliminate the conflicting roles of ministries and provinces as owners and 0.8 regulators of SOEs. The rise of the domestic private sector has been 0.6 accompanied by a boom in foreign direct investment. At first most investors were from East Asia and partnered with 0.4 SOEs. Now, however, investors from Western countries are well represented too. An increasing share of projects takes 0.2 the form of green-field investment. In 2006, Vietnam is expected to attract almost $7 billion in FDI, almost half as much as India in absolute terms, and more than China as a 0 proportion of GDP. FDI now accounts for 16 percent of total investment and 46 percent of non-oil exports. Japanese -0.2 China Kong re Japan investors now rank Vietnam as the third most attractive IndonesiaMalaysia ilippines ThailandHong (China) Ph investment destination worldwide. -0.4 Singapowan Tai Despite these remarkable successes Vietnam gets apparently gloomy assessments in cross-country investment climate comparisons. Why? First, such international As later discussion in this report corroborates, the ratings tend to focus on the legal and regulatory framework US remains a significant final export market for East Asia for the conduct of business, where Vietnam undoubtedly has despite the large growth in the share of intra-regional trade much to do. However entrepreneurs also value other in recent years. Some 20 percent of the region's exports go aspects of the investment climate such as the diligence and to the US, down mildly from 22 percent in 1995. Exports low cost of labor, the predictability of economic policies, by other East Asian economies to China and to each other and low levels of crime. Second, there is sometimes a gap have grown strongly over the last decade, on the other hand, between the regulatory framework and the way it is reaching some 44 percent by 2005 and raising the question implemented in practice. For example, laws and regulations whether strong domestic demand growth in China and the may allow a long time for the authorities to register an rest of Asia could offset a US downturn. Exhibit 6 shows enterprise, but competition between provinces may that the correlation between export growth and GDP growth dramatically reduce the actual time required. has been rather low ­ negative in fact - in large Asian economies like China, and Japan. This suggests that these Box contributed by Vivek Suri and Viet Tuan Dinh. larger East Asian economies may be better able to weather a US downturn despite a weakening in their export growth. What about most other emerging East Asian Outlook for 2007 economies? Could they also ride on coat-tails of continued In some respects the forces expected to influence robust growth in China? Here the key observation is that the outlook for 2007 are the converse of those that have something like two thirds of intra-Asian exports are driven outcomes in East Asia in 2005-06. Growth in intermediate products used as inputs into exports whose Emerging East Asia is expected to slow by about half a final markets lie outside Asia. A slowdown in extra- percentage point in 2007 to a little over 7 percent, and in regional markets would thus have an immediate and Developing Asia to a little over 8 ½ percent, principally significant impact on intra-regional trade, a connection reflecting an expected weakening in US and developed clearly seen during the 2001 global high-tech recession. At country growth, and in the region's export growth. On the that time GDP growth in Emerging East Asia ex-China fell other hand domestic demand is expected to play a more to only 1-2 percent, even though China continued to grow at East Asia Update 9 over 8 percent. Thus while strong continued domestic most of the larger East Asian economies, thanks to fiscal demand growth in China could provide some offset, and consolidation efforts, relatively low interest rates and while consensus forecasts look for a slowing in US and sustained economic growth since 2001. Except for the other OECD economy growth to a 2-2 ½ percent range, a Philippines, central government debt levels are now more severe `hard landing' would, other things equal, generally less than 50 percent of GDP, (Table 3), leaving undoubtedly have a severe impact on many economies in room for short run fiscal stimulus, should global growth and the region. exports slow to an unexpected degree in 2007. Indeed in a Nevertheless there are a number of factors that may number of economies the greater difficulty seems to be lack help mitigate the impact of an unexpectedly severe export of administrative capacity to spend budgeted resources slowdown in the world outside East Asia. First, world oil rather than any lack of resources. prices had fallen by around $15 from their summer highs by the end of October. Oil prices are forecast to stabilize at Table 3. Fiscal Balances and Debt around current levels and then gradually decline over time, 2000 2001 2002 2003 2004 2005 2006 which should help unwind some of the income losses Fiscal Balance (a) caused by rising oil prices over the last three years in what China -3.3 -2.7 -3.0 -2.5 -1.5 -1.3 -1.0 is overall a net oil importing region. Indonesia -1.8 -2.5 -0.9 -1.7 -1.0 -0.5 -1.1 As noted, East Asian central banks have generally Korea (b) 1.3 0.6 2.3 2.7 2.3 2.1 2.4 tightened monetary policies, with policy interest rates rising Malaysia -5.7 -5.5 -5.6 -5.3 -4.3 -3.8 -3.5 from mid 2004 to the early part of 2006 to curb potential Philippines -4.0 -4.0 -5.3 -4.6 -3.8 -2.7 -1.5 acceleration of inflation. Inflation rates have indeed been Thailand -2.2 -2.4 -1.4 0.4 0.1 -0.6 0.0 stabilizing and turning lower over the course of this year, Government Debt (a) allowing central banks to keep policy rates stable, and in the case of Indonesia, to begin easing. Central banks should China (c) 16.4 17.7 18.9 19.2 18.5 17.9 16.9 have room to begin or continue easing monetary policy in Indonesia 80.0 76.4 70.8 61.1 54.6 46.8 37.0 2007, which should help bolster domestic demand in case of Korea (d) 31.8 35.3 33.4 32.6 33.5 36.4 35.4 a significant export led slowdown. The move towards Malaysia 36.6 43.6 45.6 47.8 48.1 46.2 44.6 greater exchange rate flexibility in the region in the years Philippines 64.6 65.7 71.0 77.7 78.5 71.8 65.4 since the financial crisis (Exhibit 7) should also give central Thailand (e) 57.0 56.5 53.8 48.7 48.0 46.4 41.0 banks more freedom to use monetary policy in support of Source: World Bank data and staff estimates. (a) Central government. domestic policy targets rather than to maintain a given fixed (b) Including social security funds.(c) Includes local government exchange rate target. (d)Includes KAMCO, KDIC bonds. (e) Includes SOEs and FIDF. Exhibit 7 In Indonesia, for example, government debt has dropped from 80 percent of GDP at the end of 2000 to an Exchange Rate Flexibility: Average Absolute Monthly % estimated 37 percent at the end of 2006. Last year's Change in US$ Exchange Rate administered fuel price increases totaling a cumulative 143 3 percent effectively transferred an estimated US$10 billion of disposable income from consumers to regional and central governments. This, together with under-spending of 1990-96 budgeted expenditures, resulted in fiscal tightening, with the 2 2000-06 fiscal deficit falling to only 0.5 percent of GDP. In 2006 fiscal policy has been put on a more expansionary track, although under-spending by regional governments means that the actual deficit will again be lower than planned. 1 Looking forward, both central and regional governments have room to expand spending on public infrastructure in 2007 and beyond. In Thailand the budget is likely to be in balance this year, as it has been on average since 2003. Here 0 too government spending has been coming in below budget, in particular as disbursements for public investment were IndonesiaPhilippines Thailand Korea Singapore Japan delayed by the uncertain political conditions. Public Taiwan,China investment spending is likely to pickup in 2007 as political conditions stabilize. In Korea the surplus on the overall balance (inclusive of social security funds) is likely to come in well above budget, also because of under-spending. In Fiscal balances have improved and government the Philippines the National Government deficit was cut by debt has generally declined over the course of the decade in more than half through September 2006, as tax revenue increased sharply with implementation of a VAT reform. East Asia Update 10 This followed a major adjustment of the consolidated public investment and other fiscal expenditure programs. With sector deficit to 2 percent of GDP in 2005 (implying a further buoyant growth, poverty rates in Vietnam are primary surplus of over 4 percent). But, with national estimated to have now fallen below those in Indonesia and government debt still at over 70 percent of GDP at the end Philippines. Poverty reduction has nevertheless been much of 2005, the scope for counter-cyclical fiscal policy is more slower among ethnic minorities than among the majority limited than in other East Asian economies. Kinh and Chinese populations in Vietnam, so that, as the later discussion in this section suggests, poverty is increasingly concentrated among minority communities, Poverty reduction and human development requiring more carefully designed and focused approaches to poverty alleviation. Poverty reduction and economic In a year of strong economic growth for growth have also accelerated in low income economies like Developing East Asia ­ an aggregate 9.2 percent ­ further Cambodia and Lao PDR in recent years, although poverty solid gains in poverty reduction are to be expected. Our levels still remain high ­ over 50 percent of the population current estimates suggest that the number of East Asian poor at the $2 a day level. at the $2 a day level is likely to have fallen to some 550 million (or 29.3 percent of the population) in 2006, a drop Exhibit 8 of some 25 million (or over 1 ½ percentage points) from 2005. (Exhibit 8). More unusually, the current estimates Poverty - Headcount Index are a little higher than in the last East Asia Update, ($2 a day poverty line; Percent) accounted for by an unexpected up tick in poverty in Indonesia, the first since the financial crisis. Poverty at the Vietnam China national poverty line was estimated to have increased from 80 S.E.Asia 4 Other Small * 16 percent in February 2005 to 17.8 percent in March 2006. East Asia Most of the increase resulted from a sharp run-up in domestic rice prices, which in turn was partly due to 65 shortages resulting from a ban on rice imports. Rice makes up about 25 percent of the consumption basket of the poor in Indonesia and three-fourths of the poor are net consumers of rice. In response the government reopened rice imports, 50 helping stabilize prices. Current estimates also suggest that the pace of poverty reduction in Thailand may have eased in the last 2-3 years, in line with slowing economic growth in 35 this period. * Cambodia, Lao PDR, Papua New Guinea In much of the rest of the region, though, substantial gains in poverty reduction continue to occur. In 20 China, where growth topped 10 percent this year, poverty at 1990 1996 1999 2000 2001 2002 2003 2004 2005 2006 2007 the $2 a day level is estimated to have been falling by 2 ½ - 3 ½ percentage points a year throughout this decade, falling China to an estimated 26 percent in 2006. As the discussion of China below indicates, however, these findings come with a Recent estimates for China indicate that the poverty rate and the number of poor continued to fall caveat about the accuracy with which household surveys between 2005 and 2006. The World Bank estimates that in cover the large itinerant migrant population, which may 2006, 8 percent of the population--about 106 million number as many as 150 million. While internal rural-urban individuals--were below the dollar-a-day consumption migration has been one of the great engines of poverty poverty line, nearly all of whom were in (or from) rural reduction in China, more attention is now being paid to areas. These findings come with a caveat: China has better protecting the interests of migrants and to easing the witnessed an unprecedented internal migration from rural to stresses in urban areas caused by high migration. urban areas during the last 15 years and there are concerns Poverty reduction is also occurring at rapid rates in about the accuracy with which household surveys cover the Vietnam. The current estimates now incorporate the results often itinerant migrant population, many of whom may be of Vietnam's 2004 Household Survey, which suggest a living in temporary and unregistered structures. (See Box 2.) sharp acceleration in poverty reduction in 2002-04, almost Nevertheless, three things are clear. First, internal all of it in rural areas, resulting from rapid productivity migration and remittances play an important role in poverty gains in agriculture, diversification to new crops and non- reduction in rural areas: World Bank estimates indicate that agricultural activities, hefty increases in international prices in 2003, rural households with no migrant workers were for key exported crops, more resources for targeted poverty nearly 50 percent more likely to be poor than those with reduction programs and a more pro-poor focus in public migrant workers. Second, migration is a cause of rising East Asia Update 11 social inequities in urban areas: where migrant workers do work in cities are likely to return to rural areas, and the bring their families to the cities, they are often denied access dependents of low income earners often remain in villages. to government-funded health care facilities and priced out of local government schools--a recent survey indicated a Box 2. The dimensions of internal migration in China premium of over 35 percent above what urban residents paid for tuition and school fees. Third, migration is likely to Internal migration in China since the late 1980s, continue and even increase: while the `floating population' and particularly in the last decade, has been described as the of migrants is estimated at nearly 150 million, the number largest peacetime movement of people in history. Large of remaining surplus workers in rural areas is estimated at numbers of rural workers have migrated to the cities to about another 150 million. work, pulled by jobs in China's fast-growing manufacturing industries, and pushed by the growing pool of surplus labor Apart from new initiatives under the 11th Five Year resulting from reforms in agriculture. This movement has Plan announced in March and described in the previous occurred despite longstanding policy impediments to labor issue of the East Asia Update, the main recent poverty mobility, notably, the "hukou" or household registration policy development was State Council Document No. 5 of system. An individual's "hukou" status is assigned at birth 2006: "Opinions of the State Council on the Issue of Rural and gives certain guarantees, for example an allocation of Migrant Workers." The document lays out an ambitious arable land in rural areas and rights to whatever social policy agenda to protect the rights and opportunities of rural services are provided by local government in urban areas. migrant workers and their families and to ensure that they But, except for college-educated white-collar workers, do not become a permanent urban underclass. It establishes switching one's hukou from rural to urban and from one a State Council Joint Conference on Rural Migrant Issues to location to another is difficult. implement this agenda. There are two key challenges: realizing the potential for rural poverty reduction, and The result has been a large "floating population" of addressing socioeconomic stresses in urban areas. people who live and work for many months of each year in places where they do not have hukou and thus have only Realizing the poverty reduction potential of migration limited, highly variable access to basic social services, Arguably, migration has played a foundational role potentially suffering discrimination in access to economic in China's growth over the last two decades. In urban areas, opportunities. Rough estimates of the size of the floating the abundant supply of migrant workers has been an population--those who live for more than six months important element of China's competitive advantage. outside the township where they have their hukou--indicate Migrant remittances are a major source of income for rural that it constituted nearly 150 million people in recent years, households--in the first nine months of 2005, RMB 85 nearly ten times the number in the late 1980s. billion in remittances were transferred through the postal The Rural Household Survey of the National system. However, not all the poor have been able to make Bureau of Statistics indicates that in 2004 nearly two-thirds use of this opportunity. And significant labor productivity of migrants had left their families behind in rural areas. differentials across sectors suggest that not enough people They were young, over two-thirds male, less educated than are moving: in 2004, value-added per worker in urban areas their urban counterparts--only 15 percent have completed was 3.3 times that in rural areas. Thus the policy challenge senior high school--and concentrated in low-skilled includes addressing market failures and policy induced industry, services and construction. Most work in the coastal barriers in both factor and product markets that impede provinces, often traveling long distances to do so. The scale labor mobility, as well as fostering more investment in of the phenomenon is suggested by the fact that in 2004 42 upgrading the skills of potential migrants in line with percent of rural households had at least one household evolving labor demands. member who worked as a migrant worker elsewhere. Less is Meeting challenges of migration in urban areas known about the remaining third of the floating population. The presumption is that many are rural migrants who have Migrants remain a vulnerable segment of the moved with their families to urban areas and now urban labor market. Even controlling for occupation and permanently reside there without official recognition. skills, migrant workers earn less than registered urban workers and are more likely to experience wage arrears and Box contributed by Shubham Chaudhuri. to work without a contract. Few migrant workers participate in the main urban social insurance programs. Interestingly, preliminary estimates suggest that poverty rates are no Indonesia higher among migrant households than among urban Indonesia's Central Bureau of Statistics (BPS) residents, despite urban residents having more access to announced that the poverty rate rose to 17.75 percent in social assistance programs. Several facts help explain this. March 2006 from 16 percent in February 2005, the first Migrants are less likely to be out of the labor force or increase in poverty incidence since the economic crisis. An unemployed, work much longer hours and have fewer additional 4 million people fell into poverty during the dependents (1.6 compared to 2.2). Migrants who cannot find period. Several events have likely affected poverty. A cut in fuel subsidies in October 2005 increased fuel prices by 114 East Asia Update 12 percent, tripling the price of kerosene. Rice prices also rose Mongolia 33 percent between February 2005 and March 2006. Mongolia's last available Household Survey in World Bank analysis indicates that the fuel price 2002 suggested a national poverty rate of around 36 percent. increase is unlikely to have been the main driver behind the Estimates based on sectoral output and employment rates poverty increase. On its own the fuel price increase would suggest it may have fallen to around 32 percent by 2005. have reduced the welfare of the poor and near poor by some Poverty is highest in rural areas and in the west of the 5 percent. However this effect was more than offset by the country. The largest single group of poor comprises poor impact of the unconditional cash transfer (UCT) program herder households. Poverty incidence among herders is 41 introduced to soften the impact of the fuel subsidy cuts. The percent compared to the national rate of 36 percent. UCT program, which targets 19.2 million poor and near- poor households ­ some 34 percent of the population­ is the Livestock are the main livelihood for 40 percent world's largest ever cash transfer program, with beneficiary of the workforce, (or 386,000 out of a labor force of families each receiving about US$11 per month. Even 968,000), though contributing only around 20 percent of assuming significant mistargeting of cash transfers, national GDP. Goats, sheep, cattle, horses, yaks and camels households in the lower deciles were on average more than are the main animals tended. Herder households are compensated for the price increases6. vulnerable to extreme climate events that cause high Higher rice prices--partly due to shortages livestock mortality, in particular frequent droughts and the resulting from a ban on rice imports--are therefore likely severe winters and springs known as dzud. One third of the the main factor behind the increase in poverty rates. Rice national herd was lost in dzud between 1999 and 2002. makes up about 25 percent of the consumption basket of the Many households left the livestock sector and sought poor. Three-fourths of the poor are net consumers of rice. alternative livelihoods, including migration to cities, Thus rice price increases hurt far more people than they especially Ulaan Baatar, the capital, which now has a help. World Bank estimates suggest that 3.1 million people population approaching 1 million out of the national may have been pushed into poverty as a result of the rice population of 2.5 million. Many rural Mongolians will price rise between February 2005 and March 2006, around nevertheless continue to depend on livestock for some time. 75 percent of the published increase in poverty. In response Coping with the inherent risks of the livestock sector will be the government reopened rice imports before Idul Fitri, critical to their well-being. In part increased mobility has allowing in 210,000 ton, which has helped stabilize prices. enabled households to diversify sources of income and so to The planned CCT program scheduled to begin in mitigate risk. It is estimated that around 100,000 people are May 2007 in 6 provinces will cover approximately 1 million now engaged in small-scale informal mining. households. Bappenas is working with relevant agencies to Philippines develop key elements of the program, including payment levels, the transfer system, institutional arrangements, The Philippines' National Statistical Coordination training and communications, and monitoring and Board (NSCB) and the World Bank recently released a evaluation. The World Bank is providing technical national poverty map (Exhibit 9) for the period 2004-2005. assistance to Bappenas and DepSos. Cash transfers will be The map is a response to the demand from policy makers for given to the female caregiver in each beneficiary family, a more disaggregated level of poverty estimates. In and will be conditional on primary and junior secondary particular, the country's anti-poverty flagship program, education enrollment and attendance, and on preventative KALAHI, needs such information to allocate resources to care for children under 5 years and prenatal care. the neediest areas. The NSCB-World Bank project is the first to produce a consistent set of poverty measures for all In August 2006 the government announced its 1623 municipalities in the country, using the 2000 Census decision to implement the National Community and the 2000 Family Income and Expenditure Survey. Empowerment Program (Program Nasional Pemberdayaan Masyarakat), a nationwide community driven development program which will build upon the Kecamatan Development Program (KDP) and Urban Poverty Program (UPP). The Government plans to have the program in all 5,358 kecamatan (hamlets) by 2009. In recent years, the World Bank has channeled over $1 billion to CDD programs, with significant benefits for the communities involved. The new program will be scaled up to over US$1 billion per year. 6 Although on average the scenarios point to a positive net income gain, the actual impact depends on the level of expenditure of the recipients. Further studies to fully decompose the change in poverty incidence will be conducted when Susenas 2006 data become available. East Asia Update 13 Exhibit 9 remote, mountainous and border areas. The 2002 Budget Law decentralized public finance, with a clearly pro- poor impact. New rules for tax-revenue sharing allow poor provinces to retain more of the revenue collected in their territory.7 Looking forward, Vietnam's Socio-Economic Development Plan for 2006-2010 has a stronger focus on poverty reduction and candidly analyzes the problems of disadvantaged groups and regions, including rural-urban migrants, people with disabilities and ethnic minorities. The problem of poverty among ethnic minorities is especially pressing.8 Because poverty reduction has been Municipal Poverty Incidence much slower among minorities than among the majority 0.03 - 0.25 Kinh and Chinese populations, the proportion of the poor 0.26 - 0.50 0.51 - 0.60 who are ethnic minorities doubled over the past 11 years to 0.61 - 0.70 around 39 percent (although minorities are only 14 percent 0.71 - 0.90 of the population). Despite government efforts, 61 percent of ethnic minorities were still poor in 2004, compared to 14 percent of Kinh. If current trends continue the problem of poverty in Vietnam will be overwhelmingly one of ethnic minorities within five years. Even more worryingly, over a third of ethnic minorities were unable to meet basic food needs in 2004. (Figure 10). Exhibit 10 Vietnam: Food Poverty trends for Kinh and non- Kinh in the Central Highlands and North West The results find high provincial poverty incidence 100 in Mindanao Island, Bicol, Eastern Visaya, Cardillera Administrative Region, and Southern Tagalog. Over half Ethnic Minorities, Central Highlands the population in most provinces in these regions lived ) 80 below the national poverty threshold in 2000. There is also a great variation of poverty incidences across municipalities (%e within provinces. Some municipalities in the better-off atr 60 provinces also experienced high poverty incidence, but the worst municipalities with the highest poverty incidence and Ethnic Minorities, North West 40 poverty severity were mainly in Mindanao, Eastern Visaya and Southern Tagalog regions. The lowest poverty tyrevoP Kinh, Central Highlands incidences were found in all the districts of the National 20 Kinh, North West Capital Region (i.e., Manila and surrounding areas). Vietnam 0 The poverty estimates discussed here recently 1998 2002 2004 incorporated the results of the 2004 Vietnam Household Living Standard Survey (VHLSS). The Survey suggests that poverty reduction accelerated sharply in 2002-04, dropping from 29 percent in 2002 (the date of the previous Ethnic minority poverty persists because minorities Survey) to 21 percent in 2004, using the national poverty lack access to quality cropping and forest lands. While most line. At the $2 a day level, poverty is estimated to have minority households have annual cropland with sizes fallen from 58 percent to 44 percent. Virtually all of the fall comparable to Kinh farmers, their land quality is lower. was due to declines in rural poverty. Rural incomes benefited from productivity gains in agriculture and 7On a technical note, it is possible the 2002 Survey might diversification to new crops and non-agricultural activities, have underestimated consumption expenditure and thus as well from hefty increases in international prices for crops somewhat overestimated poverty, leading to some such as coffee and rice. Policy also played a part. There exaggeration in how quickly poverty fell in 2002-04. was a large increase in government resources for targeted 8See Rob Swinkels and Carrie Turk: "Explaining Ethnic poverty reduction programs. The 2001-2005 Public Minority Poverty in Vietnam: a summary of recent trends Investment Program raised infrastructure investment in and current challenges." World Bank, September 2006. East Asia Update 14 Only 14 percent have access to gravity or pump irrigation, median prices were 2.2 percent below a year earlier. Other compared to 54 percent of Kinh farmers. Ethnic minorities indicators suggest continued weakness in October. The are disadvantaged by isolation, limited market access and Institute of Supply Management's headline index of activity constrained access to agricultural and forestry extension in manufacturing dropped from 52.9 in September to 51.2, services and to quality health and education services. The below most forecasts, and rapidly approaching the 50 mark helpfulness of national target programs (NTPs) and which divides "expansion" from "contraction". extension services aimed at minorities has sometimes been limited, partly due to local officials limiting participation in Table 4. International Economic Environment decision making, reluctance to decentralize program 2004 2005 2006 2007 management and lack of attention to market demand, % Change from previous year, except interest rates affordability or local conditions. Ethnic minority adults have less education than their Kinh counterparts. Only 29 GDP Growth percent have completed at least lower secondary compared World 4.1 3.5 3.9 3.3 with 52 percent of Kinh adults. But there is evidence that World (PPP Weights) 5.2 4.7 5.1 4.5 the transfer of more resources to poorer areas is beginning OECD 3.2 2.6 3.0 2.4 to improve school quality standards, while mechanisms to United States 4.2 3.2 3.3 2.4 exempt ethnic minorities from school contributions are Euro Area 2.0 1.4 2.3 1.9 expanding their outreach. Japan 2.7 2.6 2.9 2.4 Australia 3.0 2.5 3.1 3.5 The international and regional environment World Trade (Volume) 10.4 7.5 9.7 7.3 a/ Global growth accelerated to near 4 percent in CPI Inflation - G7 1.8 2.2 2.5 2.1 2006 from 3.5 percent in 2005 (to around 5 percent in PPP Oil Price - $/bbl 37.7 53.4 65.0 60.0 terms), despite a further rise in average oil prices and - % Change 30.6 41.5 21.7 -7.7 widespread tightening of monetary policies aimed at Non-oil Commodity keeping inflation in check. (Table 4). Developing country Prices 17.5 13.4 20.6 -4.5 growth accelerated to 6.9 percent, more than twice the pace LIBOR (US$. 6 Mo.) 1.6 3.6 5.4 5.7 in OECD economies, with China alone contributing an Source: World Bank DEC Prospects Group update 10/03/06. a/ In estimated 0.5 percentage points to world growth. Evidence local currency, aggregated using 1995 weights. also mounted over the course of the year of a rotation in relative demand growth from the United States to Europe, Exhibit 11 where growth accelerated in the first half, and also to emerging Asia, in particular China, where growth also OECD Real GDP Growth accelerated to over 10 percent. A continued rotation in (% Change on previous quarter, SAAR) global demand would help ensure that the expected slowing 8 United States in world growth in 2007 in response to tighter monetary 7 Japan policies should be relatively modest, a `soft landing' with Euro Area world growth of about 3.3 percent. It was troubling, then, to 6 see signs of greater weakness emerging in Japan in the second quarter and in the Euro area in the third quarter. 5 4 Developed country trends 3 In the United States growth decelerated from an exceptionally strong 5.6 percent (saar) in the first quarter of 2 2006 to 2.6 percent in the second and 1.6 percent in the 1 third. (Exhibit 11). All of the downturn in the second quarter resulted from slower domestic demand growth, notably 0 weaker growth in spending on consumer durables, housing investment and business investment on equipment and 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 -1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 software. Nine tenths of the slowdown in the third quarter -2 reflected the ongoing slump in housing, with residential investment falling 17.4 percent, after an 11 percent fall in Not all recent indicators were negative though, the second quarter. By the end of the third quarter existing leading to some expectations of a stronger fourth quarter. home sales stood 12.7 percent below year-earlier levels; The outlook in part depends on the extent of spillover housing starts were down 20 percent; permits 28 percent. effects from the housing recession, including possible The median price for homes sold dropped in August and negative wealth effect on consumption due to weaker house September for the first time since 1995. By September prices. The third quarter GDP data gave some cause for East Asia Update 15 cheer in this respect. Despite the plunge in residential to an exceptional 3.8 percent (saar), up from an also strong investment, consumption spending growth accelerated to 3.1 3.2 percent growth pace in the first quarter. This was also percent (saar), while business investment growth doubled to the most robust Euro Area growth pace in six years. Fixed 8.6 percent. Sharp declines in oil and gasoline prices investment--the pillar for Euro Area recovery in 2006-- underpinned some increases in consumer confidence in contributed about half of growth in the quarter while September and early October, after large declines earlier in inventories contributed another 0.5 percentage points. More the year. Consumer spending is also likely to be recent data show a firming of production trends across the underpinned by continued strength in labor markets. big countries of the Area, drawing on both stronger Payroll numbers in the third quarter and October have been domestic and foreign demand. These include solid gains in higher than expected and come on top of a big upward factory orders, industrial production, PMI surveys for revision of 810,000 jobs in employment estimates for the manufacturing and services activity, employment and retail year to March 2006. The unemployment rate fell to 4.4 sales. Inflation pressures are waning running at below the percent in October from 4.6 percent in September. Worker below the ECB's 2 percent target in September. Euro Area compensation growth picked up to a hefty 5.5 percent in the business sentiment has climbed to its highest level in five third quarter. Housing starts and sales actually showed years. Nevertheless, some worrying signs of weakness did small month-to-month increases towards the end of the third emerge in Europe in the third quarter, for example a fall in quarter, leading to suggestions that the `freefall' may be French growth to zero from 4.9 percent in the second drawing to an end, although few would look for any quarter. sustained rebound for some time yet. On balance the flow of data has led to consensus China forecasts for US growth in 2007 being cut from a little over 3 percent last January to a little over 2 ½ percent in October, Growth in China accelerated to almost 11 percent with a greater likelihood of a `hard-landing', and with in the first half of the year, reaching 11.3 percent in the increased uncertainty about the outlook. Increased second quarter, the highest in a decade, before decelerating uncertainty could be one explanation for the divergence modestly to 10.4 percent in the third quarter, following seen in US financial markets: stock market prices have risen tightening measures aimed at reducing investment growth, strongly from August onwards, suggesting that equity which together with exports, has been one of the principal investors were not looking for a further marked weakening drivers of growth in the year. in growth. On the other hand yields in the government bond Growth in nominal urban fixed asset investment market fell by over 50 basis points over the third quarter, (FAI)9 accelerated from a little over 25 percent in 2005 to suggesting expectations of a weakening economy. about 31 percent in the first half of 2006. Concerns about In Japan solid GDP growth rates of 3-4 percent excessive investment growth led to a new round of (saar) in the last quarter of 2005 and first of 2006 led to tightening starting in April. The measures include monetary expectations of sustained robust growth of 2½-3 percent for tightening by absorbing liquidity in the interbank market; the rest of 2006. These hopes took a knock when growth administrative measures to limit speculative investment in dipped to only 1 percent in the second quarter, pulled down real estate, reinforcement of controls and regulations on by lower public investment (reflecting longer term efforts at investment projects, including a re-evaluation of all large fiscal consolidation), as well as lower housing investment investment projects under implementation; and loosening and a slowing in export growth. On a more positive note, controls on capital outflows. As Box 3 below elaborates, private consumption grew by about 2 percent, while rising internal profitability has made enterprise saving the business investment continued to expand at a double-digit principal source of financing for investment by Chinese rate, supported by buoyant business profits. Current enterprises. This development may make investment more indicators for factory orders, exports and retail sales also pro-cyclical, as high profits in good times are ploughed back suggested that the weaker trend continued in the third into more investment, and may also weaken the ability of quarter. On a more positive note, the Bank of Japan's monetary policy to control investment. The tightening September Tankan Survey was more upbeat than expected, measures did nevertheless succeed in easing FAI growth to with large manufacturing firms planning significant 24 percent in the third quarter. Consumption growth also expansion in capital expenditures. Business confidence was continued at robust rates, although lagging well behind bolstered by the new Prime Minister Shintaro Abe's investment. Real per capita urban consumption grew 8.4 appointment of what are perceived to be a strong cabinet percent in the first half, fuelled by rapid wage increases. and economic policy teams. Overall, the consensus Real per capita rural consumption rose an even more solid expectation remains for the economy to achieve a `soft 9.3 percent in this period. landing' in 2007, with projected growth of 2.4 percent. Countering the slower trend in the US and Japan, 9FAI is an imperfect measure of fixed investment in the growth in the Euro Area has accelerated in 2006, with national accounts sense. It is, however, available in a outcomes generally exceeding expectations. Second quarter monthly data series. The relation between the two is GDP growth for the Euro Area was revised up by 0.2 points discussed further in the World Bank's China Quarterly Update, November 2006. East Asia Update 16 Box 3. Saving, Investment and Profits in China's Box Table 1. Industrial Profits in China's industry (%) Enterprises 1999 2000 2001 2002 2003 2004 2005 Profit Margin 2.7 4.8 4.5 4.9 5.7 6.0 5.7 A lively debate has emerged on how high Sales Growth 10.2 20.4 11.4 16.7 28.3 31.4 27.0 enterprise profits are in China and what role they play in Profit Growth 52.0 86.2 8.1 20.6 42.7 38.1 22.6 financing enterprise investment and the implications for Source: National Bureau of Statistics. policy. If it is internal enterprise saving that is the main source of investment finance rather than external bank SOEs are very much part of this profit story. financing, monetary policy may be less effective in slowing Profits of all SOEs in 2005 amounted to RMB 905 billion, China's rapid investment growth, and other measures may up 25 percent from the year before. Profits of state- be needed. A high share of profits in investment financing controlled enterprises rose 20 percent in the first 3 quarters may also lead to more inefficient investment if corporate of 2006. The number of loss-making SOEs has been governance is weak, with little outside scrutiny by declining over time, and the ratio of profits of profit making shareholders or banks. enterprises to losses of loss making ones rose from over 1 in China's investment reached over 40 percent of 1999 to over 6 in 2005. Subsidies to loss-making SOEs GDP in 2005, of which around 31 percentage points was have fallen over time to now only RMB20 billion, or only 2 undertaken by enterprises. Of this enterprise investment, percent of total SOE profits. However, State Enterprises just over 20 percentage points was financed internally from still use capital less efficiently than private enterprises. enterprise savings and the remainder, about one third, by outside sources such as banks. This level of enterprise Three issues stand out: First, given that such a saving is higher than household saving in China, and higher large share of investment is financed by enterprise saving than enterprise saving in most other countries.10 and government transfers, monetary policy may not be as effective in reining in investment as sometimes thought. There are three reasons why enterprise saving is Second, the important role of internally-generated funds in relatively high in China. First, industry makes up a larger financing makes investment pro-cyclical: in good times, share of GDP in China than in most other countries. high profits, ploughed back into new investment, will Industry is more capital intensive than other sectors, which further fuel activity, while in bad times subdued profits will means that a relatively large share of total income goes to hold back investment and activity. Third, the importance of capital in the form of interest and profits, instead of wages retained earnings means that much of the financing of to labor. That is why there is a strong cross-country investment faces little outside scrutiny, since the decisions correlation between the importance of industry and saving. Second, China has a tradition of low dividend payments. on financing projects are made by enterprise management This is so especially for state owned enterprises (SOEs), rather than the financial sector. This may affect the which still make up a significant share of the economy, efficiency of investment. That is why the continued especially in capital-intensive sectors like heavy industry. investment boom warrants concerns about efficiency, Third, since the mid-1990s, profitability has increased due making more moderate growth desirable. to rapid industrial growth and restructuring of SOEs. Profit Introducing a dividend policy for SOEs is a reform margins of Chinese enterprises have doubled since 1999. that can help both with improving the efficiency of (Box Table 1). Since total profits equal profit margin on investment and with addressing macroeconomic concerns. sales times sales volume, and rapid economic growth boosted sales volumes in recent years, profit volumes have Box contributed by Louis Kuijs. also surged, averaging 36 percent growth in 1999-2005. Of course there are still many loss-making enterprises in China, even if overall profits are up. But the The slowdown in investment growth in the third trend in the share of such enterprises is clearly down. quarter was partly offset by a further increase in the According to the NBS Yearbook, 18 percent of industrial contribution of net trade to growth. Export growth has in enterprises (above a certain size) were making losses in fact been picking up over the course of the year, rising from 2005 compared to 28 percent in 1998. And whereas in 1998 around 22 percent in nominal US dollar terms in the last such losses still outweighed total profits of profitable quarter of 2005 to 29 percent in the third quarter of 2006. enterprises, by 2005 such profits were RMB 1.4 trillion, 14 Export strength partly reflects new production capacity put times larger than the losses of loss-making enterprises. in place by the heavy investment of recent years, particularly in sectors such as steel and machinery, resulting, for example, in the country turning from a net steel importer into a net exporter. Import growth has been rather more stable, running at 21 percent in the first nine 10See Louis Kuijs. "How will China's Saving-Investment months and 22 percent in the third quarter. (Exhibit 12). Balance Evolve?", World Bank Policy Research Paper 3958 and "A Note on Profits and Investment of China's Enterprises", available on www.worldbank.org/cn. East Asia Update 17 Exhibit 12 emerging East Asia were up about 20 percent in the first three quarters of 2006, about the same pace as in 2005. East Asia - Import Growth (Exhibit 13). Measured from the perspective of these (US$ 3Mo. Mov. Averages - % Change Year Ago) trading partners, exports to China and Hong Kong 60 contributed about a third of overall export growth in the first E. Asia half of the year, while exports to other emerging East Asian SE Asia economies contributed about a quarter. (Exhibit 14). China 40 NIEs Exhibit 13 China: Imports from East Asia (% Change Year Ago) 60 20 2004 2005 2006 H1 40 2006 Q3 0 01 02 03 04 05 Jan-2May 001-2001 Sep-20Jan-2May Sep-20Jan-2May Sep-20Jan-2May Sep-20Jan-2May Sep-20Jan-2May 002-2002 003-2003 004-2004 005-2005 006-2006 20 -20 With rising export growth outpacing imports by a growing margin, the contribution of net trade to GDP 0 growth increased to almost 3 percentage points in the third quarter, after 1.2 percentage point in the first and 2.4 P EA percentage points in the second. The trade surplus reached a Korea China Thailand record US$ 49 billion in the third quarter, up from US$ 29 IndonesiaPhilippines billion in the third quarter of 2005. In the first three quarters Taiwan, the trade surplus rose to US$110 billion from US$ 69 billion in the same 2005 period. Exhibit 14 The rapid increase in the trade and current account Contribution to Growth in Exports surpluses (discussed further in the later section on balance of 8 East Asian Economies* (%) of payments issues) is now the principal short term 80 macroeconomic imbalance of concern to the authorities. As % Growth in Exports of 8 East Asian Economies: noted, the authorities have aimed to cool the rapid growth in US 2002: 5.7% investment. The aim has been not so much to prevent 60 2003: 13.9% Japan generalized overheating, of which there is little sign in the 2004: 23.2% China ** inflation data, but rather to reduce the risk of overcapacity 2005: 12.8% 8 EAP Countires and resources being wasted in poorly chosen and inefficient 2006 H1: 23.3% 40 investment projects (which could in time contribute to bad debt problems in the banking system). Nevertheless lower investment growth is likely to aggravate the rapid rise in the 20 trade imbalance unless offset by stronger consumption growth and a greater switching of domestic demand growth towards imports. The circumstances therefore point towards 0 a continued focus on the role of a stronger exchange rate in 2002 2003 2004 2005 2006: H1 bringing about desirable expenditure switching, as well as structural measures to foster stronger consumption growth. -20 Such measures can include, for example expansion of the * 8 economies are Indonesia, Korea, Malaysia, Philippines, social safety net, in particular expansion of rural health Singapore, Taiw an (China), Thailand, Vietnam. insurance and establishment of rural pensions, as well more ** Inclusive of Hong Kong public financing of education. The rapid growth of China's imports from the rest From the perspective of its trading partners in of East Asia has in effect compensated those economies for Emerging East Asia, China's rapid growth continues to their losses in world markets as a result of competitive provide an important locomotive for trade and growth in the pressure from China's exports. At the same time China is region as a whole. China's imports from the rest of East Asia Update 18 rapidly moving up the value-added ladder in its export Table 5 indicates that the share of emerging East composition, in part because of the fast growth of wages Asian exports going to the US fell modestly from 22 percent that has accompanied economic growth. Average nominal in 1995 to a still substantial 19.7 percent in 2005. (The wages in China have risen 145 percent since 1998, about 14 table treats China and Hong Kong as a single economy, percent a year. Chinese workers and middle managers in netting out their exports to each other.) Over the same many coastal cities are now more expensive than in many period the share of intra-East Asian exports rose modestly low and middle income economies in Asia. (Exhibit 15). from 30 percent in 1995 to just less than 32 percent in 2005. The concerns of some that it would take many years before These seem rather small changes from which to argue that they could compete with cheap Chinese labor should be East Asia has become substantially less dependent on US alleviated by the rapid structural changes taking place in markets in recent years. China's product and labor markets. The geographical pattern of China's exports (inclusive of Hong Kong) has also been remarkably stable. Exhibit 15. Exports to the US comprised 26 percent of the total in 2005, Monthly Wages in Low and Middle Income Asia only slightly down from 27 percent in 1995, while exports (November 2005. In US Dollars) to the rest of East Asia have been steady at 16 percent. 1800 China (inclusive of Hong Kong) is now the economy in the Source: JETRO 16th Survey of Investment Kuala Lumpur region with the highest export orientation towards the US.. 1500 Related Cost Comparison in Major Cities and regions in It is only when one looks at Emerging East Asian Asia. March 2006. sr economies other than China and Hong Kong that more ge 1200 Shanghai dramatic changes emerge. Taking the seven main other naa economies together, Table 5 shows that their exports to the Bangalore Mlevel US fell from 20 percent to 15 percent of their total exports 900 Qingdao Shenzen over this period, while exports to the rest of East Asia (including China and Hong Kong) jumped from 36 percent d-i Jakarta Manila 600 to 44 percent. Indeed it was precisely exports to China M Hanoi Bangkok (inclusive of Hong Kong) that explained all of the increase 300 Dhaka in these countries' intra-Asian trade: exports to China jumped from 13 percent to 23 percent of the total, while the share of exports to other East Asian economies (not 0 including China) was generally flat. 0 50 100 150 200 250 Workers (General Industry) The key change in the geographical structure of trade in East Asia over the last decade, then, has been a shift in the export orientation of East Asian economies other than China from the USA to China. Does this mean these `Decoupling', Intra and Extra-Regional Trade economies are now significantly more decoupled from the US than a decade ago? Given the strong growth of domestic How seriously would a marked slowdown in the demand in China, is it not likely that China could replace US economy affect the export-oriented Emerging East Asia the US as the main locomotive of East Asian growth? There region? Is it likely that - given the rapid momentum of are at least two answers to this question. From a short run growth in the region and the rise of intra-regional trade ­ cyclical perspective, the short answer seems to be: not yet ­ East Asia could now rely mainly on intra-regional demand, it is unlikely that strong growth in China could offset the that it might be only lightly scathed by a recession in the US effects of a recession in the US. However, from a longer or, more generally, in the world outside the region? The run, structural perspective, the deepening integration of East question has been widely debated among economic Asian economies is indeed a crucial source of productivity commentators of late. The answer appears to be that East gains and growth for the region. Asian exports would still be significantly affected by a serious US slowdown or recession. Here we briefly review From the short run, cyclical perspective, there is some of the issues underlying this question, referring where reason to think that there has been rather less decoupling appropriate to several detailed studies already undertaken by from extra-regional markets than would appear on the face other analysts.11 of it. The change in export-orientation of other East Asian economies towards China mainly reflects the change in the regional division of labor within East Asia over the last 11See for example Jonathan Anderson: `The Return of Asia decade, with the growth of China as a central assembler and (Part 3): Delinking? Or Just Recovering?' UBS Investment exporter of finished manufactures to global markets outside Research,. Asian Economic Perspectives October 24, 2006. Asia, and of other East Asian economies as suppliers of See also Hak Bin Chua: `A US Slowdown: Asia Decoupling specialized capital goods, parts, components and other or Vulnerable?' Citigroup. Asia Macro Views September 4, intermediates to China. China's demand for these inputs 2006. from the rest of East Asia is therefore driven to a large East Asia Update 19 Table 5. East Asia - Export Market Shares (% of Total Exports) Exports to: USA Emerging East Asia China+HK Other East Asia (7) 2005 1995 2005 1995 2005 1995 2005 1995 Emerg.East Asia 19.7 22.0 31.9 30.1 12.9 9.4 19.0 20.7 China+HK 26.3 27.4 16.0 16.3 .. .. 16.0 16.3 Other E.Asia (7) 14.7 19.8 43.8 35.8 22.5 13.3 21.3 22.5 Indonesia 11.5 13.9 38.1 27.2 9.5 7.5 28.6 19.7 Malaysia 19.7 20.8 43.3 40.1 12.4 7.9 30.9 32.2 Philippines 18.0 35.8 42.5 24.6 18.0 5.9 24.5 18.7 Thailand 15.5 17.2 35.7 29.7 13.8 7.8 21.9 21.9 Korea 14.6 18.5 39.4 30.6 27.2 15.1 12.1 15.5 Singapore 11.5 18.3 49.4 44.3 19.9 10.9 29.4 33.4 Taiwan (China) 15.1 23.7 52.4 38.5 37.8 23.7 14.6 14.8 extent by demand for its exports to the major developed imports is rather different from that of its exports, though. economy markets outside emerging East Asia ­ the United In particular, as Exhibit 16 indicates, parts and components States in the first place, but also Europe and Japan. A are almost [80] percent of China's high tech imports from downturn in China's exports to these global markets is the rest of East Asia, a proportion that has increased swiftly felt in the exports of the rest of East Asia to China. dramatically over the last 15 years. On the other hand, they The rest of this section presents evidence that supports this are less than 20 percent of China's high tech exports to the view. US, a proportion that has fallen substantially over the years, implying a growing share of finished products in exports to Exhibit 16 the US. Parts and Components as % of China's Exhibit 17. Electronics Trade China: Processing Exports (As % of Total) 80 percent 60 60 As % of China's 55 Electronics Imports from East Asia 50 40 As % of China's Electronics Exports to the USA 45 20 40 0 35 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 30 China's emerging role as a processor and workshop 1988 1990 1992 1994 1996 1998 2000 2002 for global markets and the role of other East Asian economies as suppliers of inputs to China are especially clear in electronics and `high tech' products. Such high tech products (defined here as the SITC 75, 76 and 77 categories) Exhibit 17 documents the importance of assembly have become ever more important in both China's exports and processing for China's export economy more generally. and imports, increasing from 7 percent of exports in 1990 to Some 55 percent of China's exports now are goods that 37 percent in 2005, and from 10 to 31 percent of imports have been imported into China by foreign enterprises for over the same period. The composition of China's high tech processing and re-export back into global markets. Such processing exports have almost doubled over the last East Asia Update 20 decade, rising from 29 percent of the total in 1994. The the initial 69 percent allocated to extra-Asian exports). A corresponding imports for processing have risen from 46 to more accurate measurement would then be that about 14 56 percent over this period. Anderson (2006) calculates that percent of East Asian exports are intra-regional if such processing shipments are stripped out and "re- (=11/(11+69)), while 86 percent are extra-regional assigned" to their final destinations, then the share of China (=69/(11+69) ).14 Within the latter figure, exports to the in the exports of the other main East Asian economies falls USA would represent 25 percentage points, while those to from 27 percent to only 13 percent.12 The share of the US, Japan, Europe and all other markets would comprise 14, 22 Japan and the EU increases from 36 percent to 45 percent. and 25 percentage points respectively. Exhibit 19 Exhibit 18. East Asian Export Shares Using I-O Tables Emerging East Asian Export Growth (% Change Year Ago) 40.0 Correlation Coefficient 1992-2005 = 0.86 30.0 20.0 10.0 0.0 -10.0 1992Q1993Q1994Q1995Q1996Q1997Q1998Q1999Q1 1 1 1 1 1 1 1 2000Q1001Q1002Q103Q1 04Q1005Q1006Q1 2 2 20 20 2 2 To Japan & USA Intra-East Asia -20.0 Source: Citigroup Asia Macro Views. September 4, 2006. These calculations also suggest that it is premature Exhibit 18 presents the results of a recent study to expect a decoupling of East Asian export prospects from (Bin Chua, 2006) that provides a more systematic analysis developments in the US or other major extra-regional of the final destination of East Asian exports using recently markets. As Exhibit 19 indicates, growth in intra-Asian published international input-output tables for East Asia.13 exports over the last two decades has been closely correlated Exhibit 18 notes that some 31 percent of East Asian exports with that in extra-regional markets, in this case with exports (including China and Hong Kong) are intra-Asian exports, to the US and Japan. Exhibit 20 shows a similar close while 69 percent go outside the region. There is a correlation between growth in China's imports of high tech significant element of double-counting in this calculation, parts and components from East Asia and its exports of high however, because a large part of intra-Asian exports are tech goods to the US. As recently as 2001, the end of the intermediates that end up incorporated in extra-Asian global high tech bubble and sharp declines in high tech exports. The exhibit suggests that of the 31 percent of intra- demand in the developed economies resulted in an equally Asian exports, only 5 percentage points directly satisfy sharp fall in intra-Asian exports. Growth in China's imports Asian domestic demand. The remaining 26 percentage from the rest of Asia fell from 36 percent in 2000 to almost points are intermediates that go into Asian production zero in 2001, despite GDP growth in China of over 8 processes. Of these, 6 percentage points also finally go to percent. Real GDP growth in the rest of Asia fell to only 1- satisfying Asian domestic demand (making a total 11 2 percent in 2001. percentage points devoted to Asian domestic demand), The broadly diversified geographical structure of while the remaining 20 percentage points are exports East Asian export markets does however suggest that the outside the region (but which have already been counted in impact of a US slowdown could be mitigated to some extent by stronger growth in other major markets even after netting 12These figures include Hong Kong in the group of other out the impact of intra-regional intermediate trade. As the East Asian economies, and so differ from the figures in Table 5, which include Hong Kong with China. 14This calculation of course makes the somewhat unrealistic 13IDE JETRO. Asian International Input Output Tables assumption that extra-regional exports do not also need to 2000. March, 2006. be adjusted for input-output relationships. East Asia Update 21 earlier adjusted calculations show, intra-Emerging East US versus Japan, and exports to Japan versus those to Asian exports and exports to Japan together comprise 28 Europe. These indexes can range in theory from 0 (no percent of exports, while Europe and the rest of the world similarity) to 100 (perfect similarity). The indexes suggest comprise 22 and 25 percent respectively, each broadly quite high similarity between East Asian exports to the US similar to the 25 percent US share of East Asian exports. and Europe, and, to a somewhat lesser extent, between Such a switch towards non-US markets may be facilitated exports to the US and Japan. (To provide some comparison, by the fact that the commodity composition of East Asian the similarity index between Korean and Indonesian exports exports to different major extra-regional markets is quite to the world - i.e. between a capital goods and manufactures similar. exporter and a more primary commodity oriented exporter - is only 33). Exhibit 20 Electronics Trade: China's Exports to the Commodity markets USA and Imports from East Asia High tech cycle (% change) Robust exports of electronics and high tech 60 products have been one of the more positive sustaining forces in many East Asian economies this year. On balance 50 recent data seem to confirm that global demand for these products is continuing to expand at healthy rates. Worldwide semiconductor sales in the three months to 40 August 2006 averaged a record $20.5 billion, rising 10.5 percent from a year earlier. (Exhibit 21). The 30 Semiconductor Industry Association (SIA) reports that sales growth was spread across a wide range of semiconductor products, reflecting good growth in end-markets. Consumer 20 electronics end-markets, which now account for over 50 percent of semiconductor sales, continue to perform well, 10 with an upturn in September US retail sales mildly alleviating concerns about severe downturn in US consumer Correlation: 0.76 Exports to USA Part Imports from East Asia spending in the rest of 2006 or in 2007. 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Exhibit 21 World Semiconductor Billings Table 6. Export Similarity Indexes for Emerging (US$ Billion, 3 Mo. Mov. Averages, 7/95 - 8/06) East Asian Exports to Various Markets (2005) * 25 USA- USA- Japan- Asia ex Japan as % of World Sales: Asia excl Japan Japan Europe Japan Europe December 1995: 19.3% Europe December 1998: 23.5% Export Similarity Index 15 83.6 66.3 67.2 20 Americas December 2001: 33.5% Spearman Rank Correlation 91.4 82.5 80.3 August 2006: 46.6% * Calculated with exports at the 3 digit SITC level. 15 Table 6 shows several measures of export similarity for Emerging East Asian exports to the US 10 compared to exports to Europe, together with exports to the 5 15 The export similarity (XS) index provides useful information on distinctive export patterns from country to country. It is defined as: XS j,k= i [min (Xij, Xik) * 100] 0 Where Xij and Xik are industry i's export shares in country j's and country k's exports, which usually include a group of countries or Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 competitors. The index varies between zero and 100, with zero indicating complete dissimilarity and 100 representing identical export composition. This measure is subject to aggregation bias (as Not all indicators are entirely rosy though. The the data are more finely disaggregated, the index will tend to fall) SIA noted that inventories have been rising in recent and hence embodies a certain arbitrariness due to product choice. months, though they remain in line with requirements for the upcoming peak holiday sales period. Worldwide sales East Asia Update 22 bookings by the North American semiconductor equipment Be that as it may, East Asian high tech exports and machinery industry have moved a little lower in recent industrial production are clearly benefiting from the current months, causing the book-to-bill ratio to fall from 1.14 in strength in world high tech final product markets June to 0.99-1 in August September. (Exhibit 22). Taken in (particularly for sales of cell phones, MP3 players and conjunction with the SIA's report that capacity utilization in similar consumer electronics products). And after a slow the semiconductor industry is expected to remain at a high period in the early months of 2006, aggregate high tech 95 percent level for the rest of year, the weakening in production and exports from selected East Asian economies semiconductor machinery orders may suggest that accelerated in the middle part of the year. The three month semiconductor manufacturers are expecting a downturn in on three month seasonally adjusted annual rate (saar) of final demand for their products and therefore do not think it growth of industrial production jumped to 17.2 percent in worthwhile to invest in additional capacity. August from 2.5 percent during the second quarter, while export growth more-than doubled from 13.3% to 31.2% by Exhibit 22 August. (Exhibit 23). Semiconductor Equipment Orders and Billings Non oil commodity markets (N. America. Mill.US$. 3 Mo. Mov.Averages. Jul-98 to Sep-06). 3500 1.6 Strong world economic growth in 2006 has been reflected in another leg upward for the boom in many non- 3000 1.4 oil primary commodity prices that began in early 2002, 1.2 along with the present global economic expansion. The 2500 Bank's index of non-oil commodity prices surged 31 1 percent between September 2005 and May 2006 in US 2000 dollar terms. (Exhibit 24). Dollar prices have shown 0.8 modest declines or held flat since May, perhaps reflecting 1500 such factors as expectations of slowing world demand 0.6 growth going forward, tighter monetary policies around the 1000 world and the modest strengthening of the dollar against 0.4 other major currencies in recent months. 500 Billings 0.2 Bookings Exhibit 24 Book-to-Bill (Right Scale) 0 0 Non-oil Commodity Prices. JulNo -98vMa -98r-9Jul-NovMa -JulNovMa -JulNovMa -Jul-NovMa -JulN- ovMa -Jul-NovMa -JulNovMa -Jul- 9 99 99r 00 00 -00r 01 -01 -01r 02 02 02r 03 03 -03r 04 04 04r 05 05 -05r 06 06 - - - - - U.S. Dollar Indexes (Jan.2002=1) 3.4 Source: Semiconductor Equipment and Materials International 2.9 All non-oil commodities Exhibit 23 Food East Asia - High Tech Industrial Production Agricultural raw materials and Exports (3 mo./3 mo. saar) 2.4 Metals & Minerals 40.0 1.9 20.0 1.4 0.0 0.9 J J N Apr- S F Jul- D M Oct- M A J J an- un- ov- 02 ep- eb- 03 ec- ay- 04 ar- ug- an- un- 99-n 99-l 00-n 00-l 10-n 10-l 20-n 20-l 30-n 30-l 40-n 40-l 50-n 50-l 60-n 60-l 01 01 01 02 03 03 04 05 05 06 06 Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju Ja Ju -20.0 High-tech Industrial Production Metals and minerals have been especially buoyant, rising 64 percent between last September and this May, with High-tech Exports (US$) especially large gains for copper, nickel and zinc, metals -40.0 where, in addition to robust industrial demand growth, prices have also been boosted by labor and other supply problems, and by very low inventory levels. Prices have been volatile since May, but have generally remained close East Asia Update 23 to the highs attained in the first half. While US demand is Exhibit 25 slowing because of the downturn in US housing construction, demand from China has been strengthening Monthly Average Crude Oil Price ($/bbl) after a period of de-stocking. Sentiment remains quite (Jan 1990 - Sep 2006) bullish, with metals like zinc and nickel making new nominal highs in September. In East Asia, an exporter of 70.0 both minerals and oil like Papua New Guinea has enjoyed multiple terms of trade gains from both higher minerals and 60.0 oil prices. A mineral exporting oil importer like Mongolia has had a more mixed experience, with high copper export 50.0 prices offsetting by more costly oil imports. Average Sept. 1999 - Sept 2003 - $26.2 Of note for agricultural raw materials exporters 40.0 Average Jan. 1990 - Aug 1999 - $18 such as Indonesia, Malaysia, Thailand and Vietnam, rubber prices have fallen by about 25 percent since May, after 30.0 rising nearly 50 percent since last September, reflecting the fall in world oil prices, and hence in the cost of synthetic 20.0 rubber. Prices for food commodities exported by East Asian economies have also been rising, though at generally modest rates. An exception is robusta coffee, exported from 10.0 Indonesia and Vietnam, prices for which are up 65 percent over the past year following weather related supply Jan-1990 Oct-1990 Jul-1991 Apr-1992Jan-1993Oct-1993 Jul-1994 Apr-1995Jan-1996Oct-1996 Jul-1997 Apr-1998Jan-1999Oct-1999 Jul-2000 Apr-2001Jan-2002Oct-2002 Jul-2003 Apr-2004Jan-2005Oct-2005 Jul-2006 problems in Brazil, and Vietnam. Rice, a significant export in Thailand and Vietnam, saw a close-to 10 percent increase in its price over the past year, and close to 60 percent since Exhibit 26 the end of 2003, supported by rising prices for wheat (a close substitute for rice in many countries), and a Average Real Oil Price (1970 Q1 - 2006 Q4.* Real is Constant 2004 Dollars) government price stabilization program and rising currency 100 in Thailand, a major world exporter. As noted in the Real oil price - constant discussion of poverty, though, higher rice prices were the 2004 dollars per barrel main reason for a small increase in poverty in Indonesia, a n 80 occasional rice importer. 3 year average of real oil price Oil markets 60 Crude oil prices have been on a highly volatile path since our March 2006 East Asia Update, first running up to lerraBrep well over $70 in early August, before falling to below $60 $SU40 in early October.16 (Exhibit 25). In both nominal and real terms, the recent price declines are the largest retracement since prices began their medium term run-up in early 2003. 20 (Exhibit 26). These developments bolster confidence in the view put forward in March, that oil prices have seen their * Assumes nominal oil price of $60 in 2006 fourth quarter. peak and are likely to decline further over the next several 0 years, albeit at a gradual pace. Nevertheless the underlying demand and supply factors remain finely balanced, reflected in the unusually low level of spare production capacity in Q1-1970 Q4-1971 Q3-1973 Q2-1975 Q1-1977 Q4-1978 Q3-1980 Q2-1982 Q1-1984 Q4-1985 Q3-1987 Q2-1989 Q1-1991 Q4-1992 Q3-1994 Q2-1996 Q1-1998 Q4-1999 Q3-2001 Q2-2003 Q1-2005 OPEC. Although OPEC spare capacity has recently trended For the moment, though, it is a dissipation in fears higher to reach about 3 mb/d, that remains only half the of supply disruptions that have played their part in pushing levels as recently as early 2002. Renewed fears of war and prices lower ­ for example, the ceasefire in Lebanon, oil supply disruptions in the Middle East, for example, perceptions that the nuclear crisis with Iran will not lead to could easily send prices well above their recent August war just yet and the passing of a hurricane season in the peaks. Gulf of Mexico without major storm-related disruption of US production. Although actual supply increases have tended to disappoint and to undershoot planned increases, non-OPEC supply is now starting to grow, rising 1.1mb/d in the third quarter, with largest gains in the United States, Russia, Azerbaijan, Canada, Angola, Sudan and Brazil. 16 This reference price is an average of Brent, Dubai and West Texas Intermediate (WTI) crudes. East Asia Update 24 On the demand side, the high and rising level of oil Balance of payments and financial markets prices has also begun curbing demand. Oil demand in OECD countries declined in each of the first three quarters Emerging East Asian foreign exchange reserves of 2006. Adjustment to high prices also crimped demand continue to accumulate at a solid pace, rising to $1938 growth in developing Asia (other than China) and Latin billion by September 2006, of which $989 billion were held America. Demand growth was more robust in China, driven by China alone. Regional reserves were up $242 billion by strong demand for transport fuels and unusually warm compared to the end of 2005, the pace of accumulation weather, although remaining well below demand increases having picked up from $190 billion in the same period of seen in 2003 and 2004. Taken together, the International 2005. (Exhibit 27). As Table 7 indicates, about two thirds Energy Agency estimates that world oil demand will of the reserve accumulation in the region was contributed by increase 1.1 mb/d in 2006, the same as in 2005 and well China, although reserve accumulation also accelerated in below demand increases in 2003 and 2004, despite the most of the South East Asian middle income economies and strong growth of the world economy this year. (Exhibit 27). in the NIEs as compared to 2005. The combination of reviving supply growth and weak demand growth was reflected in rising inventories. OECD Exhibit 27 inventories at end-August were 89 million barrels or 3.4 percent higher than a year earlier, and days of forward East Asia - Foreign Reserves supply stood at 55 days, the highest since 2002. In the (US$ Bill. 1/1997 - 9/2006) 2,000 United States, crude and product stocks are well above the China Indonesia Malaysia last 5-year range. 1,800 Philippines Korea Taiwan (China) Exhibit 27 1,600 Singapore Thailand Hong Kong World Oil Demand Growth 1,400 % Increase in reserves: (Million Barrels per Day) 2000: 7.6% 3 1,200 2001: 10.4% 2002: 21.1% 1,000 2003: 26.4% 2.5 Others 2004: 30.0% N.America 800 2005 16.6% Other Asia Sep 06 17.8% 600 2 China 400 1.5 200 0 1 97 97 19 899 98 99 99 00 01 02 03 04 04 05 06 19 an-J g- r-1a 19-tc 20 200 20 20 500 20 g- r-2a 20-tc 20-ya Au M O 19-ya M 19-ceD 20-luJ eb-F 2001-peS r-2pA 20-voN un-J an-J Au M O M 0.5 As in 2005, much the greater part of the region's 0 reserve accumulation continues to be financed by its current 2000 2001 2002 2003 2004 2005 2006 2007 account surplus, which is likely to reach another record in nominal dollar terms in 2006. Table 8 shows that the -0.5 Source: IEA Oil Market Report. Various issues. regional current account surplus in the year to the second quarter of 2006 rose to an estimated $302 billion, up from Looking forward, supply and demand forces are $266 billion in 2005. The regional surplus is likely to rise likely to remain finely balanced, resulting in an only gradual further in the second half of 2006, mainly due to strong decline in prices. Prices are currently projected to ease from export growth and a surge in China's trade surplus. For the $65 in 2006 to $60 in 2007, which would be higher than year as a whole China's trade surplus is expected to rise to prices in early October 2006. On the supply side, high $170 billion (from $134 billion in 2005), while its current current prices are expected to induce further significant account surplus is forecast to rise to $223 billion (8.5 investments and gains in production, which are expected by percent of GDP) from $160 billion in 2005. Elsewhere in the IEA to reach 1.8 mb/d in 2007, led by increases in the the region current account surpluses have also been rising FSU, Africa and North America. On the other hand, among the main South East Asian economies, due to a continued world economic growth at relatively robust rates combination of strong export growth and only modest over 3 percent is expected to induce stronger demand gains growth in domestic demand leading to less rapid growth in than in the last two years. Thus the margin of spare imports. These trends should begin reversing as domestic production capacity is expected to widen only gradually, demand strengthens in late 2006 and into 2007, in Thailand, leaving prices vulnerable to unexpected supply disruptions for example, as public investment on proposed `mega- and fears of disruptions. projects' revives. East Asia Update 25 quickly in the last 2-3 years, principally from Indonesia and Table 7. Change in Reserves (US$ Bill.) Malaysia, reflecting the emergence of South East Asian 2002 2003 2004 2005 2006 multinational corporations undertaking their own cross- 1-9 border investment and production strategies. East Asia 154.3 234.1 335.7 241.2 241.6 Exhibit 28 China 75.5 117 206.3 207 166.4 S.E. Asia 13.3 18 28.9 7 29.2 FDI in South East Asia Indonesia 4 4.3 0 -1.6 7.6 (4 Quarter Moving Totals; US$ Mill) 20000 Malaysia 3.7 10.4 21.8 3.8 9.3 Net FDI Philippines -0.1 0.3 -0.5 2.8 2.9 15000 Thailand 5.7 3 7.6 2 9.3 Inward FDI NIEs 65.4 99.1 100.5 27.1 46.1 Outward FDI Hong Kong 0.7 6.5 5.2 0.7 6.1 10000 Korea 18.6 33.9 43.7 11.3 17.8 Singapore 6.6 13.7 16.5 3.6 13.9 5000 Taiwan, China 39.4 45 35.1 11.6 8.3 0 Table 8. Current Account Balances (US$ Bill.) -5000 Q1-2001Q3-2001Q1-2002Q3-2002Q1-2003Q3-2003Q1-2004Q3-2004Q1-2005Q3-2005Q1-2006 2002 2003 2004 2005 2006* -10000 East Asia 118.0 165.9 182.9 265.6 301.7 China 35.4 45.9 68.7 160.8 185.1 S.E. Asia 27.2 40.0 25.5 18.6 30.8 Exhibit 29 Indonesia 7.8 17.3 1.6 0.3 4.1 Stock Market Indices (Jan 2003 = 1) Malaysia 8.0 13.3 14.9 20.0 19.9 4.2 Philippines 4.4 1.4 2.2 2.0 4.2 Thailand 7.0 7.9 6.9 -3.7 2.7 3.8 NIEs 55.4 80.0 88.7 86.2 85.8 Indonesia Malaysia 3.4 Hong Kong 12.4 16.5 15.7 20.3 18.6 Thailand Korea Korea 5.4 11.9 28.2 16.6 7.7 3.0 Singapore 11.9 22.3 26.3 33.2 38.3 Taiwan, 2.6 China 25.6 29.3 18.5 16.1 21.2 2.2 * 4-quarter total, as of 2006 Q2. 1.8 Private capital inflows to and outflows from East 1.4 Asia remain buoyant, reflecting the growing integration of the region into global financial markets. Net foreign direct 1.0 investment inflows remain strong, totaling $101 billion in 0.6 the year to the second quarter of 2006, compared to $112 billion in 2005. The equivalent figures for China were $76.3 billion, down mildly from $86.1 billion in 2005. A few years ago it was common to hear concerns that the Jan-2001 May-2001Sep-2001Jan-2002 May-2002Sep-2002Jan-2003 May-2003Sep-2003Jan-2004 May-2004Sep-2004Jan-2005 May-2005Sep-2005Jan-2006 May-2006Sep-2006 popularity of FDI in China was diverting FDI from the middle income South East Asian economies, among others. Gross financial capital inflows to East Asia (mainly Exhibit 28 should ease such concerns, showing that gross comprising portfolio capital and bank lending) rose FDI inflows to South East Asia revived strongly in 2005 to substantially in 2005 and the first part of 2006 ­ part of the reach $15 billion. FDI inflows continued to increase in the broader revival of flows to emerging markets over the last first half of 2006 in Malaysia, Philippines and Thailand, 2-3 years. In May and June of 2006, however, signs of although there was some pullback in Indonesia. FDI rising inflationary pressure, tightening of monetary policies outflows from South East Asian economies have also grown in advanced countries and an increase in international East Asia Update 26 investor risk perceptions led to some weakening in Exhibit 31 advanced country equity markets and more significant corrections in emerging equity markets ­ including East Eurobond Spreads 1/2001 - 9/2006 Asian equity markets - and other risky asset classes. Net equity portfolio sales by international investors contributed China to equity market declines of 9-12 percent in Indonesia, 800.0 Malaysia Korea and Thailand and 6-7 percent in Singapore and Thailand Taiwan (China). (Exhibits 29 and 30). Gross financial Indonesia capital inflows to the region also slackened in July and 600.0 Philippines August. Exhibit 30 400.0 Stock Market Indices (Jan 2003 = 1) 2.5 200.0 2.3 Philippines Singapore Hong Kong China 2.1 0.0 1.9 01 06 11 04 09 02 07 12 05 10 03 08 01 06 1.7 2001M2001M2001M2002M2002M2003M2003M2003M2004M2004M2005M2005M2006M2006M 1.5 1.3 Exhibit 32 1.1 Exchange Rates vs. US$ (Rise=appreciation, Jan 2002=1) 0.9 1.6 Indonesia 0.7 1.5 Korea Jan-2001 May-2001Sep-2001Jan-2002 May-2002Sep-2002Jan-2003 May-2003Sep-2003Jan-2004 May-2004Sep-2004Jan-2005 May-2005Sep-2005Jan-2006 May-2006Sep-2006 Philippines Thailand 1.4 Yen Euro 1.3 Taiwan As Exhibits 29 and 30 suggest however, the May- China June equity market corrections did not signify a more negative re-evaluation of fundamentals in the East Asia 1.2 region by international and domestic investors. On the contrary, the region's strong fundamentals appear to have 1.1 prevailed in investor perceptions quite quickly. These fundamentals include the region's large and growing foreign 1.0 exchange reserves, declining external debt, surplus current account positions, strong export growth, improved balance 0.9 sheets and profitability in the corporate and financial 02 02 2 03 03 3 04 04 05 5 06 6 sectors, strengthening fiscal positions, and, finally, greater exchange rate flexibility, which is allowing central banks Jan-20May-20Sep-200Jan-20May-20Sep-200Jan-20May-20Sep-2004 Jan-20May-200Sep-2005an-20May-200Sep-2006 J more room to pursue independent and effective monetary policies to control inflation. The equity price declines in However, while gross financial capital inflows of East Asia were generally smaller than those in Latin portfolio capital and loans have remained healthy, one of the America and Emerging Europe, and prices resumed moving more notable balance of payments developments in East higher in the third quarter. In most cases external spreads Asia in the last 1-2 years has been that on a net basis the on sovereign debt was little affected (Exhibit 31). Exchange region is now supporting large net outflows of these kinds of rates versus the dollar either appreciated or were broadly flat capital. As a matter of definition the region's net flow of between the end of 2005 and the end of the third quarter of portfolio and other financial capital (inclusive of net errors 2006. (Exhibit 32). Monthly data suggest gross financial and omissions) must equal the change in its foreign capital inflows revived strongly in September. exchange reserves less the region's current account surplus and its net FDI flows. This calculation suggests that in the year to the second quarter of 2006 East Asia had net financial capital outflows of around $110 billion (a change East Asia Update 27 in foreign exchange reserves of $293 billion over this period, less a current account surplus of $302 billion and Table 9. Inflation (% change year ago) less net FDI inflows of $101 billion). The emergence of 2004 2005 2006 2006 Latest these net outflows during 2005 and 2006 represents a large Year Year Q1 Q2 Month swing from 2004, when the region was still a recipient of "Headline" Consumer Price Inflation over $100 billion in net inflows of portfolio and other China 3.9 1.8 1.5 1.8 1.3 financial capital. Indonesia 6.1 10.5 16.9 15.5 14.6 Korea 3.6 2.8 2.4 2.3 2.4 The main factors underpinning this change in net Malaysia 1.5 3.1 3.8 4.1 3.3 financial capital flows include both shifts in the relative Philippines 6.0 7.6 7.3 6.9 5.7 macroeconomic policy stance and cyclical position of East Thailand 2.8 4.5 5.7 6.0 2.7 Asia relative to other major regions, as well as policy "Core" Inflation changes in the direction of greater exchange rate flexibility China 0.0 0.5 0.0 0.4 0.7 and capital account openness. Indonesia 4.2 10.0 9.6 9.2 Korea 2.9 2.4 1.6 1.9 2.2 Exhibit 33 Philippines 4.9 7.0 6.1 6.1 5.0 Thailand 0.4 4.6 2.6 2.8 1.9 Overnight Interest Rates (%) 6.0 East Asia overnight interbank rates* Recent data suggest that inflation in the region has US Federal Funds Rate 5.0 begun to ease at both the headline and core levels, (Table 9), allowing central banks to put the tightening cycle on hold and hold interest rates steady for the moment, or, as in the 4.0 case of Indonesia, to begin lowering rates. As inflation and inflation expectations have fallen Bank Indonesia has 3.0 reduced interest rates by two and a half percentage points from a high of 12.75 percent, with single digits (or close to) expected by year end. In other economies it is generally 2.0 expected that policy rates will remain stable through the year end and that the next moves will likely be lower, 1.0 especially if the world economy weakens more than * Simple average of China, Hong Kong, Indonesia, Malaysia, currently expected. As Exhibit 33 above shows, with the Korea, Philippines, Singapore, Thailand and Taiwan (China). current stabilization or easing, East Asian short term rates 0.0 are now average lower than US rates, providing one key Jan-2002y-200ep-20Jan-2003y-200ep-20Jan-2004y-200ep-20Jan-20Ma 2 02 3 03 4 04 05 05 06 006 006 reason for the swing towards greater net outflows of financial capital from the region noted above. Ma S Ma S Ma S y-2005p-20Jan-20May-2Sep-2 Se Changes in exchange rate policy are also likely to have had some impact on the direction of net capital flows. At the level of the relative macroeconomic policy A large volume of speculative short term capital flows were stance there has been a closing of the gap and then a attracted to East Asia in 2004 by the prospect of capital reversal of the differential between US and East Asian gains to be made from exchange rate revaluation in interest rates. As Exhibit 33 shows, East Asian short term countries with pegged exchange rates, such as China and interest rates averaged 200-300 basis points higher than US Malaysia. However both China and Malaysia undertook rates through the middle of 2004. The tightening of US small revaluations of their currencies in mid 2005, followed monetary policy from mid 2004 through mid 2006 then by a gradual or `crawling' appreciation at variable rates. eliminated that entire gap, despite a turn to monetary This has introduced a modicum of uncertainty about the tightening in East Asia as well. A number of countries such future course of these exchange rates, tending to dissipate as Hong Kong, Singapore and Thailand began tightening at earlier speculative pressures. around the same time as the US, while other economies joined in over the course of 2005, to avert the impact of Finally, China has been looking at means to give rising oil prices becoming embedded in a more sustained residents more options for portfolio and other types of rise in inflation rates. Indonesia began tightening in the financial investments abroad, in part as a means of easing third quarter of 2005, after a narrowing spread with U.S. the inflationary pressure on domestic money supply created rates contributed to capital outflows, a fall in reserves and a by continued large increases in China's foreign exchange significant weakening of the currency. The Bank Indonesia reserves. Non-FDI financial capital flows from China policy rate was raised in a number of steps to 12.75 percent (including "errors and omissions") ran a net outflow of $0.5 by year end, which successfully stabilized the exchange rate billion in the first half of 2006 compared to a net inflow of and staunched capital outflows. $10.7 billion in the same period of last year. Much of this turn-around in non-FDI flows appears to have been led by East Asia Update 28 domestic financial institutions, which some argue was done growth and cyclical investment will encourage unproductive at the request of the monetary authorities, as well as the and will create a new generation of Non-Performing Loans second Qualified Domestic Investor Initiative (QDII) in the event of an economic downturn. introduced in April 2006, which granted banks more leeway in investing in international capital markets on their own Exhibit 34 account. The fact that the monthly increase in banks' net foreign assets jumped to RMB 400 billion in June from an Commercial Bank Non-performing Loans average RMB 150 billion previously suggests that banks are (% of Total Loans) using this leeway. The authorities also made some progress 20 in liberalizing individuals' overseas investment under the Indonesia QDII mechanism. Korea Malaysia 15 Philippines Thailand Domestic trends and policy challenges China Financial sector trends and issues 10 Over the last 5-6 years banks in the previously crisis-affected East Asian countries have achieved 5 substantial improvements in capital adequacy, asset quality and profitability. (Exhibit 34, Table 10). Exhibit 34 suggests there was something of a pause or slowing in the process of clearing up bad debts during the first half of 0 2006. In Indonesia the rate of non-performing loan (NPL) 2000 2001 2002 2003 2004 2005 Jun-06 rate at commercial banks picked up from 7.6 percent at the end of 2005 to 8.3 percent in June 2006 (and 8.4 percent in August), due in part to a change in rules about loan Exhibit 35 classification at the two largest state owned banks. In Thailand the NPL rate at 8.2 percent in June 2006 was only Commercial Bank Non-Performing Loans slightly below the end-2005 rate. In both cases the (% of Total Loans; Averages for Regions) authorities announced steps to further address NPL issues. 12 Policy efforts to continue to address tasks of financial sector restructuring and consolidation left over from the financial crisis, as well as longer term financial sector strengthening and development remain important. As Exhibit 35 8 indicates, NPL ratios in Emerging East Asia remain rather higher than in other developing regions such as Latin America and Emerging Europe. 4 Among developments at the country level: Source: IMF Global Financial Stability In China the carving out of non-performing loans Report September 2006; National sources from the "Big Four" State Commercial Banks (SCBs) is largely complete, for now. By the end of 2005 more than 0 $400 Billion of loans was written off or transferred to Asset Management Companies. According to statistics from the 2001 2002 2003 2004 2005 2006 China Banking Regulatory Commission (CBRC), the ratio Latin America (6) Emerging.Europe (6) of Non-Performing Loans (NPLs) to total loans at SCBs fell USA Japan East Asia (5) to 9.8 percent in June 2006 from 10.9 percent at the end of 2005. The NPL ratio for all banks (including joint stock and other commercial banks) also fell from 8.6 percent at the end of 2005 and to 7.5 percent at the end of June 2006. Private sector estimates of NPL levels vary widely but are generally higher. Despite the comprehensive `carve-out' of previously reported NPLs, increased pressure on bank managers to avoid poor quality lending and much progress on reforming and recapitalizing China's banks, there remains concern that the current high level of lending East Asia Update 29 recapitalization and restructuring, for the sake of Table 10. Commercial Banks ­ Financial Ratios maintaining financial stability. It continues to appoint top 1998 2003 2004 2005 2006* managers in these banks, which has been criticized as direct Interest Margin interference in the internal corporate governance of the post- restructuring SCBs. East Asia** 0.5 3.2 3.7 3.9 3.8 Indonesia -8.3 4.6 5.9 5.6 5.9 In Indonesia bank interest margins and overall Korea 1.5 2.8 2.8 3.1 2.9 profitability remain at healthy levels (Table 9), indicating Malaysia 4 3.1 3 3.1 3.3 the ability of the banking sector to mitigate adverse impacts Philippines 5.7 3.7 4.2 4.6 4.1 from the sudden monetary policy tightening in late 2005. Capital adequacy ratios also remain at high levels. There Thailand -0.3 2 2.5 2.9 3.2 was a modest increase in the ratio of commercial bank NPLs Return on Assets in the first part of 2006, however, due in part to a change in East Asia -5.7 1.2 1.6 1.5 rules for loan classification which did not reflect a Indonesia -18.8 2.6 3.5 2.6 2.5 fundamental change in the State Banks current Korea -3 0.1 0.9 1.2 circumstances. A measure allowing State Banks to provision Malaysia -1.3 1.3 1.4 1.4 1.2 and write-down loans as private banks are allowed to do is Philippines 0.8 1.1 0.9 1.1 1.1 expected shortly. The government's financial sector reform Thailand -6.1 0.7 1.2 1.4 1.3 package issued in early July 2006 however strengthened Capital Adequacy Ratio regulatory powers to resolve problem debts at state banks more speedily. More broadly, the July reform package East Asia 6.4 14.6 15.0 15.0 15.6 covers key areas such as financial stability, the banking Indonesia -15.7 19.4 19.4 19.3 20.5 sector, non bank financial institutions (NBFI), capital Korea 8.2 10.4 11.3 12.4 12.7 market development, export financing and privatization of Malaysia 11.8 13.8 14.4 13.1 13.2 SOEs. Whilst most of the areas covered are not new, the Philippines 17.5 16 17.4 16.7 16.7 reform package should facilitate better coordination Thailand 10.2 13.4 12.4 13.2 13.5 amongst stakeholders and sharpen the focus of work, while National Sources. *June 2006. ** Simple average. assigning clear time-bound results and responsibilities for each area. Implementation has started and thus far the The Chinese banking sector continues to diversify results have been encouraging. its ownership. Three out of 4 state-owned commercial Korea's banks have continued to strengthen their banks - Bank of China (BOC), China Construction Bank financial position. The average non-performing loan ratio (CCB) and Industrial and Commercial Bank of China fell to 1.0 percent at the end of June 2006 from 1.2 percent (ICBC) - have been recapitalized by the government to the at the end of 2005. The non-performing loan ratio hit record tune of US $75 billion. All three have made headway in lows for all main categories of loans, corporate, household ownership transformation by signing agreements with and credit card receivables. As a result of increased net foreign strategic investors and all three have now made income, the average capital adequacy ratio rose slightly to a initial public offerings and have listed on the Hong Kong record 13.1 percent at the end of June 2006 from 13.0 and Shanghai stock exchanges: percent at the end of 2005. All banks reported capital · adequacy ratios higher than 10 percent at the end of June ICBC launched simultaneous IPOs on the Hong 2006. Continued loan growth and a drop in provisioning for Kong and Shanghai Stock Exchanges on October 16, non-performing loans drove up banks' net income in the raising US $19.1 billion by Oct. 20. ICBC ranks as first half of 2006 by 23.4 percent over the previous year. China's largest lender by assets and is so far the biggest The six credit card companies have also been improving in IPO in the world. financial health. After registering combined positive net · In June 2006 the Bank of China listed on the profits in 2005 for the first time in three years, they Hong Kong Stock Exchange raising US$11.2 billion. In increased profits to Won 526.4 billion in the first quarter of July it was listed on the Shanghai Stock Exchange where 2006, up from Won 344.2 in the previous quarter, due to a it raised nearly 20 billion yuan (US$2.5 billion). drop in bad debt expenses. · At the end of October 2005, China Construction Philippines has seen some improvements in bank Bank made an initial public offering on the Hong Kong asset quality and profitability over the last 18 months, Stock Exchange, raising over US$8 billion. together with a pick-up in reforms affecting banking sector operation and regulation. The NPL ratio at commercial Foreign listings are expected to bring higher banks edged down to 8.2 percent at the end of the first standards of oversight, particularly in areas such as quarter of 2006 from 8.5 percent at the end of 2005 and 12.7 corporate governance and the appointment of senior percent at the end of 2004. A broader measure of non- managers that have traditionally been state-directed. performing assets (NPAs) that includes "real and other Nevertheless, the government has declared that it will properties owned or acquired"(ROPOA) also edged down to remain a dominant shareholder in the SCBs even after East Asia Update 30 a little over 18 percent. The take-out of non-performing Towards a More Resilient, Diversified Financial Sector assets from commercial bank balance sheets has picked up. After a slow start, the Special Purpose Vehicle (SPV) Act The importance of diversified financial systems is enacted in 2002 has facilitated the sale of about Peso 97 increasingly recognized in the East Asia region. Promotion billion worth of non-performing assets by the end of 2005, of deeper, more diversified financial systems through cross- reducing the stock of non-performing assets in the banking border integration has been a major thrust of regional system by about 19 percent. The life of the SPV Act has cooperation efforts since the financial crisis of 1997. As been extended for two years. BSP estimates this would long as financial systems are sufficiently deep17, a facilitate resolution of an additional NPAs with a face value diversified financial system can serve to enhance of about Peso 100bn during the next six months or so. efficiency--since financial intermediaries and markets Recent reforms implemented by the central bank perform the core functions of resource mobilization, have focused on strengthening corporate governance, risk resource allocation and risk management in different ways management, and capital adequacy in commercial banks. and each may be better at certain aspects of these functions. Higher risk weightings were introduced for NPLS, as a step By offering a wider array of risk-sharing mechanisms, towards introducing the Basel II framework, which is due to diversification can also increase the overall risk-bearing take effect in 2007. The application of international capacity of the economy. This section reviews progress accounting standards (IFRS) also became mandatory for towards more robust and diversified East Asian financial commercial banks starting with 2005 financial accounts. markets in recent years, key constraints and the main areas These measures are causing banks to raise additional capital. where further policy reforms are needed.18 Commercial banks including state-owned banks raised more The region has made considerable progress in than US$200 million in the first half of 2006 by way of developing the securities markets. Equity markets in the bonds that qualify as Tier-2 capital. At least another region have tripled since the crisis--from a market US$100 million worth of hybrid capital debt instruments are capitalization of US 0.8 trillion in 1997 to almost US$ 2.9 planned to be issued during the remainder of this year. trillion in 2005 (Exhibit 36). Although stock markets are These changes are also leading to revival of consolidation still considerably smaller than in the US, UK or Germany, and merger activity in the banking system with two and in aggregate still account for only 6 percent of world commercial banks being put into play in the first half of stock market capitalization, in relation to the size of 2006. domestic economies, they compare favorably to those of Non-performing loans in Thailand's commercial advanced industrialized countries. Indeed, stock market banks have been reduced from a high of 47 percent of loans capitalization in Hong Kong (China), Singapore or Malaysia in mid 1999, in the aftermath of the financial crisis to 8.3 is proportionally larger than in the US, UK or Germany. percent at the end of 2005. The NPL ratio has remained The region's bond markets have also seen sizable growth relatively flat since then, touching 8.2 percent in June 2006. over the past nine years, albeit with considerable variation Viewed by sectors, the highest NPL ratios are in across countries. For the region as a whole, bonds construction, real estate and agriculture, all over 15 percent, outstanding amounted to US$1.5 trillion in 2005--up from while the lowest are to financial institutions, public utilities US$ 0.4 trillion in 1997. and loans for personal consumption (the latter about 6 Despite the impressive (300 percent) growth in the percent). The Government has announced a plan to further securities markets over the past nine years, the banking reduce NPLs to around 5 percent by year end by transferring sector, with US$5.5 trillion in assets, still dominates. On NPLs to the Government owned asset management average the banking sector accounts for almost 60 percent of company BAM. As in other countries, there are NPLs in total financial sector assets. Indeed, given the depth of the the system that have been transferred to private or public financial sector overall,19 the region lags in the relative asset management companies (AMCs). The NPL ratio importance of the securities markets and in particular, the inclusive of NPLs transferred to AMCs was estimated at 24 corporate bond markets. percent in December 2005. Calculation of this series was The key constraint that needs to be addressed in discontinued at the start of this year however. Bank East Asian securities markets is limited liquidity. Investors profitability continued to improve in 2006, as indeed it has are generally willing to invest in securities only if there is done throughout this decade, primarily because of enough liquidity for them to sell and exit easily when increasing net interest margins. In the current phase of needed. And, if liquidity is low and price discovery does not monetary policy tightening, both lending and deposit rates function well, the investors that do participate will generally have risen, but the former more than the latter: the average demand a higher interest rate or return to compensate for the interest yield on assets picked up to 5.2 percent in the second quarter of 2006 from 4 percent at the end of 2005, while average funding costs rose to 2 percent from 1.2 17 percent over the same period. Otherwise the markets are likely to be too thin, i.e. there is a size threshold for sustaining liquid (secondary) markets. 18 This discussion draws on Swati Ghosh: "East Asian Finance: The Road to Robust Markets." World Bank (2006). 19Total financial sector assets amounted to US$9.6 trillion. East Asia Update 31 low liquidity, and this in turn may further deter companies terms of efficiency20 (Exhibit 37). The lack of liquidity in from listing on the stock exchange or issuing bonds. bond markets--measured by turnover ratios and bid ask spreads--is a greater issue in most countries but especially Exhibit 36. Equity Markets so in countries such as Indonesia and the Philippines.21 Equitymarketcapitalization US$billions Exhibit 38. Bond Market Turnover Turnover ratios 3500 percent 3000 40 Tha Sgp 2500 Phl Mys 30 2000 Kor 1500 Idn 20 1000 HK 500 10 Chn 0 1997 2000 2004 2005 0 Chn Idn Kor Mys Tha HK Sgp Jpn Can UK US Exhibit 37. Equity Market Efficiency Compositemeasureofefficiencyofequitymarkets Three key factors affect liquidity and efficiency-- Standardizedscore and ultimately the role that securities markets play in the region, namely: the availability of information to price 8 securities accurately, transactions costs, and the size and heterogeneity of the investor base. To enhance efficiency, each of these elements will need to be addressed. Mex 6 US The availability of good information to price CHL Esp UKKor securities accurately is clearly affected by corporate HKMys governance and the degree and quality of disclosure. RF Tur Countries in the region have made considerable progress in 4 Sgp strengthening the legal and regulatory framework with Jpn respect to corporate governance and disclosure Tha Idn requirements, and in strengthening accounting and auditing 2 Phl Chn 20 This is a composite measure of efficiency that captures 0 transactions costs and the quality of information disclosure. Transactions costs are measured by the proportion of zero return days in a trading year. Since informed traders only trade when the Based on a measure of efficiency that captures benefits of doing so exceed the costs, a market with higher trading transactions costs and the quality information disclosure, costs (both explicit and implicit) will exhibit more days without Korea, Hong Kong, Singapore and Malaysia have the most trading--hence zero return. The quality of information disclosure efficient markets in the region. However, among a sample of is measured by stock market synchronicity which captures the co- 124 economies, Korea falls in the third highest quartile, the movement between individual stocks. A high level of co- others in the median. The remaining countries--Indonesia, movement indicates that there is not much firm specific Thailand Philippines and China fall in the bottom quartile in information. 21Turnover ratios are value of bonds traded/average amount of bonds outstanding. East Asia Update 32 standards. But assessments indicate that a stronger focus on impact on pension funds on the development of capital implementation and enforcement are needed.22 markets. Pension assets in the region are still relatively Transactions costs comprise explicit trading small; amounting to less than 25 percent of GDP in most costs--such as commissions, settlement fees and taxes--as countries, with the exception of Malaysia and Singapore, well as implicit costs--which represent the opportunity where they exceed 50 percent.. Even at their current size, costs of delaying or not executing a trade. The factors that though, the region's pension funds could contribute more to affect explicit and implicit transactions costs include capital market development if they were to invest in a withholding taxes and fees, the efficiency of intermediaries, greater share of their assets in securities. The World Bank market infrastructure and institutional arrangements and East Asia Region's recent report on "East Asian Finance: "complementary" infrastructure. The Road to Robust Markets" outlines a range of reforms that would both advance the goals of pension funds and The region's securities market infrastructure is simultaneously encourage a greater use of capital markets. relatively well developed, with almost all countries possessing advanced clearing and settlement systems. Assets of life insurance have grown quite rapidly, There is more variation in the "complementary" although they are still relatively small. Insurance premiums infrastructure--repo (repurchase) markets, securities as a percentage of GDP and premiums per capita show lending, margin trading and derivatives. These instruments substantial scope for further growth, particularly in China, can foster greater liquidity, reduce transactions costs and Indonesia, the Philippines and Thailand. In countries such allow market participants to manage and transfer risks to as Indonesia, Malaysia, the Philippines and Thailand, the those better able and willing to bear them. They can industry consists of many small players which are unable to however also facilitate inappropriate risk transfers to play a significant role in capital market development. institutions with weak risk management capacity and to Greater consolidation in the insurance sector could therefore more weakly regulated segments of the financial markets play a role in capital market development. Several This calls for an appropriate framework of good corporate jurisdictions are moving to introduce risk-based capital governance and sound risk management within financial requirements in the insurance sector, which is likely to institutions, as well as proactive measures by regulators and enhance insurance companies' risk management skills and supervisors to monitor and contain such risks. allow countries to move to more liberal investment regimes. A focus on more stringent minimum capital regulations can At present, the bulk of the derivatives activity is also help foster more consolidation. limited to a few economies in the region, notably Hong Kong (China), Korea and Singapore. To further develop The regional financial cooperation measures that derivatives markets, cross country experience suggests the are being undertaken under the Executives Meeting of East following needs: efficient, liquid and integrated cash Asia and Pacific Central Banks, (such as the Asian Bond markets (for bonds, equities, commodities and other assets) Fund Initiatives), ASEAN + 3 and APEC, are also helping that are broadly determined by market forces rather than to identify the impediments to cross-border investments and administered prices; a suitable legal and regulatory to facilitate issuance by private sector participants. Together framework, and key elements of institutional infrastructure with measures taken at the domestic level, these initiatives (accounting and auditing and disclosure standards) as well should help promote deeper and more diversified markets. as market infrastructure. Finally, developing a broader and more Towards an "An East Asian Renaissance" diversified investor base is key for liquidity: the participation of investors with different risk preferences and East Asia is vastly different today than the place appetites contributes to greater trading and to more efficient described in a 1993 World Bank report The East Asian markets. This will require further developing the domestic Miracle. That report summarized its success as `growth with institutional investor base--pension funds, insurance and equity' powered by global integration and good mutual funds--as well as fostering greater regional financial government. Since then, China has emerged as the biggest integration. The assets of East Asia's institutional investors development story of the nineties, while the region was also in these three categories have grown over the past few years wracked by the most severe economic crisis in many and now amount to 45 percent of GDP for the region as a decades. East Asia has been transformed by these whole. There is much variation across countries, however, developments, from a set of countries rapidly integrating with the institutional investor base still a very small with the world to one that is also aggressively exploiting the percentage of GDP in China, Indonesia and the Philippines. sources of dynamism that lie within the region. Just as the Pension schemes of the region differ widely in region was earlier drawn to the developed world by their institutional design, coverage, maturity, benefit prospects of a mutually beneficial exchange of goods, provision, value of assets under management, and asset capital, and ideas, so now different parts of the region are allocation--all of which bear on the actual and potential now being pulled towards each other for the same reasons. But countries in East Asia now face potential pitfalls associated with congestion, conflict, and corruption, the 22See CLSA, 2005. East Asia Update 33 domestic side-effects of rapid growth driven by successful Europeans, a radical reversal from ten years ago. A more international integration. In addition to global and regional diversified supply of finance which includes knowledgeable integration, East Asian countries need a third integration, investors from within the region will provide more stability this time at home. A new report of the World Bank to financial flows in East Asia. assesses the steps needed for ensuring that this "third Exhibit 39 integration" is as potent as the first two.23 Regional integration accelerates Intra-industry Trade Within East Asia East Asia's first integration was with global trade markets and is today very advanced. East Asian economies 70 vertical intra-industry trade have been built on trade and their success with global integration continues to grow. Excluding Japan, other 60 countries in the region--known collectively as emerging East Asia--have increased their world export market share 50 to 20 percent, double their GDP share. Emerging East Asia is now one of the most open regions in the world with total 40 merchandise trade reaching the same size as total GDP. inter-industry trade This has been achieved in large part because of open trade 30 policies. Although tariffs for selected items like rice and other agricultural products are high, the weighted average 20 import tariff rate in East Asia is just over 5 percent. East Asia's second integration has been within the 10 horizontal intra-industry trade region. Regional integration has accelerated since China's accession to the World Trade Organization in 2001. 0 Regional trade has been growing at about 10 percent over 1990 1992 1994 1996 2001 2003 the last decade, despite the crisis of 1997-98. East Asian economies now source over half their imports from within the region. But this trade is complementary to, not a Growth challenges in a middle income region substitute for, global trade. Regional trade is dominated by intermediate imports of parts and components, moving The result of growth spurred by global and regional between countries in complex production networks. (Exhibit integration has been unprecedented progress. 250 million 39). Outside the region, trade is dominated by final goods. East Asians left the ranks of the poor in the last five years The two go hand-in-hand: intra-regional trade provides a alone. In 1990, emerging East Asia had a GDP of $1.2 low-cost high-quality supply chain; inter-regional trade trillion; today it is over $4 trillion. With Japan, Australia provides a mass market in which economies of scale can be and New Zealand added, the region has a combined GDP of exploited. over $10 trillion, close to one-quarter of the world's output. With this growth, the region has become more middle Regional technology flows are becoming income. Once Vietnam reaches middle income country important. While the US and Japan are still the most levels, which could happen as early as 2010, more than nine important sources of know-how, Korea, Taiwan, China, and out of ten East Asians will inhabit a middle income country. China have been increasing their R&D efforts. As a result, This transition of spending power is changing the pattern of intra-regional creation of knowledge and associated economic growth, with more demand for consumer technology flows have joined global flows in spurring durables, non-tradable services, and housing, fuelled by innovation in East Asian enterprises. growing consumer credit. Finance has followed trade and technology. The East Asia is increasingly a middle-income region major global multinationals which have long made direct with more countries looking for strategies to move to rich investments in East Asia have now been joined by emerging country status. Research suggests that the sectoral pattern of multinationals from within the region. Investors from growth changes as countries grow through middle-income. Korea, Taiwan (China), Singapore and Hong Kong are On the one hand, there is a demand for a greater variety of active in the developing East Asia. In fact, they now have goods, many of which can be produced domestically, so larger equity and bond investments in the developing there is a force towards sectoral diversification. On the markets of the region than do Americans, Japanese or other, countries only get richer if they specialize in what they do best. Which tendency dominates is an empirical question--researchers speculate that it depends on the 23 Indermit Gill and Homi Kharas. "An East Asian extent of scale economies in production compared with the Renaissance: Ideas for Economic Growth", The World desire for variety in consumption. Countries appear to Bank, forthcoming. initially diversify, meaning that value added and employment is spread out more and more through the East Asia Update 34 economy. But at a turning point that differs across countries Distributional effects of scale-centered growth but which systematically happens at middle-income levels, countries start to specialize in production and employment Scale-centered growth powered by international again. Scale economies in production appear to win out. integration and innovation will help middle-income This suggests that new strategies must be adopted at some countries reduce the gap in living standards relative to point in time by middle income countries if they are to industrialized countries. But this development strategy has successfully become rich. distributional consequences at the country level which need to be managed. Inequality in much of developing East Asia The idea that middle income countries have to do has risen, not just in terms of income levels, but also in something different if they are to prosper is consistent with terms of schooling and access to basic services. Poorer the fact that middle income countries have grown less regions and rural areas are falling further behind their urban rapidly than either rich or poor countries, and this accounts counterparts. In some cases ethnic minorities are not for the lack of economic convergence in the world. Middle participating in growth. Despite the huge differences in income countries, it is argued, are squeezed between low- income per head between East Asian countries, more than wage competitors in poor countries who dominate mature three-quarters of the inequality of living standards of East industries, and innovators in rich countries, who dominate Asian citizens comes from within-country inequality. industries undergoing rapid technological change. This is the challenge that confronts East Asian In short, despite successful global integration and countries today, especially those in South East Asia. There increasing regional integration, many East Asian countries is reason for optimism. The Newly Industrialized are falling behind in domestic integration. Economies (NIEs) in East Asia successfully made this Exhibit 41 transition from middle income to rich, showing that it can be done given the right circumstances. And within East Urban Population Growth Rates, 2005-2030 Asia, experience suggests that there is not such a sharp 2.98 distinction between low-income domination of 3 manufacturing and rich country domination of the ) 2005-2010 2015-2020 2025-2030 knowledge economy. For middle-income countries, it seems %( 2.25 2.19 the answer lies in straddling both strategies: remaining ht successful manufacturers while seeking success in the 2 1.72 1.68 1.72 knowledge economy. Indeed, developing East Asia has been owrG expanding exports in sectors that exhibit increasing returns ega 1.34 to scale, such as electronics and electrical machinery. 1.1 1.01 (Exhibit 40). ervA 1 al Exhibit 40 nunA det Exports and Scale Elasticities ecjo 0 Pr North East Asia South East Asia East-0.23 Europe -0.19 Latin America & -0.38 Caribbean Instruments Electrical -1 machinery scale elasticity Non-electronics machinery > 1 Iron and steel Addressing the challenge of domestic integration Pharmaceuticals must start with cities. East Asia is witnessing one of the Wood products largest rural-to-urban shifts of population in history: two million new city-dwellers are expected every month for the Footwear next twenty years. (Exhibit 41). This massive movement scale elasticity Leather will put pressure on the mega-cities of the region, those with = 1 Apparel more than 10 million inhabitants, especially on their ability Textiles to provide clean air, sanitary water, green spaces, easy commutes and low crime. In other words, mega-city -4.0 -2.0 0.0 2.0 4.0 6.0 livability must improve dramatically. But the bulk of urban population growth will happen in small cities, those with change in export share 1994-2004 fewer than 500,000 people. These cities are generally less well-managed. A poor business environment also translates into a smaller tax base and these cities spend less per capita East Asia Update 35 on key social services and on environmental clean-up, will make control of corruption harder to achieve, making them even less attractive places for investment. threatening economic efficiency, aggravating social The gap between income levels in smaller interior tensions, and worsening gaps in sub-national economic cities and large coastal cities is also related to the poor level performance. These changes may explain the deterioration of domestic infrastructure connecting most cities to major in perception-based anti-corruption indicators. These ports. While East Asia has some of the world's most suggest that East Asia is falling behind in its efforts to fight efficient seaports and air transport facilities, the internal corruption; what they may be signaling is the greater logistics within countries fall far short of what is needed. emphasis needed to ensure clean governments as these Better road and rail links and improved multi-modal economies grapple with the middle-income development logistics are necessary to link interior cities to trading challenge. centers and so reduce the income gap between workers in different cities. East Asia needs a `third integration' Growing inequality is pressuring East Asia's social The region has successfully integrated with global cohesion. Governments have to come up with solutions to markets, and East Asian goods are found in every country of the problems of national distribution and local economic the world. It has also integrated regionally, developing a management and service delivery. But governments in turn complex structure of production networks to provide a low are being sharply questioned by civil society groups because cost, high quality manufacturing base. The challenge now is of a perception of widespread corruption in some countries. to complement global and regional integration with Centralized corruption has been a target of organized civil domestic integration. This requires ensuring vibrant cities society. Countries like Korea and Malaysia are trying to join that are well-linked to the outside world but which remain Singapore, Japan and Hong Kong as places where linked domestically; strengthening social cohesion so that corruption is severely sanctioned and opportunities for societies stay as strong as economies; and providing clean corruption are minimized by a rules-based government. governments which efficiently reinvest the economic returns Indonesia, China and Vietnam have also launched that accompany fast growth. The global trade and aggressive anti-corruption programs at the national level and technology flows and regional networks that are powering moved to prosecute high ranking officials. East Asia's growth provide adequate resources for meeting the challenge of domestic integration. If East Asian policymakers succeed in making this third integration as Exhibit 42 successful as the first two, they can, within a generation, eliminate poverty and lead their countries into the ranks of Control of corruption index, 1996 and 2004 rich, developed nations of the world. 60 1996 2004 40 elitnecr Pe 20 0 East Asia Latin America Eastern Europe Middle East and North Africa Much of the problem is now at the local level. East Asia has moved swiftly to decentralize public expenditures on social services and infrastructure. In the long run, this should lead to greater transparency and accountability of local public officials, helping promote a fair and just society. But in the interim, while institutional checks and balances are maturing, there is a risk that decentralization East Asia Update 36 COUNTRY SECTIONS Major Economies 24 Chinese standards, there are no strong signs of economy- wide overheating. Production capacity continues to expand China in line with demand, inflation remains low, and the current account is in surplus. However, high investment could cause Rapid growth continues. China's economy overcapacity in specific sectors, and may affect the banks expanded by 10.7 percent in the first nine months of 2006. because loans may turn bad in the future. The authorities GDP growth slowed to 10.4 percent in the third quarter, can take some comfort from the fact that most investment is after 11.3 percent in the second quarter, when China financed from enterprise saving rather than by banks, and registered its highest growth in over a decade. Boosted by a that the highest investment growth is taking place in largely rapidly rising trade surplus, China's international reserves commercialized sectors. But the continued investment boom topped that of Japan and totaled $988 billion at end- warrants concerns about efficiency, making more moderate September. growth desirable. On the external side, key risks are a On the supply side, industry continued to power sharper than expected slowdown in the US economy and a ahead, up 13 percent in the third quarter of 2006 (yoy), disorderly resolution of global imbalances. while services continued to lag.. Investment and exports In deciding on macroeconomic policies, the remained the main drivers of demand. Export growth was authorities may stay the course on current measures, and up to over 30 percent (yoy) in dollar terms in August- await further evidence of their effects before initiating September, outpacing that of imports by a growing margin. additional demand-reducing measures. A drastic slowdown As a result, the contribution of net trade to GDP growth alone would further lower imports and boost the current increased to almost 3 percentage points in the third quarter, account, creating more problems for monetary policy and and the current account surplus has continued to increase. trade relations. Continuing the recent strengthening of the The sharply rising trade surplus also continued to boost a Renminbi against the dollar may ameliorate part of this buildup of international reserves despite a mild slowdown in dilemma, as it would raise imports, reduce capital inflows, FDI, and rising portfolio outflows from China abroad in the and switch investment to the non-tradables sector. Also, the third quarter. At the end of the third quarter, reserves stood latest data suggest that the recent measures have started to at $988 billion, the largest in the world, and are set to have some effect on monetary aggregates and investment. surpass the $1 trillion mark in October. The increase in Internationally, if the slowdown in the US starts to affect reserves has sparked a debate as to whether better use of China's growth prospects, the authorities may need to them could be made. Meanwhile, monetary aggregates reconsider the macroeconomic stance. expanded beyond targets, although more recently M2 has slowed down somewhat. China's government has included social and environmental considerations more firmly among the key The authorities implemented a series of measures economic policy objectives. This was confirmed by the to cool down the economy. Continued rapid economic communiqué of the sixth Plenum of the 16th CPC Central growth in the first half of 2006, especially of investment, Committee held during October 8-11. While the raised concerns with the authorities. Around mid-year they communiqué stated that rapid economic growth remains a implemented several tightening measures, including key objective, it also confirmed the objective of improving monetary tightening by absorbing liquidity in the interbank the quality of economic growth, rebalancing the economic market and raising reserve requirements; administrative growth pattern, and striving to achieve a harmonious measures to limit investment in real estate; reinforcement of society. controls and regulations on investment projects, including a re-evaluation of all large investment projects; and loosening More policy focus can be put on rebalancing the controls on capital outflows. The measures seem to have economy away from industry, investment and export led taken some effect on investment: urban fixed asset growth towards growth more driven by domestic investment slowed down considerably, from around 30 consumption and growth in services. Although this is a percent (yoy) in the first half to 24 percent in the third medium term objective of the authorities, there are reasons quarter, although fixed asset investment rebounded in to give it more prominence. First, many of the measures that September with respect to August. can help rebalance the economy also support desirable macroeconomic adjustment. Second, the current investment The outlook for China's economy remains boom may give rise to a capital stock that would no longer favorable. Although growth is clearly very rapid, even by be viable once relative prices and standards better reflect the government's new priorities. The package of policies that would promote rebalancing include: (i) measures to 24 More detailed individual Country Briefs for the major stimulate domestic consumption (for example expansion of economies can be found at the World Bank website: the social safety net, in particular expansion of rural health http://www.worldbank.org/eapupdate/ East Asia Update 37 insurance and establishment of a rural pension, as well more appeared to take a wait-and-see attitude. Higher exports and public financing of education), and to increase the efficiency slowing growth in imports raised the current account of investment (for example introducing a dividend policy balance to US$4.6 billion in the first half, up from US$0.8 for SOEs and further financial sector reform); (ii) measures billion a year earlier. Exports clearly benefited from higher to increase the relative attractiveness of producing services international commodity prices with agriculture (non tradables) over manufacturing production (tradables); commodities up 12 percent and mining 46 percent, although and (iii) institutional reforms to give local decision makers industrial exports lagged). stronger incentives and better tools to pursue rebalancing. Unfortunately, despite increased spending on poverty programs, poverty rose from 16 percent to 17.75 Indonesia percent between 2005 and 2006. While the government's Following dramatic fiscal and monetary policy Unconditional Cash Transfer program more than adjustments in late 2005, growth in the Indonesian economy compensated the poor for higher fuel prices, a ban on rice slowed significantly in the first half of 2006, although imports contributed to a 30 percent rise in domestic rice recovery was underway by the third quarter. This year's prices by the time of the poverty survey in 2006. As the economic slowdown was also aggravated by new natural poor spend close to a quarter of their income on rice, disasters. Another devastating earthquake struck Yogyakarta poverty rose. In response the government reopened rice and Central Java, there was another tsunami in West Java imports, allowing in some 210,000 tons, which helped and now a mud volcano in East Java, all adding to the toll of stabilize domestic rice prices. destroyed property and displaced people. On the plus side, The higher current account surplus and balance on reconstruction and recovery from the December 2004 the capital account25 allowed Bank Indonesia to add tsunami in Aceh and Nias is now well underway, with substantial international reserves, which reached US$41 thousands of houses built and more under construction. The billion in September, despite prepayments of almost US $8 key economic challenge involves turning the cyclical upturn billion to the IMF. Reserves had fallen to a low of US$30 in the latter part of this year into sustained longer term billion in September 2005. In October, as the impact of last growth while addressing poverty and improving disaster year's fuel price increase was removed from year-on-year preparedness and response. comparisons, inflation fell to 6.3 percent, down from 17.1 Last year's cuts in fuel subsidies (leading to percent at year end 2005. Annual inflation in 2006 is now administered fuel price increases totaling a cumulative 143 expected to come in below Bank Indonesia's target of 7-9 percent) effectively transferred an estimated US$10 billion percent. As inflation and inflation expectations have fallen dollars of disposable income from consumers to regional the Central Bank has reduced interest rates by two and central governments. This shock, combined with percentage points from a high of 12.75 percent, with single interest rate increases of 400bps between August and digits (or close to) expected by year end. The central December, brought Indonesian growth to below 5 percent in government budget deficit is estimated to be around 1 H1 2006. These adjustments were designed to put percent of GDP, which will reduce the government debt to Indonesian fiscal and monetary policy on solid footing and GDP ratio to less than 40 percent by year end. were well received in financial markets. The exchange rate Recent data is beginning to confirm a sharp upturn strengthened, the stock market increased over 40 percent in in growth. By August/September most real indicators (cars, the year to this September. Rating upgrades were announced motorcycles, cement, etc.) were turning sharply upward. by Moody's from B2 to B1 in May and by S&P from B+ to Import of capital goods, which had turned down, reflecting BB- in July. Monetary policy was eased and policy interest low investment, began to recover in the third quarter. rates lowered from May, as inflation also began receding. August saw the highest single month's capital imports since The short-run negative impacts of last year's policy September 1997 (US$855 million). tightening on the economy in 2006 were partly offset by The government recognizes the need to reinforce growth in exports, which reached 17.2 percent in the first this improving macroeconomic position with investment eight months of this year. There was also a pick up in climate reforms. Three key policy packages are being government spending (up 38 percent over relatively low implemented: levels in 2005), including cash transfers of approximately US$30 per household per quarter to over 19 million Investment climate reforms are divided into five categories: households (which transferred approximately US$ 2 billion (i) general investment policies; (ii) customs; (iii) tax; (iv) in disposable income back to the poor over the course of the labor; and (v) SMEs. Among the many measures included year). Increases in central spending were offset to some are completion of an investment law with new regulations extent by an accumulation of fiscal reserves at regional designed to increase transparency and reduce red tape; cuts governments, which were unable to program or spend increased resource transfers to regions that averaged over 50 25The capital account went from a deficit of US$2.3 billion in H1 percent. The slowdown in private consumption in the first 2005 to one of US$0.4 billion in H1 2006. Although net FDI was half was milder than expected (growth of 3.0 percent) almost balanced, strong portfolio investment contributed to the although investment contracted (-0.1 percent) as businesses improvement. East Asia Update 38 in corporate and personal income tax rates; business friendly weaker domestic demand. Real GDP growth moderated to a revisions to tax administration; and improved procedures in 4.6 percent year-on-year pace in the third quarter of 2006 customs. from 6.1 percent in the first. Consumer spending, which has Infrastructure includes: (i) establishing an effective exceeded household income growth for the past two years, framework for policy, regulation, and new institutions; (ii) started to moderate. Gross fixed investment remained sector specific reforms; (iii) facilitating increased local sluggish, in large part due to government measures to government participation in infrastructure; and (iv) restrain speculative investment in real estate. On the other improved project preparation. One of the key framework hand, export growth has been robust despite the hefty 20 measures has been the creation of a Risk Management Unit percent won appreciation over the last 2-3 years, reflecting at the Ministry of Finance which can offer guarantees to strong productivity gains and the high non-price private sector infrastructure providers on behalf of the competitiveness of Korean IT-related products. Government, and specific budget allocations for the Inflation has continued subdued, aided by the contingent liabilities taken on. strengthening of won. Core inflation has remained below the The financial reform package was formulated with three lower range of the central bank's medium term target of 2.5- broad objectives (i) increasing access to finance (ii) 3.5 percent. Given an expected moderation in economic reducing the cost of finance and (iii) diversifying the growth and the recent decline in oil prices, inflation is likely financial sector and reducing its vulnerability to shocks. to be kept in check though the next year. On the other hand, This latest package has provisions that allow State Banks to housing prices have been rebounding since last November, provision and write down bad debts and begins the long after government measures had stabilized the real estate sought after clean-up of the insurance sector among other market between last August and October. things. The central bank kept its target for the benchmark Each of these packages includes important reform call rate (uncollateralized call rate) steady in the last two measures but there have been implementation problems in months after it raised rates by a cumulative 125 basis points. some areas. Measures have sometimes slipped or been The monetary tightening cycle might come to an end in dropped and the quality of the reforms enacted has not been response to subdued inflation and moderation in growth, consistent. Revisions to Labor Law 13/2003 designed to although signs of acceleration in real estate prices still foster increased employment met a negative reaction from remain a concern. Korea's government will maintain a organized labor and were put on hold, although there is now neutral stance in drafting the budget for 2007, with a greater discussion of changes to improve severance provisions. The focus on redistributive and social welfare functions. The investment law is on this year's Parliamentary agenda but fiscal balance excluding the social security fund will implementing decrees needed to improve transparency and continue to be a deficit of less than 1 percent in 2007. reduce red tape are awaiting final enactment; the submission On the external front, the current account slipped of business friendly tax measures was held up in Parliament into a slight deficit for the first eight months in 2006, on the and are now expected to take effect in 2008. Lack of back of a larger oil import bill. On the other hand, the capacity has slowed the development of model capital account surplus widened substantially during the infrastructure projects. same period, as banks increased borrowing from overseas Both fiscal and monetary polices are now supportive of on the back of their improved credit worthiness and low higher growth. Bank Indonesia should have room for further Japanese yen interest rates, which helped drive up the easing into 2007 as inflation continues to fall. This should country's short-term debts to a record high. With the small spur demand for corporate investment and recovery in current account deficit more than offset by capital account consumer durables. Both central and regional governments surpluses, the country's foreign exchange reserves are increasing spending and have fiscal space to expand continued to rise to US$ 228.2 billion as of September, public investment into 2007 and beyond. The current policy which is more than enough to cover the short-term external momentum will increase investment and bring the economy debts. to into the 6 percent growth range by early 2007 and growth Korean banks have continued to strengthen their for the year as a whole should be 6 to 6.5 percent. The key financial position. The average non-performing loan ratio of economic challenge is to maintain this growth through 2007 commercial banks fell to 1.0 percent at the end of June and into the longer term. This will require investment and 2006. The non-performing loan ratio hit record lows for all financial sector reforms that trigger business confidence and categories of loans including corporate loans, household ramping up public and private infrastructure spending to loans and credit card receivables. As a result of a 20 percent overcome binding energy and transport constraints. increase in net income, the average capital adequacy ratio rose slightly to a record 13.1 percent at the end of June Korea 2006. In addition, the six credit card companies have been improving in financial health. Their average capital After accelerating throughout the course of 2005, adequacy ratio continued to rise sharply, reaching 22.4 Korea's economy slowed down this year, principally due to percent at the end of March 2006 as a result of increased East Asia Update 39 profit and an additional capital injection. Meanwhile, large As in other economies around the region, inflation Korean commercial banks are moving further into universal has picked up and is expected to reach 4 percent in 2006, the banking by acquiring non-bank financial institutions. highest in eight years. Consumer price inflation rose to 4.1 Shinhan Financial Group is set to acquire LG card, the percent at the end of the second quarter of 2006 from 3.7 country's largest card issuer. percent in the first quarter. The increase was driven mainly A moderation of consumption and export growth is by reductions in fuel subsidies in February and the resulting expected to result in overall GDP growth of 4.5 percent in 23 percent jump in fuel prices. Higher duties on cigarettes 2007, compared to 5.1 percent in 2006. Private consumption and liquor, steeper highway toll charges, and a 12 percent is like to slow moderately, reflecting low consumer rise in electricity tariffs in June also contributed to higher confidence and sluggish stock prices. While the firm labor inflation. market will help soften this slowdown, still high household To curb inflation, Bank Negara Malaysia (BNM) debts could weigh on consumer spending in case consumer raised the benchmark overnight policy rate (OPR) by 80 sentiment deteriorates further. Export growth is also basis points to 3.5 percent between November 2005 and expected to moderate in line with a slowdown in industrial April 2006. However, the OPR is expected to remain at 3.5 countries. Geopolitical risks associated with North Korea, a percent the rest of the year, given concerns over the global sharper-than expected slowdown in the U.S. economy and economic slowdown. In addition, headline inflation seems still volatile oil prices could pose a substantial downside to have peaked in H1 2006, as the rate has declined to 3.87 risk to the Korean economy. percent for the first eight months of the year from 3.94 percent for H1. While core inflation doubled in 2005, it Malaysia remained relatively low, averaging less than 2 percent. As of October 31, 2006, the international reserves of BNM The Malaysian economy has done remarkably in amounted to RM293.4 billion (USD79.6 billion), equivalent the first half (H1) of 2006 with real GDP growing at 5.5 and to about 8.1 months of retained imports and 6.7 times short 5.9 percent in the first and second quarters respectively. term debt. Looking forward, medium-term prospects remain broadly positive. Malaysia is expected to grow by 5.5 percent in Private investment has been relatively weak in 2006 and 2007, and 5.5-6 percent through 2008. Among Malaysia since the 1997 crisis. There are several reasons factors contributing to growth next year are likely to be explaining the lack of investment recovery in Malaysia. public investment, spurred by implementation of 20 high- Several studies including World Bank (2005), UBS (2006) impact projects, and continued strong demand for have identified the regulatory burden, especially for commodity products. Growth of real GDP reached 5.7 services, and skills shortages as the two most binding percent in H1 2006, from 4.9 percent in H1 2005, mainly constraints to private investment recovery. These two driven by the strong growth in manufacturing output, constraints have increased the cost of doing business and spurred by recovery in the production of electronic and reduced expected profitability of future investments. The electrical products. Economic growth for 2006, currently Malaysian government is aware of the situation and is expected to be 5.5 percent could actually be higher as more initiating measures to tackle these issues. recent numbers suggest, in part due to increased government In addition, the budget for 2007 announced on disbursements in the second half of this year and the September 1, 2006 increased federal government resulting boost in domestic consumption. development expenditures by 24.3 percent in 2007 Spurred by higher prices, exports of commodities compared to 17.3 percent in 2006 and the budget deficit will have seen healthy growth in 2006. Rubber exports grew by be around 3.5 percent of GDP. More than RM 100 billion is 56 percent in January-July 2006, compared to 0.1 percent in earmarked for "high-impact" projects aimed at encouraging the first seven months of 2005. This is due mainly to the private investment and reducing regional inequality. The surge of rubber export prices by almost 50 percent in 2006 budget has also lowered the corporate income tax by one combined with a supply constraint in major exporters like percentage point. The Ninth Malaysia Plan (2006-2010) and Thailand and Malaysia. Palm oil exports also grew by 2 the third Industrial Master Plan target the development of percent in RM value terms in the first seven months of higher value-added manufacturing and expansion of the 2006, compared to -3 percent in the first seven months of services sector such that services account for 60 percent of 2005, driven by a 4 percent increase in export prices GDP in 2020 compared to 50 percent currently; this will between January and July 2006. Going forward, although, also involve higher investments in infrastructure projects. palm oil prices are expected to stabilize, exports will continue to grow as a result of the stronger food Philippines consumption demand from China and India as well as industrial demand for the bio-fuel programs in EU-25 and Philippine economic performance has strengthened China. Malaysian rubber export growth depends mainly on in 2006, aided by a recovery of agriculture and exports and the global demand for automobile, in particular China's. continued rapid growth of remittances. Following a major adjustment of the consolidated public sector deficit (CPSD) to 2 percent of GDP in 2005 (implying a primary surplus of East Asia Update 40 over 4 percent), the National Government deficit was cut by Reform Administration Group headed by a deputy more than half through September 2006, as tax revenue commissioner to manage the reform program of the bureau. increased sharply with implementation of the VAT reform. Task forces have been created for each of the seven critical Progress with fiscal consolidation objectives has contributed reform areas identified, including registration cleanup, to buoyancy in the financial markets, which have bounced enhanced audit, and performance-based management. The back following the worldwide correction in the second non-passage of the 2006 budget restrained spending through quarter that impacted the Philippines significantly. September although the recent passage of a P47 billion GDP growth increased to 5.6 percent in the first supplemental budget mainly to finance obligatory expenses half of 2006, while GNP growth reached 6.5 percent, aided such as salaries and internal revenue allotment (to local by double-digit expansion of remittances. Favorable governments), spending in the last quarter is expected to weather helped increase farm output by over 5 percent while increase. a rebound in electronics exports pushed overall export The consolidated public sector posted a deficit of growth to 17.5 percent. The service sector which P33.2 billion in the first quarter of 2006, down from P51.1 contributes about half of total output continued to lead billion in the first quarter of 2005. The deficit was trimmed overall growth. Back office activities such as business by improvements in the balances of government process outsourcing have become a dominant driver of corporations and savings from local government units. The service sector growth, although manufacturing growth also second quarter national government surplus is expected to rose above 6 percent in the first half of 2006. Investment, further bring down the deficit but delays in the disposition however, contracted by nearly 4 percent, while government of major generation assets of the National Power spending was constrained by the non-passage of the 2006 Corporation could reverse these gains in the second half of budget. the year. Average inflation in the first three quarters slowed Until the tightening of global liquidity conditions to 6.8 percent from 7.9 percent, while the 12-month CPI led to the May-June 2006 correction, financial markets in decelerated to 5.7 percent in September, as farm prices the Philippines displayed an extended period of stabilized and the stronger peso countered the impact on improvement, reflected in reduced spreads for global bond prices of the VAT adjustment. As a result of a lower than issues, falling interest rates for local currency government programmed inflation rate, the BSP was able to keep its borrowing, a strengthening currency, and a buoyant stock policy rates unchanged despite increases in US rates in the market which reached a seven-year high in mid-May. Bond second and third quarters. spreads have fallen significantly in the past two years, The pace of formal employment increased in reflecting both the liquidity in emerging market spreads and parallel to the stronger economic activity in the year ending improving Philippine spreads vis-à-vis the EMBI. In July. The number of wage and salary workers increased by common with other emerging markets, these positive trends about 1.2 million (7.5 percent) with the service sector were reversed during mid-May to early July, but financial accounting for the majority of the increase. Overall markets have since stabilized and in fact have been employment growth, however, was more modest, and relatively quick to regain lost ground in comparison to other unemployment increased from 7.7 percent to 8 percent, emerging markets. For example, the Philippine peso was reflecting the growth of new entrants into the labor force trading at a four-year high against the US dollar in October, and the fact that wage and salary workers account for less gaining some 14 percent since a year ago. Ample domestic than half of the labor force. In particular, employment in liquidity pushed down short-term treasury rates well below agriculture decreased in the same period. About 8½ million inflation, but rates have risen relative to mid-May. FDI and Filipino workers, a quarter of the domestic labor force, work portfolio flows grew rapidly in 2005 and early 2006 but abroad. these flows remain small in relation to the economy and its neighbors. A sharp increase in tax revenue collection thus far in 2006 has strengthened the credibility of the Rapid growth of remittances and transfers from Government's fiscal consolidation objectives for the overseas workers, amounting to about 14 percent of GDP in medium term as tax reforms have achieved high initial 2005, has converted large trade deficits into modest current returns. In the first nine months, the national government account surpluses, and helped to boost consumption and deficit fell to P50.4 billion from P108.5 billion through reduce its volatility. The strong performance of remittances September 2005. Strong revenue collection and depressed and exports has helped to insulate the current account from spending generated budget surpluses in four out of the nine higher imported oil prices, allowing the central bank to months. In particular, VAT revenue was 6 percent above increase gross reserves by $3.1 billion in 2006 through target in the first eight months (after netting out revenue September, notwithstanding the prior market correction. losses due to mitigating measures). Over all, revenue grew by nearly 20 percent through September, while tax revenue Thailand including non-cash collection grew by 24 percent. The Thailand's economic growth this year has been Bureau of Internal Revenue has recently created a Tax mainly driven by high export growth. Domestic demand, on East Asia Update 41 the other hand, continued to be depressed by high oil prices, Private investment growth should strengthen higher inflation, rising interest rates, and declining terms of modestly in 2007. This year, the sharp rise in energy prices, trade. Political uncertainties since the beginning of the year rising interest rates, real appreciation of the baht, delays in also lowered consumer and private investor confidence and public spending, political uncertainties, and the uncertain delayed public investment. Real GDP growth this year is outlook for global demand in coming years have taken a projected at 4.5 percent, the, same as last year. Net exports large toll on private investment growth. Private investment surged as exports grew strongly, reflecting robust global will grow at around 4.6 percent this year, the lowest since demand, while imports slowed in line with depressed 2002, although overall manufacturing capacity utilization is domestic demand. very close to pre-crisis levels, with many industries running Growth in 2007 is expected to be similar to this at more than 90 percent utilization. Next year, private year. A forecast decline in fuel costs, lower inflation, and investment growth should pick up slightly as energy prices interest rates and improved confidence next year should fall, public investment resumes, political uncertainties are help encourage household consumption and private reduced and investor sentiments improve. Foreign direct investment. Public investment growth will also be higher investment was quite robust this year, expanding in the first next year as Government budget disbursements, which were 7 months of the year by more than 20 percent from the same delayed in the last quarter of 2006, will resume in January period last year, but may be less so next year. Foreign 2007. Export growth, on the other hand, will likely investors will likely remain cautious and wait for greater decelerate with the lower growth expected in several of clarity in policies, especially those related to foreign share Thailand's major markets, namely the US, Japan, and the holdings. EU, and the expiration of the US GSP for Thailand at the Public investment should speed up in 2007 as end of 2006. disbursements delayed this year start in the beginning of Thailand's external situation remains robust. next year. Public investment this year has been delayed, Because of a much lower trade deficit and a rebound in the particularly that from the central government budget, services account the current account is expected to swing to refelcting cash flow management problems at the start of the a surplus of around 1.5 percent of GDP in 2006 from a year and delays in disbursing the investment budget due to deficit of 2.1 percent last year. The current account surplus political uncertainties. The FY200726 investment budget will would decline to roughly 0.2 percent of GDP next year as be disbursed in January next year. Thus, next year, public exports of goods decelerate while those of imports investment is expected to rise further. However, there may accelerate. . At the end of August, foreign reserves stood at be delays in the large infrastructure projects (known as US$59.4 billion or 3.2 times short term external debt. Total mega-projects) which will be mostly undertaken by state- external debt is 28 percent of GDP. owned enterprises, because they will be revised by the interim government. Thus, public investment growth in The fiscal situation remains strong. The 2007 should pick up modestly from this year, which should government budget is balanced this year, and will be in help strengthen investor sentiment and crowd-in private deficit by about 1.2 percent of GDP in 2007. Public debt as investment. a share of GDP as of August is 41 percent and is projected to remain below 50 percent over the next 5 years. Goods exports in 2006 have risen about 9 percent in volume terms and by around 18 percent in value terms. Headline inflation and interest rate peaked this year The top three Thai exports remain non-electrical machinery and are expected to decline in 2007. The sharp rise in and parts (HS84), electrical machinery and equipment inflation this year mainly reflects a rise in domestic retail (HS85), and vehicle and parts (HS87). The main export petrol prices, especially in the first half of the year, markets continue to be the US, Japan, and EU. Services following the floating of retail prices since July 2005. exports growth reflects the rebound of tourism from the Headline inflation this year will be around 5 percent, up tsunami disaster at the end of 2004. As the global from 4.5 percent in 2005. Core inflation has also risen. environment is quite uncertain next year with world trade Inflation in 2007 is expected to ease to around 3-3.5 percent. volumes and growth in the economies of Thailand's key trading partners expected to slow, export growth is also Political uncertainty has diminished after the expected to decelerate in 2007. Moreover, Thailand's interim government was established in October. Consumer exports to the US will be affected by the expiration of the and investor confidence indices had been declining since the US GSP for Thailand at the end of this year, while the beginning of the year but improved after the coup in Thailand-US bilateral free trade agreement (FTA) September as political uncertainties have somewhat cleared negotiations have been delayed. up. Nevertheless, sentiment has not risen back to in the levels of 2004 or 2005. Both consumers and investors are Private consumption will unlikely be a major driver still waiting to see the policy direction of the interim in 2007. Farm incomes next year will not support household government, which will be presented to the Legislative consumption growth as much as they did in 2006, as world Assembly on October 27th, 2006. prices of Thailand's key crops, which have increased by 13 26FY2007 is from October 2006 to September 2007. East Asia Update 42 percent this year, are projected to rise by only 0.5 percent in 22 percent while that of state-owned enterprises (SOEs) 2007. Household borrowing will tend to be limited due to grew 9.4 percent year-on-year. substantial increases in the ratio of household debt to income since 2000. Lending rates, while expected to trend Retail sales, an indicator of consumption, grew by lower next year, will also remain higher than the low levels 20.4 percent in the first nine months of 2006, about the prevailing before the recent tightening of monetary policy. same as in the equivalent 2005 period. Implemented investment, which is different from the standard measure of Thailand needs to focus on supply-side reforms to gross capital formation, was estimated to reach 76 percent remain competitive in the coming years. Firms in the of its annual forecast of 377 trillion dong (or 38.6 percent of Thailand Investment Climate Survey27 indicated that GDP). FDI commitments have surged 26 percent year-on- regulatory burden, shortage of skilled labor and year in the first nine months of the year to reach 5.1 billion infrastructure inadequacies were constraining business dollars. FDI disbursements, including domestic borrowing operations and investment. Streamlining regulations (in of foreign enterprises, rose 8.8 percent to reach 2.87 billion respect of investment, labor, tax, customs, etc) will be an dollars. important step for raising rates of return for firms. Similarly, improvements in secondary education, vocational Export growth in the first nine months of the year education, English skills and IT skills will contribute much stood at 24.2 percent year-on-year, supported by strong to removing the constraint of skill-availability and to garment and footwear export growth, the latter despite an expansion of ICT-use by firms. Expansion of infrastructure antidumping suit in the EU, their largest market. Exports of and infrastructure services will lower logistic costs. crude oil benefited from higher prices, even though there Moreover, price controls have been put in place since last was some fall in volumes. Rice and coffee also experienced year on over 170 consumer products and could limit firm volume declines owing to weather related shocks. However, profitability and expansion. These need to be carefully re- with Vietnam being a key coffee producer, a sharp rise in considered. prices more than compensated the volume decline. Imports grew by 19.3 percent in the first nine months. Capital goods The interim government will continue policies to imports recovered strongly to record a growth of 22.1 strengthen the quality of growth and has confirmed its percent compared with less than 2 percent in first nine commitment to elections in September next year. The months of 2005. Fabric imports also rose by a sharp 25 interim government had indicated its commitment to pursue percent, reflecting the input requirements of garment policies that promote the quality of growth, whereby the exports. The trade balance swung from deficit to a small growth is underpinned by good governance practices and surplus in the first nine months of 2006. Helped by strong gains from growth are more fairly distributed to all sectors remittance flows, the current account recorded a surplus of and groups in the country. . The Government will also focus 0.4 percent of GDP in 2005, and a similar surplus is on political reforms, including revising the 1997 anticipated in 2006 as well. Inflows of FDI and ODA have Constitution as well as reducing the problems and violence been robust, leading to a rapid rise in foreign reserves. By in the southern part of the country. The details of the policy end-June reserves reached nearly 11 billion dollars (11 platform for the up coming year will be presented by the weeks of imports) compared with 8.6 billion dollars at end- Prime Minister to the Legislative Assembly on October 27th, 2005. 2006. Broadly, it will be consistent with the targets in five areas laid out in 10th National Economic and Social Vietnam has concluded all the bilateral agreements Development Plan (2007-2011): (a) Improving social needed for WTO accession. According to trade minister capital, (b) improving economic capital, (c) increasing Truong Dinh Tuyen, Vietnam's entry to the WTO will then community development and participation, (d) sustaining be approved at a general meeting of the WTO Secretariat on natural resources, and (e) promoting good governance. November 6-8. Vietnam also requires a vote on Permanent Normal Trade Relations in the US congress. This vote is expected to be concluded in Vietnam's favor prior to the Vietnam APEC summit meeting in Hanoi in late November. GDP grew by 7.8 percent in the first nine months Fiscal revenues and expenditures look on track to of the year, compared with 8.1 percent in the same period of meet budget targets. The target for the budget deficit in 2005. With growth expected to remain strong in the fourth 2006 is 2.6 percent of GDP, and on-lending of ODA is quarter, the government's target of 8 percent is likely to be projected to add another 1.3 percent. Revenues were buoyed met. In the first nine months, industrial value added grew by high oil prices in the first half, but will be dampened by nearly 10 percent year-on-year, followed by services at 8 lower prices in the third quarter. To partially compensate, percent and agriculture at 3.3 percent. Within the industrial the government reintroduced tariffs on certain oil products sector, the turnover of the domestic private sector expanded which had earlier been eliminated to stabilize domestic prices. On the expenditure side, a pay rise for state employees is expected to cost the government 6.2 trillion in 27The survey was conducted as a part of the Thailand Productivity and the final quarter of 2006, and 26.6 trillion dong in 2007. Investment Climate Study (2006), a joint report of the World Bank and the This pay hike is related to an increase in the minimum wage National Economic & Social Development Board (NESDB). East Asia Update 43 in state owned and private enterprises from 350,000 dong SOCBs will now conduct their equitizations by 2008, two (22 dollars) per month to 450,000 dong (28 dollars). The years earlier than previously stated. The state is expected to adjustments will further narrow the minimum wage gap retain a 51 percent stake, with foreign ownership restricted between domestic and foreign invested sectors. The gap is to 30 percent. The limit on a single foreign investor is to be reduced to zero by 2010 as part of WTO likely to be raised from 10 to 20 percent. commitments. The minimum wage hike will also be a basis for adjustment of government pensions and other social In coming months Vietnam may issue international security payments. bonds to finance projects that are deemed strategic. The proceeds are likely to be on-lent to state owned corporations In an effort to enhance transparency, the Ministry executing the projects. These corporations have not yet of Finance has begun to post quarterly budget execution established their own creditworthiness in international reports on its website. Off-budget expenditures have been markets, and the financing requirements are likely too large reported for 2004 and 2005. Regulations to publish local to be met through domestic commercial banks. Last year the budgets have also been issued. The State Audit of Vietnam government raised 750 million dollars to on-lend to a became an independent body reporting to the National shipbuilder. The bond currently trades at a spread of 160 Assembly in 2005, and has made its audit of the state budget basis points over US treasuries. In September, Standard and public for the first time. The report, which has been widely Poor's upgraded Vietnam's foreign currency rating by one quoted in the press, sheds light on loss making SOEs, tax notch to BB, its local currency rating to BB+ from BB, and arrears, and funds that had hitherto been "secret." assessed the outlook as stable. Inflation fell to 6.9 percent in September 2006, its lowest level since April 2004, and down from 7.7 percent Smaller Economies year-on-year in the first eight months. Poor weather conditions have continued to exert upward pressure on food Cambodia prices. Domestic oil price adjustments have lagged behind Cambodia's real GDP grew by an unprecedented international price movements, but the lags have become smaller in recent months. With the recent softening in 13.4 percent in 2005.28 The stellar performance was driven international prices, the domestic price for gasoline has been by solid garment exports, strong tourism receipts, reduced, although the price of diesel, which is currently significant growth in FDI, the continuing construction below international levels, has not been adjusted boom, and record crops in agriculture. Agriculture remained downwards. a crucial sector for the economy, accounting for 38 percent of GDP growth and some 60 percent of total employment in The stock market has grown rapidly during 2006. 2005. Growth in 2006 is expected to moderate to a projected The number of listed companies increased from 36 at the 8.9 percent owing to slower expansion in construction and end of 2005 to 67 in early October 2006. Fifty of these are agriculture. Consumer price inflation is projected to fall to listed on the Ho Chi Minh City securities trading center around 5 percent in 2006, down from 6.7 percent in 2005. A (HSTC), and the other 17 on the organized over-the-counter sound macroeconomic framework has helped underpin market in Hanoi. Market capitalization of the HSTC has success in 2006. However, Cambodia's narrow growth base increased from under-500 million dollars in December 2005 to nearly 3.3 billion (5.5 percent of annualized GDP) in remains a concern. Recent and ongoing work--including October 2006. The stock price index has increased by over the National Export Strategy, 2007­2010, the Small and 70 percent since December 2005. Foreign investors have Medium Enterprise Development Framework, 2005­2010, been net buyers and have accounted for around 13 percent and the second phase of the Integrated Framework (IF) for of trading activity in 2006. Enterprises are keen to list trade--aim to tackle this challenge. before January 2007, when tax incentives available to listed The external sector maintained its dynamism in companies will be removed. 2005 with an 11 percent increase in apparel exports. The Credit growth slowed to 21 percent at the end of apparel industry benefited from protective measures against June, compared with nearly 32 percent in December 2005. Chinese apparel imports introduced by the US and the The decline was mainly due to slower lending by State European Union in mid-2005. The signing of the Trade and Owned Commercial Banks (SOCBs). The sharper slow Investment Framework Agreement (TIFA) between down in SOCBs credit may be related to their efforts to Cambodia and the U.S. in July 2006 is expected to further conform to stricter prudential standards that were introduced spur bilateral trade. The external sector also saw 44 percent in 2005. However, deposit growth at both the SOCBs and JSBs has remained high at 40 percent. Deposit rates have 28 been rising especially as joint stock banks have competed The official growth figure is not strictly comparable to for funds and currently stand at 8.4 percent for a one year earlier years since it also reflects some changes in national deposit. With deposit growth far exceeding lending growth, accounts methodology, including revised statistical SOCBs have experienced a build-up of excess liquidity. On coverage and compilation methods. A comparable figure the policy front, the government recently announced that taking these adjustments into account would put 2005 growth at about 9.8 percent. East Asia Update 44 growth in tourism receipts and a more than doubling of FDI. system and a comprehensive information technology system The external sector remains strong, with exports expected to for banking functions has become a pressing sectoral grow by 15 percent in 2006 and FDI continuing to expand. challenge. Despite projected strong export growth, the trade deficit is forecast to reach 20 percent of GDP in 2006, up from 16 Another major challenge for the Government is the percent in 2005, due to faster import growth. Gross foreign passage of several laws necessary for WTO compliance, reserves are projected to reach US$ 1.1 billion (from US$ including: the Secured Transactions Law, the Commercial 0.9 billion in 2005) and the exchange rate is projected to Leasing Law, the Law on the Issuance and Trade of Non- depreciate slightly (0.8 percent) against the US dollar. Governmental Securities, the Insolvency Law, and the Law on Establishment of Commercial Court, among others. The fiscal front saw modest improvement in 2005 with total revenue rising slightly from 10.4 percent of GDP Fiji in 2004 to 10.5 percent in 2005. Revenue is expected to jump to 12 percent of GDP in 2006, due to growth in both The National Elections in May 2006 saw a historic event for the country with the installation of its first multi- domestic and international tax collections, while non-tax party cabinet, led by the incumbent Prime Minister. The revenue is expected to remain steady as a share of GDP. military has also welcomed this move. Fiji also hosted the Expenditure contracted to 13.8 percent of GDP in 2005, but 37th Pacific Islands Forum Leaders Meeting in October this is expected to increase slightly to 14.4 percent in 2006, year. reflecting growth in current spending. The net impact of both revenue and expenditure measures is expected to Fiji's economy is projected to recover from its low reduce the overall deficit (excluding grants) from -3.4 to - growth of 0.7 percent in 2005 to 3.1 percent in 2006. The 2.6 percent of GDP in 2006, with the deficit inclusive of stronger growth is driven by robust economic activity in the grants falling to 0.9 percent in 2006. agriculture, forestry, fishing, and services sectors. The government forecasts real GDP growth of around 2.5 Growth in broad money is expected to increase by percent over the medium term. about 27 percent in 2006, significantly higher than in 2005. Private sector credit is expected to continue to accelerate in The fiscal deficit for 2006 is projected to narrow slightly from its 2005 level to meet the government's target 2006 with growth of about 35 percent. Commercial interest deficit of 4 percent of GDP. The government aims to reduce rates, however, remain relatively high at about 15 percent the budget deficit over the medium term to contain rising p.a. public sector debt, which remains above 50 percent of GDP. On the structural reform agenda the Public Inflation at end-2006 is projected to remain under 4 percent. Financial Management (PFM) Reform Program, launched Inflationary pressures from high global oil prices and a by the Prime Minister in December 2004, is beginning to weaker local currency is expected to be partially offset by yield results. The amount of customs revenue collected lower domestic prices and the tightening of monetary through the banking system has increased from zero in 2004 policy. to 36 percent of the total in 2005, and is scheduled to The boom in the tourism industry (Fiji's main increase further in 2006; 86 percent of all Tax Department foreign exchange earner) is expected to resume after a slight revenue is now collected through the banking system; a slowdown in the first quarter of 2006, associated with growing share of Treasury payments to suppliers are made uncertainties surrounding the national elections. Tourist by check instead of cash; a new annual budget process that arrivals in 2006 are projected to increase by 5 percent over incorporates program budgeting has been adopted; the stock the previous year. of old expenditure arrears has been reduced by over 40 The current account balance deteriorated percent; the procurement process has been streamlined, cumulative to April 2006. Merchandise exports fell by 9 tightened, and made more competitive; the Government has percent mainly due to lower earnings from garments and set up internal audit departments in a dozen line ministries, sugar, while imports climbed by 18 percent owing to and, for the first time in Cambodia, a pilot program has been stronger consumption demand and the higher cost of oil. launched to pay civil servants through commercial banks This has led to a worrying decline in foreign reserves, to instead of by cash. The PFM Reform Program is supported cover less than 3 months of imports of goods at end-June by 11 donors, most recently the World Bank, which 2006. approved a US$ 14 million grant project in June 2006. The performance of the garment industry continues Financial sector reform, guided by the ten-year to weaken following the expiry of US preferential trade sector blueprint adopted in 2001, has also progressed. A agreement in early-2005. Export earnings fell by 43 percent Credit Information Sharing System has been introduced, in 2005 and are projected to further decline in 2006. Sugar providing commercial banks with credit-related information production in the season to June 2006 declined by 14 on prospective customers, thus lowering delinquency rates percent over the comparable period last season, largely due and loan defaults. The development of a national payment to mill-related issues and unfavorable weather conditions. East Asia Update 45 Government efforts to cushion some of these of GDP in 2005 (or 166 percent of exports in NPV terms), adverse impacts on the economy include issuing a FJD$300 but it remains a concern. If reforms continue to be million (US$173 million) bond on the international market implemented as planned, new borrowing is mainly on to raise gross reserves, negotiating with Australia to review concessional terms, and growth continues to be robust in the the SPARTECA (South Pacific Regional Trade and medium term, the debt-burden ratios are projected to fall Economic Cooperation Agreement) Rules of Origin for further. garments, restructuring the sugar industry and upgrading the four sugar mills, as well as initiatives to diversify export Implementation of structural reforms has production. continued, even if slowly. Actions to open trade and private investment continue to be taken. The SOE sector is borrowing less from banks and receiving lower subsidy Lao PDR from the government. Large SOEs are undergoing Lao PDR has maintained relatively stable restructuring and tariff adjustments. But the restructuring of macroeconomic conditions and robust economic growth. state-owned commercial banks is not going that well. There Monetary and fiscal discipline has improved. The is an urgent need to implement the modified `Governance momentum of structural reforms in trade, private sector Agreements' and make better use of International Banking development and public financial management has been Advisors. More importantly there is a need to obtain private sustained. Strong growth and relatively low inflation strategic partners. To improve banking services in the continues to reduce poverty in both rural and urban areas. country, there is also a need to `level the playing field' for all state-owned and private banks, though progress in this Growth is estimated to exceed 7 percent in 2006, direction is very slow. Public expenditure management after reaching 7 percent in 2005, largely due to continuing reform has gained considerable momentum over the last six investments in mining and hydro-power. This rate of growth months, including expanded internal Government dialogue is expected to continue in 2007 as investment and exports on key aspects of center-local fiscal relations i.e. greater continue to grow. Foreign investment inflows into mining central control and administration of customs and taxes; and hydro-power remain buoyant. Tourism receipts continue more consolidated treasury management and increased use to perform well (with tourist visits growing over 20 percent of budget norms to ensure that provinces' choices reflect a year), as are some non-traditional exports. Gold and national priorities. copper exports have been rising rapidly over the last two years. However, garments, coffee, and wood exports are The final version of the sixth National doing less well. Socioeconomic Development Plan (2006-11) is expected to be issued in late October 2006. Its preparation followed a Headline inflation fell to 7 percent in August 2006 consultative and participatory process for the first time, with from a high of 9 percent earlier in the year. The donors providing formal comments in January 2006. This government's efforts to control the budget deficit, despite sixth Plan draft emphasizes the objective of poverty- pressures on the wage-bill and slow growth in revenue, have reduction and of the Millennium Development Goals helped keep inflation in check. Core inflation remains (MDGs), as well as directions for policies and public subdued at 5 percent. Nevertheless, there are a number of investments necessary to achieve them. fiscal risks that will have to be managed to sustain macro- economic stability. On the expenditure side, budget Mongolia consolidation efforts have generated arrears and lowered non-wage recurrent spending. On the revenue side, if the Mongolia's high economic growth continues. mining royalties collected are not remitted by provinces to Between January and August 2006, real gross industrial the central budget or if non-resource tax administration output increased by 32 percent compared to the slackens or if greater central control over customs and taxes corresponding period last year. Main drivers of industrial is not restored, the fiscal situation could deteriorate. A growth were manufacturing products, in particular secular decline in aid inflows as a share of GDP has made beverages (32 percent), textiles (31 percent) and basic faster growth in revenue and higher efficiency in public metals (36 percent). Despite remarkably high international spending imperative if delivery of basic services is to prices, mining sector production contracted by 7.5 percent improve without undermining fiscal stability. in real terms, as a result of the stagnation of copper The external position of Lao PDR has extraction and a decrease in recorded gold production. (The strengthened. A surge in mining exports, combined with mining sector is however attracting foreign direct buoyant tourism receipts and substantial foreign direct investment which is expected to reach $319 millions in investment inflows, helped raise external reserves to more 2006.) In the tertiary sector, the volume of railway transport than 3 months of imports. The kip/baht exchange rate has services decreased by 2.7 percent over the period, despite been stable and the current account deficit has increased strong growth in freight forwarding (40.3 percent). Overall significantly to accommodate the foreign investment GDP growth is projected to be around 7 percent in 2006, inflows to the mining and hydropower sectors. External debt with the main contributions coming from the manufacturing, is down from 83.4 percent of GDP in 2004 to 77.4 percent livestock and services sectors. East Asia Update 46 High prices for copper and gold have sustained revenue boom subsides. This would make needed fiscal export revenue growth in 2006. In the January-August 2006 adjustments in the future more difficult and crowd out period, exports in US dollar terms increased by 60 percent capital expenditures, typically in key items such as and imports by 32 percent from the year earlier period. maintenance of existing capital and infrastructure. Copper concentrate and gold contributed 43 percent and 13 Mongolia is at moderate risk of debt distress over percent of total export value respectively. The floating the medium term. The outstanding stock of external debt is exchange rate appreciated slightly, reaching 1168 togrog per equivalent to 70.5 percent of GDP as of end-2005, and 44 USD by September. Inflation was brought down from 9.2 percent in Net Present Value terms (NPV). The debt burden percent in 2005 to 5.3 percent in 2006 as of August, looks sustainable assuming no major negative terms of trade although monetary growth remains strong, suggesting that shock and only concessional borrowing. International monetization of the economy is still at work. As of June commodity prices are volatile however, and significant 2006, broad money increased by 46 percent and credit to the declines from current high levels cannot be ruled out. The private sector by 40 percent. Government is working on a debt management strategy The fiscal balance is expected to remain in surplus which will articulate the medium-term priorities for in 2006, for the second consecutive year. As of August domestic and external borrowing. 2006, budget revenue collection reported an increase of 47 Finally, an Anti-Corruption Law as well as an Anti percent compared to the same period last year, while total Money Laundering Law were adopted by Parliament last government expenditure was up 21 percent. As a result, the Spring. These 2 laws, together with the ratification by government budget recorded a surplus of 181bln togrog Mongolia of the UN Convention against corruption last through August 2006. The main factors contributing to the year, will form the backbone of Mongolia's legal framework surplus were the exceptionally high level of copper and gold to fight corruption. prices leading to an increase in foreign trade tax collection and dividend earnings, an overall increase in tax collection Papua New Guinea due to a higher level of economic activity. Significant changes to fiscal policy have been Economic performance in 2006 is expected to be implemented since the beginning of the year including on good with GDP growth expected to be nearly 4 percent, the revenue side, the introduction of a large "windfall" tax marking the third consecutive year of expansion. The on the copper and gold sectors, and an increase in mining strength of economic performance has been due mainly to royalties from 2.5 percent to 5 percent. On the spending the mineral sector which has benefited from historically side, civil service wages were increased by over 30 percent, high international commodity prices--principally for oil, means testing for the child allowance was eliminated, and copper and gold--that have prevailed over the first three universal lump-sum allowances for newlyweds and quarters of the year. Non-mineral GDP is expected to newborns were introduced. A development fund was created increase by over 3 percent due to continued robust into which revenues from the windfall tax are paid. Two agricultural production and an expansion in construction for third of the development fund is aimed at financing social both commercial and residential real estate. Fiscal programs and capital spending while the remaining should management has remained the cornerstone of the recovery be saved for future uses. In addition, new tax laws were while stable monetary conditions have played an important adopted and are expected to come into effect on January supporting role. 2007. The main reforms include (i) a cut in the corporate A budgetary surplus of 2.3 percent of GDP was income tax by 5 percent, combined with a thirty-fold registered in the first half of the year due to higher than increase in the threshold for the higher CIT rate, the budgeted mineral tax receipts. Underlying tax collections abolition of tax holidays, the introduction of loss carry across all other categories also remained strong, reflecting forward and (iii) a cut in the VAT by 5 percentage points, the strength of the economy. Expenditure control measures combined with the abolition of numerous exemptions. implemented in the recent past continued to bear fruit with The recently adopted fiscal policy measures overall spending remaining on track, relative to the budget. accentuate the dependence of public finances on the mining Lower than expected yields on Treasury bills and sales of economy and, as a result, increase Mongolia's vulnerability government bonds at unexpected premiums resulted in to a reversal of the upward trend in metals prices. On the further savings over the first half of the year. An overall revenue side, the reduction of VAT rate, and the cut in CIT surplus of about 1.8 percent of GDP is expected for the full will narrow the revenue base. Meanwhile, the increase in year. mining royalties rates and the introduction of the windfall Due to the exceptionally high global commodity tax would skew the revenue structure towards mining. On prices the trade balance remained in surplus over the first the expenditure side, the increase in civil service wages, the half of the year, a situation expected to be maintained elimination of means testing for child allowances and through the full year and reflected in a current account introduction of new universal allowances will imply a surplus. The kina has remained stable over the first three continuing call on resources for the government to meet quarters of the year, appreciating slightly against both the these recurrent expenditures even in times when the current U.S. dollar (about 21/2 percent) and the Australian dollar East Asia Update 47 (about 31/2 percent) consistent with the country's improving logging duty exemptions outpaces higher public spending terms of trade. on some relatively low-priority areas (public wage bill, Although inflation picked up during the second tertiary scholarships and embassies). The medium term quarter of 2006 compared to the first, it remains modest outlook presents several medium term fiscal risks, including running at an annualized rate of 2.3 percent at mid-year. public service wage increases, declining logging tax Treasury bill yields declined slightly to the 3-4 percent receipts, lower import duties and aid flows, recurrent range as the government ceased to issue Treasury bills after expenditure needs, and the fragile financial situation of May, on account of the continuing cash surplus. Both SOEs and provincial governments, the latter linked to deposit and lending rates at commercial banks have problems of fiscal decentralization. continued the trend of 2005, declining slightly in the year to Total public debt has fallen from 122 percent of date. The build up of external reserves has been maintained GDP in 2003 to 80 percent of GDP in 2005, and external with reserves at the end of the third quarter standing at about debt has also declined from 70 to 54 percent of GDP in the US$1,300 million, equivalent to over nine months of same period. Public debt is projected to fall further to 70 non-mineral imports. percent of GDP in 2006 (with external debt falling to 50 The long awaited PNG-Australia gas pipeline percent of GDP). While debt forgiveness received through project suffered a setback in September 2006 when a partner the Honiara Club negotiations and the agreement to settle in the Australian section of the pipeline decided to cut back interest arrears and outstanding advances with the Central on design work due to rising costs and questions about Bank of Solomon Islands have helped to reduce public debt, demand. This is not expected to pose a long term the levels are still high and the debt position remains impediment to the project. vulnerable. Solomon Islands Timor Leste Notwithstanding a violent two-day outbreak of Timor-Leste slid into a complex crisis in April civil unrest in the capital city during the National Elections 2006, triggered by over a third of the army going on strike in April 2006, a new four-party Coalition for Change to protest alleged discrimination and their subsequent government has been formed. The new government has dismissal by the Government. The ensuing violence was released its Policy Framework Translation and centered in Dili, (although the rest of the country remained Implementation Document which outlines the government's comparatively peaceful), and left about 160,000 internally vision and mission for the nation. The document also displaced, 35 dead and about 1,200 houses burnt in Dili. identifies government's commitment toward several issues The violence has exposed tensions within the military, which include Constitutional reform (a new Constitution is between the military and police, and between eastern and expected to be completed by January 2007). The political western parts of the country. The country was forced to call situation however, remains fluid. for international forces to restore order. The unrest subsided after the arrival of troops from Australia, Malaysia, New Macroeconomic conditions remain stable. Real Zealand and Portugal, but underlying tensions remain and GDP growth is expected to reach 5 percent in 2006, the sporadic incidents of violence have continued. same as in 2005, supported by palm oil production and the demand for services due to the Regional Assistance Mission The security crisis led to a political crisis, forcing to Solomon Islands (RAMSI).. However, growth is the resignation of former Prime Minister Alkatiri, and the arrest of the former interior minister on charges of projected to slow to around 4 percent in 2007, reflecting distributing arms. In mid-July, former Foreign Minister lower timber logging. Inflation is projected to exceed 8 Ramos-Horta was appointed as the new Prime Minister. A percent in 2006, largely due to higher oil prices, rapid UN Commission of Inquiry is expected to release its growth in private credit, and stronger demand from the findings on the events leading up to the crisis. Previously expatriate community. scheduled parliamentary and presidential elections are now The external position continues to weaken as oil due to take place in the spring of 2007. prices soar and non-oil imports are boosted by investment The crisis paralyzed the government and the Dili projects. The current account deficit is projected to widen economy. Between May and June, with the exception of the from 11 percent of GDP in 2005 to 16 percent in 2006 and Ministry for Labor and Social Reintegration, Ministry of 2007. Foreign reserves are projected to stand at US$98 Health and a few departments in the Ministry of Planning million at end-2006, just over 5 months of import cover. and Finance, all public offices and private business in Dili Despite the prospective current account deficit, gross were closed. The districts were less affected, but suffered reserves are expected to remain relatively stable, aided by from supply disruptions, decreased demand for their strong official development assistance and an increase in products, and the need to accommodate an influx of FDI linked to palm oil and gold mine projects. refugees. The offshore oil and gas sector was undisturbed, A small budget surplus is projected for 2006 as however, as was most family farming. Overall, non-oil higher revenue from improved tax compliance and reduced GDP growth may be close to zero in 2006, notwithstanding East Asia Update 48 an expected end-year boost from higher public spending and employed and subsistence workers, and a relatively small international aid. CPI inflation spiked to nearly 7 percent in formal labor force. the year to June 2006, driven by higher transportation costs. The country now faces the challenge of rebuilding Until April 2006, Timor-Leste had made trust and addressing the security situation and the rule of considerable progress in nation-building, maintaining peace, law. At the same time it needs to jump-start the economy converting its petroleum wealth into a sustainable source of and respond to basic humanitarian needs and development revenue for future generations, and restoring public services. requirements. Fiscal and current account surpluses have increased sharply on account of rapidly growing offshore revenue from oil and A large increase in spending for FY06/07 has been gas, and the Petroleum Fund had accumulated deposits approved by Parliament, in particular for emergency amounting to $650 million by June 2006. assistance, wage bonuses for civil servants, and an increased subsidy to the state-owned electricity company (offsetting a While petroleum GDP has grown rapidly, reduction in electricity prices). The budget directs more developments in the non-petroleum sector have been much spending to development expenditure (44 percent) than had weaker. After declining by about 6 percent per year during originally been planned. Although more than double the 2002-03, non-petroleum GDP is estimated to have grown previous fiscal year levels, the new spending remains within modestly during 2004-05. But with population growth of the "sustainable" levels allowed under the country's savings around 3.9 percent, non-petroleum GDP per capita likely policy. declined even in the recent period, and is estimated at about $350 in 2005. Non-petroleum exports, consisting largely of A critical challenge is to improve budget execution coffee, are estimated at $8 million in 2005. so that spending priorities can be better realized. The government has revised its procurement law, allowing The country has encountered difficulty and delay in delegation of procurement up to $100,000 to those line executing its capital budget, and private investment and job ministries with the capacity to assume this responsibility. creation have also been disappointing. Unemployment in The first phase of the process covers the ministries of Dili, where about a quarter of the formal labor force resides, education, health, agriculture and finance, to be followed by is estimated at 27 percent, and youth unemployment is a 4-5 other ministries and agencies before June 2007. The particular problem that appears to have exacerbated the core objective is to revamp the delivery of basic services intensity of the recent conflict. Unemployment rates in the and generate some 4-5,000 sustained jobs. rest of the country are much lower, with the national rate estimated at 8.5 percent, reflecting the prevalence of self- East Asia Update 49 APPENDIX TABLES Appendix Table 1. Quarterly Real GDP Growth - % Change Year Ago China Hong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand East Asia Kong (China) Q3 2000 8.6 12.5 5.3 8.2 8.4 7.2 10.9 6.5 2.4 7.8 Q4 2000 7.9 9.3 7.5 4.3 7.1 5.3 10.1 3.6 4.0 6.8 Q1 2001 9.1 2.4 4.4 3.5 2.9 1.3 4.7 0.6 1.7 4.8 Q2 2001 8.7 1.6 6.1 3.7 0.2 2.0 -0.6 -3.1 2.2 4.1 Q3 2001 8.1 -0.3 3.9 3.4 -1.2 1.4 -6.5 -4.6 2.1 2.9 Q4 2001 7.6 -1.0 1.0 4.6 -0.5 2.3 -6.1 -1.5 2.7 4.2 Q1 2002 8.8 -1.0 3.4 6.5 1.3 4.2 -0.6 1.3 4.5 5.0 Q2 2002 9.2 0.4 4.1 7.0 4.2 4.6 4.7 4.2 5.0 6.1 Q3 2002 9.3 2.9 5.2 6.8 6.0 3.3 6.4 6.1 5.8 6.7 Q4 2002 9.1 4.8 4.7 7.5 5.8 5.5 5.8 5.3 6.0 7.8 Q1 2003 10.3 4.4 4.9 3.8 5.0 4.8 2.9 3.4 6.8 6.5 Q2 2003 7.9 -0.7 5.2 2.2 4.7 4.3 -2.4 0.1 6.6 4.4 Q3 2003 9.6 4.0 4.6 2.3 5.3 5.4 3.6 4.2 6.7 6.1 Q4 2003 9.9 4.8 4.2 4.1 6.8 5.1 7.6 5.9 8.0 7.1 Q1 2004 9.8 8.1 4.1 5.4 7.9 6.5 8.5 7.6 6.7 7.7 Q2 2004 9.7 12.4 4.4 5.7 8.5 6.9 12.3 9.0 6.4 8.4 Q3 2004 9.5 6.8 4.6 4.7 6.8 6.0 7.5 5.5 6.3 7.1 Q4 2004 9.5 7.5 7.1 3.3 5.9 5.5 6.9 2.5 5.3 6.5 Q1 2005 9.9 6.0 6.3 2.7 6.1 4.2 3.4 2.5 3.2 6.1 Q2 2005 10.1 7.2 5.6 3.2 4.1 5.4 5.7 2.9 4.6 6.5 Q3 2005 9.8 8.2 5.6 4.5 5.3 4.8 7.6 4.2 5.4 7.0 Q4 2005 9.9 7.5 4.9 5.3 5.2 5.3 8.6 6.4 4.7 7.4 Q1 2006 10.3 8.0 4.7 6.1 5.5 5.7 10.8 4.9 6.1 7.7 Q2 2006 11.3 5.2 5.2 5.3 5.9 5.5 8.1 4.6 4.9 7.6 Source: Haver Analytics and national sources. Quarterly data for China is estimated using new annual production side GDPdata. Appendix Table 2: East Asia: Merchandise Export Growth (US $; % change form a year ago) Q2 Q3 Q4 Q1 Q2 Jun- Jul- Aug- Sep- Oct- 2004 2005 2005 2005 2005 2006 2006 06 06 06 06 06 East Asia (9) 25.6 18.1 17.6 18.3 17.3 20.0 19.4 20.3 20.0 23.1 SE Asia 17.6 13.6 13.4 12.9 12.5 14.9 17.2 19.6 20.4 18.3 Indonesia 13.8 21.8 25.7 11.8 20.2 12.3 18.0 26.1 26.2 22.2 16.8 Malaysia 20.8 11.4 10.8 8.4 13.3 13.7 14.5 14.6 19.8 17.5 Philippines 9.5 4.0 3.6 5.0 3.5 14.0 19.5 20.6 12.9 21.3 Thailand 19.9 14.5 12.3 23.1 9.7 18.7 19.2 20.7 19.6 15.7 15.4 China 35.4 28.4 30.9 29.1 21.7 26.6 24.1 23.3 22.6 32.7 30.6 NIEs 22.8 12.7 10.3 12.8 15.8 17.3 16.6 18.2 17.9 17.2 18.2 Hong Kong 15.8 11.6 12.6 13.0 10.4 12.8 5.6 6.9 10.7 9.8 4.4 Korea 12.1 24.6 9.0 15.4 11.6 11.4 16.3 15.2 12.4 17.0 21.3 11.5 Singapore 24.6 18.8 13.4 14.7 31.0 36.7 36.7 40.4 33.6 28.9 35.3 Taiwan (China) 20.7 8.8 6.0 7.1 14.2 11.9 13.7 16.2 20.6 16.1 17.3 East Asia Update 50 Appendix Table 3. East Asia and the Pacific: GDP Growth Projections Forecast Forecast 1999 2000 2001 2002 2003 2004 2005 2006 2007 East Asia 6.7 8.0 4.6 6.9 6.8 8.0 7.5 7.8 7.3 Developing East Asia 6.4 7.7 6.7 7.9 8.9 9.1 9.0 9.2 8.7 South East Asia 3.3 6.0 2.4 4.6 5.6 6.0 5.1 5.2 5.6 Indonesia 0.8 5.4 3.8 4.4 4.7 5.1 5.6 5.5 6.2 Malaysia 6.1 8.9 0.3 4.4 5.5 7.2 5.2 5.5 5.5 Philippines 3.4 6.0 1.8 4.3 5.0 6.2 5.0 5.5 5.7 Thailand 4.4 4.8 2.2 5.3 7.0 6.2 4.5 4.5 4.6 Transition China 7.6 8.4 8.3 9.1 10.0 10.1 10.2 10.4 9.6 Vietnam 4.8 6.8 6.9 7.1 7.3 7.8 8.4 8.0 7.5 Small Economies 9.1 3.2 3.9 3.6 5.3 6.6 7.6 6.4 5.3 Cambodia 12.6 8.4 7.7 6.2 8.6 10.0 13.4 8.9 6.5 Timor-Leste 15.4 16.6 -6.7 -6.2 0.4 2.3 0.3 8.0 Lao PDR 7.3 5.8 5.8 5.9 6.1 6.4 7.0 7.3 6.6 Mongolia 3.2 1.1 1.0 4.0 5.6 10.7 6.2 7.0 7.0 Fiji 8.8 -1.7 2.0 3.2 1.0 5.3 0.7 3.1 2.2 Kiribati 5.6 1.9 1.8 -4.3 2.3 -1.4 0.3 0.8 0.8 Marshall Islands 0.6 0.9 5.5 4.0 1.8 0.4 3.5 4.0 3.5 Micronesia, Fed. Sts. -3.1 8.4 0.3 1.1 5.1 -3.8 0.3 1.0 1.0 Palau -5.4 0.3 1.3 -3.5 -1.3 4.9 5.5 5.7 5.5 Papua New Guinea 7.5 -1.2 -0.1 -0.2 2.9 2.9 3.0 3.8 4.0 Samoa 2.3 7.0 7.1 4.4 1.6 3.2 5.4 4.3 3.1 Solomon Islands -0.5 -14.3 -9.0 -1.6 6.4 8.0 5.0 5.3 4.3 Tonga 3.1 5.2 1.8 3.0 3.2 1.4 2.3 1.9 0.6 Vanuatu -2.7 2.7 -2.7 -4.9 2.4 4.0 2.8 3.0 3.0 East Asia NIEs 7.3 8.4 1.1 5.2 3.2 6.0 4.7 5.1 4.5 Hong Kong (SAR) 3.4 12.4 0.6 1.8 3.2 8.6 7.3 5.9 4.9 Korea 9.5 8.5 3.8 7.0 3.1 4.7 4.0 5.1 4.5 Singapore 7.2 10.0 -2.3 4.0 2.9 8.7 6.4 7.4 5.0 Taiwan (China) 5.7 5.8 -2.2 4.2 3.4 6.1 4.0 4.0 4.0 Japan 0.2 2.8 0.2 0.1 1.8 2.7 2.6 2.9 2.4 Source: World Bank data and staff estimates. East Asia is the sum of Developing East Asia and the Newly Industrialized Economies. East Asia Update 51 Appendix Table 4: Primary Commodity Prices (US Dollars - % change from a year ago) Actual Projections 1980- 1991- Commodity 90 98 1999 2000 2001 2002 2003 2004 2005 2006 2007 Crude oil average 0.0 -5.7 38.3 56.2 -13.7 2.4 15.9 30.6 41.5 27.3 -1.3 Non-Energy Commodities -0.8 0.4 -11.2 -1.4 -9.1 5.3 10.2 17.5 13.4 20.9 -4.6 Agriculture -1.9 0.8 -13.9 -5.7 -9.1 8.6 9.6 10.5 7.9 10.9 -1.6 Cocoa -7.3 4.0 -32.3 -20.2 18.0 66.4 -1.5 -11.5 -0.8 0.8 3.2 Coffee, arabica -3.6 12.6 -23.2 -16.2 -28.5 -1.2 4.3 25.3 42.7 -2.5 -5.1 Coconut oil -1.4 10.6 12.0 -38.9 -29.4 32.4 11.0 41.4 -6.6 -2.8 -4.5 Palm oil -3.0 12.3 -35.0 -28.8 -7.9 36.6 13.6 6.3 -10.4 4.2 0.2 Rice, Thai, 5% 0.8 2.1 -18.3 -18.5 -14.6 11.0 3.0 20.3 20.4 6.5 3.3 Sugar, world 16.4 -2.8 -29.8 30.6 5.6 -20.3 3.0 1.1 37.8 60.6 -14.3 Logs, Malaysia 1.9 3.4 15.2 1.5 -16.3 2.7 14.5 5.4 3.0 18.2 8.3 Sawnwood, Malaysia 4.1 -0.1 24.1 -1.0 -19.1 9.4 4.6 5.5 13.2 13.0 2.7 Rubber, RSS1, Singapore -1.7 0.5 -12.9 6.2 -13.8 33.0 41.5 20.4 15.2 49.8 -6.9 Metals and minerals 2.9 -2.6 -2.3 12.6 -9.6 -3.1 12.7 37.1 26.7 41.6 -9.2 Tin -6.7 -0.7 -2.5 0.6 -17.5 -9.5 20.5 73.9 -13.3 8.4 -12.5 Copper 4.3 -4.1 -4.9 15.3 -13.0 -1.2 14.1 61.1 28.4 71.2 -12.7 Source: World Bank DEC Prospects Group. East Asia Update 52 Appendix Table 5: East Asia: Exchange Rates (LCU/$) Taiwan, China Indonesia Korea Malaysia Philippines Singapore China Thailand Yen Nov -2005 8.08 10035.00 1036.30 3.78 54.00 1.69 33.52 41.22 119.63 Dec -2005 8.07 9830.00 1013.00 3.78 53.07 1.66 32.85 41.07 117.97 Jan -2006 8.06 9395.00 971.00 3.75 52.34 1.62 31.99 39.08 117.71 Feb -2006 8.04 9230.00 969.00 3.71 52.09 1.62 32.46 39.31 116.25 Mar -2006 8.02 9075.00 975.90 3.69 51.28 1.62 32.46 38.83 117.40 Apr -2006 8.02 8775.00 945.70 3.63 51.83 1.58 31.91 37.52 114.30 May-2006 8.02 9220.00 947.40 3.63 52.65 1.58 32.02 38.13 112.24 Jun -2006 8.00 9300.00 960.30 3.68 53.59 1.59 32.40 38.22 114.95 Jul -2006 7.97 9070.00 953.10 3.65 51.62 1.58 32.76 37.85 114.80 Aug -2006 7.96 9100.00 959.60 3.68 50.94 1.57 32.91 37.58 117.32 Sep -2006 7.91 9235.00 945.20 3.69 50.39 1.59 33.10 37.54 118.03 Oct -2006 7.88 9110.00 944.20 3.65 49.81 1.56 33.26 36.75 116.88 Appendix Table 6: East Asia: Foreign Reserves Minus Gold (US$ Billion) Hong Kong Taiwan, China Indonesia Malaysia Philippines Thailand (SAR) Korea Singapore China Total Dec-1996 107.039 19.281 27.009 9.905 37.810 63.808 33.201 76.847 88.038 462.938 Dec-1997 142.762 17.396 20.788 7.178 26.254 92.804 20.369 71.289 83.502 482.341 Dec-1998 149.188 23.516 25.559 9.273 28.825 89.650 51.975 74.928 90.341 543.255 Dec-1999 157.728 27.257 30.588 13.282 34.063 96.236 73.987 76.843 106.200 616.185 Dec-2000 168.278 29.394 29.523 13.090 32.016 107.542 96.131 80.132 106.742 662.848 Dec-2001 215.605 28.016 30.474 13.476 32.363 111.155 102.753 75.375 122.211 731.428 Dec-2002 291.128 32.039 34.222 13.329 38.055 111.896 121.343 82.021 161.656 885.689 Dec-2003 408.151 36.296 44.607 13.655 41.077 118.360 155.282 95.746 206.632 1119.806 Dec-2004 614.500 36.320 66.418 13.116 48.665 123.540 198.994 112.232 241.738 1455.523 Dec-2005 821.514 34.724 70.203 15.927 50.692 124.246 210.317 115.794 253.290 1696.707 Jul- 2006 957.070 41.126 79.059 18.333 57.112 127.383 225.642 129.003 260.370 1895.098 Aug-2006 974.584 41.995 79.000 18.672 57.695 128.900 226.951 129.908 261.020 1918.725 Sep-2006 987.928 42.353 79.539 18.810 59.997 130.300 228.150 129.719 261.550 1938.346 Source: Haver Analytics, Datastream East Asia Update 53 Appendix Table 7: Regional Aggregates for Poverty Measures in East Asia $1 ­a-day $2-a-day Mean Consumption Headcount Number Headcount Number Population (1993 Index (%) of Poor Index (%) of Poor (mill.) PPP$/month) (mill.) (mill.) EAP 1990 68.03 28.8 456.9 66.9 1,060.8 1585.4 1996 99.84 14.7 252.1 49.6 851.2 1716.0 1999 101.93 15.5 274.8 49.9 884.8 1772.4 2000 113.40 13.9 247.9 45.8 820.0 1789.6 2001 121.48 12.9 233.7 43.2 780.1 1805.6 2002 131.81 11.7 212.5 40.1 731.7 1822.5 2003 139.57 10.5 193.1 37.3 685.7 1838.0 2004 149.61 9.4 173.3 34.1 630.9 1850.8 2005 162.22 8.1 151.2 30.9 575.6 1865.5 2006 174.78 7.6 143.2 29.3 550.5 1880.7 2007 188.30 6.8 129.5 27.3 516.8 1896.2 EAP less China 1990 96.44 21.8 96.3 59.1 261.2 442.1 1996 136.25 10.4 51.3 44.6 219.6 492.1 1999 123.58 11.0 56.4 50.8 261.2 514.5 2000 132.13 10.2 53.1 48.4 252.6 522.2 2001 135.55 9.6 50.8 47.3 250.5 529.3 2002 143.80 8.4 45.1 44.0 236.5 538.0 2003 145.44 7.5 40.9 41.2 225.0 545.7 2004 149.55 7.3 40.0 38.9 214.5 550.9 2005 155.29 6.1 34.2 36.2 202.1 557.8 2006 157.95 6.7 37.6 36.9 208.8 565.4 2007 163.80 5.9 33.6 34.6 198.1 573.1 S.E.Asia 4 1990 82.33 17.8 56.0 60.3 189.7 314.6 1996 111.23 7.9 27.5 43.6 152.7 350.2 1999 97.26 10.1 36.9 52.8 193.5 366.2 2001 104.27 8.6 32.4 48.7 183.7 377.2 2002 111.40 7.0 26.9 44.7 171.3 383.4 2003 114.13 6.7 26.2 42.1 163.7 389.2 2004 118.76 6.9 27.4 40.8 161.4 395.3 2005 123.68 5.9 23.7 38.2 152.9 400.4 2006 123.69 7.0 28.6 40.0 162.3 406.1 2007 128.60 6.2 25.5 37.5 154.3 411.8 Lower Income EA (Cambodia, Laos, PNG, Vietnam) 1990 45.21 47.7 40.3 84.6 71.6 84.6 1996 64.62 24.6 23.7 69.4 66.9 96.4 1999 68.68 19.1 19.5 66.5 67.6 101.6 2001 74.40 17.5 18.3 63.7 66.7 104.8 2002 75.77 16.9 18.1 60.9 65.2 107.0 2003 81.58 13.5 14.6 56.4 61.3 108.7 2004 89.42 11.7 12.6 49.3 53.0 107.5 2005 94.86 9.6 10.4 45.1 49.2 109.1 2006 99.89 8.1 9.0 41.9 46.4 110.8 2007 104.49 7.1 8.0 38.9 43.8 112.5 East Asia Update 54 Appendix Table 8: Poverty in East Asia - Country Estimates $1 ­a-day $2-a-day Mean Consumption Headcount Number Headcount Number Gini Population (1993 Index of Poor Index (%) of Poor Coefficient (mill.) PPP$/month) (%) (mill.) (mill.) Cambodia 1990 55.95 32.5 3.4 76.3 7.9 -- 10.3 1996 66.43 24.2 2.8 69.3 8.1 -- 11.7 1999 70.67 21.0 2.6 66.6 8.3 -- 12.5 2000 70.42 22.6 2.9 67.8 8.6 -- 12.7 2001 71.88 21.4 2.8 66.8 8.7 -- 13.0 2002 70.76 23.7 3.1 68.1 9.0 -- 13.3 2003 74.33 18.9 2.6 64.6 8.7 -- 13.5 2004 76.50 19.0 2.6 63.9 8.8 41.7 13.8 2005 85.99 12.4 1.7 56.2 7.9 -- 14.1 2006 90.65 11.0 1.6 53.8 7.7 -- 14.4 2007 94.00 10.0 1.5 52.0 7.6 -- 14.6 China 1990 57.05 31.5 360.6 69.9 799.6 36.0 1,143 1996 85.20 16.4 200.8 51.6 631.6 39.3 1,224 1999 93.07 17.4 218.4 49.6 623.6 42.6 1,258 2000 105.69 15.4 194.8 44.8 567.4 43.9 1,267 2001 115.65 14.3 183.0 41.5 529.6 44.9 1,276 2002 126.79 13.0 167.4 38.5 495.2 45.7 1,285 2003 137.09 11.8 152.2 35.7 460.7 -- 1,292 2004 149.63 10.3 133.2 32.0 416.4 -- 1,300 2005 165.18 8.9 117.0 28.6 373.5 -- 1,308 2006 182.02 8.0 105.6 26.0 341.7 -- 1,315 2007 198.91 7.2 95.9 24.1 318.7 -- 1,323 Indonesia 1990 61.58 20.6 36.7 71.1 126.7 28.9 178.2 1996 86.62 7.8 15.4 50.5 99.6 36.5 197.2 1999 66.80 12.0 24.9 65.1 135.0 31.0 207.4 2000 72.53 9.9 20.9 59.5 125.3 -- 210.5 2001 73.44 9.2 19.7 58.7 125.2 -- 213.2 2002 81.72 7.2 15.5 53.5 115.6 34.3 216.2 2003 83.98 6.6 14.5 50.1 110.0 34.1 219.4 2004 85.58 7.4 16.5 49.0 109.1 34.7 222.7 2005 90.21 6.0 13.6 45.2 102.1 34.9 226.1 2006 85.65 8.5 19.5 49.6 113.8 35.4 229.5 2007 89.47 7.5 17.5 46.4 108.2 -- 232.9 Laos 1990 39.16 53.0 2.2 89.6 3.7 -- 4.2 1996 48.27 41.3 2.0 83.1 4.1 -- 4.9 1999 51.56 36.6 1.9 80.5 4.2 -- 5.3 2000 53.31 33.9 1.8 79.4 4.3 -- 5.4 2001 55.48 31.3 1.7 77.4 4.3 -- 5.5 2002 56.91 28.1 1.6 75.0 4.2 34.6 5.7 2003 57.06 27.9 1.6 74.9 4.3 -- 5.8 2004 61.40 22.9 1.4 71.1 4.2 -- 5.9 2005 64.23 20.0 1.2 68.6 4.2 -- 6.1 2006 67.39 17.5 1.1 65.9 4.1 -- 6.2 2007 70.24 15.1 1.0 63.4 4.0 -- 6.4 East Asia Update 55 Appendix Table 8: Poverty in East Asia - Country Estimates (Continued) $1 ­a-day $2-a-day Mean Consumption Headcount Number Headcount Number Gini Population (1993 Index of Poor Index (%) of Poor Coefficient (mill.) PPP$/month) (%) (mill.) (mill.) Malaysia 1990 195.32 2.0 0.4 18.5 3.4 -- 18.2 1996 261.87 0.8 0.2 13.1 2.8 -- 21.1 1999 271.70 < 0.5 -- 12.6 2.9 -- 22.7 2000 304.27 < 0.5 -- 9.7 2.3 -- 23.3 2001 304.09 < 0.5 -- 9.7 2.3 -- 23.8 2002 310.00 < 0.5 -- 9.2 2.2 -- 24.3 2003 326.10 < 0.5 -- 8.0 2.0 -- 24.7 2004 354.20 < 0.5 -- 6.2 1.6 -- 25.1 2005 367.57 < 0.5 -- 5.4 1.4 -- 25.5 2006 382.53 < 0.5 -- 4.6 1.2 -- 25.9 2007 398.10 < 0.5 -- 3.9 1.0 -- 26.2 PNG 1990 82.18 29.7 1.2 59.4 2.3 -- 3.9 1996 93.15 24.6 1.1 54.4 2.5 48.4 4.6 1999 78.35 30.7 1.5 61.6 3.1 -- 5.0 2000 71.87 35.3 1.8 65.0 3.3 -- 5.1 2001 66.43 38.0 2.0 69.2 3.6 -- 5.3 2002 63.43 39.2 2.1 70.4 3.8 -- 5.4 2003 63.83 39.5 2.2 70.5 3.9 -- 5.6 2004 64.39 38.6 2.2 70.0 4.0 -- 5.7 2005 64.01 38.9 2.3 70.0 4.1 -- 5.9 2006 64.77 38.6 2.3 69.9 4.2 -- 6.0 2007 65.63 38.3 2.4 69.0 4.3 -- 6.2 Philippines 1990 90.32 19.1 12.0 53.5 33.5 -- 62.6 1996 107.15 14.8 10.6 46.5 33.4 -- 71.9 1999 107.20 13.5 10.0 46.9 34.9 -- 74.4 2000 106.93 13.5 10.3 47.2 36.0 46.2 76.3 2001 106.10 13.5 10.5 46.7 36.3 -- 77.9 2002 109.12 12.4 9.9 45.1 35.9 -- 79.5 2003 106.35 13.1 10.6 44.8 36.3 44.5 81.1 2004 110.72 11.7 9.6 42.8 35.2 -- 82.4 2005 114.26 10.8 9.0 41.2 34.5 -- 83.7 2006 118.49 9.6 8.1 39.3 33.4 -- 85.1 2007 123.15 8.4 7.3 37.4 32.3 -- 86.5 Korea 1990 301.09 < 0.5 -- < 0.5 -- 29.88 42.87 1996 480.46 < 0.5 -- < 0.5 -- 29.71 45.52 1999 450.06 < 0.5 -- < 0.5 -- 30.00 46.62 2001 496.18 < 0.5 -- < 0.5 -- -- 47.01 2002 519.96 < 0.5 -- < 0.5 -- -- 47.35 2003 557.51 < 0.5 -- < 0.5 -- -- 47.62 2004 545.12 < 0.5 -- < 0.5 -- -- 47.85 2005 537.13 < 0.5 -- < 0.5 -- -- 48.08 2006 553.91 < 0.5 -- < 0.5 -- -- 48.29 2007 577.51 < 0.5 -- < 0.5 -- -- 48.50 East Asia Update 56 Appendix Table 8: Poverty in East Asia - Country Estimates $1 ­a-day $2-a-day Mean Consumption Headcount Number Headcount Number Gini Population (1993 Index (%) of Poor Index (%) of Poor Coefficient (mill.) PPP$/month) (mill.) (mill.) Thailand 1990 102.88 12.5 7.0 47.0 26.1 43.8 55.6 1996 143.92 2.2 1.3 28.2 16.9 43.4 60.0 1999 123.50 3.1 1.9 33.6 20.7 -- 61.7 2000 125.42 5.2 3.2 35.6 22.0 43.2 61.9 2001 131.21 3.6 2.2 32.0 19.9 -- 62.3 2002 139.38 2.4 1.5 27.7 17.6 42.2 63.5 2003 145.46 1.6 1.1 24.0 15.3 -- 64.0 2004 151.53 1.8 1.2 23.8 15.5 42.5 65.1 2005 156.47 1.7 1.1 22.9 14.9 -- 65.1 2006 161.45 1.4 0.9 21.1 13.9 -- 65.7 2007 166.57 1.2 0.8 19.2 12.7 -- 66.2 Vietnam 1990 41.73 50.8 33.6 87.0 57.6 -- 66.2 1996 63.66 23.6 17.7 69.4 52.2 -- 75.2 1999 68.90 16.9 13.4 65.9 52.0 -- 78.9 2000 73.16 15.2 12.1 63.5 50.7 -- 79.9 2001 76.62 14.6 11.8 61.8 50.1 -- 81.0 2003 78.67 13.6 11.3 58.2 48.1 37.5 82.6 2004 85.63 9.9 8.3 52.9 44.3 -- 83.8 2005 95.36 7.8 6.4 43.9 36.0 37.0 82.0 2006 100.77 6.2 5.2 39.7 33.0 -- 83.1 2007 106.37 4.7 4.0 36.1 30.4 -- 84.2 Notes for Appendix Tables 7 and 8 The poverty lines in Tables 7 and 8 are set at $1.08 and $2.15 per person per day (in 1993 PPP$) for all countries. For most countries, 1993 World Bank PPP estimates are used. The PPP for the Philippines is from the Penn World Tables, while that for PNG is the 1996 World Bank PPP. PPPs for Vietnam, Lao PDR and Cambodia have been further adjusted using a calorie price ratio between Indonesia and Vietnam. Projections are based on World Bank growth rate forecasts for 2003-2004. Wherever possible, the projections utilize information on sectoral GDP growth rates, changes in the food CPI relative to the general CPI, changes in the GDP deflator relative to the CPI, and changes in the consumption-income ratio. The projections assume that there is no change in relative inequalities within sectors. For China, the projections are done separately for rural and urban China, and then aggregated using population shares. Estimates for all countries except Malaysia and China are based on surveys of household consumption. The estimates for Malaysia and China use income surveys. For China, a survey-based estimate of mean consumption is used in conjunction with the income Lorenz curves to derive poverty estimates. These poverty estimates differ from those commonly found in national poverty assessments for two main reasons. First, country assessments use national poverty lines that differ from the uniform international poverty lines used here. Second, national poverty lines also typically allow for spatial cost of living differentials within countries, but such adjustments are omitted here to maintain a consistent methodology across countries. For instance, in the case of Thailand, these differences explain why the above estimates indicate a small increase in poverty between 1998 and 2000 (in spite of adjusting the CPI by the change in the national poverty lines over this period), while national poverty line-based estimates indicate a decline. Also for Thailand, the 2002 estimate is based on a longer consumption module, which could lead to a small overestimation of consumption relative to 2000. Poverty estimates for the Philippines for the years 2001 and 2002 are an average of a "forward" projection using survey data for 2000 and a "backward" projection using survey data for 2003. East Asia Update 57 Appendix Table 9: NPLs in the Commercial Banking System of the Crisis-Affected Countries (% of total loans) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Dec Dec Dec Dec Dec Dec Dec Dec Mar Jun Sep Dec Mar Jun Sep Indonesia a/ 7.2 48.6 32.9 18.8 12.1 7.5 6.8 4.5 4.4 7.0 7.9 7.6 8.2 8.3 8.4 Korea b/ 6.0 7.3 13.6 8.8 3.3 2.4 2.2 2.0 1.9 1.7 1.5 1.3 1.2 1.1 Malaysia c/ 10.6 11.0 9.7 11.5 10.2 9.0 7.5 7.2 6.7 6.1 5.8 5.7 5.4 5.1 Philippines d/ 4.7 10.4 12.3 15.1 17.3 15.0 14.1 12.7 11.3 9.2 9.5 8.5 8.0 7.2 Thailand e/ .. 45.0 39.9 19.5 11.5 18.1 13.9 11.6 11.1 10.6 10.2 8.3 8.0 8.2 (a) Excludes IBRA's AMC; end-3Q 2006 data is as of Aug. (b) Excludes KAMCO/KDIC. The NPL ratio increased in 1999 due to the introduction of stricter asset classification criteria (forward looking criteria); (c) Excludes Danaharta. NPL series used by Bank Negara Malaysia, which is net of provisions and excludes interest in suspense; (d) From September 2002 onwards, the NPLs ratios are based on the new definition of NPLs (as per BSP Circular 351) which allows banks to deduct bad loans with 100 percent provisioning from the NPL computations; (e) Excludes transfers to AMCs. (Note that the jump in headline NPLs in December 2002 was a one-off increase, reflecting a change in definition and did not affect provisioning requirements). East Asia Update 58 Special Focus Investing in Young People in East Asia and the Pacific World Development Report 2007: Development and the Next Generation There are more young East Asians and Pacific these countries with unprecedented opportunities to grow Islanders aged 12 to 24 than ever before. The number of and to make further progress in reducing poverty if the young people in the region is at a historical peak of 450 right policies and institutions are in place. There are at million. They account for one-third of the developing least two reasons for this. world's 1.3 billion youth population, largely because of the large youth populations in China, Indonesia, the First, this generation of young people is more Philippines, and Vietnam. These numbers will decline in educated and healthier than previous generations, which is the near future because the region's fertility rates began to a strong base for countries to build on in a global decrease earlier than those of other regions (see Figure 1). economy that demands more than basic skills. Thanks to Within this overall picture, trends differ across countries the success of past policies, more young people are within the region. In China and Thailand, the youth surviving childhood diseases and completing primary population peaked over 15 years ago, but everywhere else school. For the region as a whole, primary completion the numbers of young people are at historical highs or will rates are close to universal, which is the highest rate of all continue to grow in the foreseeable future. the developing regions. Even in countries where primary completion rates are still far from universal (such as Figure 1: The number of young people in East Cambodia, Lao PDR, and Myanmar), recent progress has been dramatic, particularly in Cambodia where these rates Asia and the Pacific is near it's historical peak increased from less than 30 percent in the late 1990s to over 80 percent by the early 2000s. 500 450 Second, because of falling fertility, the large numbers of young people today will translate into higher 400 proportions of people of working age than of those of )sn East Asia South non-working age (chiefly children and the elderly), 350 Asia llioi Pacific meaning that more income will be available per m dependent. This demographic dividend can boost ni( 300 42-21 Sub economic growth. One study attributes more than 40 250 Saharan percent of the high growth rates in the countries known as Africa Latin America the East Asian "tigers" from 1965 to 1990 to their ability onita 200 and Caribbean to take advantage of this dividend.30 150 opulP This dividend will not be available forever 100 because this "demographic window of opportunity" will eventually close as this cohort ages. Happily, it is still 50 Middle East Europe and Central open for most of the countries in Eat Asia and the Pacific North Africa Asia 0 (see Figure 2). For middle-income countries such as 0 0 0 0 0 0 0 0 0 0 0 China and Thailand, the window of opportunity will close 195 196 197 198 199 200 201 202 203 204 205 within 10 years, which means that these countries need to invest in their young people urgently if they are to take advantage of this Source: UN Population Division, 2005 These large numbers could cause problems for the countries in question because of the need to employ all of these young people and to maintain social stability.29 However, high youth populations also present 29 Unemployment is not only costly to individuals in generates social unrest, potentially hurting the climate for terms of foregone learning while on the job, but it is also investment. costly to societies as high open unemployment also 30Bloom and Canning (2004). East Asia Update 59 Figure 2: Demographic windows of opportunity in East Asia and the Pacific Window closed Year window closes Similar: Ireland, Germany, Japan France, Czech Rep. Peak Year Window will close < 10 years Year window opens China Similar: Korea, Rep., Korea, Thailand Dem.Rep., Kazakhstan, Iran Window closes >10 years Philippines Indonesia Similar: Tonga, Vietnam Mongolia, Myanmar, Cambodia Malaysia, FSM, Fiji Window remains open beyond 2050 Similar : Vanuatu,Samoa Papua New Guinea Solomon Islands Lao PDR 19 19 19 19 20 20 20 20 20 Year 50 60 70 1980 90 00 2010 20 30 40 50 High Income Middle Income Low Income Source: UN Population Division, 2005 opportunity. For other countries in the region, especially This article summarizes some lessons from the the poorest, the window will remain open for much WDR 2007 as they apply to the East Asia and Pacific longer. region. The following sections discuss each policy lens in turn, focusing on three of the five transitions discussed in The dividend is also not automatic. For WDR 2007: transitions to learning, going to work, and example, in Latin America, the fertility rate in some growing up healthy. Each section begins by illustrating countries declined early, and these countries failed to reap the current youth status in the region. the growth dividend because they did not have the appropriate policies and institutions in place to develop 1. Broadening Opportunities for Young and deploy human capital effectively. So what are those People policies and institutions? The growth of East Asian economies has been The World Development Report (WDR) 2007, remarkably resilient. The rebound from the tumultuous Development and the Next Generation (World Bank, financial crisis of 1997-98 has recently been described as 2006b) argues that key policies and institutions are those a "renaissance."31 This growth has created many that develop young people's skills as they undergo five opportunities for young people to develop and use their life transitions. These transitions are: (i) continuing skills, but they continue to face several challenges in education beyond primary-school age, (ii) going to work terms of their transitions through education and into work. for the first time, (iii) growing up healthy, (iv) forming families, and (v) exercising citizenship. The WDR 1.1 Broadening Opportunities: Challenges outlines three lenses through which to assess the adequacy of a country's existing policies for addressing these transitions. Do they offer opportunities for young people Most EAP countries have almost universal to develop their human capital and use it productively? primary completion rates. Yet many children in Do they help young people develop their decisionmaking Cambodia, Lao PDR, and Myanmar drop out before capabilities to choose wisely among available completing primary school, and too many children never opportunities? Do they provide second chances when even start school. Also, for many, particularly the poor, choices are either unavailable or missed? 31Gill and Kharas (2006). East Asia Update 60 Figure 3: The transition to secondary school is a stumbling block for many students Proportion completing each grade Indonesia 2002 Thailand 2002 1 1 0.8 0.8 noit 0.6 onit 0.6 or oprP0.4 pororP0.4 0.2 0.2 0 0 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 Grade Grade Rich 20%M ale Rich 20%Female 0.2 Poor 40%M ale Poor 40%Female 0 Note: The richest 20 percent and poorest 40 percent are derived from an index of assets and housing characteristics. Figures are Kaplan-Meier estimates based on nationally representative samples of 10-19 year olds: http://econ.worldbank.org/projects/edattain. Figure 4: Learning achievement in EAP middle-income countries is low Pisa 2003 test score: mathematics TIMSS 2003 test score: mathematics 600 600 500 500 400 400 300 300 200 200 100 ai es ndalai aisi Br Ko avodl ai es occ tpy acir ile ro Eg Ch ainto aer donnI Th Tun .deFnaiss ilza eykr y y ar .p Tu guaurU iakav dnla coxie aer Ko estatS Slo Po M nguH Rehce estatS Mo Mo Es Ru Cz edtinU donnI senipipil Ph Afhtu So edtinU Poorest quintile of students Richest quintile of students Poorest quintile of students Richest quintile of students Average score Average score Source: World Development Report 2007. TIMSS 2003 test scores refer to grade 8. East Asia Update 61 there are barriers to making the transition to secondary However, in countries like the Solomon Islands, FSM and school, even in countries with high primary completion Tonga, even where such ratios are not so high, there are rates such as Indonesia and Thailand (see Figure 3). so few employment opportunities that open youth And the educational preparation of those who do unemployment exceeds 35 percent. In countries such as get access to secondary school is low, particularly among Indonesia and Thailand, adult unemployment rates are the poor. The average performance of adolescents from low but youth unemployment is six to nine times that of three middle-income EAP countries (Thailand, Indonesia, adults (see Figure 6). and the Philippines) on standardized tests is well below the OECD average of 500 (see Figure 4). These numbers Table 1: High returns to higher skills 34 are all the more worrisome because these assessments do (annualized returns to schooling) not include students who have already dropped out of Primary Lower General Tech. Tertiary school, who are likely to be the poorest and worst Second. Second. Second. performing students.32 Singapore 5.7 7.6 8.4 23.7 Thailand 5.2 14.3 11.5 13.4 22.1 Low learning achievement has knock-on effects Philippines 10.7 7.6 19.8 as the economies of East Asia are increasingly in need of Indonesia 5.6 8.6 10.7 11.7 13.6 workers with high skills and knowledge. This is reflected in the increase of the returns to upper secondary and, particularly, higher education relative to primary and lower secondary education despite the increase in their Figure 6: Unemployment is higher among young relative supplies (see Figure 5 and Table 1). people than among adults Figure 5: High and rising returns to higher skills Youth and Adult Unemployment Rates (annualized returns to schooling) 60 Youth(15-24) Vietnam - Rates of Return to Education 49 (Relative to Primary Education in 1998=1) 50 Adult(25-49) 10 Primary 40 Secondary 8 High school 30 27 Tech/professional 21 University 20 18 15 6 14 11 10 3 4 6 4 1 2 1 1 1 4 0 Is. esia Fiji 2 Solomon rLeste Indon mbodia Timo Mo ngoliaThailandVietnamCa Source: World Development Report 2007 0 1998 2002 Many of those who do find work are employed in dead-end jobs, which make it difficult for them to Another challenge is the rising youth escape poverty. Many young people start working in the unemployment rate in many countries in East Asia, which informal sector, which can be an important stepping may have a negative effect on social cohesion.33 Young people everywhere tend to have higher unemployment rates than adults (twice as high in rich countries). 34Note: Estimates are based on log wage regressions for male workers whose primary employment was in the wage sector aged 18-65. Source: Vietnam (Living 32In Thailand and Indonesia, the proportion of 15 year Standards Survey, 2002), Indonesia (Susenas, 2003), olds in school in Grades 7 and above is 84 and 73 percent Thailand (Socioeconomic Survey, 2002), Philippines respectively, while 85 percent of Philippino young people (Annual Poverty Indicator Survey, 1999), Singapore are enrolled in Grade 8. (Labor Force Survey, 1998). 33Gill and Kharas, 2006. East Asia Update 62 stone, as in Latin America where the vast majority of the lower secondary level and to make lower secondary apprenticeships occur in this sector. However, a study school part of the basic and compulsory education cycle. suggests that growing informality may be fueling growing While all EAP countries have moved admission tests and inequality between the rich and the poor in urban areas in vocational specialization to upper secondary or beyond, countries such as China.35 In Indonesia, new jobs for thus giving students enough time to build a solid young people are increasingly being created in the academic base before having to choose an occupational informal sector while at the same time employment in the specialization, lower secondary education is still not formal sector is in decline, indicating that young people compulsory in low-income countries like Cambodia and may be getting stuck in jobs that do not enhance their Lao PDR, and even in the Philippines. human capital.36 Such poor opportunities can lead to discouragement. The proportion of young people aged However, the universalization of lower between 15 and 25 who are neither working (in formal or secondary education should not come at the expense of informal sector) nor in school is large in countries like quality. In Korea, the government's strong commitment to Indonesia (21 percent) and FSM (28.3 percent). quality education and partnership with the private sector 1.2 Broadening Opportunities: What is to be allowed the secondary education sector to expand without compromising its quality. Vietnam has increased Done? secondary enrollment substantially since the early 1990s while also improving quality by introducing an effective Those countries in East Asia that have cost-sharing system.39 To ensure that basic education successfully increased the opportunities available to equips children with key basic skills, standards need to be young people to develop and deploy their human capital set and evaluation systems need to be set up to monitor have focused on ensuring: schools' performance. The success of these measures ultimately depends on having well-prepared and · The quality of basic education motivated teachers and schools that are accountable for · The relevance of post-basic education for work and their performance. life 1.2.2. Increasing the Relevance of Post-basic · That economic growth fuels the demand for young Education for Work and Life workers · Labor market mobility Middle-income EAP countries are challenged by · Opportunities for migration. the growing demand for higher levels of skills. Labor markets are increasingly demanding workers who are 1.2.1. Improving the Quality of Basic Education capable of creative and critical thinking. Surveys of the investment climate in Malaysia, Thailand, and Mongolia Large numbers of young people in EAP still do have also indicated that there is an increasing demand for not acquire the basic skills needed for further study, work, workers with communication skills as well. and life.37 Because learning is cumulative, early Entrepreneurship also requires thinking skills and such investments in children can increase their subsequent behavioral skills as self-confidence and leadership.40 learning achievement and yield larger returns than later investments. For example, a program in the Philippines The rising demand for these skills is largely that combines education in preschools, health stations, unmet by the current education systems in EAP countries. and homes (parenting classes) has yielded significant The curricula remain too theoretical and fact-centered and gains in children's cognitive, motor, language, and social provide little variety and flexibility. development, especially among children under the age of four.38 So there is clear evidence that these early The mismatch between the demand and supply investments, complemented with subsequent learning of skills and its negative impact on growth are already investments in school, pay off. being felt in a number of EAP countries. In a recent survey of the investment climate in Malaysia, about 50 A critical step towards ensuring that all young percent of firms believed inadequate worker skills were people have the basic skills necessary for work and life is to defer selection and specialization of students until after 39The new system included the creation of semi-public and private schools and the introduction of fees and, more 35Gill and Kharas (2006). recently, steps towards eliminating basic education fees 36World Bank (2004b). for poor children. The additional resources were used to 37Basic skills denote the minimal set of abilities needed enhance quality (notably for effective textbook and for further learning, work, and life, including numeracy teacher training policies) and to improve further the and literacy and basic behavioral skills such as governance of the education sector (World Bank, 2006a: perseverance, self-discipline, and self-confidence. LAC-EAP secondary education book). 38Armecina et al (2006). 40Lee and Wong (2005). East Asia Update 63 the "top obstacle to business." In Vietnam, about 50 the general and vocational curricula by introducing percent of firms in the textiles and chemical sectors vocational content into the academic curriculum as consider the supply of skilled labor to be inadequate for electives. their needs. Software companies also report that local IT training institutions fail to churn out qualified graduates Connecting School and Work. School and work and that they have to spend at least one year retraining also need to be more connected. The German "dual them. system," which combines schooling with work, has been tried in several EAP countries, but success has been Countries that have succeeded in meeting the limited mainly because of the inability of these countries growing demand for post-basic skills41 have taken a to create jobs for apprentices and to ensure sustainable number of identifiable steps that have contributed to their employment for them thereafter.43 In Japan, full-time success. schooling is followed by full-time employment in enterprises closely connected with the school. The Providing Diverse and Flexible Post-basic transition from school to work can also be eased by Learning Options. Upper secondary education is still linking educational institutions with prospective heavily directed towards preparing students for academic employers so that the employers can provide feedback on university degrees, except in China, Indonesia, and the relevance and effectiveness of the curriculum. Formal Thailand where vocational education accounts for university-industry partnerships are rare in EAP countries. between 30 and 40 percent of total enrollment in upper In China, universities and research institutes (URI) have secondary schools. Students who chose vocational tracks contributed a great deal to the growth of local industry. should also be given the opportunity to enter higher Some of the largest Chinese high-tech firms (such as education. Higher education is also heavily biased Lenovo and Tongfang) are spin-offs established to make towards academic university degrees except in China and and market URI's inventions. Malaysia, where half or more of all students are enrolled in shorter, more occupationally oriented programs. Strengthening Educational Finance. Expanding Governments can greatly facilitate the expansion and and improving post-primary education can be costly. EAP diversification of post-primary education by encouraging countries should be able to raise the additional resources the private sector to become involved in financing and needed through a combination of cost-sharing, public- providing schools, while the governments themselves private partnerships, and efficiency enhancements, and ensure quality standards throughout the education system. some will also need help from donors. Vietnam and Korea The private sector is small but rapidly growing in most managed to finance the expansion and improvement of EAP countries, except in the Philippines where it secondary education by a combination of contributions accounts for two-thirds of higher education enrollment. from the families of students and working with the private Private schools in the Philippines need to go through a sector. Soliciting contributions from those parents who probationary period after which they can ask to be are able and willing to pay prompts parents to become accredited, which would enable them to receive more engaged in the school's management and therefore government funds.42 Educational accreditation system is, to hold it accountable. Free tuition is neither fiscally however, rare in EAP countries. sustainable nor pro-poor, particularly at the higher education level. To ensure equitable access, cost-sharing Making School Curricula More Relevant to the needs to be accompanied by grants, loans and learning Skills Needed in the Economy. School curricula can be accounts (see below). In the Philippines, the private sector made more relevant to producing the skills needed by the has played a key role in the expansion of tertiary modern economy by teaching practical subjects, thinking enrollment. Private universities in the Philippines can skills, and higher order behavioral skills (such as receive government funding (including subsidies for decision-making skills, teamwork, the ability to negotiate students) provided they are accredited. conflict and manage risks), as well as blending the academic and vocational curricula at the upper secondary Efficiency can be increased by applying formula level. These were the goals of the recent reform of the funding (which uses indicators such as enrollment rates) secondary education curriculum in Malaysia. The new to channel funding to education institutions, particularly curriculum includes health and civic education as core in countries where the institutions have considerable subjects in upper secondary schools and has introduced autonomy over how to use the funds. Secondary school such practical subjects such as science and technology, autonomy over the design and allocation of their budgets English language, and economics. It has also integrated has been associated with efficiency gains in Indonesia, Thailand, and Korea. Formula funding can also be 41 combined with competitive funding. In Indonesia, about Post-basic skills include thinking skills, higher order behavioral skills, specific knowledge applied to real-life situations, and vocational skills. 42World Bank (2004b). 43Johanson and Adams (2004). East Asia Update 64 25 percent of the recurrent budget to public universities is employability for the future. Leaving training to firms, allocated through competitive funding. either in formal or informal sector, does not ensure that all young people can get access to training,47 which calls for 1.2.3. Increasing Job Opportunities for Young People public intervention. But the track record of public training institutions in providing training to young people is very Economy-wide growth tends to be a rising tide poor. These public training programs are more effective that lifts all boats, including those of young people. when they include employment services, counseling, and Growing intra-regional trade and the rising importance of training in life skills (see below).48 China, Korea, intra-industry trade in EAP are together creating diverse Malaysia, and Singapore have launched on public-private new job opportunities. Because the young are most able to partnerships to diversify the financing of these programs, meet new and growing demand for labor, these shifts to make them more sustainable and relevant, and to favor young workers -- not only because of the large increase access to them. numbers, but also because youth are typically more mobile and may be more adaptable than older workers to new production methods. In Indonesia, the industries with Entrepreneurship. Another option for the young the highest shares of young workers (more than twice the is self-employment, but young people face many more national average) are electronics and textile constraints to starting a business than their elders because manufacturing, both of which are heavily engaged in of their lack of access to capital and networks of potential exporting. clients and suppliers. As shown by the Doing Business indicators, EAP countries could do more to reduce the Young workers in these youth-intensive bureaucratic and legal hurdles to starting a business, exporting sectors are disproportionately well-educated; 47 though some countries such as China and Indonesia have percent have completed secondary schooling compared already made efforts in this direction. Programs that with only 11 percent of other young workers. In Vietnam, promote youth entrepreneurship specifically may be an the comparable percentages are 20 percent and 8 effective way to increase youth employment, but this is an percent.44 As wages in these firms tend to be high, area in which there is little solid evidence of what growth in export-oriented sectors can also give young works.49 people an incentive to acquire the skills required to get a job in these sectors. In Indonesia, young workers in the 1.2.4. Generating Job Opportunities through Migration youth-intensive exporting sector were paid 30 percent more than young workers in other sectors and 20 percent Geographic mobility broadens opportunities. In more than young workers in other manufacturing firms. this respect, the young are well positioned because they represent a disproportionately large share of all migrants More Flexible Labor Markets. In many both to urban areas and to other countries. However, there countries, labor market institutions penalize new entrants. is a need for governments to help young migrants to According to the 2007 Doing Business Report (World assimilate into their new communities and to minimize Bank, 2006c),45 labor market regulations in EAP as a potential stress on the host populations. Rural to urban whole tend to be relatively flexible, but there is wide migrants often face poor working conditions and limited variation among countries. For example, Malaysia and access to social services. Migrants also lack information Thailand have little employment rigidity, while the labor on required skills in the labor market. Recognizing the markets in Cambodia and Indonesia are more rigid.46 mismatch between the skills of these migrants and the demands of urban labor markets, the Chinese government Job Training. Many young people who start out has recently introduced a Rural Migrant Labor Training in the informal sector need to learn new skills while Plan (2003-2010). working in these jobs. If they are given practical on-the- job training in occupational and general behavioral skills International migration to larger economies is in these informal sector jobs, then this will increase their crucial for expanding the employment opportunities for young people, especially for young people from the Pacific Islands. However, this international migration is 44 Authors' calculation using Investment Climate Surveys currently an option just for skilled workers. Governments for Indonesia and Vietnam. can expand these international opportunities to a wider 45Compared with other regions and the OECD, EAP has the lowest indices for difficulty in hiring and firing as well as rigidity of hours (with South Asia), hiring costs 47Large exporting firms with foreign ownership that tend (second lowest after South Asia), and firing costs (third to demand higher skilled labor are the most likely to lowest after ECA and OECD). provide training to their employees (Johanson and Adam, 46More research is, however, needed to assess the degree 2004). of labor market rigidity (beyond the assessment of labor 48Betcherman, Olivas, and Dar (2004). legislation) and its impact in EAP countries. 49World Bank (2006b). East Asia Update 65 group of workers, for example, by developing bilateral Mongolia, and Vietnam and more than 80 percent in work arrangements with other countries, by recognizing Indonesia and the Philippines think that HIV can be the skills gained by migrants while abroad, and by transmitted through witchcraft or mosquito bites or that a lowering remittance costs. They can mitigate some of the healthy-looking person cannot have the AIDS virus.50 risks associated with migration by providing job counseling and better information (for example, to reduce the risk of trafficking especially of women) and working Figure 7: Many young people, especially young with receiving countries to enable families to join men, consume tobacco migrants. Tobacco Use by Adolescents (age 13-15) % Vietnam 2. Developing the Decision-making Capabilities of Young People Singapore Cambodia Expanding opportunities is critical, but it is not enough. It is also important to help young people to China choose among those opportunities. Lao PDR 2.1 Developing Capabilities: Challenges Phlippines Fiji As young people grow up (broadly between the ages of 12 and 24), they gradually take over from their Myanmar parents the power to make decisions about their lives. Indonesia Yet many young people must make these Palau decisions without the information, financial resources, or decision-making skills needed to make good choices 0 10 20 30 40 50 60 among life's opportunities. Take, for example, the question of safeguarding one's health. Youth is a time for Note: *Data for males only from WDR 2007. Others are experimentation when many people begin smoking, taken from World Bank (2004a) Youth in Numbers. consuming alcohol and drugs, engaging in sex, and having more control over their diet and physical activity. The chances of young people making the wrong choices 2.2 Developing Capabilities: What is to be Done? are heightened by the fact that they may not be aware of the costs of such risky behavior until they are older. This Risky health behavior during youth can deplete is dangerous for those who are less risk averse and the economy of productive human capital for many years discount the future too heavily. into the future. The best way to avoid the future loss of productive human capital and steep increases in future Although per capita consumption of tobacco is health care expenditure is to modify people's health declining in developed countries, it is rising in many behavior during their youth when habits are still being developing countries. Between 1970 and 1990, tobacco learned. Changing people's behavior is one of the most consumption rose by about 3.4 percent a year in low- and difficult goals to achieve, but three critical ways to do so middle-income countries. Also, people are beginning to are discussed in this section ­ informing young people, smoke at younger ages. In East Asia, smoking among helping them to command resources, and enhancing their very young people (aged 13-15) is especially prevalent in capacity to make good decisions. countries like Palau, Indonesia and Myanmar. (See Figure 7). 2.2.1. Informing Young People The major ways in which HIV is spread are unprotected sex and sharing infected injecting equipment. Use schools. Young people can be provided with Although the average prevalence rate of HIV is low in the the necessary information about good health practices in region, it has been a major health concern in countries several different ways. First, this information can be such as Cambodia and Thailand where the prevalence transmitted via the schools, which is where young people exceeded 1 percent among the population aged between pick up much of what they know about the practicalities 15 and 49. Knowing how to prevent transmission is of daily living. Health education programs and school crucial for avoiding the infection, yet misconceptions about HIV/AIDS are widespread among young people in 50UNICEF, Joint United Nations Program on HIV/AIDS, EAP. More than half of all young women in Cambodia, and WHO (2002) East Asia Update 66 health policies have been effective in increasing young In countries where many young people are not in people's knowledge and adoption of safe health behavior. school, it is important to go beyond the school-based While some countries in East Asia offer students approach. Both Cambodia and Thailand have contained information on HIV prevention, on reproductive health, the spread of HIV/AIDS partly through nationwide and on the dangers of tobacco, alcohol, and substance information campaigns that broadcast health information abuse, evidence suggests that most school curricula in the through the media, NGOs, and other information region need to be improved. For example, Vietnam providers. For example, in Thailand, NGOs were used to introduces HIV/AIDS education in schools to students outreach to commercial sex workers (CSWs), which has from the age of 8, but a recent report51 showed that, been crucial to Thailand's success in reducing the HIV among primary graduates aged 15 to 24, only 17.3 percent transmission through unprotected commercial sex. of women and 19.0 percent of men had comprehensive knowledge about HIV/AIDS.52 The percentages were Use new technology. Given that a very high 44.4 for women and 53.5 for men aged 15 to 24 among proportion of young people tends to use the Internet, this secondary graduates. can be an important conduit of information to young people, not just on matters of health but also education One way to improve this situation is to provide and work opportunities. A study in China showed that, specific rather than general information. It is also among young people aged between 16 and 25, 35 percent important that messages delivered through campaigns are use the Internet for online study, 31 percent use it for accurate and tailored to different targets. work, and 20 percent use it to search for medical information. More reliable information and greater Those who deliver information to young people guidance on how to access this information can be helpful must also be skilled at communicating with them. This to young people. Other new technologies that can be used requires that they receive better training and that better to provide information include SMS (text messaging). incentives are provided to attract people to become New Zealand succeeded in using this means to help school-based counselors. School-based career guidance young people to quit smoking. services, a fairly new initiative, have shown promising results in many countries. One consistent finding is that 2.2.2. Helping Young People to Command Resources their success depends on the quantity and quality of information available to counselors. Because young people are only beginning to be financially independent, they are more constrained in their Use options outside schools. It is not enough just consumption and investment choices than adults. to intervene in schools because so many young people Investing in secondary and higher education tends to be drop out, often because of poverty but also because young beyond the means of poor young people. The opportunity people can be poorly informed about the benefits of costs from foregoing work to stay in school are highest in continuing their education. Simple and relatively cheap poor countries like Cambodia where 43 percent of boys interventions that inform young people of the payoffs are already working by the ages of 10 to 12. In Vietnam, a from further schooling can help them to make better study has found that when children aged between 8 and decisions.53 13 work while also being in school, this reduced their school enrollment and educational attainment rates five years later.54 However, even in Thailand and Indonesia where most children complete primary school, large numbers of poor young people do not make it into lower 51General Statistical Office, National Institute of Hygiene secondary school or beyond. and Epidemiology [Vietnam] and ORC Macro (2006). 52Comprehensive knowledge here refers to knowing that A combination of grants, loans and savings people can reduce their chances of getting the AIDS virus schemes can help to ease the credit constraints on the by having sex with only one uninfected, faithful partner demand for education at the secondary and tertiary levels. and by using condoms consistently; knowing that a Need-based grants are more appropriate for lower healthy-looking person can have the AIDS virus; and secondary education, while loans and savings schemes are knowing that HIV cannot be transmitted by mosquito more suitable for upper secondary and higher education. bites or by sharing food with a person who has AIDS. 53 In the Dominican Republic, a survey of boys in the Conditional cash transfers (CCT), which provide final year of primary school showed that they cash to poor young people conditional on them attending underestimated the returns to completing secondary school, have proven to be effective in raising school school by up to a factor of ten. Boys at randomly selected enrollment in Latin America and are quickly becoming schools were then told about the "true" earnings premium popular in other parts of the world. In Cambodia, a to secondary education. Four years later they were found to have completed more years of secondary school than those who had not been told (Jensen 2006). 54Beegle, Dehejia, and Gatti (2004). East Asia Update 67 secondary school scholarship program for girls has had a PHA) have been given treatment through the auspices of significant positive effect on girls' attendance in the first government-led programs. Many PHAs who received grade of secondary school.55 treatment through these programs are now helping to plan and implement a wide range of HIV/AIDS programs Income-contingent loans are superior to using the extensive network of more than 300 PHA conventional loans because, by deferring payments until organizations. PHA peer educators play an essential role individuals start working and reach a certain income, they in providing health information and in promoting healthy have lower default rates and promote more equitable behavior when the availability of doctors and nurses is access and loan repayment. They also increase efficiency limited. Experience over the past few years indicates that by addressing uncertainty about future earnings and by PHAs can make a large contribution to helping others to facilitating consumption smoothing. They are often adhere to treatment by sharing experiences and providing collected alongside income tax or social security basic information in easy-to-understand language. The contributions and thus have in-built-in insurance against increased role of PHAs not only increased acceptance of borrowers' inability to repay since the loan repayment and support for PHAs within the health care system, but it falls if a borrower's income falls. However, they are hard also helped PHAs to regain self confidence and dignity.58 to implement and may be a realistic option only in some Providing remediation programs may trigger moral middle-income countries.56 Developing countries with hazard, which is a primary concern for policymakers, but, well-developed tax systems such as Thailand are only as Thailand's case illustrates, when people are given now starting to try such schemes. For countries with incentives to safeguard their health, then this risk can be poorly developed income tax systems, alternative mitigated. mechanisms such as targeted vouchers and individual learning accounts that encourage saving for education 3.2. Education may be better options.57 Many young people drop out of school without the basic skills needed to find productive employment. 3. Providing Second Chances This is a particular problem in low-income countries like Papua New Guinea, Myanmar, Lao PDR, and Cambodia Invariably, bad choices will be made. Young where many children drop out before completing primary people may drop out of school, begin working too early, school (or never start) and where literacy rates among 15 or end up with jobs that lead nowhere. This can result in to 25 year olds are low (for example, 67 percent in Papua an enormous missed opportunity not just for the young New Guinea and 79 percent in Lao PDR). But many but also for society as a whole. Policies that help young young people, particularly the poor, in middle-income people to recover from bad choices or to escape poor countries like Thailand and Indonesia also drop out of circumstances can provide a safety net that benefits school after completing basic education. A coherent society well into the future. However, because system of second-chance programs, such as equivalency remediation is costly, these programs must be targeted to education programs, literacy programs, and job training, those most in need, must be well coordinated with the is needed to meet the diverse needs of these young mainstream programs and must provide the right people. Involving the private sector and NGOs in incentives to beneficiaries. providing these programs can increase both diversity and enrollments. 3.1 HIV/AIDS The Philippines has a good example of an Thailand's experience in combating HIV/AIDS equivalence education program. This program has three highlights the essential element needed for the success of levels ­ basic literacy, primary, and secondary. Learners second-chance interventions ­ the need to align these are pre-tested to determine at which level they should programs with interventions that provide opportunities begin. The program is designed to be client-oriented and and enhance capabilities. This is necessary to give the flexible, with the curriculum and material being divided right incentives to beneficiaries, to avoid moral hazard, into short, self-paced modules. When ready for testing, and to achieve high payoffs from the investment. In the learner can register for national tests and, if Thailand, many people living with HIV/AIDS (known as successful, will receive certificates equivalent to the completion of primary or secondary education. The 55 program is supported by a strong private-public Filmer, Deon and Norbert Schady. 2006. 56 partnership that is key to its success ­ while the See Chapman (forthcoming). 57 government develops the curriculum, materials, and tests, Oportunidades in Mexico introduced Jovenes con accredited private sector institutions and NGOs deliver Oportunidades, through which conditional cash transfer the training beneficiaries accumulate points from the last year of lower secondary until the end of secondary school, which beneficiaries can tap for further study or to start a business if they complete high school before turning 22. 58World Bank (2006a). East Asia Update 68 Evidence from Entra 21 and Jovennes in Latin References America shows that job training programs need to be part of a larger package of services to maximize their impact. Armecina, G., Jere R. Behrman, P. Duazo, S. Chumanc, Both of these programs target disadvantaged young S. Gultianoa, Elizabeth King, and N. Lee. 2006. "Early people on a massive scale to provide them with technical Childhood Development through Integrated Programs: training combined with life-skills training. They also Evidence from the Philippines." World Bank. cooperate with both the public and private sectors to Washington, DC. Processed. providing internship opportunities to young people that may facilitate their later employment. The keys to the ASUCLA Student Media. 2005. Daily Bruin. "Taking a success of these programs are the high quality of the Swing at new life". Published on May 19, 2005. training providers, frequent feedback from employers, and strong institutions managing the programs. Beegle, Kathleen, Rajeev Dehejia, and Roberta Gatti, 2004. "Why Should We Care about Child Labor?" Because of the high cost of second-chance Washington, DC: World Bank Policy Research Division programs, it is important to direct them to those young Working Paper Series 3479. people who are most in need, and design them in ways that meet their needs. Geographical targeting may be a better option wherever poverty is clustered in specific Betcherman, Gordon, Karina Olivas, and Amit Dar. 2004. poor regions and in remote rural areas.59 "Impacts of Active Labor Market Programs: New Evidence from Evaluations with Particular Attention to Developing and Transition Countries." Washington, DC: 4. Footing the Bill World Bank, Social Protection Discussion Paper Series 0402. Some of the policy directions recommended here require a reallocation of resources. The biggest bill may Bloom, David E., and David Canning. 2004. "Global be needed to underwrite increasing access to and Demographic Change: Dimensions and Economic improving the quality of basic education, while expanding Significance." Cambridge, Mass.: Harvard Initiative for the definition of basic education to include at least some Global Health Working Paper Series 1. Available on line secondary education. However as their economies grow, at these sums of money are not beyond the capabilities of http://www.hsph.harvard.edu/pgda/working/working_pap most countries in EAP. er1.pdf. Other measures that have been mentioned here Chapman, Bruce. Forthcoming. "Income Contingent may require less financial capital than political capital. Loans for Higher Education: An International Reform" in Increasing the accountability of schools to students and Eric A. Hanushek and Finis Welch (eds.) Handbook of the their families or directing education subsidies towards Economics of Education. Amsterdam: North-Holland. those who need it the most are not easy to do. Neither is reforming employment protection legislation, which may Cohen, J. and D. Bloom. 2005. "Cultivating Minds." threaten the entitlements of older workers. Similarly, Finance and Development, June 2005, Volume 42, No. 2 . providing young people with more and better information and developing their capability for making decisions may Dupas, Pascaline. 2005. "Relative Risks and the Market be controversial. At the same time, there are many ways for Sex: Teenagers, Sugar Daddies and HIV in Kenya." to move forward that would allow young people, EHESS-PSE. Paris. Available on line at http://econ- supported by good policies and institutions, to flourish www.mit.edu/events/pdf.php?id=1115. Processed. and thereby contribute not only to their own futures but also to the future prosperity of the societies in which they Filmer, Deon, and Norbert Schady, 2006. "Getting Girls live. into School: Evidence from a Scholarship Program in Cambodia." World Bank Policy Research Working Paper 3910. This Special Focus was prepared by Emmanuel Y. Jimenez, Natsuko Kiso and Cristobal Ridao-Cano of the General Statistical Office (GSO). 2006. National Institute World Bank East Asia and Pacific Human Development of Hygiene and Epidemiology (NIHE) [Vietnam] and Department., with the assistance of Tomoko Nakata. ORC Macro. 2006. Vietnam Population and AIDS Indicator Survey 2005. Calverton, Maryland, USA: GSO, NIHE, and ORC Macro. 59School attainment in urban areas is between 33 percent Gill, Indermit and Homi Kharas. 2006. "An East Asian (the Philippines) and 50 percent (China, Indonesia and Renaissance: Ideas for Economic Growth." Washington, Thailand) higher than in rural areas. D.C., The World Bank. East Asia Update 69 UNICEF, Joint United Nations Program on HIV/AIDS Global Youth Tobacco Survey Collaborative Group. and World Health Organization. 2002. Young People and 2002. "Tobacco use among youth: a cross-country HIV/AIDS: Opportunity in Crisis. comparison." Tobacco Control 2002; 11: 252-70. Walker, S. P., S. M. Grantham-Mcgregor, C. A. Powell, Global Youth Tobacco Survey Collaborative Group. and S. M. Chang. 2005. "Effects of Early Childhood GYTS Factsheet, Pakistan-Quetta. Available online at Psychosocial Stimulation and Nutritional http://www.cdc.gov/tobacco/global/GYTS/factsheets/200 Supplementation on Cognition and Education in Growth- 4/pdf/PakistanQuetta_factsheet2004.pdf stunted Jamaican Children: Prospective Cohort Study." Lancet 366 (9499):1804-7. Hanushek, Eric A., and Ludger Wößmann. 2005. "Does Educational Tracking Affect Performance and Inequality? White, Howard. 2005. "Maintaining Momentum towards Differences in Differences Evidence across Countries." the MDGs: An Impact Evaluation of Interventions to Munich: IFO Working Paper Series 1. Improve Maternal and Child Health and Nutrition Outcomes in Bangladesh." Washington, D.C.: World Jensen, Robert. 2006. "Do the Perceived Returns to Bank, Operation Evaluation Division. Education Affect Schooling Decisions? Evidence from a Randomized Experiment." John F. Kennedy School of WHO, Government of India, and Centers for Disease Government, Harvard University. Cambridge, Mass. Control and Prevention. 2004. "Report on Tobacco Processed. Control in India" WHO Tobacco Control Papers. Paper India2004. Available online at Johanson, Richard K., and Arvil V. Adams. 2004. Skills http://repositories.cdlib.org/tc/whotcp/India2004 Development in Sub-Saharan Africa. Washington, DC: World Bank. World Bank. 2004a. "Addressing HIV/AIDS in East Asia and the Pacific." Health, Nutrition, and Population Series. Johnson, Jo and R. McGregor, 2006. "Are India and Washington, DC: World Bank. China Up to the Job?" Financial Times, July 19, 2006. World Bank. 2004b. East Asia Update: Strong Kaiser Family Foundation. 2006. "New Media and the Fundamentals to the Fore. Washington, DC: World Bank. Future of Public Service Advertising: Case Studies" March 2006. World Bank, 2006a. The Economics of Effective AIDS Treatment: Evaluating Policy Options for Thailand, Kremer, M., E. Miguel, and R. Thornton, 2004. Washington, DC: World Bank. "Incentives to Learn" Cambridge, MA: National Bureau of Economic Research Working Paper Series 10971. World Bank, 2006b. World Development Report 2007: Development and the Next Generation. Washington, DC: Lee, Lena, and Poh Kam Wong. 2005. "Entrepreneurship World Bank. Education ­ A Compendium of Related Issues." Singapore: SSRN Electronic Paper Collection Available World Bank, 2006c. 2007 Doing Business Report. online at http://ssrn.com/abstract=856227. Washington, DC: World Bank. National Research Council and Institute of Medicine, 2005. Growing Up Global: The Changing Transitions to Adulthood in Developing Countries. Washington, D.C.: The National Academies Press. Partnership for Child Development, 2006. Background note prepared for World Development Report 2007. United Nations Development Program. 2004. Thailand's Response to HIV/AIDS: Progress and Challenges, Bangkok, Thailand. UNESCO. 2005. Global Monitoring Report 2005. Paris: UNESCO. Available online at http://www.EFAREPORT.UNESCO.ORG Cambodia: Key Indicators 2002 2003 2004 2005/pr 2006 /p 2007 /p Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change, previous year) 6.2 8.6 10.0 13.4 8.9 6.5 Industrial production index (2000=100) 126.1 145.4 180.3 207.0 235 255 (% change, previous year) 15.0 15.4 24.0 14.8 13.5 8.5 Unemployment rate (%) .. .. 1.0 .. .. .. Real wage growth (%) .. .. .. .. .. Consumer price index (end-of-peroid % change) 3.7 0.5 5.6 6.7 5.0 4.0 Public Sector Government balance (% GDP) -6.6 -6.0 -4.7 -3.5 -2.6 -5.0 Domestic public sector debt (% GDP) .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (US$ million) -563 -533 -718 -983 -1,328 -1,567 Exports of goods, (US$ million) 1,755 2,027 2,476 2,695 3,014 3,328 (% change, previous year) 11.7 15.5 22.1 8.9 11.8 10.4 Key export, Garments (% change, previous year) 15.8 19.7 22.6 10.6 15.0 10.0 Imports of goods, (US$ million) 2,318 2,560 3,193 3,678 4,342 4,895 (% change, previous year) 10.7 10.4 24.7 15.2 18.1 12.7 Current account balance (US$ million, excl. off. tran -357.0 -497.0 -440.0 -594.0 -719.0 -825.0 (% GDP) -8.4 -10.8 -8.4 -9.6 -10.8 -11.5 Foreign direct investment (US$ million) 139 74 121 388 394 426 Total Debt Oustanding (US$ million) 2,626.0 2,740.0 2,976.0 3,180.0 2,277.0 2,513.0 (% GDP) 61.6 59.8 56.7 51.6 34.2 35.0 Short-term debt (US$ million) 216.8 221.4 262.1 279.4 220.0 220.0 Debt service ratio (% exports of g&s) 2.6 2.6 2.1 1.8 0.8 1.1 Reserves, Gross ($US million) 663 737 809 923 1,051 1,161 (months of imports of goods and services) 3.0 2.8 2.6 2.4 2.4 2.4 Financial Markets Domestic credit (% change, previous year) 8.6 28.3 33.0 10.9 10.0 10.0 Short-term interest rate (One year US dollar loans: rates 16.2 17.3 16.0 16.0 15.0 14.0 Exchange rate (end-period) 3,935 3,980 4,031 4,116 4,150 4,200 Real effective exchange rate (2000=100) 114.8 106.8 92.0 96.0 99.0 102.0 (% change, previous year) 1.1 -7.0 -13.9 4.3 3.1 3.0 Stock market index (end-period, Aug 88=100) .. .. .. .. .. .. Memo: Norminal GDP in US$ million 4,261 4,585 5,245 6,159 6,652 7,184 pr = preliminary p = projection China: Key Indicators 2002 2003 2004 2005 2006 /p 2007/p 2005 2006 2006 Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP ( % change previous year) 9.1 10.0 10.1 10.2 10.4 9.6 11.1 10.3 11.3 10.4 .. .. .. .. Industrial production index (value-added) 10.0 12.8 11.5 11.6 12.0 11.0 16.7 16.7 18.5 16.2 19.5 16.7 15.7 16.1 Unemployment rate (%) /1 4.0 4.3 4.2 4.2 4.4 .. .. .. .. .. .. .. .. .. Real wage growth 15.5 12.0 10.5 12.8 .. .. .. .. .. .. .. .. .. .. Consumer price index (% change, previous year) -0.8 1.2 3.9 1.8 1.7 2.1 1.4 1.2 1.4 1.3 1.5 1.0 1.3 1.5 Public Sector Government balance (% GDP) -3.0 -2.5 -1.5 -1.3 -1.0 -0.7 .. .. .. .. .. .. .. .. Domestic public sector debt (% GDP)/7 18.3 18.6 18.0 17.5 16.5 16.2 .. .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance ($US billion) 44.1 44.8 59.0 134.2 170.0 174.4 33.6 .. .. .. .. .. .. .. Exports of goods ($US billion) 325.6 438.4 593.4 762.5 948.3 1113.8 215.6 197.3 231.4 262.7 81.3 80.3 90.8 91.6 (% change, previous year)/2 22.4 34.6 35.4 28.4 24.4 17.5 21.7 26.6 24 29 23.3 22.6 32.8 30.5 Key export (% change, previous year) /3 23.9 35.8 37.0 29.0 26.1 18.2 22.8 .. .. .. .. .. .. .. Imports of goods ($US billion) 281.5 393.6 534.4 628.3 740.9 892.4 182 165.3 203.4 214 66.6 65.7 71.9 76.4 (% change, previous year)/2 21.2 39.8 35.8 17.6 17.9 20.7 22.1 24.8 18.3 21.9 18.3 19.7 24.6 22 Current account balance ($US billion ) 35.4 45.9 68.7 160.8 223.4 226.0 .. .. .. .. .. .. .. .. (% GDP) 2.4 2.8 3.6 5.6 8.5 7.5 .. .. .. .. .. .. .. .. Foreign direct investment (US$ billion)/4 52.7 55.5 60.9 86.1 76.3 67.0 .. .. .. .. .. .. .. .. Total external debt ($US billion) 186.1 208.5 247.5 281.6 .. .. .. .. .. .. .. .. .. .. (% GDP) 12.8 12.7 12.8 12.6 .. .. .. .. .. .. .. .. .. .. Short-term debt ($US billion) 65.7 88.1 115.8 148.3 .. .. .. .. .. .. .. .. .. .. Debt service ratio (% exports of g&s) 7.8 7.9 3.7 3.7 .. .. .. .. .. .. .. .. .. .. Reserves, including gold ($US billion) 292.0 409.2 615.5 822.5 .. .. .. .. .. .. .. .. .. .. (months of imports of goods and services) 10.5 10.6 12.0 13.0 .. .. .. .. .. .. .. .. .. .. Total reserves excl. gold ($US billion) 291.1 408.2 614.5 821.5 .. .. 821.5 877.6 943.6 987.9 943.6 957.1 972.0 987.9 Financial Markets Domestic credit (% change, previous year, nominal) 29.3 19.6 9.2 11.5 .. .. 10.7 .. .. .. .. .. .. .. Short-term interest rate (less than 20 days)/5 2.7 2.7 3.3 3.3 .. .. 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 Exchange rate (end-period) 8.3 8.3 8.3 8.1 7.9 7.8 8.1 8.0 8.0 7.9 8.0 8.0 8.0 7.9 Real effective exchange rate ( + = appn) 2000=100 101.9 94.5 91.9 91.9 .. .. .. .. .. .. .. .. .. .. (% change, previous year) -2.8 -7.3 -2.8 0.0 .. .. .. .. .. .. .. .. .. .. Stock market index (Dec. 19, 1990=100), close/6 1358.6 1154.0 871.8 787.0 .. .. .. .. .. .. .. .. .. .. Memo: GDP (US$ billion) 1453.8 1641.0 1931.7 2234.3 2669.2 3043.2 948.3 542.4 600.7 633.3 .. .. .. .. p = projection 1/ Official unemployment only, not including laid-off workers 2/ Norminal growth rate 3/ Manufactured exports 4/ Gross FDI 5/ Central Bank loans to financial institutions 6/ Shanghai Stock Exchange High Comprehensive Index (A share, Dec.19, 1990 =100) 7/ Includes treasury bond, policy financial bond and other financial bond (end-period outstanding) Fiji: Key Indicators 2002 2003 2004 2005 /e 2006 /p 2007/p Year Year Year Year Year Year Output, Employment and Prices GDP ( % change previous year) 3.2 1.0 5.3 0.7 3.1 2.2 Tourist arrivals ('000) 397.9 430.8 498.5 549.9 576 610 (% change, previous year) 14.3 8.3 15.7 10.3 4.7 5.9 Unemployment rate (%) .. .. .. .. .. .. Real wage growth (%) .. .. .. .. .. .. Consumer price index (% change, previous year) 0.8 4.2 2.8 2.4 3.5 3.8 Public Sector Government balance (% GDP) -5.6 -6.0 -3.2 -4.3 -4.0 -4.0 Domestic public sector debt (% GDP) 43.2 47.5 47.3 48.9 .. .. Foreign Trade, BOP and External Debt Trade balance (Customs data, US$million) -266.1 -413.8 -630.2 -742.0 -754.2 -671.0 Exports of goods (Customs data, US$million) 533.7 649.3 655.6 719.6 746.1 853.2 (% change, previous year) 5.4 21.7 1.0 9.8 3.7 14.4 Key export: Sugar (% change in value, previous year) 8.4 11.3 0.4 9.4 -9.6 -16.3 Imports of goods (Customs data, US$million) 799.9 1063.1 1285.8 1461.7 1500.3 1524.2 (% change, previous year) 3.4 32.9 20.9 13.7 2.6 1.6 Current account balance (US$million) -2.7 -174.3 -448.3 -465.9 -384.7 -254.3 (percent GDP) -0.2 -8.0 -17.4 -17.1 -13.2 -8.2 Foreign direct investment (US$million) 19.7 22.7 91.0 -14.1 .. .. Total external debt (US$million) 281 357 357 353 .. .. (% GDP) 15.7 16.4 13.8 12.9 .. .. Short-term debt (US$million) 36.7 86.1 75.3 75.3 .. .. Debt service ratio (% exports of g&s) 1.9 1.7 1.7 1.8 .. .. Reserves, including gold (US$million) 359 424 478 315 249 .. (months of imports of goods and non factor services) 3.6 3.1 3.8 3.9 2.8 .. Financial Markets Domestic credit (private, % change, previous year) 5.0 16.8 18.0 19.0 .. .. Short-term interest rate 1.25 1.19 1.75 1.75 .. .. Exchange rate (end-of-period) 2.06 1.72 1.65 1.74 .. .. Real effective exchange rate (2000=100 and + = appn) 100.8 107.6 109.8 109.2 .. .. (% change, previous year) 0.3 6.7 2.0 -0.5 .. .. Stock market index (end-period, Aug 88=100) .. .. .. .. .. .. Memo: GDP in US$ million 1797 2181 2582 2729 2923 3104 e = estimate p = projection Indonesia: Key Indicators 2002 2003 2004 2005 /e 2006 /p 2007 /p 2005 2006 2006 Year Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP ( % change previous year) /1 4.4 4.9 5.1 5.6 5.5 6.2 4.9 4.7 5.2 .. .. .. .. .. Industrial production index (2000=100) 107.7 113.6 117.3 121.9 .. .. 111.6 110.2 111.8 .. 111.8 120.7 128.3 136.5 (% change, previous year) 2.8 5.5 3.3 3.9 .. .. -6.6 -7.2 -6.8 .. .. .. .. .. Unemployment Rate (%) 9.1 9.5 9.9 10.3 10.6 .. .. .. .. .. .. .. .. .. Real Wage Growth (%) 1.0 7.1 0.3 .. .. .. .. .. .. .. .. .. .. .. Consumer price index (% change, previous year) 11.5 6.8 6.1 10.5 15.4 7.7 15.3 15.5 14.8 13.6 15.5 15.2 14.9 14.5 Public Sector Government balance (% GDP) /2 -1.1 -1.7 -1.0 -0.5 -1.1 -0.5 .. .. .. .. .. .. .. .. Domestic public sector debt (% GDP) 33.8 29.9 26.7 23.4 19.4 18.2 .. .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (million$US) 23,513 24,563 21,552 22,785 26,869 27,139 38,135 37,559 41,865 .. 2,815 3,438 3,268 .. Exports of goods, ($millionUS) 59,165 64,109 72,167 86,641 95,306 104,478 23,020 23,146 25,274 .. 8,483 8,823 8,888 .. (% change, previous year) 3.1 8.4 12.6 20.1 10.0 9.6 5.9 0.5 9.2 .. .. .. .. .. Key Exports, (% change, previous year) /3 -8.7 -3.6 16.1 15.3 18.1 16.8 22.8 19 28 .. .. .. .. .. Imports of goods, ($millionUS) 35,652 39,546 50,615 63,856 68,437 77,339 -15,115 -14,413 -16,591 .. 5,668 5,385 5,619 .. (% change, previous year) 2.8 10.9 28.0 26.2 7.2 13.0 1.3 1.2 1.4 .. .. .. .. .. Current account balance ($millionUS ) 7,823 8,106 3,109 2,997 3,947 3,338 602 2,564 1,980 .. .. .. .. .. (percent GDP) 3.8 3.4 1.2 1.1 1.1 0.8 0.8 3.1 2.2 .. .. .. .. .. Foreign Direct Investment (million US$) /4 145 -950 1,896 1,066 .. .. 1,035 484 491 .. .. .. .. .. Total external debt (million $US) 132,254 134,320 138,951 131,565 132,338 134,452 133,482 .. 128,911 .. 128,911 .. .. .. (% GDP) 64.9 55.2 54.6 46.8 37.5 33.9 .. .. .. .. .. .. .. .. Short-term debt (million $US ) .. .. .. .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% exports of g&s) .. .. .. .. .. .. .. .. .. .. .. .. .. .. Reserves, including gold ($US billion) 32,046 36,253 36,303 .. .. .. 34,579 .. .. .. .. .. .. .. (months of imports of goods and services) 7.6 7.0 5.6 .. .. .. .. .. .. .. .. .. .. .. Financial Markets 17 22 35 Domestic credit (% change, previous year) 4.7 5.3 17.8 15.5 .. .. 13.0 11.5 8.3 .. 7.4 5.1 4.1 .. Short-term interest rate /5 12.9 8.3 7.4 9.2 .. .. 12.0 12.8 12.5 .. 12.5 12.3 11.8 .. Exchange rate (average period) 9,311 8,500 8,938 9,704 .. .. 9,985 9,233 9,098 9,135 9,300 9,070 9,100 9,235 Real effective exchange rate (1990=100 and + = appn) 76.9 80.8 76.6 80.3 .. .. .. .. .. .. .. .. .. .. (% change, previous year) 21.7 5.2 -5.2 .. .. .. .. .. .. .. .. .. .. .. Stock market index (end-period, Aug 88=100) 424.9 653.0 753.0 1,162.0 .. .. 1,162.6 1,323.0 1,310.3 1,534.6 1,310.3 1,351.6 1,431.3 1,534.6 Memo: GDP in US$ million (based on Ex.rate eop.) 212,282 246,516 254,298 281,276 353,138 396,566 73,788 82,894 88,304 .. .. .. .. .. /1 Based on GDP 2000 base /2 Central Government budget, Indonesia fiscal, April-March, until the year FY1999. Covers only 9 months April-December in FY2000 and, starting FY2001, changes to January-December. /3 Crude oil exports /4 FDI starting 2004 using new classification /5 One month Bank Indonesia Certificates Korea: Key Indicators 2001 2002 2003 2004 2005 2006 2007 2005 2006 2006 Year Year Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP (% change, previous year) 3.8 7.0 3.1 4.7 4.0 5.1 4.5 5.3 6.1 5.3 4.6 .. .. .. .. Industrial production index (2000=100) 100.7 108.8 114.5 126.2 134.1 .. .. 147.3 142.4 146.0 144.2 146.1 136.9 141.6 154.0 (% change, previous year) 0.7 8.0 5.3 10.2 6.2 .. .. 10.4 12.1 11.0 10.6 10.9 4.5 10.9 16.3 Unemployment rate (%) 4.0 3.3 3.6 3.7 3.7 .. .. 3.5 3.9 3.4 3.3 3.4 3.4 3.4 3.2 Norminal wage (% change) 5.7 11.5 9.4 6.5 6.4 .. .. 5.7 5.5 5.6 .. 4.1 6.0 .. .. Real wage growth (% change previous year) 1.6 8.5 5.7 2.8 3.5 .. .. 3.1 3.1 3.2 .. 1.5 3.6 .. .. Consumer price index (% change, previous year) 4.1 2.8 3.5 3.6 2.8 .. .. 2.5 2.4 2.3 2.5 2.6 2.3 2.9 2.4 Public Sector Government balance (% GDP) 1/ 0.6 2.3 2.7 2.3 2.1 .. .. .. .. .. .. .. .. .. .. Consolidated central government debt (% GDP) 2/ 35.3 33.4 32.6 33.5 36.4 .. .. .. .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance ($US billion) 3/ 9.3 10.3 15.0 29.4 23.2 .. .. 6.1 1.5 5.0 2.5 2.0 .3 .3 1.9 Exports of goods ($US billion) 3/ 150.4 162.5 193.8 253.8 284.4 .. .. 76.8 73.9 81.5 82.9 28.0 25.8 27.3 29.7 (% change, previous year) 3/ -12.7 8.0 19.3 31.0 12.0 .. .. 11.4 10.6 16.9 16.6 17.9 11.1 17.0 21.3 Imports of goods ($US billion) 3/ 141.1 152.1 178.8 224.5 261.2 .. .. 70.7 72.4 76.4 80.4 28.0 25.8 27.3 29.7 (% change, previous year) 3/ -12.1 7.8 17.6 25.5 16.4 .. .. 14.6 19.5 20.0 21.4 22.0 18.6 22.9 22.6 Current account balance ($US billion ) 8.0 5.4 11.9 28.2 16.6 .. .. 5.4 -1.1 .7 .3 .9 -.4 -.6 1.4 (% GDP) 1.7 1.0 1.8 4.1 2.1 .. .. 2.5 -0.6 0.3 .. .. .. .. .. Foreign direct investment, net (US$ billion) 4/ 1.1 -0.2 0.1 4.6 0.0 .. .. -0.1 -1.3 0.8 -3.7 0.1 -0.1 -0.7 -2.9 Total external debt ($US billion) 128.7 141.5 157.6 172.3 190.0 .. .. 190.0 203.1 229.3 .. .. .. .. .. (% GDP) 26.7 25.8 25.9 25.3 24.1 .. .. 22.2 25.7 26.2 .. .. .. .. .. Short-term debt ($US billion) 40.3 48.2 50.8 56.3 65.8 .. .. 65.8 74.5 94.6 .. .. .. .. .. Debt service ratio (% exports of g&s) 5/ 12.6 12.5 13.1 10.6 8.5 .. .. .. .. .. .. .. .. .. Usable reserves ($US billion) 102.8 121.3 155.3 199.0 210.3 .. .. 210.3 217.3 224.3 228.2 224.3 225.6 227.0 228.2 (months of imports of goods and services) 7.2 7.9 8.6 8.8 8.0 .. .. 7.5 7.4 7.4 7.0 7.2 7.4 6.8 6.8 Financial Markets Domestic credit (% change, previous year) 6/ 13.8 18.2 9.3 2.4 9.4 .. .. 9.4 9.9 .. .. .. .. .. .. Short-term interest rate 7/ 4.7 4.2 4.0 3.6 3.3 .. .. 3.5 3.9 4.0 4.4 4.2 4.2 4.4 4.5 Exchange rate (end-period) 1313.5 1186.2 1192.6 1035.1 1011.6 .. .. 1011.6 971.6 948.9 946.2 948.9 955.2 961.5 946.2 Real effective exchange rate (2000=100) ( + = appn) 93.8 98.4 100.0 101.8 114.2 .. .. 115.2 121.3 122.8 .. 122.5 122.3 .. .. (% change, previous year) -6.2 4.9 1.7 1.8 12.1 .. .. 9.0 8.2 6.4 .. 5.7 7.4 .. .. Stock market index (1/4/1980=100) 693.7 627.6 810.7 895.9 1379.4 .. .. 1379.4 1359.6 1295.2 1371.4 1295.2 1297.8 1352.7 1371.4 Memo: GDP (US$ billion) 481.8 548.7 608.5 682.1 787.4 .. .. 214.2 197.9 219.1 .. .. .. .. .. p = projection 1/ Consolidated central government. Includes Social Security Funds. Source: IMF, Article IV, October 2006. 2/ Consolidated central government. Includes government-guaranteed KDIC and KAMCO restructuring bonds. Source: IMF, Article IV, October 2006. 3/ Trade figures are on a customs-clearance basis. 4/ Foreign direct investment is on a net basis as reported in the BOP. 5/ source: IMF 6/ source: IMF IFS 7/ Overnight repo rate (end-of-period). Lao PDR: Key Indicators 2002 2003 2004 2005 /e 2006 /p 2007 /p Year Year Year Year Year Year Output, Employment and Prices GDP (% change previous year) 5.9 6.1 6.4 7.0 7.3 6.6 Industrial production index (1993=100) .. .. .. .. .. .. (% change, previous year) .. .. .. .. .. .. Unemployment rate (%) .. .. .. .. .. .. Real wage growth (%) .. .. .. .. .. .. Consumer price index (% change, previous year) 10.6 15.5 10.5 7.2 7.7 5.0 Public Sector 1/ Government balance, after grants (% GDP) -4.0 -5.7 -3.4 -3.2 -3.2 -2.7 Domestic public sector debt (% GDP) .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (US$ million) -263.0 -244.0 -478.0 -553.4 -394.1 -878.6 Exports of goods (US$ million) 370.0 450.1 499.6 656.5 982.2 1004.4 (% change, previous year) 2.2 21.7 11.0 31.4 49.6 2.3 Key Export (% change, previous year) 1.7 22.1 10.8 32.6 53.6 2.1 Imports of goods (US$ million) 633.0 693.7 977.2 1209.9 1376.3 1883.0 (% change, previous year) -2.6 9.6 40.9 23.8 13.8 36.8 Current account balance (US$ million) -131.3 -174.6 -357.9 -573.0 -504.2 -934.5 (% GDP) -7.2 -8.2 -14.3 -19.9 -14.6 -24.9 Foreign direct investment (US$ million) 60.0 42.0 234.1 349.0 302.8 784.9 Total external debt (million US$ million) 1614.0 2171.0 2530.0 2910.0 3179.0 3428.0 (% GDP) 88.8 101.6 101.2 101.2 92.0 91.2 Short-term debt (US$ million) 150.6 71.9 95.3 108.6 118.7 128.0 Debt service ratio (% exports of g&s) 14.0 15.1 17.4 20.6 19.5 20.2 Reserves, excluding gold ($US million) 196.0 215.5 227.5 237.9 270.0 290.0 (months of imports of goods and services) 2/ 3.1 3.7 3.4 3.1 3.3 3.3 Financial Markets Domestic credit (% change, previous year) -48.0 10.5 20.6 18.8 .. .. Short-term interest rate 3/ 21.4 24.9 16.0 15.0 .. .. Exchange rate (everage) 10,115.0 10,571.9 10,613.1 10,671.0 10,292.8 10,586.8 Exchange rate (end-period) 10,680.0 10,466.5 10,377.0 10,800.0 10,463.0 10,711.0 Real effective exchange rate (2000=100 and + = appn) 97.3 97.6 103.2 106.7 .. .. (% change, previous year) 0.0 0.0 0.1 0.0 .. .. Stock market index (end-period, Aug 88=100) .. .. .. .. .. .. Memo: GDP (US$ million) 1,818.1 2,137.6 2,500.7 2,874.9 3,454.3 3,757.9 Sources: Recent IMF data and projections e = estimate p = projection 1/ Fiscal year basis 2/ Excluding large projects 3/ Treasury bill rate Malaysia: Key Indicators 2002 2003 2004 2005 2006 p/ 2007 p/ 2005 2006 2006 Year Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP (% change, previous year) 4.4 5.4 7.1 5.3 5.5 5.5 5.2 5.5 5.9 .. .. .. .. .. Industrial production index (2000=100) 101.2 110.5 122.5 127.5 .. .. 130.2 131.0 132.9 .. 135.4 136.8 138.4 .. (% change, previous year) 2.3 3.3 4.5 4.1 .. .. 5.5 5.8 6.1 .. 7.0 6.7 5.0 .. Unemployment rate (%) 3.5 3.6 3.6 .. .. .. .. 3.8 3.4 .. .. .. .. .. Real wage growth (%) .. .. .. .. .. .. .. .. .. .. .. .. .. .. Consumer price index (% change, previous year) 1.8 1.0 1.5 3.0 3.5 3.5 3.3 4.8 3.9 .. 3.9 4.1 3.3 3.3 Public Sector Government balance (% GDP) /1 -5.6 -5.3 -4.3 -3.8 -3.6 -3.0 -3.6 3.8 4.8 .. .. .. .. .. Domestic public sector debt (% GDP) 1/ .. .. 40.5 39.4 39.3 39.7 39.4 .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance ($US billion) /2 14.3 21.4 21.2 26.3 37.6 40.9 7.6 8.3 .. .. 2.2 2.5 2.8 .. Exports of goods ($US billion) /2 94.1 104.7 126.5 141.0 160.2 179.9 37.7 36.0 39.3 .. 13.4 13.8 14.6 .. (% change, previous year) 6.9 11.3 20.8 11.4 13.6 12.3 13.2 9.6 14.2 .. 14.6 19.8 17.5 .. Key export: Electronics (% change, previous year) 6.7 -2.6 20.8 19.1 .. .. 24.7 .. .. .. .. .. .. .. Imports of goods ($US billion) /2 79.8 83.3 105.3 114.6 122.6 139.0 30.2 27.7 33.0 .. 11.2 11.3 11.8 .. (% change, previous year) 8.2 4.4 26.4 8.9 7.0 13.4 8.1 .. .. .. 15.5 13.8 20.4 .. Current account balance ($US billion) 8.0 13.3 14.9 20.4 23.7 26.0 4.4 5.2 .. .. .. .. .. .. (% GDP) 8.4 12.9 12.6 15.5 16.1 16.0 6.8 .. .. .. .. .. .. .. Foreign direct investment (US$ billion) 1.3 1.1 2.6 3.3 .. .. .. .. .. .. .. .. .. .. Total external debt ($US billions) 3/ 48.9 49.1 52.8 51.8 .. .. 51.8 .. .. .. .. .. .. .. (% GDP) 51.3 47.3 44.6 39.7 .. .. 39.7 .. .. .. .. .. .. .. Short-term debt ($US billion) 3/ 8.5 8.8 11.5 12.2 .. .. 12.2 .. .. .. .. .. .. .. Debt service ratio (% exports of g&s) 6.6 6.2 4.4 .. .. .. .. .. .. .. .. .. .. .. Reserves, including gold ($US billion) 34.2 44.9 66.7 70.5 77.6 87.6 70.2 73.4 78.8 .. 78.8 79.1 79.3 79.5 (months imports of goods) 4.5 6.5 7.6 7.4 7.6 7.6 7.0 7.2 7.8 .. 7.8 8.0 8.1 8.1 Financial Markets .. .. .. .. .. .. .. Domestic credit (% change, previous year) 8.2 11.3 11.2 13.9 .. .. 13.9 .. .. .. .. .. .. .. Short-term interest rate /4 2.9 2.9 2.8 2.9 .. .. 3.1 .. .. .. .. .. .. .. Exchange rate (end-period) 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 Real effective exchange rate (1990=100, + = appn) 92.9 85.4 80.5 .. .. .. .. .. .. .. .. .. .. .. (% change, previous year) 0.1 -8.1 -5.8 .. .. .. .. .. .. .. .. .. .. .. Stock market index (4/4/1986=100) 646.3 793.9 907.4 899.8 .. .. 899.8 926.6 914.7 .. 914.7 935.9 958.1 .. .. .. .. .. .. .. .. Memo: GDP (US$ billions) 95.3 104.0 118.3 130.6 .. .. 34.5 34.1 35.2 .. 35.2 .. .. .. p = projection 1/ Federal government 2/ Customs-clearance basis 3/ Source: Treasury and Bank Negara Malaysia 4/ 3-month interbank rate Mongolia: Key Indicators 2002 2003 2004 2005 /e 2006 /p 2007 /p Year Year Year Year Year Year Output, Employment and Prices GDP (% change, previous year) 4.0 5.6 10.7 6.2 7.0 7.0 Industrial production index (1993=100) .. .. .. .. .. .. (% change, previous year) .. .. .. .. .. .. Unemployment rate (%) 3.4 3.5 3.6 3.5 .. .. Real wage growth (%) .. .. .. .. .. .. Consumer price index (% change, period average) 0.9 5.1 7.9 12.5 .. .. Public sector Government balance (% GDP) -5.9 -4.2 -2.1 3.2 .. .. Domestic public sector debt (% GDP) 3.0 14.9 7.7 4.6 .. .. Foreign Trade, BOP and External Debt Trade balance (US$ million) -228.9 -199.6 -149.0 -155.1 .. .. Exports of goods (US$ million) 524.0 627.3 872.0 1068.6 .. .. (% change, previous year) 0.2 19.7 39.0 22.5 .. .. Copper 140.2 161.7 284.0 308.0 .. .. (% change, previous year) -4.7 15.3 75.6 8.5 .. .. Imports of goods (US$ million) -752.8 -826.9 -1021.0 1223.6 .. .. (% change, previous year) 8.6 9.8 23.5 19.8 .. .. Current account balance incl. off. transfers (US$ million) -108.0 -99.0 26.6 29.4 .. .. (% GDP) -9.6 -7.7 1.7 1.6 .. .. Foreign direct investment (US$ million) 77.8 132.0 129.0 258.0 .. .. Total external debt (US$ million) 978.0 1237.0 1361.0 1308.0 .. .. (% GDP) 88.7 99.1 86.1 70.5 .. .. Short-term debt (US$ million) 0.0 .. .. .. .. .. Debt service ratio (% exports of g&s) 4.5 34.0 7.5 2.9 .. .. Reserves, including gold ($US million), gross 271 178 208 333 .. .. (In weeks of next year imports of goods & services) 3.9 1.5 1.6 2.1 .. .. Financial Markets Domestic credit (% change, previous year) 43.2 146.9 23.0 22.3 .. .. Interest rate on central bank bills 8.0 15.0 15.8 3.7 .. .. Exchange rate (end-period) 1125.0 1168.0 1209.0 1221.0 .. .. REER, end-period (1995=100) 111.0 106.0 104.0 .. .. .. (% change, previous year) -2.6 -4.5 -1.9 .. .. .. Stock market index (end-period, 1992=100) 933.9 895.9 .. .. .. .. .. .. Memo: GDP (US$ million) 1117.5 1274.5 1601.9 1880.9 .. .. e = estimate p = projected Source: Ministry of Finance and Economy; Staff estimates Philippines: Key Indicators 2002 2003 2004 2005 2006 /p 2007 /p 2005 2006 2006 Year Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP (% change, previous year) 1/ 4.4 4.9 6.2 5.0 5.5 5.7 5.3 5.7 5.5 .. .. .. .. .. Industrial production index (1994 = 100) 188.8 204.1 221.8 250.6 .. .. 280.7 241.4 258.9 .. 264.6 259.9 .. .. (% change, previous year) -1.7 8.1 8.7 13.0 .. .. 15.8 8.8 5.9 .. 7.5 3.0 .. .. Unemployment rate (%) 2/ 10.2 10.2 10.9 8.0 .. .. 8.1 8.2 8.0 .. .. 8.0 .. .. Nominal wage (% change) 3/ 10.3 0.0 3.6 9.9 .. .. 8.3 8.3 0.0 .. .. .. .. .. Real wage (% change) [1994=100] 3/ 7.0 -3.8 -0.2 52.6 .. .. -0.2 -6.8 .. .. .. .. .. Consumer price index (% change, previous year) 3.0 3.5 6.0 7.6 6.7 5.0 6.9 7.3 6.9 6.1 6.7 6.4 6.3 5.7 Public Sector Government balance (% GDP) 4/ -5.3 -4.6 -3.8 -2.7 -1.5 -0.7 -2.5 -4.9 2.5 .. .. .. .. .. Domestic public sector debt (% GDP) 5/ 34.4 35.5 35.2 32.2 .. .. 32.2 29.2 .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance ($US billion) 6/ 0.4 -5.5 -6.4 -7.5 .. .. -1.7 -1.5 -2.0 .. -0.6 -0.5 .. .. Exports of goods ($US billion) 6/ 34.4 35.3 38.7 40.2 .. .. 10.7 10.7 11.6 .. 4.0 4.0 4.3 .. (% change, previous year) 10.0 2.8 9.6 3.9 .. .. 2.4 14.5 19.9 .. 20.7 15.0 23.5 .. Key export: Electronics, semiconductors (% change) 11.3 34.5 11.2 1.9 .. .. 0.3 12.9 16.9 .. 16.9 -1.7 12.4 .. Imports of goods ($US billion) 6/ 34.0 40.8 45.1 47.8 .. .. 12.4 12.2 13.6 .. 4.6 4.5 .. .. (% change, previous year) 6.2 20.1 10.6 5.9 .. .. 9.4 12.8 14.4 .. 11.4 13.8 .. .. Current account balance ($US billion) /7 -.4 .3 1.6 2.4 2.7 2.1 1.1 1.4 1.5 .. 0.6 .. .. .. (% GDP) -0.5 0.4 1.9 2.4 2.3 1.7 3.9 5.3 5.3 .. .. .. .. .. Foreign direct investment (US$ billion) 1.7 0.2 0.1 1.0 .. .. 0.3 0.3 0.6 .. 0.2 .. .. .. Total external debt ($US billion) 8/ 53.6 57.4 54.8 55.5 .. .. 54.2 55.3 53.9 .. .. .. .. .. (% GDP) 69.8 72.1 63.3 56.4 .. .. 55.1 53.9 50.6 .. .. .. .. .. Short-term debt ($US billion) 8/ 5.6 6.2 5.0 6.2 .. .. 6.4 6.1 5.8 .. .. .. .. .. Debt service ratio (% of exports of g&s and income receipts) 15.6 18.7 9.9 15.5 .. .. 11.9 12.3 10.8 .. .. .. .. .. Reserves, including gold ($US billion) 9/ 16.4 17.1 16.2 18.5 .. .. 18.5 20.6 21.1 21.6 21.1 21.3 21.5 21.6 (months of imports of g&s and receipts) 9/ 4.7 4.3 3.8 3.8 .. .. 3.8 4.2 4.2 4.3 4.2 4.2 4.3 4.3 Financial Markets Net Domestic credit (% change, previous year) 4.8 4.8 9.5 -4.1 .. .. -4.1 -6.1 1.1 .. 1.1 0.2 .. .. Short-term interest rate 10/ 7.2 7.0 7.0 7.3 .. .. 7.8 7.9 7.9 8.1 8.0 8.0 8.0 8.1 Exchange rate (period average) 51.6 54.2 56.0 55.1 51.5 53.0 54.6 51.9 52.2 51.4 53.2 52.4 51.4 50.4 Real effective exchange rate (2000=100) 102.2 89.1 86.2 92.3 .. .. 96.4 101.8 100.0 .. 98.2 99.8 .. .. (% change, previous year) 0.4 -12.8 -3.2 7.0 .. .. 11.2 12.6 9.6 .. 7.4 9.3 .. .. Stock market index 11/ 1018.4 1442.4 1621.7 1983.1 .. .. 2052.0 2154.5 2248.5 2419.9 2178.8 2390.8 2312.2 2556.7 Memo: GDP (US$ billion) 76.8 79.6 86.7 98.4 117.7 126.9 28.4 26.4 27.8 .. .. .. .. e = estimate p = projection 1/ GDP series breaks in 2001 2/ Using new methodology effective 2005 3/ Non-agriculture, National Capital Region 4/ National government 5/ Total public sector domestic debt 6/ Balance of payment basis 7/ Revised 8/ BSP estimates 9/ GIR end of period; import cover is avg 10/ Interbank call rate 11/ Phisix (composite index) Thailand: Key Indicators 2002 2003 2004 2005 e/ 2006 p/ 2007 p/ 2005 2006 2006 Year Year Year Year Year Year Q4 Q1 Q2 Q3 Jun Jul Aug Sep Output, Employment and Prices GDP (% change, previous year) 5.3 7.0 6.2 4.5 4.5 4.6 4.7 6.1 4.9 .. .. .. .. .. Industrial production index (2000=100) 112.0 127.6 142.6 155.5 .. .. 160.2 167.0 162.9 .. 168.3 162.3 165.9 .. (% change, previous year) 9.1 13.9 11.7 9.1 .. .. 7.2 9.7 6.5 .. 6.5 6.3 7.4 .. Unemployment rate (%) 2.4 2.2 2.1 1.8 .. .. 1.5 1.9 1.7 .. 1.5 1.1 1.4 .. Real wage growth (%) 1/ -1.5 0.4 -0.4 2.4 .. .. 0.0 0.5 7.1 .. .. .. .. .. Consumer price index (% change, previous year) 0.6 1.8 2.8 4.5 .. .. 6.0 5.7 6.0 .. 5.9 4.4 3.8 .. Public Sector Government balance (% GDP) 2/ -1.4 0.4 0.1 -0.6 .. .. -5.7 -1.5 5.2 .. .. .. .. .. Domestic public sector debt (% GDP) 3/ 38.8 37.1 38.2 38.1 .. .. 38.1 34.1 34.8 .. 34.8 34.9 .. .. Foreign Trade, BOP and External Debt Trade balance (US$ million) 2,739 3,759 1,460 -8,530 -1,654 -4,402 -763.3 -224.5 -1,704.6 .. -424.5 -222.9 271.2 .. Exports of goods (fob, US$ million) 66,092 78,105 94,941 109,193 126,664 140,597 28,391 29,091 30,592 .. 10,762.4 11,042.8 11,728.0 .. (% change, previous year) 4.8 18.2 21.6 15.0 16.0 11.0 10.9 17.7 16.0 .. 17.3 17.7 17.0 .. Key exports: Rice and rubber (% change in US$, previous yr) 15.9 37.1 32.5 -1.4 .. .. -4.9 23.7 33.9 .. 39.5 78.2 28.1 .. Imports of goods (cif, US$ million) 63,353 74,346 93,481 117,722 -128,317 -144,999 29,154 29,316 32,297 .. 11,186.9 11,265.6 11,456.8 .. (% change, previous year) 4.6 17.4 25.7 25.9 9.0 13.0 19.6 5.5 3.3 .. 2.6 16.3 11.2 .. Current account balance (US$ million) 7,008 7,965 6,865 -3,666 3,156 108 897 1,656 -1,153 .. 64.9 308.5 812.6 .. (% GDP) 5.5 5.6 4.2 -2.0 1.5 0.0 1.9 3.4 -2.3 .. .. .. .. .. Foreign direct investment, net (US$ million) 4/ 1,023 1,882 814 3,098 .. .. 1,009 3,131 911 .. 185.2 381.9 .. .. Total external debt (US$ million) 5/ 59,459 51,783 51,312 52,040 .. .. 52,040 57,719 57,826 .. .. .. .. .. (% GDP) 48.8 40.3 35.7 32.4 .. .. 32.4 34.9 33.9 .. .. .. .. .. Short-term debt (US$ million) 5/ 11,919 10,904 12,174 16,014 .. .. 16,014 19,130 17,838 .. Debt service ratio (% exports of goods and services) 6/ 19.6 16.0 8.5 10.8 .. .. 12.8 9.1 6.8 .. Reserves, including gold (US$ million) 38,924 42,148 49,832 52,066 .. .. 52,066 55,266 58,057 61,593 58,057.4 58,796.3 59,355.7 61,592.7 (months of imports of goods) 7.4 6.8 6.4 5.3 .. .. 5.4 5.7 5.4 .. 5.2 5.2 5.2 .. Financial Markets Domestic credit (% change, previous year) 6/ 3.6 4.3 7.4 7.7 .. .. 7.7 .. .. .. .. .. .. .. Short-term interest rate (average period) 7/ 2.0 1.3 1.0 1.6 .. .. 2.5 3.4 4.0 .. 4.0 4.0 4.1 .. Exchange rate (average period) 43.0 41.5 40.2 40.2 .. .. 41.0 39.3 38.1 37.6 38.3 38.0 37.6 37.4 Real effective exchange rate (1994=100) 79.6 78.0 77.7 79.0 .. .. 80.1 82.6 85.2 .. 84.7 85.4 85.8 .. (% change, previous year) 2.0 -2.1 -0.3 1.6 .. .. 5.0 4.5 8.7 .. 9.0 9.7 9.4 .. Stock market index (Dec 1996=100) 356.5 772.2 668.1 713.7 .. .. 713.7 733.3 678.1 686.1 678.1 691.5 690.9 686.1 Memo: GDP (US$ billion) 126.9 142.9 161.7 176.6 .. .. 46.5 49.1 49.6 .. .. .. .. .. e = estimate p = projection 1/ Average wage of employed person from Labour force survey, National Statistical Office. 2/ Cash balance of central government. 3/ Include domestic central government (CG) debt, domestic debt of non-financial state enterprise and Financial institutions Development fund (FIDF) debt. 4/ Non-Bank FDI 5/ Source: Bank of Thailand 6/ Include those extended by financial institutions 7/ Average interest rates on time deposits of less than 6 months (percent per annum). Vietnam: Key Economic Indicators 2002 2003 2004 2005 e/ 2006 p/ 2007 p/ Year Year Year Year Year Year Output, Employment and Prices GDP (% change previous year) 7.1 7.3 7.8 8.4 8.0 7.5 Industrial production index (% change, previous year) 14.5 15.5 16.0 17.2 16.5 16.5 Unemployment rate (%, urban areas) 6.0 5.8 5.6 5.3 5.0 5.0 Consumer price index (% change, period-end) 4.0 3.0 9.5 8.4 7.0 6.5 Public Sector Government balance (% GDP) -1.4 -1.2 0.9 -1.2 -1.3 -1.5 Domestic public sector debt (accumulated, % GDP) 6.3 6.8 7.5 8.3 9.2 10.5 Foreign Trade, BOP and External Debt -3,027 -5,080 -5,469 -4,536 -4,708 -6,117 Trade balance ($US million) -3,027 -5,107 -5,451 -4,648 -6,314 -7,979 Exports of goods, ($US million) 16,706 20,176 26,485 32,442 38,963 45,197 Exports of goods (% change, previous year) 11.2 20.8 31.3 22.5 20.1 16.0 Key exports, (value, % change) - crude oil 4.6 16.8 48.3 30.3 18.0 0.0 Imports of goods, ($US million, cif) 19,733 25,256 31,954 36,978 43,671 51,313 Imports of goods (% change, previous year) 22.1 28.0 26.5 15.7 18.1 17.5 Current account balance ($US million ) -670 -1,930 -1,565 215 165 -505 Current account balance (percent GDP) -1.9 -4.9 -3.4 0.4 0.3 -0.7 Foreign direct investment ($US million) 2 1,900 1,900 1,980 2,150 2,600 Total external debt -DOD- ($US billion) 12.3 13.4 15.4 17.2 19.7 21.8 as percent of GDP 35.0 33.8 33.9 32.5 32.6 32.1 Debt service ratio (% exports of g&s) 8.3 7.5 5.9 5.5 5.6 5.8 Reserves, including gold ($US million) 3,695 5,620 6,314 8,560 11,460 15,000 Reserves (in weeks of imports of g&s) 7.2 8.7 8.5 9.8 11.2 12.5 Financial Markets Credit to the economy (% change, period-end) 22.2 28.4 41.6 31.7 22.6 23.6 Short-term interest rate (3-M deposits, period-end) 7.0 6.3 6.7 7.8 7.9 7.5 e = estimate p = projection Source: GSO, SBV, IMF and WB