East Asia and Pacific Update, April 2009
As countries in the East Asia and Pacific region prepare themselves for an expected surge in joblessness resulting from the global slowdown, a ray of hope may be emerging with signs of China’s economy bottoming out by mid-2009, says the World Bank's latest half-yearly assessment of the region's economic health. The report is available at http://www.worldbank.org/eapupdate.
Ivailo Izvorski, Lead Economist and author of the report, and Vikram Nehru, Chief Economist for the East Asia and Pacific region, took your questions in a live online chat on Thursday, April 16.
Thank you very much for taking part in today's discussion. We're sorry we weren't able to get to every question. For more on the World Bank's East Asia and Pacific Update, please visit http://www.worldbank.org/eapupdate. In addition, our country economics in Cambodia, Lao and the Philippines are also blogging about the report's finding as they apply to those countries. To read more on that, visit our blog at http://eapblog.worldbank.org/category/usertags/eap-update.
Resti raises an important question about incipient signs of protectionism -- important because if there is one thing we learnt from the 1930s Great Depression, it is that raising trade narriers compunds recessionary forces and prolongs the recovery process.
You probably know that at the G20 meetings in November last year and more recently in April this year, the leaders called to avoid protectionist measures. Unfortunately, 17 of the 20 countries present have implemented 47 measures (at last count) that in effect restrict trade at the expense of other countries (and I include among these, measures such a subsidies and other support packages).
There aren't too many signs of prtectionism in East Asia -- but there are some. For example, Indonesia now requires 5 categories of goods (garments, footwear, toys, electonics, food, and beverages) to pass through five ports or airports. China has also introduced a few import restrictions through tightening phytosanitary standards in food improts) and provided additional support to its car industry. And Malaysia has banned the hiring of foreign workers to preserve jobs for its own citizens.
But these East Asian actions are relatively few and minor compared to actions being taken in the advanced economies and in other developing regions. These include, for example, enormous subsidies for car manufacturing worldwide ($45 billion at last count, of which $43 billion is in the advanced economies).
Most important, however, is the point that the current contraction in global trade has little to do with protectionist measures -- and everything to do with global recessionary forces. Nevertheless, if such protectionist measures become more prevalent and widespread they will add to these cotractionary forces and prolong the recovery process.
I hope that answers your question, Resti.
What do you think regarding the economic growth on Asia Facifics region, and how about your prediction in Indonesia as well,during global crisis and how long it will impact to the global situation.
Indonesia's slowdown came somewhat later compared with other countries in the region, and growth in 2008 slowed by a very small margin compared with 2007. The contraction in global demand, nonetheless, will cause growth to slow to perhaps 3.4 percent in 2009 from 6.1 percent in 2008.
What do you think are the strengths and weaknesses of the Philippine economy and Asean region?
The Philippines is heavily dependent exports and forex remittances from overseas Filipino workers. What do you think are the bright spots of the Philippine economy?
I live in Vietnam now since about five years and came here since ten years. Iam German, European citizen, as I would diagnose myself before.I have studied the Asian culture by working with the people, and I have learned to understand many issues. The one is, that the Western world has behaved ignorant about the Asian one. And the ignorance could have cost all our lives. But the spiritual orientated Chinese and Asians give the Americans and Europeans a chance for a better global living, to understand, that we should not run after a golden lamb, which a few US bandits created and which nearly ruined the planet. Their task of destroing the community is unbelievable, but it is based on two criminal world wars and the robbery of assets, belonging to other countries. The scheme has been detected.
The new leadership for a global community is in the hands of Beijing, with an axle to Europe and a good understanding to Mr Obama, who has the duty to declare the US citizens, what has happened and what is the future in thinking and living.
Question: How do you see the roll of Worldbank and IMF in the future? IMF ia the arm, which has allowed the FED scheme, working like a "Central or State Bank, being nothing more than a company tool for high educated bankers and the biggest scandal in financial robbery in the past centuries. The century 2000 has used a political and celebrity coverage to act as the worst crime people - covered by humanitarian assistance. Which now leads to the problem, how to select the "real humanitarian organisations" from the crime ones. It is the duty of World Bank to take action and give confidence to the investors, donors, the governments and the leaders, the real asset holders for the century in front of us, which shall lead us to a global human understanding and equality.
Do you agree and how do you think, such can be performed?
But its only natural that the roles of the two institutions occasionally overlap. For example, for the Fund, problems of macroeconomic stability in a particular country may stem from underlying structural and institutional issues -- and getting the macro right often means improvements in policies that address microeconomic imediments or institutional weaknesses (areas that the World Bank is concerned about). And for the Bank, the success of development programs often need macroeconomic stability and a stable policy environments (issues that the IMF is concerned about).
For these reasons, the two institutions need to work closely together with one another -- as well as with other stakeholders in the development process in their client countries.
-Redesign the World’ Financial Architecture; Invest more in IMF
- Eliminate stock speculation; Introduce National Exchange
The communique gives a useful summary of the problems that led up to the crisis and the avenues that the largest and most important countries of the world are collectively pursuing to resolve them.
If after reading this, there is any further questions that you have, then please feel free to raise them with me.
Second question is developing a small economy strategy for exploiting the opportunities of the downturn? Is there one that mobilizes the resources and incentives of the private sector? Your report underlines the severity of the contraction in Cambodia, due in part to the contraction in TCF demand and in part to tourism contracton. But at some point demand for these products will resume ( in fact, tourism opportunities see to be emerging for those countries quick enough to capture the switch from Thailand and Fiji) and those countries or firms that have taken advantage of the downturn to restructure, improve quality etc. will be best positioned to resume their growth paths. I am seeing a little too much emphasis on fiscal and monetary policy solutions and too little on private sector development in not just this report, but across the globe in both developed and developing countries. This is leaving the private sector somewhat sidelined in the policy debate and solutions.
The first priority for the countries in the region is to combat the slowdown, protect their financial systems and, most importantly, alleviate the impact of the crisis on the poor and vulnerable. But a recovery in global demand will come. Countries will benefit from that to the extent they have improved competitiveness, are in a position to extract more growth from the domestic economy, and whose companies are able to diversify exports across regions and products.
th Asean counties.
The Asean meeting was cut short.
Do you think China will
atill try to assist the Asean countries?
I am not an economist, but I read with interest that the GDP Projection (Table 4) for Vanuatu is 3.0. This appears to be the 2nd highest projection for a country in the Pacific Islands (PNG is 4.7), and I wonder if you could comment in any way about the situation in Vanuatu, and why projections for Vanuatu are higher than most other Pacific states. I realize Vanuatu is not the focus of the report, but any general comments would help cast light on this matter.
- Since 2005, GDP growth has hovered between 6 percent and 7.2 percent. The growth rate in 2008 was 6.3 percent. The strategy of the Goverment prioritizes private sector development, macroeconomic stability, good governance, and public sector management and reform.
- Growth in 2008 was driven by strong growth in tourism and construction.
- Inflation has been moderate -- around 5 percent -- despite high fod and fuel prices last year. Reserves have been high, and the fiscal accounts have been broadly balanced or in surplus (they recorded a surplus of 2.3 percent of GDP in 2008, thanks to better-than-expected VAT revenues).
- a slowdown in construction activity (which is already happening), because capital flows from Australia and New Zealand are expected to ease.
- tourism and foreign direct investment inflows are also expected to decline.
- donor inflows are likely to remain strong;
- a more relaxed monetary stance can be supplemented by a more expansionary fiscal policy; and
- the authorities have the fiscal space and adequate international reserves to take these appropriate macroeconomic measures
What is the WB doing to prevent future financial crises and to protect poor countries. Thank you
In the Philippines, the government is expanding social spending under the stimulus package and front-loading some of it in early 2009. Coverage under the government's conditional cash transfer program has been increased to 360,000 from 20,000 in 2007, and further efforts are under way to improve targeting and scope. In addition, the government has enacted a program to help returning overseas workers.
All in all, most social programs in the region are underdeveloped. Governments are likely to act with renewed urgency in the medium term and develop a more comprehensive approach to social protection, including by expanding the set of interventions to ameliorate the impact of adverse shocks.
The World Bank has worked with governments in developing countries to support policies that improve the countries' defences against adverse shocks. The World Bank is also very active in helping countries deal with such shocks once they occur. The Bank has increased financial assistance; called for the development of a Vulnerability Fund to which developed countries could dedicate 0.7 percent of their planned fiscal stimulus, and the Bank is adapting its financial instruments to the specific needs of its clients. In addition, the World Bank is providing countries with access to diagnostic and capacity-building instruments to help improve policies and identify priority areas for government spending. The IFC, a part of the World Bank group, has expanded its support for trade finance through the Global Trade Finance Program and the $50 billion Global Trade Liquidity Pool, in addition to its support to developing countries through an infrastructure crisis facility, a bank recapitalization fund and a microfinance liquidity facility.
Should East Asia increase consumption or should we move towards a new economic paradigm altogether (e.g. low carbon economy, moderation of conspicuous consumption,etc).
Let me make some preliminary points before I answer your question.
First, it is important to recognize that East Asia's open trade policies have served the region well -- supporting rapid growth in trade and GDP over three decades and allowing capital to flow to countries where it could be used most efficiently . As the 2009 World Development Report has also noted, East Asia's rapid growth in trade has been, in considerable measure, within the region -- and the bulk of it has been intra-industry trade which has taken advantage of economies of scale, including agglomeration economies.
Second, all those calling for a review of East Asia's export-oriented development strategy are not advocating protectionism or a retreat to autarky. What they are asking is whether domestic market sources of growth can potentially replace export growth.
This is defintely possible -- but mainly for countries with relatively large domestic markets (China, Indonesia, Philippines, Thailand, and Malaysia). At the same time, it must be recognized that domestic markets give only limited possibilities compared to global markets.
So what could East Asia do differently that would give it greater resilience in the face of a crisis similar to the current one? In fact, there a number of things it could do. First and foremost, East Asian countries could diversify their export markets. The reliance on the US and European markets has proved to be a problem in this crisis. Second, some countries should reconsider any subsidies that export industries may receive -- but those aimed at the domestic market do not. These may include preferred access to capital and land, cheaper prices of inputs (including energy inputs), and quicker administrative approvals for licences and so on. Third, an improved environment for the private sector, and lower entry and exit barriers, will help industries develop that cater for the domestic market. In particular, government should encourage small and medium enterprises (SMEs) that cater mainly to domestic markets. Fourth, improved financial makets and banking systems that give broad access to finance will help provide for more balanced development, And finally, more flexible exchange rate regimes will ensure that adequate incentives are provided for non-tradeables sectors, just as much as for tradeables industries (exportables and import substitutes).
Over the medium term, the government needs to continue with the restrained fiscal policy of recent years and allow an adjustment in the exchange rate in order to limit a decline in reserves and maintain external sustainability. Management of the windfall revenues saved during the commodity boom also needs to be improved. Among the key structural challenges that remain, the key ones include ensuring the integrity of the public financial management, adequate expenditure mix for sectoral service provision, strict control over the size and performance of the civil service, and transparency and accountability in budget management.
To stimulate private sector investment and job creation, particularly outside the mining sector, the critical priorities are maintaining law and order, establishing a level playing field and improving the business climate, especially through opening more markets to competition, commercializing parastatals, reducing the regulatory and licensing burden, clarifying property rights (especially for land. Developing infrastructure – electricity, telecommunications, road and other transport – through private sector involvement and greater efficiency of public investment is also a crucial precondition for accelerated private sector-led growth.
Thus, Cambodia has the uneviable task of adjusting not only to the external crisis, but also has to cool its own internal macroeconomic "overheating" -- and both these adjustments means that its economy could possibly contract in 2009. Of course, we hope we are wrong -- because any recession in an economy has serious repercussions, but the implications are all the more serious in a low income country such as Cambodia.
Unfortunately, being a low income country, Cambodia has very few resources to combat the crisis. I hope that the international donor community, including IDA (the interest-free loan window of the World Bank), provide additional resources to Cambodia so that it can increase public expenditures on programs to protect the poor from the worst effects of the crisis. In addition, the authorities in the country need to make sure thay reorient their public expenditure program away from low-priority programs and toward social safety net programs targeted at the poorest groups in the population.
Do you have any comments on the economic statistics of the first quarter in China published today? Thank you very much.