East Asia and Pacific Update April 2010

Dear Deborah, thank you for this question. It touches an issue that is one of the hottest topics these days. Bear with me while I answer your question. Firstly, China’s economy barely slowed during 2009, thanks to a massive investment-led stimulus. While government influenced investment added mightily to growth in 2009, net exports were a drag as imports surged. The surge in imports, in turn, helped countries in the region, especially in the first half of 2009. Now, unlike most other countries which are struggling with output below potential, and for years to come, China has output very close to potential. Risks of bubbles in some sectors, notably real estate, have emerged. The government has recognized early that all this calls for a tighter macroeconomic stance. And that includes broadly unchanged fiscal stance from 2009. Incipient pressures in consumer, property and other prices, meanwhile, can be contained by tighter monetary policy stance, which can be accomplished by pressing on several levers. And the exchange rate is one of them. Further, if policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would also help.

Now, secondly, China’s authorities have made the centerpiece of the 11th five-year plan the rebalancing of the economy away from the investment-heavy, manufacturing-centered export-led model of growth toward a model that allows for a greater role of domestic sources of growth. The crisis slowed progress on rebalancing, but some key measures have been taken, including a boost to spending on health, education, and social insurance, improved access of small companies to finance, and efforts to mitigate environmental damage and upgrade energy efficiency in the economy. Now with the global economy set to grow more slowly over the medium term, the case of rebalancing is emerging even stronger after the crisis. And, thus, for strong growth to be sustained in China over the medium- to long-term, rebalancing will need to be advanced with vigor as the authorities intend. Rebalancing will mean, as a result, that net exports will contribute less to growth and domestic demand will contribute more. China will, to use your term, “absorb more production” from the rest of the world through imports.

Let me first of all welcome everyone to this Speakout! We find the interaction quite invigorating and our only frustration is that we can’t type fast enough and do more justice to the questions you raise. Ivailo is in Beijing while answering these questions and I am in Singapore – both of us trying to juggle our schedules to accommodate this important interchange.

Resti – thanks to you for a very perceptive question on the Philippines. Indeed, over the last 50 years or so, GDP per capita growth in the Philippines (1.4 percent on average) has been languishing behind the other middle income countries of East Asia (3.6 percent to 6 percent). As a result, while the per capita income of the countries of East Asia has been catching up with the advanced OECD countries, the Philippines has been falling further behind.

The World Bank has studied the Philippines economy very carefully, and while there are lots of things that can be fixed, we consider three sets of reforms crucial – strengthening public finances, improving infrastructure (especially in transport and energy), and improving the investment environment.

Your specific question is related to “regional integration”, and I take it you mean the integration of the Philippines with the rest of the East Asia region. As you can see, it does not appear as one of our top three constraints. The reason is that trade barriers in the Philippines have been lowered significantly since the 1990s – with the result that the Philippines compares favorably with other countries in the region as far as the MFN Tariff Trade Restrictiveness Index (a measure of formal border trade barriers) is concerned. Unfortunately, the Philippines remains highly protected owing to “behind the border” constraints that limit the entry and exit of firms and cumbersome regulatory impediments that stymie competition and reduce competitiveness. Surveys of investors also show that corruption, civil unrest, crime, and political instability discourage new investment. So, to genuinely increase integration between the Philippines and the other economies of the region will require a significant improvement of the investment climate which encourages foreign and domestic investors alike. Ironically, at this point, the Philippines is an exporter of both labor and capital – the binding constraint to growth is not the availability of either of these critical factors of production but the incentives to deploy them at home rather than abroad.

Best

Dear Sir, thank you for this question. It is a question that is on the mind of many in Indonesia, and one that we were repeatedly asked last week when with my colleagues in the Jakarta office of the World Bank we presented jointly the East Asia Update and the latest Indonesia Economic Quarterly (note: the latter can be downloaded from www.worldbank.org/id). Let me begin by noting that implementation of the ASEAN-China Free Trade Agreement (ACFTA) began in July 2005, with both ASEAN countries and China aggressively reducing tariff rates on imports. As a result of these reductions, the average tariff rate on imports into Indonesia was reduced markedly from an average of almost 10 percent in 2004 to 3.8 percent in 2009. Now, from the start of 2010, when the ACFTA formally went into force, the average tariff rate was reduced further to 2.9 percent by eliminating additional tariff lines. Notice that the reduction in average tariff rates in 2010 is much smaller than what has been achieved until this year. Also notice that as of now both China and all ASEAN-6 countries (including Indonesia) have cut to zero preferential tariff rates on 90 percent of imports. And, most importantly, with these reductions have come great gains in exports. From 2005 until 2009, Indonesia’s exports to China grew some 70 percent, led by increases in electronic machinery (more than three-fold increase) and transport equipment (a four-fold increase).

My colleagues in the Jakarta Bank office, and economists from the ADB, have carried out extensive studies on the benefits from ACFTA. In summary, these studies suggest that Indonesia should benefit from increased access to the world’s third largest consumer market, the world’s second largest economy and biggest exporter. Indonesia’s exports to China should continue to expand strongly, and prospects for Indonesia to be a larger participant in global and regional production networks will expand. Now, while the analysis suggests that exports will expand, it also shows that Indonesia’s overall trade surplus may decrease. In addition to these estimates, one should not forget about other long-term benefits that this analysis does not capture. These include greater transfers of technology as a result of greater specialization and increased participation in production networks (note that now Indonesia’s participation is very small, compared with the other middle-income countries in the region, i.e., Malaysia, Thailand, Philippines and China). The country’s bargaining power in international for a will also increase substantially.

Dear Yang – thanks for your question. To be honest, I am not sure of the context in which the Chinese Premier made the above remarks nor would I (obviously) know his motivation for doing so. But I agree with the thrust of his statement – and my reasons are as follows. By ethics, we mean a system of moral principles, values, and rules of conduct that prevail between individuals and institutions which do not require enforcement from third parties (such as the government) because they are self-enforced. Thus, ethics should pervade all aspects of our lives – economics, politics, social interaction, and so forth. If people were guided by moral values and their conduct was governed by these values, then trust between transacting or interacting individuals or groups would be high and we would live in a world of little friction and even fewer lawsuits! To some extent, the body of law in countries can be considered broadly as a reflection of the ethical standards of the society that made these laws – so that when individuals or groups deviate from these ethical standards, the enforcement of the law ensures that these standards are maintained.

It is possible that the Premier was referring to the financial debacle in the advanced countries and considered poor ethical standards as the root cause of the crisis. While many would agree with the Premier, it is important to note that the investment bankers at the center of the crisis were operating within the law (except for those who actually broke the law, such as Bernie Madoff, who have been convicted and sent to jail) – and thus, these bankers were operating within the standards set by society. Hence the recognition in the United States and elsewhere (notably Europe) that perhaps the legal framework itself should be changed to better reflect the values of society. There is a belief now that (financial) risk has been heavily underpriced, thanks to the laws, rules and regulations that rewarded risky behavior but did not correspondingly penalize failure. It is this belief that is motivating a complete rethinking of the international financial architecture, and is being spearheaded by the Financial Stability Board and the IMF.

Best

Dear Roger, thank you for your interest and the question. For China, rebalancing the economy is the key medium-term structural issue. Rebalancing will give a larger role to private consumption as a driver of growth, a larger role to the service sector, and will give more prominence to concerns and measures to ensure environmental sustainability and energy security. For the region’s middle-income countries, Indonesia included, moving up the value chain to help “escape” the crowded middle of industrial development is needed. Indonesia’s recently unveiled Medium-term Development Plan (RPJMN) for 2010-2014 elaborates the policies to guide the country through that structural transformation. The overall focus of the plan is on sustaining high and stable growth that creates jobs and is inclusive (that is, pro poor). Two of the strategies in the plan are especially notable, namely the emphasis on infrastructure which is seen as one of the substantial constraints to further growth, and the focus on the pro-poor agenda. For Vietnam, sustaining the “breaking into” manufacturing and production networks will be key. Vietnam is well advanced in this agenda. In fact, manufacturing accounts for a larger share of GDP in Vietnam than in countries with similar income levels. And the country’s decision at the beginning of reforms to open its economy to foreign direct investment and embark on ambitious structural reforms boosted investment to one-third of GDP, the largest in the region after China. Vietnam has been able to link to production networks, but to a much more limited degree than the middle-income countries of East Asia. And that will now be important to achieve.

Dear Joko

Your suggestion is an intriguing one and deserves consideration. But why do you propose to restrict such a program to obtaining university degrees abroad? Ideally – one should start with the principle that everyone should have access to education, irrespective of ability to pay. That would require the government to use a variety of instruments to help the poor and disadvantaged to enter schools or universities. Outright grants or scholarships is one way to go, but this would require a means test to make sure that only the poor benefit. You have suggested another – soft loans for education. But these too should only go to those who can least afford an education and therefore should also be subject to a means test. If they are for education abroad, then governments usually require that the student return to the home country so that the benefits of the education accrue to the home country. As you can see, administering such programs quickly become administrative nightmares and can be subject to abuse and even corruption. Moreover, scholarship or soft loan programs for education impose a fiscal cost – and there is always a question of how best to use limited fiscal resources. Should the incremental budgetary resources for education in Indonesia be used for higher secondary education, for better university facilities, for more teacher training colleges, or as you suggest --- toward subsidizing soft loans for education? These are difficult allocation decisions – and they can only be made if the country has a clearly thought through education strategy that identifies key priorities in the education sector and allocates budgetary resources accordingly.

Having said so, why don’t you put your idea forward to the Ministry of Education in Indonesia and see what they say?

Best

 

Dear Thu Ly, thank you for the question. Vietnam navigated the global crisis better than most observers had expected, especially given the high ratio of exports to GDP (one of the largest in the region), and the much higher inflows of foreign direct investment than in most other East Asian economies. Notice that Vietnam’s economy, together with China and Indonesia, did not experience a recession during the crisis. Real GDP slowed to 5.3 percent last year, helped by a large fiscal and monetary stimulus. The recovery has consolidated in recent months, and after an expansion of nearly 7 percent year-on-year in the fourth quarter of 2009 growth of 6 percent appears feasible in the first quarter of 2010. This is a strong performance, that leaves the economy in better shape overall than before or during the crisis.

Now, a pickup in inflation and concerns about large increases in prices in asset markets suggest that the limits of the expansionary monetary and fiscal stance that supported recovery last year have been reached. And the authorities are appropriately “rebalancing” policies to ensure strong growth without overheating. Monetary policy has been tightened. And the fiscal deficit is planned to be cut substantially, from the nearly 10 percent in 2009 to about 6.2 percent in 2010. Efforts thus far appear to be working, and interest in Vietnam among international investors continues to grow.

Dear Albert

Currently there is a “spaghetti bowl” of FTAs in East Asia. Indeed, there are so many, it must be very confusing for customs authorities in East Asian countries to administer them all. There are separate FTAs between ASEAN and China, India, Korea, Japan, and Australia and New Zealand. It is for this reason that several observers have suggested that an ASEAN+3 or an ASEAN+6 FTA be introduced that would eliminate the administrative difficulties associated with implementing a variety of separate arrangements while at the same time ensuring the benefits of free trade.

The traditional view has it that successful multilateral trade negotiations would be superior to regional FTAs – but, unfortunately, the Doha Round of trade negotiations is encountering severe obstacles. In the interim, while these negotiations continue intermittently with no guarantee of success, regional FTAs are a good second-best option to pursue. I think an ASEAN+6 FTA is possible but would be subject to some difficult negotiations – because while the high income countries of the East Asia region that are outside ASEAN (Australia, New Zealand, Japan, Korea) consider an FTA with ASEAN as win-win, they may not have the same view when it comes to trading with each other or with China and India.

But I hope such concerns will be overshadowed by the possible benefits such a regional trading arrangement will bring. In addition to the immediate administrative benefits, there would be considerable economic benefits as well. While intra-regional East Asian trade has been a driver of growth in the region, it still lags behind the European Union, and there is considerable scope for further integration – especially in reducing “behind-the-border” trade barriers and in spurring services trade. Greater integration will encourage more intra-industry trade, increased internal (within the firm), external (within industrial clusters) and urbanization (across industrial clusters) economies of scale, allow the location of industrial tasks in areas that offer the best comparative advantage, and provide the environment for increased innovation. Together, these benefits can only increase East Asia’s global competitiveness. Indeed, I consider this one of the highest regional priorities in the region, and I know ASEAN considers both these issues as high priority as well and has placed them on the regional agenda.

Best

Dear Raoof, you have squarely nailed the issue. Let me clarify what we mean by recovery. For most countries in developing East Asia, real GDP, production and exports are at or above pre-crisis peak levels. This is what recovery means in the economic sense of the word. But you are absolutely right that unemployment rates, even though near pre-crisis levels, are somewhat elevated in many countries. And unemployment rates tell only a part of the story. Many people are still employed, but the hours they work or their hourly wages have been cut. Their incomes, as a result, are much lower. (Underemployment rates, as some call them, are markedly higher than before the crisis in most countries.) Those that lost formal sector jobs and moved to the informal sector, or back home to the rural areas, are also living on much lower incomes. We see this everywhere, in both countries that saw GDP contract last year, and in countries such as China where the economy barely slowed.

The good news, in my view, is that capacity utilization rates in industry are nearing pre-crisis peaks, and as companies begin to invest, they will also begin to hire anew. Labor markets will begin to improve. For many this will come not a moment too soon. And I hope it will come faster so that you, and others, get a better sense of security that jobs are available and things are improving. I sincerely hope good times for jobs come sooner, and I wish you good luck.

Dear Yun Tang, thank you for the question. In short, I think China can grow for a very long time at 8 percent or more. Examples of rapid and sustained growth abound, not only for countries that are moving from low- to middle-income, but for middle-income countries as well. For example, recall Japan’s transformation after World War II that resulted in sustained explosive rates of growth. Or Korea’s. Or, more importantly, note China’s own transformation over the last three decades. China’s huge potential makes such growth possible, but not automatic. To grow rapidly, countries need to reform continuously so they find new sources of growth, and their companies transform from imitators to innovators as they approach the global technological frontier. For China over the medium-term, this will mean rebalancing the economy, as I have written in the answers to other questions in this Speak-Out. After that, reforms will need to continue, and new challenges tackled pro-actively as they emerge.

Now, as countries get richer and companies are at the technological frontier, rates of growth slow. It is not possible to innovate as fast as one can imitate. That is why the advanced countries today will not be able to grow at 8 percent regardless of the extent of structural reforms.

John

That’s a great question – and a difficult one! I believe the biggest development challenges in Indonesia are three: (a) eliminating the infrastructure deficit; (b) increasing the supply of skilled labor; and (c) improving the investment climate. Reducing corruption, improving governance more generally, and strengthening institutions comprise a higher-order overarching agenda that will be critical to achieving all three objectives.

Take infrastructure. While the government has done a lot, progress has nevertheless been slow. Cost recovery has been inadequate, expenditures on infrastructure have not been transparent, operational and cost inefficiencies plague a number of infrastructure projects, and budget execution continues to be a problem.

On the investment environment, Indonesia is ranked 123rd out of 178 countries in the Doing Business Rankings – behind all its neighbors in the region except for Cambodia and the Philippines. A number of reforms have been introduced (including the Tax Administration Law and the Investment Law), but implementation progress has been slow and the investment climate at the local level is of particular concern.

Finally – skilled labor. Indonesia has introduced a number of reforms to improve the quality of schooling and access to schools (notably the BOS system of direct transfer to schools), but there continue to be coordination issues with local government, and I believe that tertiary education needs increased investment (and perhaps the best way to achieve that is to invite foreign universities to invest in Indonesia – a reform that India is contemplating).

Best

Dear Ms. Taing, thank you for the important question. Malaysia has made very substantial progress in lifting living standards over the last several decades and is now the country with the highest level of income per capita in developing East Asia. The global crisis hit Malaysia hard, and the country was one of a few that experiences a contraction in real GDP last year. But a strong recovery is underway. Now, the key challenge is to sustain this recovery and turn middle-income Malaysia into a high-income country. And this is what the NEM is proposing to accomplish.

Most projections call for real GDP growth of about 6 percent a year over the medium term provided reforms are implemented at a modest pace. Faster growth and faster convergence are possible, however, if the structural reforms envisaged under the NEM to raise productivity are implemented forcefully and comprehensively. This should make it possible for growth rates to increase from the 6.2 percent targeted under the NEM during 2011-2015 – years in which the global economy is likely to grow more slowly than before the economic crisis – to nearly 7 percent a year in the remainder of the decade.

Dear Ismail

It is true there have been recurring crises in the global economy – and in the more recent period, it appears to be every decade! I can’t speak for the IMF, but let me say that the World Bank’s role is the development of the poorest nations of the world and the reduction of poverty. The stability of the global economy is not within our mandate. Having said so, we do owe it to our low- and middle-income country clients that we monitor global and domestic economic developments, because external and domestic crises (or shocks) can have a huge effect on development progress and poverty reduction. It is interesting to know that – at least as far as East Asia is concerned – the developing countries of the region withstood this particular crisis very well. This is because the developing economies of the region were in fine fettle going into the crisis – low inflation, low external account and budget deficits, low debt burdens, and sound financial institutions. Moreover, they responded quickly to the crisis, introducing monetary and fiscal stimulus packages and ensuring that the poor were protected through social protection programs of various kinds. Obviously the countries of East Asia learnt well the lessons of the Asian Financial Crisis of 1997-98.

Perhaps the performance of the East Asian developing economies through this crisis can also serve as a lesson. What it shows is that crises – by their very definition – either cannot be predicted or averted (those that can be predicted and averted never become crises!), but countries can make their economies relatively resilient to economic shocks by following prudent macroeconomic policies, keeping debt burdens low, ensuring well capitalized banks that follow sound lending principles, and having ready response mechanisms in the event that shocks hit.

Best

Dear Mr. van Breda,

Fantastic question. In the region, SMEs and micro-enterprises account for the bulk of jobs and job creation. And simplifying the business environment for SMEs to start business, operate, expand, hire people and move from imitation to innovation is essential. A lot is being done. But you are right that there is much more needed. Access to finance is a persistent issue, exacerbated by the crisis. And opportunities for the SMEs to link to global and regional production networks could be supported by government policies that ease the conditions for business, enhance the access and quality of education and along with it opportunities for life-long learning, improve the quality of infrastructure including access to electricity, and so on. In addition to these efforts, one needs to recognize the spatial dimension of development in which the SMEs play a crucial part. Industrial production, and increasingly modern tradeable services, are “lumpy,” they get concentrated in areas where other companies are located to take advantage of agglomeration economies. But access to social services, including education and health, should be more uniform. This is easier said than done, but government efforts to ensure uniformity in service delivery while enabling concentration of production will go a long way toward ensuring stronger growth while limiting the need for people to move in search of social services rather than economic opportunities.

Dear Samsul

I would go further than you and recommend that any “growth index” should not only include green criteria as you recommend, but also include other indicators of social well-being. I represented the World Bank at the 3rd OECD Global Forum in Busan, Korea last October, which had as its theme: “Statistics. Knowledge, and Policy”. The theme of the conference was inspired by two Nobel laureates -- Joseph Stiglitz and Amartya Sen – who headed a Commission on the state of economic statistics and recommended that the world should go “beyond GDP” -- by which they meant that the world should start measuring progress through a range of indicators, including “happiness”, empowerment, health, education, environmental quality, among others. I would recommend that you read their report – it is an impressive tour de force.

The challenge, of course, is on the ability of statistical agencies to measure such variables. Indeed, these agencies find it difficult to manage collecting their standard economic statistics, let alone a host of other indicators that are more difficult to measure, let alone capture. Consider governance, which is a high priority in developing countries. It would be terrific if we could measure progress in governance indicators – but the challenge is in reaching an agreement on what needed to be measured, and obtaining measures that accurately reflected the governance objectives of countries.

I would also submit that in our zeal to go beyond GDP, we must not lose sight of statistical priorities in developing countries. These include: strengthening statistical systems, and in some cases establishing them; improving the quality of existing indicators such as GDP and household surveys; and completing the 2010 census. Having said that, I would also recommend that key indicators of health, education, and the environment are also essential and should be included in the standard household and other special surveys that statistical agencies tend to use.

Finally is the problem of aggregation. Value added – the concept underlying GDP – is conceptually easy to aggregate across sectors. It’s more difficult to aggregated across health, education, and environmental indicators, for example. But this hasn’t stopped the UNDP from coming up with a human development index which they bring out every year as part of their annual Human Development Report. I recommend you read some of these, if you haven’t done so already, because they do represent an earnest effort in moving in the direction you are suggesting.

Best

Thank you for your question. Indonesia has done very well during the economic crisis. A large domestic economy and a large population, prudent policies before and during the crisis, have allowed real GDP growth to slow only modestly in 2009. In addition, fiscal prudence and the quality of Indonesia's macro management, including public finances, is a key reason Indonesia did so well through the crisis. Recall the appropriate monetary easing, the currency being allowed to depreciate and partly absorb the external shocks. The emergency cash transfer programs and the small-scale public work programs also did much to protect poorer households from the rise in commodity prices in the lead up to the crisis.

Now, looking forward, Indonesia can grow fast even if the global economy grows more slowly. And the structural reforms the authorities are committed to sustain implementing will be the basis for fast growth. Improvements in the investment climate, along with public investments in infrastructure should help support strong growth. Notice that investment relative to GDP in Indonesia is now at pre-1997 levels - the only country along with China and Vietnam in the region to see investment return to or above levels last seen before the 1997-98 Asian financial crisis. But that investment rate needs to be sustained and, if possible, even increased. The improved economic environment allows Indonesia to spend more on its development priorities. Indonesia’s fiscal and debt position is strong. And there are resources to be had if energy subsidies are redirected towards targeted social spending and infrastructure investments.

You rightly point out to the need for more inflows of FDI. Foreign direct investment levels are relatively low; and these investments are far less "footloose" than short-term inflows into capital markets. To encourage inflows of FDI, further structural reforms are needed. These include lower entry barriers (including reducing the time and cost to start a business), reduce operating costs (with a focus on actionable steps to improve logistics), improve trade facilitation through the National Single Window and control the proliferation of non-tariff barriers that raise costs and reduce competitiveness.

Dear Pakping

I am not familiar with the precise processes in Thailand of ensuring that industries abide by the environmental laws and safequards of the country – whether in their existing plants or in new investments. Certainly, in most countries, investments that pose a high risk to the environment (air or water pollution, for example) should be subject to environmental assessments or even audits to make sure everything is being done by the industry to abide by the law and to protect the environment. The challenge, as always, is the capacity of governments to do such environmental assessments within a reasonable time and to the appropriate standard. The most important reform that countries can implement would be to widely publicize clear environmental standards for industries and to have transparent and effective processes for ensuring their compliance so that new investors are in no doubt of what is needed. Some countries have gone further, and established one-stop-shops that not only ensure that investors have all the appropriate information on all the standards and requirements of the country, but also have in place mechanisms that help investors deal with one central authority to obtain all their required licenses and regulatory clearances from all the different agencies and ministries.

Best

Dear Dr. Jeeva

I couldn’t agree with you more! Natural resource management (NRM) is a critical part of economic management. We need to protect our renewable resource supplies to ensure they remain sustainable and manage our non-renewable resources very efficiently. One important way is to make sure that these resources are priced according to their genuine scarcity – but unfortunately, in many countries, they are not. For example, water is severely underpriced and hence tends to be overused. Also, given the low price for water, private sector initiatives at water resource development and water conservation tend to be discouraged. Raising the price of water and other similar resources tend to be politically unpopular – and so governments tend to avoid it, but then the result is as you suggest.

As important it is that industries are discouraged from polluting air and water by being required to bear the social cost of their operations (and not just the private cost). Polluted water reduces the availability of water for drinking and agricultural purposes and raises the costs for improving the quality of water. These are difficult reforms to design, let alone implement – but they are nevertheless necessary for ensuring that our natural resources are managed in a sustainable way.

Best

Dear Fiji Czar, thank you for the question. Firstly, note that the World Bank strives to help countries reduce and ultimately eliminate poverty and boost living standards.The Pacific islands face unique development and policy challenges, given the small size of their economies and population, the significant distance to large markets, and exceptionally high dependency on single sectors. And if the global economy grow more slowly in the medium term than before the crisis, these challenges will not get easier. While there are numerous long-term challenges confronting this group of countries, it is worth highlighting several where potential solutions are feasible. The first is aid coordination and aid predictability. Stable and predictable aid is needed, in good times and bad, to help support reform efforts across the region. Catastrophic risk insurance instruments need also be created to ensure resources are available when natural disasters hit. The second is to overcome the costs of distance and isolation by facilitating the quiet telecommunications revolution taking place in the Pacific. That “revolution” has helped reduce costs of telephone calls, internet access, long-distance transactions, information flows and service delivery, helping reduce distances previously thought unbridgeable.

And thirdly, and this is where your question comes into focus, is the importance of sub-regional integration. The most important among many steps undertaken are efforts to implement sub-regional agreements on the management, conservation, and development of fisheries; develop regional arrangements for marine mineral resource management; and implement key regional agreements to promote the freer movement of goods and services. There is also considerable potential for deepening integration with the nearest large market, which for the Pacific Islands mostly means integration with Australia and New Zealand. Most recently, temporary migration schemes with New Zealand and Australia have been at the forefront of this agenda. New Zealand now runs a Recognized Seasonal Employer program that allows up to 8,000 temporary migrants from the Pacific islands to work in the country’s horticulture. Such efforts can be expanded, particularly given Australia’s need for large numbers of temporary agricultural laborers.

Dear Bambang

Actually, I have a lot of admiration for Indonesia’s economic policies – although, of course, I would always like to see more progress in implementation! You are right that Indonesia is a member of ASEAN and therefore a signatory of the various ASEAN FTAs that have been concluded, including with China. I think this is a good thing. Indonesia’s growth rate accelerated in the early 1980s following the government’s decision to reduce trade barriers, and the economy has never looked back. Now the economy is no longer dependent on oil for its economic prospects (although it remains important) and there have emerged several promising industries that are highly competitive in world markets (I am thinking here particularly of the automotive components industry, which is a fairly recent phenomenon). As I have noted elsewhere in this Speakout, Indonesia needs to meet three challenges – infrastructure development, skills development, and an investment environment that encourages private sector development. In each of these three areas, the government seems to be introducing the right policies, but the challenge is always in the implementation and in the coordination across ministries and between the central and local government. Building the institutions necessary to implement the next phase of the reforms that Indonesia needs – which, by definition, are more complex and difficult than previous reforms – will be a long-term effort. I also believe that Indonesia has the resources for more investment, provided that the authorities are able to lower domestic oil subsidies. This has been a politically difficult reform to implement, but the government has done this on previous occasions despite opposition – thereby showing considerable political courage. These reforms need to be continued – with appropriate targeted safeguards for the poor – as the savings can be used for the necessary infrastructural and human development investments the country so desperately needs!

Best

Dear 韩惠民

This is a topic that is discussed at length in our latest East Asia regional update (www.worldbank.org/eapupdate). We basically believe that Developing East Asia’s growth rate will rebound in 2010 to 8.7 percent (compared to 7.0 percent in 2009) and that China will achieve a growth rate this year of 9.5 percent (compared to 8.7 percent last year). Trade is also expected to pick up globally and within the East Asia region. Thanks to the stronger-than-expected recovery in the United States and Japan (although the Eurozone is somewhat weaker-than-expected), exports from Developing East Asia have already picked up and are likely to accelerate further. China’s trade surplus has been declining rapidly – from around 8 percent in end-2008 to around 5.1 percent in end-2009 (if my memory serves me right!) – and in March, the country had a trade deficit for the first time in a long time. Nevertheless, we believe that through 2010, China will continue to have a significant trade surplus – and that the March number will prove to be an aberration.

Hope that helps answer your question.

Best

Dear Permana

You are asking a similar question to what is being asked by many people in the United States! The reality is that even though economies may recover in terms of aggregate output, the impact on people – in terms of employment and incomes – tends to take longer.

You are also raising concerns about inflation in prices that not state-controlled. I am not sure where you live in Indonesia, and it is very likely that in your local area prices may have climbed to levels that are affecting your well being. But broadly, my impression is that inflation in relatively benign (close to 3.4 percent, year-on-year). I notice that the monetary authorities are taking the appropriate action to curtail general inflation, but this may not necessarily influence the prices that worry you most!

Best

Dear Khanh, thank you for your question. Vietnam has made remarkable progress since starting reforms in 1986. Its growth rate has been the second highest in the region after China, allowing a rapid increase in real GDP to middle-income status. This progress has been accompanied by several challenges over the last several years. The global economic crisis, the latest of these challenges, slowed economic growth in Vietnam to 5.3 percent in 2009, some 2 percentage points below potential. These developments followed other external shocks. For example, at the turn of 208, in the aftermath of Vietnam's entry into the World Trade Organization (WTO), the country was confronted with massive capital inflows. Attempts to sterilize these inflows were not able to prevent a boom in banking credit, an acceleration of inflation, a ballooning trade deficit and asset price bubbles. The latter were amplified by sizeable infrastructure investments by central and provincial governments. The investment decisions of large SOEs and state-owned Economic Groups, which took advantage of their access to finance to diversify into booming sectors such as real estate and securities, contributed to fanning the flames. The impact of overheating was further aggravated by the international fuel and oil crisis of early 2008. Of late, government efforts to ameliorate the impact of the economic crisis were largely successful, thanks to a very large fiscal and monetary stimulus implemented last year.

Now, thanks to the government efforts, Vietnam navigated the global financial crisis better than could have been anticipated. After the 5.3 percent growth in 2009, the recovery has consolidated in recent months, with real GDP posting 6.9 percent growth in the last quarter of 2009 year-on-year, and growth of 6 percent is plausible for the first quarter of 2010. But reliance on domestic demand to support economic activity resulted in pressures on the balance of payments. At a fundamental level, the external position of Vietnam is sustainable. Exports decreased by 9.7 percent in 2009, the first decline since the beginning of reforms two decades ago. Imports contracted by 14.7 percent, which brought the current account deficit down to about 7.8 percent of GDP, compared to 11.9 percent in 2008. Inflows of foreign direct investment are estimated to have declined by a relatively modest 13 percent in a difficult year. For 2009, the capital account surplus roughly offset the current account deficit. However, unusually large errors and omissions item in the balance of payments by about 10 percent of GDP, and the dollar trading outside the dong band in parallel markets, indicate a lack of confidence in the dong. Throughout 2009, households and domestic enterprises (including large state-owned economic groups) have been betting on a devaluation of the dong. Meanwhile, inflation shows sign of accelerating. And government efforts have now refocused toward ensuring macroeconomic stability. There are indications that this rebalancing of the policy stance is working, and a growing interest in Vietnam by international asset managers and portfolio investors is already perceptible.

Now, over the medium term, the key for stronger growth in Vietnam will remain the “breaking into” manufacturing and production networks will be key. Vietnam is well advanced in this agenda. In fact, manufacturing accounts for a larger share of GDP in Vietnam than in countries with similar income levels. And the country’s decision at the beginning of reforms to open its economy to foreign direct investment and embark on ambitious structural reforms boosted investment to one-third of GDP, the largest in the region after China. Vietnam has been able to link to production networks, but to a much more limited degree than the middle-income countries of East Asia. And that will now be important to achieve.

Dear Oktara

You have raised a critical question – and one that is quite controversial. In the case of East Asia – contrary to my expectations – capital inflows have not resumed yet in most countries (with the exception of China, which is receiving a lot of “hot money in expectation of a Renminbi appreciation). But we must be prepared for the possibility that they do (and I expect they will). After all, the Asian Financial Crisis of 1997-98 was triggered in large part because East Asian countries (Thailand, Indonesia, Korea) found it difficult to absorb the large capital inflows they were receiving, and when these flows reversed following the crisis, the economies suffered sharp reductions in growth and considerable damage to their banking systems. We would not want that to happen again.

Some kinds of capital inflows are a “good” sign for developing countries – foreign direct investment, for example, is recognition that the country offers macroeconomic stability and long term prospects for foreign investors. But there are other kinds of capital inflows – such as short-term movements of capital by speculators to bet against the exchange rate – can do considerable damage to the economy.

Fortunately, in a recent announcement, the IMF noted that in certain circumstances it would be appropriate to introduce capital controls – but that this would need to be tailored to specific country circumstances (most notably, the ability of the country’s institutions to implement such policies). There is no one-size-fits-all here. Countries that have selective capital controls – India and China are two notable examples – have tended to be more resilient to external financial shocks than others. They also have the institutional capacity to administer such controls. Malaysia is another example of a country that introduced capital controls following the onset of the Asian Financial Crisis – and did better (in terms of growth) than its unfortunate neighbors that were hit particularly hard (Indonesia and Thailand).

Best

Dear Yen, a fascinating topic for a Ph.D. thesis. Please contact me by email (iizvorski[at]worldbank.org) to discuss.

Hello:
This is such a long - but a fascinating - topic. As an introduction, China's large monetary and fiscal stimulus package helped limit the slowdown in growth in 2009, a year in which the global economy contracted for the first time since World War II. And China's stimulus also helped neighbors and the global economy avoid a more pronounced growth slowdown. This year, the authorities are rightly focused on withdrawing the monetary stimulus gradually, given concerns about inflation and rising asset prices. At the same time, they are keeping the fiscal balance little changed from 2009, that is, not implementing any further fiscal stimulus on top of what is already agreed. Our East Asia update has much more on these issues. But please also consult the excellent China quarterly reports our team in Beijing produces (www.worldbank.org/chinaquarterly).

Dear Santiago, thank you for the question. The countries of the region has done very well, both before and during the global crisis. Why? The large and timely monetary and fiscal stimulus packages implemented by almost all countries, led by China, have played a key role. So have good macroeconomic conditions before the crisis - which reflected policy efforts that took to heart lessons from the 1997-98 Asian financial crisis. And the upturn of demand among developed economies in late 2009 is now playing an important role. With the global economy set to grow more slowly in the coming years, resumption of structural reforms will be needed to sustain growth. And these are different for the different countries. These reforms are not part of an abstract reform agenda; they are reforms that governments have embraced to lift living standards and transform the region.

Thanks for your question, David. Indeed, premature withdrawal of stimulus is a risk for most countries. Now, in China, most of the stimulus was quasi-fiscal in nature, rather than fiscal. And withdrawing the monetary stimulus, bringing about a slower growth in credit - part of the quasi-fiscal measures - is what the authorities are now rightly focused on with a view to limiting risks of asset bubbles. The fiscal stimulus is a much smaller component of the overall stimulus. Last year, for example, the fiscal deficit increased by about 2.5 percent of GDP, compared with an increase in government-led investment of 6 percent of GDP. And this year, the authorities target the fiscal deficit to be broadly unchanged from last year.

Dear Ralph, forecasting the future is always perilous and subject to errors. Now, we pen down numbers for growth simply as a reference for the story we are telling. We do hope the story makes sense and would rather than you do not focus that much on the numbers.

But you can see our track record. Table 4 of the East Asia update has a comparison with our current projections and projections at different points over the last year. Not a bad fit, overall, especially given the massive uncertainty during the crisis - and the much worse global environment which we take as given.