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Spotlights
exports. Such a close trading relationship is the reason why the IMF forecasts a slight decline of the
economic growth rate of the NIEs in 2007, since
the growth and, consequently, the import demands
of these advanced economies are expected to
decelerate.
RECENT ECONOMIC GROWTH
AND CHALLENGES FOR CHINA,
INDIA AND OTHER EMERGING
ASIAN COUNTRIES
However, there are some additional near-term
China and India have recently been the growth
risks to the economic outlook for the emerging
engines of the Asian economies. In the last three
Asian countries. First of all, there is a general fear
years, from 2004 to 2006, the real GDP growth rate
that, in the absence of a properly functioning maramounted to 10 percent and 8 percent in China
ket mechanism, the investment-led growth will
and India, respectively. Similarly high economic
lead China into one boom-bust cycle after anothgrowth is anticipated in China also in 2007, while
er, with each boom less sustainable than the previthe IMF projects a slight decline of the growth rate
ous one. The current exceptionally rapid investof India from 8.3 percent in 2006 to 7.3 percent in
ment growth could result in overinvestment, real
2007 (Figure 1).1 Economic growth in China has
estate speculation and falling profits for the cormostly been triggered by the rapid increase in
porate and financial sectors in China. An expaninvestment and net exports. On the other hand, in
sion of private investment is required, however, to
India inflation has picked up due to rising oil
prices and strong domestic
demand, which forced the
Figure 1
Reserve Bank of India to raise
REAL GDP GROWTH IN ASIAN COUNTRIES
interest rates (Figure 2). The
Annual percentage change
%
effect of higher oil prices and
12
tighter monetary controls as a
10
policy response were also the
major causes of the slow eco8
nomic growth in the ASEAN-4
6
countries (Indonesia, Thailand,
Philippines and Malaysia) in
4
2005 and 2006. A slight growth
2
improvement is expected in
these countries in 2007.
0
2004
Economic expansion in the
newly industrialised economies
(NIEs) during the last two
years was particularly led by
the increase in exports of electronic goods. The NIEs have
also benefited from the rapid
growth of the Chinese economy
and the favourable economic
performance of some advanced
economies including the Unites
States and Japan. These two
developed countries have traditionally been the major destinations of these countries’
2005
China
India
2006
ASEAN-4
NIEs
2007
Japan
Source: IMF.
Figure 2
DEVELOPMENT OF CONSUMER PRICES IN ASIAN COUNTRIES
Annual percentage change
%
10
8
6
4
2
0
-2
2004
2005
1
International Monetary Fund (IMF),
World Economic Outlook, September
2006, Washington DC, Ch. 2
China
India
2006
ASEAN-4
NIEs
2007
Japan
Source: IMF.
55
CESifo Forum 1/2007
Spotlights
Figure 3
DEVELOPMENT OF ACCOUNT BALANCE IN ASIAN COUNTRIES
Percent of GDP
%
8
6
tion also appears to be necessary
at both the central and the state
government levels of India. Taxbase broadening combined with
subsidy cuts would be an appropriate policy option.
4
NCW
2
0
-2
-4
2004
2005
China
India
2006
ASEAN-4
NIEs
2007
Japan
Source: IMF.
revive economic growth in the ASEAN-4 and
many other emerging Asian countries.
Secondly, although many emerging Asian countries have had current account surpluses (Figure
3) and have accumulated substantial foreign currency reserves, they could also be vulnerable to a
sudden deterioration in international financial
market conditions. Furthermore, due to strong
domestic demand growth accompanied by high oil
prices, some Asian countries could experience a
further deterioration in their current accounts
(for example, India and Thailand). For China,
however, the IMF recommends a substantial
revaluation of the renminbi to dampen the growth
of the current account surplus and to give the central bank control of domestic monetary conditions. According to the IMF’s assessment, the central bank’s present policy focus on reducing the
renminbi’s fluctuation against the dollar has made
effective liquidity control difficult, and the small
interest rate increases have not been sufficient to
restrain the strong credit growth, which, in turn,
has contributed to the investment boom in this
country.
The favourable economic outlook provides opportunities for fiscal reforms in a number of Asian emerging countries. In particular India, Pakistan and the
Philippines require urgent budget consolidation and
the reduction of public debt. Since governments in
the Philippines and Indonesia have a large share of
foreign debt, a continuous fiscal improvement would
also lead to reduced vulnerability of these countries’
economies to external shocks. In spite of the prevailing strong spending pressures, a gradual consolida-
CESifo Forum 1/2007
56