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CONTENTS Page Foreword ..................................................................................................................................................................... iii Preface ......................................................................................................................................................................... v Executive Summary ............................................................................................................................................... vii Acknowledgements ................................................................................................................................................. xv Explanatory notes ................................................................................................................................................... xxvii Abbreviations ............................................................................................................................................................ xxx Sources of quotations .......................................................................................................................................... xxxii Chapter 1. Sustaining dynamism and inclusive development .......................................................... 1 Recovery under pressure ....................................................................................................... 3 Stellar performance in 2010 ................................................................................................. Coping with sluggish growth in developed countries .................................................. Managing the blowback from the European debt crisis ............................................ Exports recover strongly in 2010 ....................................................................................... Intraregional flows help foreign direct investment to recover .................................... Remittance flows to the Asia-Pacific region remain robust ...................................... 3 5 9 10 12 13 Growth outlook for 2011 ......................................................................................................... 16 Growth to moderate ................................................................................................................ Exporting economies experience greatest impact ......................................................... 16 17 Key challenges to the outlook: protecting growth from external headwinds ...... 20 Rising inflationary pressures create further challenges for sustaining growth momentum .............................................................................................................. Return of food and fuel crises: impacts on income and poverty ........................ Managing capital inflows .......................................................................................................... Unemployment remains a concern for the vulnerable .................................................... Medium-term challenge is to support alternative sources of demand ................... Development-friendly global economic governance ........................................................ 20 22 33 39 42 45 Policy agenda for promoting growth and inclusive development ...................... 46 National policies ........................................................................................................................ Regional policies ....................................................................................................................... Global policies ........................................................................................................................... 46 47 48 Chapter 2. Macroeconomic performance and policy challenges at the subregional level .............................................................................................................................. 51 xvii CONTENTS (continued) Page East and North-East Asia ...................................................................................................... 53 Recovery gains momentum in 2010 ................................................................................. Inflation rises moderately but risks remain ..................................................................... Preparing for a normalization of fiscal policies ............................................................. Monetary tightening begins cautiously .............................................................................. External sector returns to pre-crisis levels ...................................................................... Return of capital inflows ........................................................................................................ Appreciating currencies ........................................................................................................... Future outlook and policy challenges ............................................................................... 53 55 56 56 57 58 59 60 North and Central Asia ........................................................................................................... 61 GDP growth receives a boost from higher oil and mineral prices ........................ Inflation remains relatively high despite deceleration in some countries .............. Fiscal and monetary policy responses ............................................................................. Strong growth in trade driven by commodity exports ................................................ Future outlook and policy challenges ................................................................................ 61 63 64 66 68 Pacific .............................................................................................................................................. 70 Pacific island developing economies: Diverse economic performance ........................................................................................... Inflation driven by higher commodity and fuel prices ................................................. Key macroeconomic policy responses .............................................................................. Current account deficits widen ............................................................................................ Future outlook and policy challenges ............................................................................... 70 72 73 75 76 Australia and New Zealand: Recovery continues ................................................................................................................. Modest inflationary pressure ................................................................................................ Export growth turns trade balance into surplus ............................................................ Fiscal consolidation policies .................................................................................................. Tightening of monetary policies .......................................................................................... Future outlook ............................................................................................................................ 79 80 80 80 81 81 South and South-West Asia ................................................................................................. 81 81 84 86 87 89 Growth remains strong and accelerates in some major economies ..................... High inflation is a major challenge as food prices rise rapidly .............................. Monetary and fiscal policy responses .............................................................................. Exports revive but imports grow more rapidly .............................................................. Future outlook and policy challenges ................................................................................ xviii CONTENTS (continued) Page South-East Asia ........................................................................................................................... 95 Growth remains robust despite some cooling off ........................................................ Price stability remains vital to rising confidence ........................................................... Fiscal and monetary policies remain supportive of growth ....................................... External sector poised for rebalancing, with strong currencies and intraregional trade ................................................................................. Future outlook and policy challenges ................................................................................ 95 98 99 101 104 Chapter 3. Regional connectivity and economic integration ............................................................. 107 Connectivity to boost regional integration .................................................................... 108 Intraregional trade ...................................................................................................................... 109 Trade costs ................................................................................................................................. 112 Intraregional foreign direct investment ............................................................................ 116 Preferential trading arrangements ...................................................................................... 118 Transport links ............................................................................................................................. 121 Developing an integrated international transport network ........................................... 124 Transport and trade facilitation ........................................................................................... 126 Information and communications technology connectivity .................................... 129 Boosting ICT connectivity ...................................................................................................... 132 Energy connectivity ................................................................................................................... 133 Towards a regional framework for energy connectivity ............................................... 137 People-to-people connectivity .............................................................................................. 140 Migration ...................................................................................................................................... Studying abroad ........................................................................................................................ Tourism ........................................................................................................................................ Managing labour migration .................................................................................................... 140 142 143 143 Regional financial cooperation ............................................................................................. 145 The Chiang Mai Initiative ...................................................................................................... Development of regional financial markets ...................................................................... Subregional investment funds ............................................................................................... Other initiatives .......................................................................................................................... Towards a development-friendly regional financial architecture for Asia and the Pacific ................................................................................................... 145 145 145 146 xix 146 CONTENTS (continued) Page Conclusion ..................................................................................................................................... 150 Chapter 4. Building the productive capacity of the least developed countries ...................... 153 Patterns of diversification ...................................................................................................... 155 Making exports more exclusive .......................................................................................... 158 Mapping diversification ............................................................................................................ 161 Assessing productive capacity ............................................................................................ 166 Learning from the transformers of productive capacity ......................................... 169 Graduating from least developed country status ....................................................... 171 The benefits of regional integration ................................................................................. 173 Strategy for increasing the productive capacities of least developed countries .................................................................................................................. 175 176 178 178 179 Differentiation ............................................................................................................................. Selection ...................................................................................................................................... Amplification ............................................................................................................................... Repetition ..................................................................................................................................... Implementing the strategy: national effort and international partnership ....... 179 National policy framework ...................................................................................................... 179 Stable investment-friendly macroeconomic policy framework .................................... Industrial policy and infrastructure development ............................................................ Domestic resource mobilization ........................................................................................... Technological upgrading ......................................................................................................... 179 179 180 180 Supportive global partnership for building productive capacities in least developed countries ...................................................................................................... 181 Financing for development: foreign direct investment and official development assistance ..................................................................................................... Market access and aid for trade ....................................................................................... South-South, triangular and regional cooperation ......................................................... 181 182 184 Choosing the diversification path ...................................................................................... 184 References and further readings .................................................................................................................... 189 Statistical annex ...................................................................................................................................................... 201 xx BOXES Page 1.1. Implications of the earthquake in Japan on developing Asia ....................................................... 7 1.2. Economic impact of oil price increases on the Asia-Pacific region ............................................ 24 1.3. Impact of food inflation on poverty ........................................................................................................ 27 2.1. Energy self-sufficiency and dependency in North and Central Asia ........................................... 69 2.2. Green growth in the Pacific island developing economies ............................................................. 78 2.3. Some policy options to contain inflationary pressures in South Asia ........................................ 92 3.1. Complementarities in products .................................................................................................................. 112 3.2. Developing dry ports...................................................................................................................................... 127 3.3. Information and communications technology overcomes the disadvantages of distance .......... 134 3.4. Association of Southeast Asian Nations institutions for energy cooperation ............................ 139 4.1. Least developed countries in Asia and the Pacific .......................................................................... 155 4.2. Assessing productive capacities ............................................................................................................... 156 4.3. Use of trade data to assess productive capacities .......................................................................... 156 4.4. Ready-made garments business in Bangladesh ................................................................................. 165 4.5. Complexity of Viet Nam’s product mix, 1984-2009 .......................................................................... 170 xxi FIGURES Page 1.1. Real growth in gross domestic product, year-on-year, in selected Asian developing economies, 2008-2010 ................................................................................................................................ 3 1.2. Real GDP trends in selected Asian developing economies, 2008-2010 ................................... 4 1.3. Real GDP trends in selected developed economies, 2006-2010 ................................................ 5 1.4. Trends in exports of selected Asian economies, January 2008 to February 2011, year-on-year ..................................................................................................................................................... 5 1.5. Loan-to-deposit ratios in selected Asian economies, latest available data ............................... 9 1.6. Exports of selected Asian economies rise to pre-crisis levels ..................................................... 10 1.7. The role of China in the export recovery of Asia and the Pacific ............................................ 11 1.8. Percentage growth/decline of FDI inflows of selected Asian economies, 2008/09 versus 2009/10 ............................................................................................................................................... 13 1.9. Top 10 remittance-receiving Asia-Pacific economies, 2008-2010 ................................................. 15 1.10. Remittance growth in selected Asian developing economies, 2008/09 and 2009/10 ........... 15 1.11. Economic growth rates for Asia-Pacific developing economies, 2003-2011 ............................. 17 1.12. Real GDP growth by region, 2010-2011 .............................................................................................. 17 1.13. Real GDP growth and forecasts of Asia-Pacific economies by subregions, 2008-2011 ........ 18 1.14. Consumer price inflation as measured by changes in consumer price index of selected economies in the ESCAP region, 2009-2011 ..................................................................................... 21 1.15. Policy rates in selected Asian developing economies, January 2008 to February 2011 ....... 22 1.16. Food price index and crude oil price, 2004-2011 ............................................................................. 23 1.17. Nominal oil prices in dollars and special drawing rights per barrel, January 2006 to March 2011 ................................................................................................................... 23 1.18. Food consumer price index trends in selected Asian developing economies, January 2009 to February 2011 .............................................................................................................. 26 1.19. Comparison between overall and food CPI (annualized) in selected Asian developing economies, February 2010 to February 2011, year-on-year ........................................................... 27 1.20. Food price index and other selected commodities (index 1998-2000 = 100), 2007-2011 ......................................................................................................................................................... 30 xxii FIGURES (continued) Page 1.21. Equity market performance in selected Asian economies, January 2008 to February 2011 ........................................................................................................................................... 34 1.22. Response of asset prices to short-term capital flows for China and India ............................. 35 1.23. Real effective exchange rates for selected Asian developing economies, January 2009 to February 2011 ........................................................................................................................................... 36 1.24. Foreign reserves (excluding gold) in selected Asian developing economies, December 2007 to January 2011 ................................................................................................................................. 36 1.25. Vulnerability yardstick as a percentage of foreign reserves in selected Asian economies, latest available data .................................................................................................. 37 1.26. Forecast and historical labour force growth in selected Asia-Pacific economies, 2000-2015 ........................................................................................................................................................ 41 1.27. Share of household and government consumption in 10-year GDP growth, 1995-2011........................................................................................................................................................... 43 1.28. Share of gross capital formation in 10-year GDP growth, 1995-2011 ...................................... 43 2.1. Inflation in selected East and North-East Asian economies, 2008-2010 .................................. 56 2.2. Budget balance in selected East and North-East Asian economies, 2008-2010 ................... 57 2.3. Current account balance in selected East and North-East Asian economies, 2008-2010 ...... 58 2.4. Index of exchange rate movements of domestic currencies against the dollar in selected East and North-East Asian economies, 2009-2010 ........................................................ 59 2.5. Inflation in North and Central Asian economies, 2008-2010 ........................................................ 63 2.6. Index of exchange rate movements of domestic currencies against the dollar in selected North and Central Asian economies, 2009-2010 ........................................................ 65 2.7. Current account balances in North and Central Asian economies, 2008-2010 ..................... 67 2.8 Inflation in selected Pacific island developing economies, 2008-2010 ........................................... 72 2.9. Budget balance in selected Pacific island developing economies, 2008-2010 ........................ 73 2.10. Current account balance in selected Pacific island developing economies, 2008-2010 .......... 75 2.11. Economic growth of Australia and New Zealand, 2008-2011 ....................................................... 79 2.12. Inflation in selected South and South-West Asian economies, 2008-2010 .............................. 84 2.13. Budget balance in selected South and South-West Asian economies, 2008-2010 .............. 86 xxiii FIGURES (continued) Page 2.14. Current account balance in selected South and South-West Asian economies, 2008-2010 ........................................................................................................................................................ 88 2.15. Index of exchange rate movements of domestic currencies against the dollar in selected South and South-West Asian economies, 2009-2010 .................................................... 90 2.16. Inflation in South-East Asian economies, 2008-2010 ....................................................................... 98 2.17. Budget balance in selected South-East Asian economies, 2008-2010 ...................................... 100 2.18. Current account balance in selected South-East Asian economies, 2008-2010 .................... 102 2.19. Index of exchange rate movements of domestic currencies against the dollar in South-East Asian economies, 2009-2010 ............................................................................................. 104 3.1. Infrastructure and gross domestic product per capita in Asia and the Pacific, 2007 ............. 108 3.2. Proportion of Asia-Pacific trade that is intraregional, 1993-2009 ................................................. 109 3.3. Intraregional trade shares of the Asia-Pacific subregions, 1993-1996 and 2006-2009 ........... 110 3.4. Comprehensive international trade costs between selected Asia-Pacific countries and Japan ..................................................................................................................................... 114 3.5. Share of ESCAP developed and developing economies in global outward foreign direct investment flows, 1992-2009 ......................................................................................................... 117 3.6. The Asia-Pacific network of preferential trading arrangements ..................................................... 120 3.7. Liner shipping connectivity index, 2004 and 2010 ............................................................................ 122 3.8. Growth of road and rail networks, selected Asia-Pacific countries, 1993-1997 to 2003-2007 ........................................................................................................................................................ 123 3.9. Asian highway network ................................................................................................................................ 124 3.10. Trans-Asian railway network ...................................................................................................................... 125 3.11. Air transport indicators, 1993-1997 and 2003-2007, selected Asia-Pacific countries ................ 126 3.12. Mobile telephone subscriptions and fixed lines, by subregion, 1993-2008 ............................... 129 3.13. International Internet bandwidth per capita in Asia and the Pacific, 2007, selected countries ........................................................................................................................................................... 130 3.14. Submarine telecommunications cables in the Pacific ....................................................................... 132 3.15. Production minus consumption of total primary energy, by subregion, 1992-2008 ............... 135 3.16. Production minus consumption of total primary energy, by economy, 2008 ........................... 136 xxiv FIGURES (continued) Page 3.17. Asia-Pacific energy imbalances ................................................................................................................ 138 3.18. Destination of Asia-Pacific migrants and origins of migrants to Asia and the Pacific, 2010 ................................................................................................................................................................... 141 3.19. Gaps in infrastructure development in Asia and the Pacific, 2007 ............................................. 147 4.1. Diversification and GDP, 2009 .................................................................................................................. 157 4.2. Simultaneous diversification within and across product categories, 2009 ................................. 158 4.3. As countries diversify, they produce more exclusive products ...................................................... 159 4.4. Diversification in the least developed countries .................................................................................. 160 4.5. A dynamic world: diversity and ubiquity of production, 1984-2009 ............................................. 161 4.6. The global product space map ................................................................................................................ 162 4.7. Cambodia’s occupation of the product space map ........................................................................... 163 4.8. Demand side of the product space ....................................................................................................... 165 4.9. Productive capacities, compared with the global mean, 2009 ...................................................... 166 4.10. Evolution of average productive capacity, 1991-2009, selected countries ................................. 167 4.11. Evolution of average productive capacity, 1991-2009, Asia-Pacific subregions ....................... 168 4.12. Evolution of average productive capacity, 1991-2009, Asia-Pacific least developed countries ........................................................................................................................................................... 168 4.13. Evolution of productive capacity: Asia-Pacific least developed countries and successful countries starting at similar levels, 1984-2009 .............................................................. 169 4.14. Evolution of Viet Nam‘s product diversification 1984-2009 ............................................................. 170 4.15. Evolution of Viet Nam’s occupation of the product space ............................................................. 171 4.16. Evolution of productive capacity: Asia-Pacific least developed countries and other graduating countries, 1984-2009 ......................................................................................... 172 4.17. Direction of Asia-Pacific productive capacity: to itself and to the rest of the world ................ 173 4.18. Trade within Asia and the Pacific is a training ground for increasing productive capacity ....................................................................................................................................... 174 4.19. An evolutionary strategy: differentiation, selection and amplification ............................................ 176 xxv TABLES Page 1.1. Major sources of FDI inflows to ASEAN, 2007-2009 ...................................................................... 1.2. Selected economies of the ESCAP region: rates of economic growth and inflation, 2007-2011 ......................................................................................................................................................... 19 1.3. Capital control measures in the Asia-Pacific region, 2010-2011 .................................................. 38 1.4. Annual growth in GDP and employment in selected Asian economies, 2001-2008 ............ 40 1.5. Contributions of demand components to GDP growth in selected economies ...................... 44 2.1. Rates of economic growth and inflation in selected East and North-East Asian economies, 2009-2011 ................................................................................................................................. 53 2.2. Rates of economic growth and inflation in North and Central Asian economies, 2009-2011 ......................................................................................................................................................... 61 2.3. Rates of economic growth and inflation in selected economies in Pacific, 2009-2011 ......................................................................................................................................................... 71 2.4. Rates of economic growth and inflation in South and South-West Asian economies, 2009-2011 ......................................................................................................................................................... 82 2.5. Rates of economic growth and inflation in South-East Asian economies, 2009-2011 ......................................................................................................................................................... 96 3.1. 14 Decomposition of intraregional trade shares of the Asia-Pacific subregions, by partner subregions, 2006-2009 .......................................................................................................... 111 3.2. Ad valorem intra- and extra-subregional trade costs, 2007 ........................................................... 115 3.3. Bilateral migrant stocks, by Asia-Pacific subregions and selected regions in the world, millions, 2010 ............................................................................................................................. 142 4.1. Share of Asia-Pacific least developed countries in international production and trade ........ 154 4.2. Economies classified by the diversity of their product mix ............................................................ 160 4.3. Changes in occupation of the product space for least developed countries, 1991-2009 ........ 164 4.4. Diversification required to graduate from least developed country status, 2009 ..................... 172 4.5. Potential new products related to those already produced by Asia-Pacific least developed countries ........................................................................................................................... 177 xxvi
