Download Asia-Pacific developing economies to grow 7% this year by Kanaga

South-North Development Monitor (SUNS)
#6920 Friday 7 May 2010
ASIA-PACIFIC DEVELOPING ECONOMIES TO GROW 7% THIS YEAR
By Kanaga Raja, Geneva, 6 May 2010
Led by the self-sustaining motors of China, growing at 9.5%, and India at 8.3%, the
developing economies of the Asia-Pacific region are forecast to grow by 7.0% in 2010,
following an estimated growth of 4.0% in the previous year, the United Nations
Economic and Social Commission for Asia and the Pacific (UN-ESCAP) said on
Thursday.
In its "Economic and Social Survey of Asia and the Pacific 2010", ESCAP said that even
at the height of the crisis, Asia and the Pacific was still the fastest-growing region in the
world, supported in large part by fiscal stimulus packages adopted by the region's biggest
economies.
The ESCAP region encompasses all the countries in the Asia-Pacific region including the
Central Asian republics of Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan, and Uzbekistan. The developed economies in the region are Australia,
Japan, and New Zealand.
At a media briefing Wednesday, Heiner Flassbeck, the Director of UNCTAD's Division
on Globalization and Development Strategies, said that it is important to note that in
UNCTAD and the UN system in general, there was the impression in the very beginning
that the "decoupling" (of the developing countries from the financial crisis), or the
avoidance of a long recession or stagnation would mean relying a lot on domestic
demand, and this is the story that Asia is telling now.
First, he said, is the strong government stimulus packages, in particular in China, that
were much bigger than in most other parts of the world. Secondly, the large developing
countries, including India, were not so vulnerable to the outside world, as they were not
part of the whole financial crisis hype and the collapse afterwards. And India relied very
much on domestic demand for its recovery, and not so much on exports, as China did.
He said that China is the classic example of successful Keynesian policy in the recession,
namely, the switch from little accommodation from the government to a fully
expansionary fiscal policy, through government stimulus for investment, which was quite
successful and the country was back on a very high growth track.
Flassbeck expressed hope that the policy lessons that can be drawn from Asia will spill
over into other regions, saying that the ESCAP report is timely in that it gives good and
clear examples of what has to be done in such a case where exports and trade drop
globally.
He also highlighted the fact that "the experience of Asia may teach us that for the world
as a whole, there is no such thing as trade, but (that) there is only consumption and
investment, which is very often forgotten in Geneva, because in Geneva, everything is
focused on trade."
"But for the world as a whole, there is no trade, there is consumption and investment, and
what we have to do to be successful for the world as a whole, is to focus on consumption
and investment and then trade will follow," he stressed.
He also said that despite the European experience, it is still worthwhile to think about
regional cooperation.
There can be more intelligent ways to do it than the Europeans have done in the last
couple of years, he said further, adding that the world should not be discouraged by the
European experience right now, but should instead continue on the way to more regional
cooperation.
Asked about the impact of the "carry-trade" in the global economy and how serious this
is for the Asian economies, the UNCTAD official said: "If you would have asked me the
question what is the most serious problem that we have in this world at this moment of
time', then I would have answered carry trade'".
He pointed out that the implications of carry-trade is that it destabilizes economies, in
that it goes from low-interest-rate, low-inflation countries or deflation countries like
Japan to countries with high inflation, and appreciates the currencies of the countries with
higher inflation. This is clearly a destabilizing effect for global trade. It also has the
potential to bring the world back into a financial crisis.
According to the ESCAP report, strong support from expansionary policies helped Asian
and Pacific economies to reverse their declines by the second half of 2009. A notable
recovery is expected in 2010. For the developing economies of the region, GDP is
expected to grow by 7.0% in 2010, following an estimated growth of 4.0% of the
previous year.
The report says that the forecasts are based on the assumption that the world economy
can stay firmly on its current track of stabilization, that the United States can resume
growth, at around 2.5% in 2010 (after the severe setback of -2.4% estimated for 2009),
that in 2010, the European Union is assumed to be able to recover growth of around
0.8%, and that the Japanese economy is expected to resume growth in 2010 of 1.3%.
Monetary policy has remained loose since the outbreak of the global financial crisis. The
loose stance is expected to prevail until mid-2010, with authorities not likely to make
bold moves on interest rates before signs of solid recovery are clear.
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The report predicts that the United States Federal Reserve Board is expected to keep its
target rate at a very low level, from 0 to 0.25%, during the first half of 2010 and
gradually increase it during the second half. Similarly, the European Central Bank is
expected to hold the main refinancing rate at 1%. Given the deep setback in economic
performance, the Bank of Japan is unlikely to revert to monetary tightening until the end
of 2010.
Regarding key exchange rates, ESCAP says that the dollar is expected to appreciate,
albeit very mildly and gradually, in 2010, owing to the economic recovery. The dollar
should edge up to around 100 yen by the end of 2010 and hover around 0.7 euro during
the year.
During 2009, the oil price averaged around $62 per barrel or 37% below its average level
of 2008. The oil price is expected to pick up to around $75 to $80 per barrel on average
during 2010, reflecting increased economic activity and hence increased demand for oil
but still a weak dollar.
Against such a background, says the report, the forecast is that growth in the developing
economies of Asia and the Pacific will pick up to 7.0% in 2010, signifying a notable
recovery from growth of 4.0% in 2009.
Yet, the pace of recovery will vary across the sub-regions. South and South-West Asia
will lead the recovery and is forecast to grow by 6.1% in 2010, after a growth of 2.9% in
2009, while North and Central Asia will experience the largest rebound. The sharp
downturn of the Russian Federation saw growth in the sub-region decelerate in 2009, to 5.8%, but positive growth is expected to return in 2010, at 3.7%.
The report also highlighted several downside risks. Pressure is growing for protectionist
measures in developed countries but also potentially in developing countries, which is of
great concern for recovery in Asia and the Pacific.
While recovery in the developed world will likely be well managed by policy-makers,
deep uncertainties persist about the pace of recovery in the United States. Economic
activities continue to pick up, but some indicators, notably rising unemployment, have
increased the complexity of managing macroeconomic policies. Continued fiscal
expansion will not be sustainable and has been exerting pressure on fiscal balances.
However, as the Government turns off the fiscal throttle, private-sector growth drivers
may not be strong enough and the economy could fall back quickly into a double-dip
recession, thereby sparking a new cycle of fiscal expansion.
A growing concern is the impact of sharply increased Government borrowing in major
developed economies.
Early in 2010, the perceived difficulties of Greece in repaying its Government debt came
to the fore; in coming years, other economies in the European Union may be facing
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similar problems. The impact on Asian and Pacific countries would emerge through
reduced import demand from developed economies, because of curtailment of their GDP
growth.
The report notes that countries across the Asia-Pacific region have begun to reverse their
monetary stance in recent months. The dilemma for the region is that if they adopt a
much tighter monetary policy than their major trading partners, in particular the United
States, it will attract capital inflows and further fuel the appreciation of Asian currencies
against the United States dollar. As a result, exports may experience renewed difficulties
that would, given the importance of external demand in the region, negatively affect the
overall forecast of economic growth.
Beyond the immediate risks to the speed and sustainability of recovery, fundamental
concerns exist about the nature of the recovery process and whether it will resurrect old
challenges as well as create new obstacles for years to come.
The main short-term threat to growth in Asia and the Pacific is the return of inflationary
pressures as recovery gathers steam. Countries will have to balance the risks of setting off
an inflationary spiral with long-term negative consequences and of halting the short-term
growth recovery trend prematurely. Critical decisions for each economy will be when and
how to turn off fiscal stimulus and accommodative monetary policy.
Abundant foreign capital buoyed by liquidity support provided to financial institutions in
developed countries has been attracted to the Asia-Pacific region in recent months
because of its comparatively strong growth prospects.
Looking forward, as the inflows grow in scale, the risk also grows that unexpected
change in interest rates, or a sudden appreciation of the dollar, could simultaneously
cause capital to exit from target countries and financial asset classes in the region,
precipitously bringing down asset prices and exchange rates.
The report further notes that liquidity has been injected into the United States financial
sector with the Federal Reserve purchases of mortgage-backed securities and other
agency debt. The scale of such liquidity support is seen from the Government targets for
such purchases, of $1.25 trillion and $175 billion respectively by the first quarter of 2010.
Foreign capital has been abundant as well due to the rise of the dollar "carry trade", with
borrowing at low dollar interest rates for investment in economies where appreciation
expectations are strong and interest rates comparatively higher. The situation resembles
that in Japan from mid-2005 onwards, where near-zero interest rates in support of
domestic recovery led to the use of the yen as the carry trade currency of choice.
"Countries in this region have been particularly susceptible to the carry trade as
expectations of recovery earlier than in other parts of the world have caused interest rate
and exchange rate rises, thereby offering more attractive differentials for carry trades than
exist in other regions."
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ESCAP says that the recovery phase for economies in the region presents the critical
challenge for policy-makers of deciding when and how to exit from the stimulus
programmes that have supported growth since the crisis.
"While continuing with stimulus policies in a climate of incipient growth recovery would
likely lead to some inflationary and fiscal pressures, the overwhelming priority for
policy-makers should be to continue stimulating economies until the self-perpetuating
motors of growth are firmly entrenched," the report suggests.
In the balance of risks, Asian and Pacific economies should aim to sustain growth rather
than manage inflation. Policy-makers should guard against premature exit from stimulus
policies until growth becomes more self-sustaining.
When exit policies are enacted, the mix between fiscal and monetary policies will be
important for the twin tasks of sustaining growth while managing inflation. In that
pursuit, monetary tightening could play the most effective role in controlling price
pressures because it could act directly on credit build-up.
The fundamental long-term challenge for maintaining growth in the Asia-Pacific region
is to complement the engine of exports to developed countries, especially the United
States. Under current projections, the import demand of the United States is unlikely to
resume its pre-crisis growth trajectory, as its debt-driven consumption is constrained.
Countries that can boost their domestic demand to significant levels may use that channel
to replace the loss in the export contribution to growth. For smaller export-dependent
economies in the region, a clear route for mitigating the decline in the role of exports to
developed countries is to increase their share of intra-regional trade to benefit from the
domestic demand of their larger neighbours.
According to the report, the impact of the crisis has revealed the vulnerability of the
region to external shocks - its excessive dependence on import demand generated by
extra-regional markets, principally the European Union and the United States, and
exposure to financial and exchange-rate instabilities.
"Asia and the Pacific as a whole survived the financial shock of the crisis far better than
the other developing regions of the world, largely because of the risk management
measures and prudent macroeconomic management that the region has followed after the
1997 Asian crisis."
The report also recommends the use of capital controls to moderate short-term capital
inflows - the result of a massive expansion of liquidity in Western countries
- which has created asset bubbles, inflationary pressures and exchange rate increases in
the region's developing countries.
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It notes that the region experienced the first impact of the crisis through short-term capital
flows, which brought instability, not unlike in 1997. Policy-makers had attempted to
mitigate the risk of instability by building up foreign reserves to levels that could cope
with expected capital outflows.
Notwithstanding policy, the manner in which the channel of capital flows operated during
the global crisis was different from that in 1997. At that time, the problem with capital
flows lay more in excessive short-term foreign debt of domestic banks and other privatesector operators.
However, the past decade has been notable for another aspect of capital flow build-up that of foreign portfolio capital. Looking at net capital flows, the collapse of 1997 and
1998 was due largely to the reversal in short-term bank loans.
The global crisis of 2008 and 2009 was driven more by sharp reversals in portfolio flows,
although inevitably there were also retrenchments in lending by many international banks
in response to the financial stresses faced by their headquarters in the United States and
Europe.
In contrast to the 1997 crisis, says the report, the reversal in capital flows was driven by
pressures emanating from outside the region, from the problems of the financial
institutions in developed countries and the increase in global risk aversion.
The critical lesson is that even countries that do not require foreign capital to finance
current account imbalances but have experienced massive portfolio capital inflows in
previous years, and thus have a stock of gross external liabilities that could potentially be
reversible, are at risk of a sudden outflow.
"Exposure to a high level of foreign portfolio capital inflows can thus create a crisis even
when economic fundamentals are sound, or it can make a bad situation worse when the
fundamentals are weak."
The traditional view of short-term debt being the main component of foreign capital
flows should be tempered with the finding that portfolio capital has become increasingly
important in the region, with the potential to destabilize currencies by flowing out in a
similar short-term fashion.
On how best to deal with portfolio capital flows, the report says that an option would be
to manage the quantum of inflow of such funds through various capital controls. The
potential benefits of such controls have come increasingly under discussion owing to the
lessons from this crisis about the risks of short-term capital inflows.
The report also finds that despite the region's accelerating growth, social imbalances are
pervasive, with close to 1 billion people living under $1.25 per day poverty line.
Although the number of poor dropped very significantly - by around 600 million between
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1990 and the mid-2000s - most of the drop was concentrated in a few countries, while the
number of poor increased in others.
With over 950 million poor as of 2005, the challenge of reducing poverty in Asian and
Pacific countries remains formidable and should be assigned the highest policy priority,
the report stresses.
Addressing the social imbalances of the region calls for two different, but equally
important, policy goals: (a) to redouble efforts to reduce entrenched poverty and
deprivation; and (b) to protect the population at large from the risk of falling into poverty
as a result of various hazards, including adverse economic shocks, natural disasters,
illness, disability and other circumstances.
Both goals can be addressed through broadly understood policies that provide social
protection in times of adversity and reduce unacceptable levels of deprivation. Such
social protection policies should be concerned with developing short-term safety nets,
preventing increases in deprivation, and promoting better chances of individual
development, says the report.
Some types of social protection measures are particularly relevant for tackling crisis
situations as they can provide quick relief to the poor in the short-term. Among them are
(a) employment generation measures; (b) cash transfers programmes - conditional or
unconditional; ( c) targeted social services, such as feeding programmes and health and
education programmes that focus on benefits for women and girls; and (d) expansion of
micro-credit schemes to impoverished groups and localities.
The report finds that across the region, people working in the informal economy do not
generally benefit from social safety nets.
ESCAP has estimated that across Asia and the Pacific, only 20% of the unemployed and
underemployed have access to labour market programmes for unemployment benefits,
training or public welfare, including work-for-food programmes.
The report concludes that given the low coverage of social safety net programmes, public
expenditures should be re-prioritized so that such programmes can be adequately
financed.
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