East Asia’s emerging economies’ recovery from the 1997 financial crisis has been impressive but further reforms are required to secure the gains, the World Bank said Thursday in its six-monthly regional economic outlook.
Improving investment climates, reducing poverty without increasing income inequalities and reducing vulnerability to new shocks and crises are the three main challenges, the bank said in its report Ten Years After the Crisis.
Failure to implement these measures could lead to countries becoming mired in a “middle income trap”, whereby they cannot advance to rich nation status, the report says.
Growth in emerging East Asia excluding Japan and Singapore reached 8.1 per cent last year, the strongest in a decade. While growth rates have not recovered to their pre-crisis levels in most countries, economic output in dollar terms has doubled, poverty rates have halved and more than $2,000bn in foreign exchange reserves have been accumulated since 1997.
“Many doubted whether the region’s economies would ever recover their former dynamism but in fact the region’s accomplishments in overcoming the crisis and returning to solid growth have been very impressive,” said Milan Bhrambhatt, the report’s author.
Some 90 per cent of Asians will be living in middle income countries within three years, the report predicts.
“But these middle income countries are now facing new external challenges,” Mr Bhrambhatt said. “History shows many examples of economies able to go from low income to middle income status but then find it difficult to go on to high income status.”
China continued to be the strongest regional economy last year. It grew at 10.6 per cent and accounted for half the economic output and more than half the foreign reserves. “High growth has been accompanied by a series of stresses that could cause imbalances if left unchecked,” Mr Bhrambhatt said. “The environmental stresses are the most apparent.”
China has 20 of the world’s 30 most populated cities, the report said.
China’s growth is predicted to slow to 9.6 per cent this year and 8.7 per cent next year in line with a slowing US economy. Overall regional growth is expected to drop to 7.3 per cent in 2007 and 7 per cent in 2008. Indonesia and the Philippines are the only countries expected to see increased growth both this year and next.
Suggested investment climate reforms include reducing policy uncertainty, removing needless red tape, strengthening labour force skills, addressing infrastructure weaknesses, strengthening financial institutions, the Washington-based development institution said.
China also needs to better manage its massive external trade balance, said Bert Hofman, the bank’s lead economist in China.
“From a domestic perspective the external balances are quite serious,” he said. “Monetary policy seems to be too loose for the good of China because of the large current account surplus.”
