More than one year after the financial crisis swept the globe, the economy of developing East Asia is starting to see renewed growth. The path toward full recovery is still littered with risks, but the crisis seems to have offered a catalyst for the region to rebalance its export-driven model and seek healthier growth. Ivailo Izvorski and Antonio Ollero, senior economists of the World Bank East Asia and Pacific Region, discussed these issues in the latest East Asia and Pacific Update, a regular assessment of the regional economy. Edited excerpts follow:

The economic recovery of East Asia from the economic downturn has been surprisingly swift and welcomed with open arms. A strong fiscal expansion in most countries in the region, led by China and South Korea, has prevented a decline in economic activity and set the regional rebound in motion. This has led us to project a 6.7-percent growth rate for the real GDP of the developing East Asia region in 2009.

But take China out of the equation and the regional picture is less promising. For 2009, industrial output is expected to shrink in Cambodia, Malaysia and Thailand and barely grow in Mongolia and certain Pacific islands.

Some governments in the region will have the fiscal space to sustain stimulus plans until a recovery can be solidified and private investment has been re-established. Others will be more restrained because of limited fiscal space. Overall, governments are aware that fiscal and monetary stimulus alone cannot hold up domestic demand for an extended period of time.

Looking ahead, the regional outlook for a consolidated recovery is not without risks. The biggest one was a double dip in economic activity in the developed world as stimulus measures and inventory restocking wear off. This will challenge many East Asian countries that have little fiscal space to continue with fiscal expansions. But they will be assisted by buoyant demands from China, which is witnessing astounding GDP growth.

The good news is the crisis has prompted countries in the region to rethink their growth strategies. Governments are realizing that more growth can be extracted from domestic demands if they ease or eliminate incentives that favor the quick build-up of export-led, investment-heavy manufacturing supported by undervalued exchange rates and suppressed domestic consumption and services. Some governments are rethinking how to manage risks stemming from large and volatile capital inflows, especially given concerns about new asset price bubbles.

At the same time, they need to resist protectionism, remain open and become more, not less, integrated into the global economy to reap the benefits of global knowledge. Moving up the value-added chain in global production networks should lead to further productivity gains and strong growth, and allow for new technologies and innovation to spread more widely through the region's economies.

The service sector also holds enormous potential for East Asia. Measures to spur competition in the service sector, combined with policies to ease restrictions on internal migration and trade, bolster infrastructure and education and improve the environment for private investment and innovation, will allow countries to take advantage of the benefits of agglomeration, and create more favorable conditions for the emergence of innovative global companies. All these efforts need to be accompanied by developing better-targeted and better-founded social protection systems to help reduce precautionary savings and stimulate consumption.