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Print Edition> Business
UPDATED: October 25, 2010 NO. 43 OCTOBER 28, 2010
Crisis Focus: Recovery in the East

As robust as the economic recovery in East Asia has been in recent months, attention must now be turned to managing emerging risks challenging macroeconomic stability, said World Bank's latest East Asia and Pacific Economic Update released on October 19. Edited excerpts follow:

Output has recovered throughout developing East Asia and, in some countries, is expanding at near pre-crisis rates. Real GDP is likely to rise 8.9 percent in the region in 2010—6.7 percent if China is excluded—up from 7.3 percent in 2009. Economic expansion will likely slow to 7.8 percent in 2011. Encouragingly, the private sector is booming as confidence runs high. But the recovery so far has generated little incremental manufacturing employment in middle-income countries.

With output gaps closing and private investment recovering, authorities across East Asia are downsizing stimulus measures, if only cautiously, as further proof is needed that the recovery is firmly entrenched.

Fiscal deficits are likely to remain above pre-crisis levels through the end of 2011. Their gradual reduction over time will allow authorities to address infrastructure gaps and maintain social safety nets. It will also provide an appropriate defense against subdued prospects for advanced economies.

Monetary policies are also being implemented cautiously across the region on the heels of fears concerning inflation. And policy rates have been raised to discourage risk taking that may impact financial stability.

The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability. The large increases, driven by abundant global liquidity and low yields in advanced countries and reflective of foreign confidence in East Asia's prospects, have resulted in a substantial appreciation of exchange rates despite interventions by central banks. The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries.

Most monetary authorities are reluctant to introduce new capital controls although some have liberalized rules for resident investment abroad. But should inflows remain strong, authorities will have to balance the need for robust capital inflows, especially foreign direct investment, with ensuring competitiveness, financial sector stability and low inflation.

Now that the recovery is on a firmer footing, many countries are also addressing medium term growth challenges. China's growth prospects over the coming decade continue to look bright, but rebalancing the economy by altering the pattern of growth and investment is becoming increasingly critical to ensure structural, social and global sustainability.

Commodity exporters in East Asia—Mongolia, Timor-Leste, Papua New Guinea and Laos—are expected to benefit from high global commodity prices and robust demand. Their challenge will be to ensure a clear and transparent framework for using resource-related revenues for development. Low-income Laos and Cambodia are trying to spur private investment in manufacturing by building infrastructure, strengthening connectivity with neighboring countries and improving the private investment climate. The middle-income countries of the region, China excluded, need to increase investment, raise skills and encourage innovation to reach high-income status.

Fixed investment has been on the rise relative to GDP in Viet Nam and Indonesia. But in Malaysia, the Philippines and Thailand, fixed investment—although recovering to pre-2008 levels—is still well below the levels reached before the 1997-98 Asian financial crisis, and below the levels of investment in Japan, Singapore and the Republic of Korea during their economic takeoffs. Moreover, the stock of capital per capita remains very low. More human and physical capital is also needed.

Much will depend on attracting private investment, building logistics and connectivity, increasing the numbers of skilled workers and transforming urban centers into incubators for new ideas.


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