Rapid growth in the People’s Republic of China (PRC) and India accounted for about 70% of the region’s economic expansion in 2006.
Inflationary pressures will wane in 2007 in response to policy tightening measures taken in the region along with the recent slide in global oil prices. Current account surpluses will also start to slowly narrow as growth gently decelerates in developed economies.
“Prudent macroeconomic management will ensure that developing Asia’s economic outlook will remain favorable” says Ifzal Ali, Chief Economist of the Manila-based multilateral development bank.
In the PRC, rapidly growing exports and strong fixed asset investment helped deliver yet another year of double-digit growth of 10.7% in 2006.
The PRC government’s moves to restrain rapid fixed asset investment are expected to gain more traction in 2007, but it may struggle to rein in spending in the run-up to the Party Congress in 2007 and the Olympics in 2008. PRC growth is expected to marginally ease to 10 percent in 2007 and moderate to 9.8 percent in the following year.
In India, vibrant industrial growth supported by buoyant services led to a 9.2% growth rate in 2006, the highest since 1988. But an uptick in inflation, an overheated property sector and rapid credit growth led the central bank to hike interest rates and restrain property sector lending.
The report forecasts India’s economic expansion will moderate to 8% in 2007 and domestic inflationary pressures will ebb. Growth will pick up to 8.3% in 2008. Affecting growth estimates is the slowing pace of economic reforms and sluggish agricultural productivity growth in an economy where most people still depend on agriculture for livelihood. A sharp rise in food prices underscores the need for structural transformation in India, the report notes.
Projected growth in Southeast Asia is 5.6% in 2007, edging up to 5.9% in 2008. In Indonesia, lower inflation and lower interest rates will give a boost to domestic spending thereby accelerating growth. Cambodia, Lao PDR, and Viet Nam will again grow briskly.
Economic prospects for some countries in the region remain uncertain as they grapple with downside political risks.
Business and consumer confidence in Thailand is slipping and growth is expected to slow down. The introduction of capital controls in December 2006 rattled the markets, and policies are still being changed. Clarity about the future direction of economic policies should strengthen the economic outlook.
Although it is still early to pass judgment on Bangladesh’s economic performance, conditions for doing business could improve if the anticorruption and reform initiatives taken by the caretaker government continue.
Risks facing developing Asia are less than in the latter half of 2006, ADO 2007 says. Risks to the region include price volatility, a disruption in oil supplies, rising protectionist pressures, a spike in geopolitical and security risk, and an avian flu pandemic.
“The recent volatility in global equity markets is a timely reminder of looming risks,” says Mr. Ali. “If asset values crumble then developing Asia may have to bear disproportionately high costs.”
Developing Asia’s long-term economic growth potential hinges critically on its ability to respond and adapt to a constantly changing environment, ADO 2007 says. Countries in the region that have achieved economic success have transformed through industrialization and the expansion of services.
“Walking on two legs – fostering manufacturing and services – is the only viable development model for most countries,” says Mr. Ali.
While policies have to be country-specific, some of the key essential ingredients to successful transformation for sustaining economic growth include: physical capital accumulation, a conducive business environment, worker skills and versatility and economic integration.
ADO 2007 analyzes the recent economic performance of 43 developing member countries and provides forecasts for key macroeconomic indicators for 2007 and 2008. It also includes a special chapter on Growth Amid Change in Developing Asia.
