The Changing Development Agenda in the Region

The development agenda has changed in the East Asia region, especially three lessons from our recent experience in the region.

First, in today’s world, competitiveness is no longer driven only by labor costs, the availability of resources, and the openness of markets. While these are important, a nation’s ability to compete in the global economy is heavily influenced by the stability, transparency, and reliability of the legal and judicial system, by levels of corruption, and by effective supply chain management.

Second, it has become easier to do business in East Asia. There is greater interest in opening markets, in coordinating the reduction of tariff and non-tariff barriers, and also in the harmonization of standards across the region.

Third, as a result of the two changes, a profound change has occurred in the organization and location of economic activity. To compete, grow and prosper, East Asian countries must understand that investors, businesses, tourists and, to an extent even workers, all have a choice of where they go. In addition, sharp reduction in the cost of trade, transport and capital transfers has allowed production processes to be unbundled and broken up into small pieces, each of which can be located in a different country. The relocation of manufacturing industries to China that is underway, or concerns about the effects of recent events in Bali on FDI in Southeast Asia, reflect this phenomenon.

The starting point in assessing the challenges that lie ahead is to recognize that we need much more progress in East Asia in coordinating and raising standards to help attract investors. The investment climate needs to be improved, not simply benchmarked to East Asia’s own past performance, but in relation to the best countries in the world.

Implications for Governments

In these circumstances, what can governments do? Here, too, there are some significant lessons from recent experience.

Governments must recognize that the so-called “structural agenda” of reforms, which the World Bank emphasizes consistently, is not an option, it is a must. That is,

First, banks and financial systems need to be cleaned up and strengthened, to provide quick and dependable support to growing economies and to consumers and investors.

Second, legal systems need to function, independently and cleanly, so investors know that there are rules to the game, and that the rules apply equally to all.

Third, Customs, trade facilitation and business approval services need to be quick and honest.

And fourth, corporate governance standards should be raised and harmonized.

Without these changes investors will favor a few countries, and with the danger that a split will appear in East Asia between those who are more open, more stable, growing and more prosperous, and those who are falling behind, have less growth, and are not making sufficient progress on these issues.

How Is the Region Doing?

In East Asia, unlike in the other regions of the world, the average growth rate is expected to rise to 5.4 percent in 2002 and 2003, compared to only 3.5 percent last year. There are differences, however, in the economic performance of individual countries. As in recent years, Korea and the two transitional economies of China and Vietnam are expected to grow most rapidly. Korea is expected to grow at about a 6 percent average rate in 2002 and 2003, while China and Vietnam are expected to grow at above 7 percent. The four countries of Southeast Asia that are still recovering from the Asian Crisis—Indonesia, Malaysia, Philippines and Thailand—are also expected to see an improvement in performance, with GDP growth rising from 2.3 percent in 2001 to about 3.8 percent in 2002 and 2003. But, as we saw last year, the smaller economies of East Asia are still struggling to reach levels of growth that could result in tangible gains in standards of living. In 2001, as a group they grew by only 1.4 percent; although recovering, for 2002-2003 their average growth rate is projected to only a little above 3 percent. Finally, it is unfortunate that there are still no clear signs of a recovery in Japan, where output is expected to decline by 1 percent this year, and move tepidly into positive territory next year.

In general, it would be fair to say that there is growth in East Asia, accompanied by a continuing reduction in the number of poor people, and the region does not face any imminent crisis. Therefore, many countries in East Asia are able to continue focusing on medium-term structural reform programs. This is a direction the World Bank endorses strongly, not only because East Asia’s agenda for reforms is still to be completed, but also because reforms will help reduce the vulnerability of the region’s economies, should international economic conditions deteriorate.

However, just as there are differences in the current and prospective economic performance of the countries that make up East Asia, there are also important differences in the reform agendas they face. In the low income countries, strategies need to formulated tightly around poverty reduction, with a clear focus and a practical set of actions keyed to the Millennium Development Goals that have been agreed by the international development community. The major challenge in implementing such a strategy seems to be the large inadequacies that exist in domestic capacity, which needs to be built up with international support.

By contrast, in the middle income countries, the macroeconomic situation has generally stabilized, although we are all waiting to see the effect of the recent tragic events in Bali. However, the pace of corporate and financial reforms needs to continue; it is clear that those countries that have made most progress on corporate and financial sector reforms—Korea, Malaysia, China—have experienced the strongest growth performance since the Asian Crisis. However, in all countries debt-to-equity ratios remain high in relation to international norms, non-performing loans continue to accumulate, and the balance sheets of the financial and corporate sectors are still weak. A sustained effort is needed to address this agenda.

As Uri Dadush from World Bank points out that international economic conditions are more favorable today that at the same time last year, or even six months ago. Nevertheless, there are risks in 2002 and 2003 that need to be recognized and figured in explicitly when designing economic policies and programs in the region. This is as true of China, despite its success, as it is of the slower growing countries of the region.

In many ways, the success of the other economies of East Asia will depend crucially on developments in the Chinese economy. Therefore, we endorse strongly the initiatives that China has taken to embrace multilateral, regional, as well as bilateral arrangements to ensure the harmonious development of the economies of the region.

A single statistic here says much about the potential for regional growth led by China. During January-June this year, exports to China from eight other East Asian countries jumped by around 50 percent from a year earlier. In fact, the absolute increase in exports to China over this period was 2-3 times as large as the absolute increase in the total exports of these eight other East Asian countries. In other words, the rise in exports to China more than offset declines in exports to other countries, in particular to Japan. In fact, over the past few years, China’s imports from ASEAN have risen consistently faster than from the rest of the world.

The initial concern that China’s post-WTO success would threaten the other economies of the region has given way gradually to a realization that China’s development presents a great opportunity for the rest of East Asia. It is our job to ensure that China’s economic growth continues on a high trajectory, but that at the same time it creates equitable opportunities for all people in China and in the region and, above all, that it is continues to be sustainable even beyond the short and medium terms.

(china.org.cn by Jemal-ud-din Kassum, Vice President with East Asia & Pacific Region, World Bank, October 25, 2002)