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East Asia Remains Robust Despite U.S. Slow Down

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In Washington:     
Elisabeth Mealey (202) 458 4475
Mohamad Al-Arief (202) 458-5964

Washington, DC, November 14, 2007 – East Asian economies are likely to remain robust in 2008 despite growing concerns about the U.S. sub-prime crisis and increasing global oil prices, says the World Bank’s latest East Asia & Pacific Update –Will Resilience Overcome Risk?  Highlighting this, the report finds that for the first time, the number of poor people living below $2 a day in East Asia has fallen below 500 million – down from 1 billion in 1990.

Growth tableThe Update – a six-monthly report on the region’s economic and social health – finds that growth in emerging East Asia1  is expected to exceed 8 percent in 2007 for a second year in a row and to moderate only slightly in 2008. Although East Asian exports to the US have already slowed, more buoyant investment and consumption in China and other countries have allowed growth to remain strong and even pick up this year.

China is expected to grow by 11.3 percent in 2007 and that is expected to slow only modestly to 10.8 percent in 2008. The stronger growth dynamic extends to middle-income economies in South East Asia and continues to run at solid 7 percent to 10 percent rates in low-income economies of the region including Cambodia, Lao PDR, Mongolia and Vietnam. Growth is also running at above historical trends in some of the small Pacific Island economies due to high commodity prices although social tensions and political instability continue to undermine performance in some of these countries.

The Update cautions that new highs for oil prices will test the solidity of the East Asian and global economic expansions in 2008.  Crude oil prices have moved to well over $90 in early November, underpinned by demand and supply factors.  Although rising prices have curbed demand growth in developed countries, demand in developing countries continues to grow by 3-4 percent year.  The report calculates that an average oil price of $90 in 2008 would be associated with an income loss in East Asia of a little over 1 percent of GDP, although that would be similar to the additional annual costs of higher oil prices that the region has already experienced over the last 3-4 years.

“The impact of the US sub-prime crisis and the renewed surge in oil prices, have clearly increased downside risks,” said Milan Brahmbhatt, the report’s lead author. “Nevertheless we expect that the stronger growth momentum in the region to carry through 2008.”

The Update notes that China has become a major export market for the rest of East Asia but warns that economies need to remain focused on finding new ways to meet China’s ever changing and highly competitive market. “The new challenge for China’s East Asian neighbors will be in making the transition from supplying inputs for China’s exports to also supplying its domestic market - something that might require significantly different research, production, branding and marketing skills and channels,” Brahmbhatt says.

According to the Update, emerging East Asia experienced its largest ever increase in foreign exchange reserves during 2007. Foreign reserves for the nine largest economies increased by $451 billion in the nine months to September 2007, reaching $2.5 trillion.  About four-fifths of the regional reserve increase was in China.

“The region’s ability to weather short- term global volatility should allow countries to remain focused on advancing their long- term development goals,” said Vikram Nehru, the World Bank’s regional Chief Economist.  “East Asia’s rapid growth has been primarily responsible for its remarkable success in lowering poverty.  Maintaining this growth remains key and to this end, continued improvements in the investment climate, financial systems, public service delivery, and education and innovation systems remain priorities in much of the region.”

The poverty headcount rate at the $2-a-day level is estimated to have fallen to about 27 percent, down from 29.5 percent in 2006 and 69 percent in 1990.  But, as the Special Focus in this Update on “Agriculture for Development in East Asia” explains, poverty has now become an overwhelmingly rural problem. The widening gap between rural and urban incomes in many countries is one of the main reasons for increasing inequality at the national level. Governments in the region are therefore pursuing policies aimed at addressing the widening urban-rural income divide, by renewing their focus on rural and agricultural development policies, while also exploring ways to strengthen the development of human capital.

 1 Emerging East Asia is Developing East Asia (China, Indonesia, Malaysia, Philippines, Thailand, Vietnam and some smaller economies) and four Newly Industrialized Economies or NIEs (Hong Kong, Korea, Singapore and Taiwan, China)

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