November 13, 2006—Strong economic growth in East Asia helped lift some 25 million people out of severe poverty in the first three quarters of 2006.
But not all poor people benefited from growth rates expected to reach close to 8 percent among the region's emerging economies, and 9.2 percent among developing countries in 2006, according to the World Bank's biannual East Asia and Pacific Regional Update, released today by the World Bank.
“Despite the fact growth has really been strong, the impact on poverty this year has been more muted than in previous years,” says Homi Kharas, Chief Economist for the World Bank's East Asia region.
An additional 4 million people in Indonesia fell into poverty mainly because of sharply higher rice prices, which rose by one-third over 2005 levels, Kharas says.
And there are growing signs of a widening gap through the East Asia region between rich and poor, and between urban and rural areas, with the most severe poverty concentrated among minorities who lack rights to productive land and social services, the report says.
Still, East Asia as a whole is increasingly becoming a middle-income region, and expectations of slightly slower growth in 2007 likely won't affect this trend, says Milan Brahmbhatt, Lead Economist for the East Asia region and principal author of the report.
He predicts “nine out of 10 East Asians will live in middle income countries by 2010.”
East Asian integration strengthens competitiveness across the region
China's double-digit economic growth peaked in the second quarter of 2006 at 11.3 percent—the highest in a decade—before moderating to 10.4 percent in the third quarter, according to the report.
This rapid growth is an important driver of growth and trade throughout the region, the report says. Vietnam, Cambodia, Lao PDR and Mongolia also grew between 7 and 9 percent. These four countries and China have had the region's most rapid growth in the last five years.
The report says China is emerging as a “processor and workshop” for global markets—some 55 percent of exports now are goods that have been imported into China by foreign enterprises for processing and re-export back into global markets.
In addition, China's trade with other countries in East Asia increasingly is made up of components of products that are finished in China and shipped to global markets.
For instance, electronics and “high tech” products made up 37 percent of China's exports in 2005, up from only 7 percent in 1990. Parts and components constitute almost 80 percent of China's high tech imports from the rest of East Asia, “a proportion that has increased dramatically over the last 15 years,” says the report.
While China's large domestic market and trade with Japan and Europe shield it from an expected downturn in the US economy in 2007, its regional trading partners are more vulnerable to reduced trade with the US, Brahmbhatt says.
“China's overall economic growth rate has tended not be that closely linked to exports—it has very robust domestic growth,” he says.
A downturn in the US “may have some dampening impact, but overall one would expect China to continue moving forward at quite a strong rate.”
But, “the impact could be more significant for the region's other economies, because they export significant amounts directly to the US, but also their largest export market is China, and what happens there is that much of these exports from the rest of East Asia wind up going into China exports, which are exported out again to the US and other markets outside the region.
“So there might be something of a double whammy happening there if the US had a severe downturn.”
Brahmbhatt, however, says that consensus expectations are still for the US and other developed economies to have a “soft landing, so the effect may be somewhat muted.”
And although higher oil prices prompted higher interest rates and dampened consumer spending in the first half of 2006, the price of oil has fallen by about US$15 from summer highs and is expected to stabilize at current levels and decline over time, “which should help unwind some of the income losses caused by rising oil prices over the last three years in what is overall a net oil importing region,” says the report.
Challenges
While the poverty rate continues to fall in most countries (the number of people living on $2 a day has fallen to 550 million, or 29.3 percent of the population), the region faces a number of challenges as people increasingly move from rural areas to cities, Kharas says.
For instance, migration is a cause of rising social inequities in China's urban areas, where migrants from rural areas often lack access to government-funded health care facilities and local government schools. Nearly 150 million people are part of a “floating population” of people who live and earn their livelihood in locations where they potentially suffer discrimination in access to economic opportunities, the report says.
Throughout East Asia, some 25 million people each year—2 million a month—will likely move to cities over the next decade or two, Kharas says.
Most of this urbanization will happen in cities of less than 1 million, “and that poses particular problems with the management of cities, because it's something that will happen in a very decentralized way,” he says.
“I think over the medium term the big challenge is this challenge of domestic integration. That means connecting cities and other localities that are not on the main trade routes with each other; it means improving city management, both the economic management of attracting new investment into cities and also the social management of delivering better services.
“It means having a new financial sector which is stable and will be able to fund new enterprises which will provide the dynamism to these new economies.
“It means dealing with the social inequities largely by providing better social services, especially in rural areas, and having public mechanisms to transfer resources into lagging regions as is done in Europe and other large federated countries.
“And is probably means dealing much more aggressively with corruption, because along with tremendous growth in East Asia has been tremendous opportunities for making money, and that in turn leads to temptations for corruption, and as that gets decentralized it becomes easier to hide the level of corruption.”
The Bank is “strongly engaged” in all countries of the region to help them “move from economies that govern by the rule of man, to economies that govern by the rule of law”—a transition that is not occurring as rapidly as the decentralization of their economies, Kharas says.
It will “take a very determined effort” to overcome that challenge, he adds.
“Strong leadership is really the most important ingredient, but then so is a continued push on transparency, of public finances and public policies, and on accountability of public officials to their citizens.”
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