Asian Development Outlook

2011
South-South Economic Links

Changyong Rhee
Chief Economist
Economics and Research Department

ADO 2011 Press conference

Hong Kong, China
6 April 2011
 Outline
1. Economic outlook
 Global outlook
 Developing Asia’s outlook
2. Key Challenges
 Managing inflation
 Finding new growth source:
South-South economic links?

3
 Key Messages
 Asia’s recovery is firm, with growth
nearing 8% in the next 2 years
 Asia is leading the global recovery
 Rising inflation is a concern
 Expanding South-South links present a
supplementary growth source
 But structural weaknesses need to be
addressed to maximize their potential

4
Part 1. Economic outlook
 Modest growth expected in
major industrial economies
  2009 2010 2011 2012
ADO 2011 ADO 2011
  Actual Actual projection projection
GDP Growth    
Major industrial economies (%) -3.8 2.6 2.1 2.1
United States (%) -2.6 2.9 2.8 2.6
Eurozone (%) -4.1 1.7 1.6 1.6
Japan (%) -6.3 3.9 1.5 1.8
World trade
Merchandise exports
(% change) -12.2 13.5 7.5 8.5
Inflation
Inflation (G3 average, %) -0.2 1.2 1.3 1.8

6
 But risks remain
 Recent surge in oil and food
prices
 Sovereign debt problems in the
eurozone periphery
 High unemployment and weak
housing market in the US
 Impacts of the Japan earthquake

7
 Developing Asia’s recovery is
firming

GDP growth
5-year moving average
12
10.1
9.4 9.0
8 7.8 7.7
6.7
5.9

0
2006 2007 2008 2009 2010 2011 2012

…due to robust domestic demand

8
 Led by the PRC…
GDP growth
%
5-year moving 16
14.2 average
14
12.7
12
10.3
9.6 9.2 9.6 9.2 10

6
2006 2007 2008 2009 2010 2011 2012

• But slowing investment and exports will see growth in

the PRC moderate in 2011 and 2012.
9
 … and India
GDP growth
%
5-year moving
9.7 average 10
9.2
8.8 9
8.6
8.2
8.0
8

6.7 7

6
2006 2007 2008 2009 2010 2011 2012

• Growth will moderate in 2011 on slower external demand and

tighter macro policies, then bounce back in 2012

10
 Other regional economies are
also doing well
  2009 2010 2011 2012
Central Asia 3.2 6.6 6.7 6.9
Azerbaijan 9.3 5.0 5.8 5.8
Kazakhstan 1.2 7.0 6.5 6.8
East Asia 6.8 9.6 8.4 8.1
China, People's Rep. of 9.2 10.3 9.6 9.2
Hong Kong, China -2.7 6.8 5.0 4.7
Korea, Rep. of 0.2 6.1 4.6 4.6
Taipei,China -1.9 10.8 4.8 5.0
South Asia 7.1 7.9 7.5 8.1
Bangladesh 5.7 5.8 6.3 6.7
India 8.0 8.6 8.2 8.8
Pakistan 1.2 4.1 2.5 3.7
Sri Lanka 3.5 7.6 8.0 8.0
Southeast Asia 1.2 7.8 5.5 5.7
Indonesia 4.6 6.1 6.4 6.7
Malaysia -1.7 7.2 5.3 5.3
Philippines 1.1 7.3 5.0 5.3
Singapore -0.8 14.5 5.5 4.8
Thailand -2.3 7.8 4.5 4.8
Viet Nam 5.3 6.8 6.1 6.7
The Pacific 4.2 5.2 6.3 5.4
Fiji Islands -3.0 0.1 0.5 0.8
Papua New Guinea 5.5 7.1 8.5 6.5
Vanuatu 4.0 3.0 4.2 4.0
Developing Asia 5.9 9.0 7.8 7.7

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 Robust domestic demand propelled
Asia’s recovery
Contributions to GDP growth
Statistical discrepancy Net exports Investment
Government consumption Private consumption GDP growth

Percentage points
20

15

10

-5
PRC INO KOR MAL PHI SIN THA

PRC=People’s Republic of China; INO=Indonesia; KOR=Republic of Korea;

MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand.

12
 Asia contributed to the
global recovery
Growth in exports to developing Asia and the rest of the world, Q3
2008 – Q3 2010

Brazil
Mexico
Saudi Arabia
South Africa

France
Germany
Japan
United States

-8 0 8 16 24 32
%
Rest of the world Asia-10

13
 Current account surpluses are
falling
Current account (% of GDP)

%
5-year moving average
8
6.8
5.9
6 5.5
4.7
4.1
4 3.3 3.0

0
2006 2007 2008 2009 2010 2011 2012

… due to rising oil prices and the region’s strong

growth, not due to structural rebalancing!
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 Inflation pressures are building
up
Inflation
%
8
6.9 5-year moving average

6 5.3
4.4 4.4 4.6
4 3.3

2
1.2

0
2006 2007 2008 2009 2010 2011 2012

… with some countries showing signs of

potential overheating.
15
 Real interest rates have turned
negative in some economies
People's Rep. of China India Indonesia Rep. of Korea
Malaysia Philippines Taipei,China Thailand
Viet Nam
%
8

-4

-8

-12

-16

16
 Inflation matters more for Asia
Food share in CPI (%)
Bangladesh 58.8 United States 14.8
Philippines 46.6 Eurozone 14.0
India 46.2 Japan 25.9
Sri Lanka 45.5
Cambodia 44.8 o The poor are especially
Pakistan 40.3 vulnerable
o Rising in part to Asia’s
Viet Nam 39.9
faster recovery
Indonesia 36.2 o Inflation expectations
Thailand 33.0 can fuel wage-price
Malaysia 31.4 spiral
PRC 30.2

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 But managing inflation is not easy
 Higher policy rates attract more capital
inflows
Net flows in emerging Asian economies

FDI Portfolio Other Net flows $ billion

207
225
111
150
71 92 24 -42
45 27 39 -22 49 68 57
75

-75

-150

-225
H104 H105 H106 H107 H108 H109 H110

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 A coherent policy mix is key to
success
 For countries with persistent current
account imbalances and misaligned
exchange rates: More flexible exchange
rates.
 For countries without the above
symptoms: Internationally coordinated
temporary measures, such as capital
controls.
 G20 could provide useful tools: practical
indicative guidelines and principles for
capital controls.

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Part 2. South-South Links
 Share of the South in global GDP is
rising
Share of South in world GDP Developing Asia’s share in South
(%) GDP, 2010
50
45

40 37
33
32
PRC
30 27 Other 30%
South
36%
20 Developing Other
Asia Asia
34%
64%
10

0 PRC = People’s Republic of China

1990 1995 2000 2005 2010

21
 The South has emerged as
important sources of outward FDI
Inward stock from North Outward stock to North Inward stock from South
Outward stock to South
In Bn US$ (2008)
10,000
US$ 9.5Trn

9,000
US$ 9.1Trn 3,000

US$ 3.8Trn
2,000

1,000

0
Africa Latin America Middle East Developing Asia North

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 South-South trade is growing

South-South trade as share of world Developing Asia’s share in South-

merchandise trade (%) South trade, 2009

17
16
15
PRC
Other 40%
10
South
7
26%
Developing Other
Asia Asia
74% 34%
1990—91* 2000—01* 2006—07* 2008 2009

Note: Merchandise trade, non-fuel

PRC = People’s Rep. of China

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 But developing Asia’s trade is driven
by factory Asia
Share of parts and components (%)
Exports Imports
Developing Asia PRC Africa Developing Asia PRC Africa
Latin America South Latin America South

60(%) 60(%)

50 50

40 40

30 30

20 20

10 10

0 0
97 98 99 2000 01 02 03 04 05 06 07 08 09 97 98 99 2000 01 02 03 04 05 06 07 08 09

• Factory Asia: intermediate goods sourced from South for assembly

and subsequent export to North
• Growing South-South links do not necessarily mean greater
economic independence!
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 Structural weaknesses need to be
addressed
Applied tariffs, simple mean

% North South
25
19.6 20.6
20
16.0
15
12.1
10 9.3
5.5 5.1
5 4.2 3.7 3.2

0
1985-89 1990-94 1995-99 2000-04 2005-08

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 Other barriers remain too
 Trade-related Average Logistic Performance Index scores,
North and South
infrastructure and
logistics performance 3.5
2007 2010

of the South lag

considerably behind
the North 3.0
 South-South FTAs are
generally less 2.5
consistent with WTO
and other global rules
2.0
North South

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 Potential gains from stronger
South-South links are large
 Lowering tariffs could increase South-
South trade by 6% points
 Industrial migration among the South
could boost global growth
 Recycling South savings for investment
could help global rebalancing

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 Key Messages
 Asia’s recovery is firm, with growth nearing 8% in
the next 2 years
 Asia is leading the global recovery
 Rising inflation is a concern
 Expanding South-South links present a
supplementary growth source
 But structural weaknesses need to be addressed
to maximize their potential

28