Asian Development Outlook 2005 Update

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ASIAN DEVELOPMENT

Outlook2005

Asian Development Bank

Update


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2005 Asian Development Bank

All rights reserved. Published 2005.

Printed in Manila.

Library o Congress Cataloging-in-Publication Data Available

ISSN: 1655-4809Publication Stock No. 080205

Asian Development Bank

Tis Asian Development Outlook2005 Update was prepared by the sta o the Asian Development Bank, and

the analyses and assessments contained herein do not necessarily reect the views and policies o the Asian

Development Bank or its Board o Governors or the governments they represent.

Te Asian Development Bank does not guarantee the accuracy o the data included in this publication and

accepts no responsibility or any consequence o their use.

Use o the term country does not imply any judgment by the authors or the Asian Development Bank as to the

legal or other status o any territorial entity.


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iii

Foreword

The economies o developing Asia and the Pacic

continued to perorm well during the rst halo 2005. At a regional level, gross domestic

product is expected to grow at 6.6% in 2005, marginally

up on the 6.5% projected in the Asian Development

Outlook 2005 (ADO 2005) in April this year. Faster

than anticipated growth in the Peoples Republic o

China and a strong showing in South Asia have nudged

the ull-year average up. But higher oil prices and other

adverse developments, including a downswing in the

global electronics cycle, as well as poor agricultural

harvests, have caused growth to soen in Southeast

Asia. Central Asia and two net oil exporters in the

Pacic have beneted rom rising oil incomes.For 2006, this Update retains the ADO 2005

projection or growth o 6.6%. Positive elements include

the likelihood o a so landing in the Peoples Republic

o China, the consolidation o gains in South Asia, and

an end to some o the temporary actors that restrained

growth in Southeast Asia during 2005. Nevertheless,

the Update cautions that high and still rising oil prices

heighten uncertainty about prospects in 2006.

Te Update eatures an overview o recent trends

within the region and sets them in their global

context. It also points to risks in the outlook and

suggests appropriate responses to these risks. Recenteconomic trends and the outlook are reappraised and

updated or selected countries in developing Asia. A

major theme o the Update is the challenge presented

by high oil prices or countries o the region. Tis

is the ocus o the special chapter in Part 3. A key

message that emerges is that higher oil prices may be

here or some time, and that countries across devel-

oping Asia need to adjust to this possibility.

Te Update was prepared by the sta o the

Asian Development Bank rom the East and Central

Asia Department, Mekong Department, Pacic

Department, South Asia Department, Southeast

Asia Department, the Economics and Research

Department, as well as the resident missions o

the Asian Development Bank. Te economists

who contributed the country chapters are: Ramesh

Adhikari assisted by Dao Viet Dung, Nguyen Phuong

Ngoc, and Bui rong Nghia (Viet Nam); om

Crouch, Joven Balbosa, and Xuelin Liu (Philippines);

David Green assisted by Ramesh Subramaniam and

Amanah Abdulkadir (Indonesia); Mohammad Zahid

Hossain and Rezaul Khan (Bangladesh); Hiranya

Mukhopadhyay (India); Sadar Parvez and Ghulam

Qadir (Pakistan); Jean-Pierre Verbiest and Luxmon

Attapich (Tailand); and Min ang and Jian Zhuang

(Peoples Republic o China). Kevin Chew o the

Malaysian Institute o Economic Research draedthe chapter on Malaysia. Other economists who

contributed inputs or the subregional summaries

include: Purnima Rajapakse (Cambodia); Rattanatay

Luanglatbandith (Lao Peoples Democratic Republic);

Nirmal Ganguly (Myanmar); Michaela Prokop

(Aghanistan); Abid Hussain (Bhutan and Maldives);

Sungsup Ra, Bipulendu Singh, and Raju uladhar

(Nepal); and Johanna Boestel (Sri Lanka). Ganeshan

Wignaraja contributed the subregional summary on

Central Asia and Craig Sugden draed the summary

on the Pacic. Te subregional coordinators were

Alain Borghijs and oan Quoc Nguyen or SouthAsia, and William Bikales and Jayant Menon or

Southeast Asia.

Frank Harrigan, Assistant Chie Economist,

Macroeconomics and Finance Research Division,

assisted by Charissa N. Castillo, coordinated the

overall production o the publication. Frank Harrigan

and Cyn-Young Park wrote the chapter on developing

Asia and the world and the special chapter in Part 3

on the challenge o higher oil prices. Douglas Brooks,

Xiaoqin Fan, Jesus Felipe, Akiko erada-Hagiwara,

Duo Qin, and Fan Zhai contributed to and reviewed

initial dras.echnical and research support was provided by

Edith Lavia, Ludy Pardo, Pil ipinas Quising, Nedelyn

Ramos, Grace Sipin, and Lea Sumulong.

Richard Niebuhr and Anthony Patrick added

substantive inputs in their capacity as economic

editors. Jonathan Aspin did the copy editing and

Elizabeth Leuterio was responsible or book design

and typesetting. Zeny Acacio, Pats Baysa, and Maria

Susan orres provided administrative and secretarial

support. Te cooperation o the Printing Unit under

the supervision o Raveendranath Rajan contributed

signicantly to the timely publication o the Update.

Ann Quon and sukasa Maekawa o the Department

o External Relations planned and coordinated the

dissemination o the Update.

IFZAL ALI

Chie Economist

Economics and Research Department


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ivAsianDevelopmentOutlook2005Update

Contents

Part 1 Developing Asia and the world 1

Developing Asia and the world 3Prospects or developing Asia, 2005 and 2006 3Prospects or the world economy 10Risks 13Subregional trends and prospects 16

Part 2 Economic trends and prospects in developing Asia 31Bangladesh 33Peoples Republic o China 36India 40Indonesia 44Malaysia 47

Pakistan 50Philippines 54Tailand 58Viet Nam 61

Part 3 Te challenge o higher oil prices 64Adjusting to higher oil prices: Te challenge or developing Asia 65Why are oil prices so high? 66Why high oil prices matter 67Policy responses to higher oil prices 76

Statistical appendix 86

Statistical notes and tables 87


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v

Figures

Figure 1.1 Real GDP growth rate, United States, Japan, and euro zone, Q1 2003Q2 2005 11Figure 1.2 Commodity prices, January 2003July 2005 13Figure 1.3 Net capital ows to emerging markets and Asia-Pacic, 20002005 13Figure 1.4 GDP growth, Central Asia, 20042006 17Figure 1.5 GDP growth, East Asia, 20042006 19Figure 1.6 GDP growth, South Asia, 20042006 21Figure 1.7 GDP growth, Southeast Asia, 20042006 26Figure 1.8 GDP growth, the Pacic, 20042006 29Figure 2.1 rends in oil imports, Bangladesh, FY2000FY2005 34

Figure 2.2 Growth o exports and imports, and trade balance, Peoples Republic o China, 19962004 37Figure 2.3 Oil prices, India, April 2003July 2005 41Figure 2.4 Growth o selected GDP components, Indonesia, H1 2004 and H1 2005 45Figure 2.5 Growth o GDP by expenditure component, Malaysia, H1 2004 and H1 2005 49Figure 2.6 Exports and imports, Pakistan, FY2003FY2005 51Figure 2.7 Revenue and budget balance, Philippines, JanuaryJuly, 2004 and 2005 55Figure 2.8 GDP growth and ination, Tailand, 19992006 59Figure 2.9 GDP and sector growth, Viet Nam, H1 2003, H1 2004, and H1 2005 62Figure 3.1 Brent utures prices, January 2004August 2005 67Figure 3.2 Brent crude oil prices, 19702005 68Figure 3.3 Oil sel-suciency index, 19802003 70Figure 3.4 Intensity o oil use in energy consumption, 19802003 72Figure 3.5 Energy intensity o GDP, 19802003 (000 BU per unit o real GDP) 72

Boxes

Box 1.1 Te challenge o high oil prices 4

Box 1.2 Foreign exchange reserves in developing Asia 8Box 1.3 Restoring local economies aer the tsunami 24Box 2.1 Implications o the new exchange-rate policy38Box 2.2 Responding to the oil price rise 56Box 3.1 How higher oil prices impact on growth, ination, and nancial balances 75Box 3.2 Oil prices, ination, and GDP growth, 20042005 78Box 3.3 Oil subsidies and scal strain 80Box 3.4 Retail uel prices in Asia 83


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viAsianDevelopmentOutlook2005Update

ables

able 1.1 Selected economic indicators, developing Asia, 20042006 6

able 1.2 Baseline assumptions or external conditions, 20032006 10able 1.3 GDP growth rates, 20032005 12able 2.1 Selected economic indicators, Bangladesh, 20052006, % 35able 2.2 Selected economic indicators, Peoples Republic o China, 20052006, % 38able 2.3 Selected economic indicators, India, 20052006, % 42able 2.4 Selected economic indicators, Indonesia, 20052006, % 46able 2.5 Selected economic indicators, Malaysia, 20052006, % 48able 2.6 Selected economic indicators, Pakistan, 20052006, % 52able 2.7 Selected economic indicators, Philippines, 20052006, % 57able 2.8 Selected economic indicators, Tailand, 20052006, % 60able 2.9 Selected economic indicators, Viet Nam, 20052006, % 63able 3.1 Oil and energy use, developing Asia, 2003 71

able 3.2 Net oil imports, developing Asia 73able 3.3 Export growth required to pay or a 75% rise in uel prices 74able 3.4 GDP and budget balance impacts o a rise in the oil price to $70 per barrel, 2006 76Appendix table Share in nal oil consumption, 2002, selected countries, by sector and by product (%) 87

Statistical appendix tables

able A1 Growth rate o GDP (% per year) 92

able A2 Ination (% per year) 93able A3 Current account balance (% o GDP) 94


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vii

Acronyms and abbreviations

ASEAN Association o Southeast Asian Nations

bbl barrelCPI consumer price indexFDI oreign direct investmentGDP gross domestic productIMF International Monetary FundLPG liqueed petroleum gasmb/d million barrels per dayOECD Organisation or Economic Co-operation and DevelopmentOEF Oxord Economic ForecastingOPEC Organization o the Petroleum Exporting CountriesPRC Peoples Republic o ChinaSOE state-owned enterprise

US United StatesVA value-added tax


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viii AsianDevelopmentOutlook2005Update

Defnitions

Te economies discussed in the Asian Development Outlook 2005 Update are classied by major analytic or

geographic groupings. For purposes o the Update, the ollowing apply:

Association o Southeast Asian Nations comprises Brunei Darussalam, Cambodia, Indonesia, LaoPeoples Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Tailand, and Viet Nam.ASEAN+3 consists o the above countries in addition to Peoples Republic o China, Japan, and Republico Korea.

Developing Asia reers to 42 developing member countries o the Asian Development Bank discussed inthe Update.

East Asia comprises Peoples Republic o China; Hong Kong, China; Republic o Korea; Mongolia; andaipei,China.

Industrial countries reer to the high-income OECD members dened in World Bank, available: www.worldbank.org/data/countryclass/classgroups.htm#High-income.

Southeast Asia comprises Cambodia, Indonesia, Lao Peoples Democratic Republic, Malaysia, Myanmar,Philippines, Singapore, Tailand, and Viet Nam.

South Asia comprises Aghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, andSri Lanka.

Central Asiaalso reerred to as the Central Asian republicscomprises Azerbaijan, Kazakhstan,Kyrgyz Republic, ajikistan, urkmenistan, and Uzbekistan.

Te Pacifc covers Cook Islands, Fiji Islands, Kiribati, Republic o the Marshall Islands, Federated Stateso Micronesia, Nauru, Republic o Palau, Papua New Guinea, Samoa, Solomon Islands, DemocraticRepublic o imor-Leste, onga, uvalu, and Vanuatu.

Te euro zone consists o Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy,Luxembourg, Netherlands, Portugal, and Spain.

Unless otherwise specied, the symbol $ and the word dollar reer to US dollars.

Te Statistical Notes give a detailed explanation o how data are derived.Te Update is based on data available up to 31 August 2005.
http://www.worldbank.org/data/countryclass/classgroups.htm#High-incomehttp://www.worldbank.org/data/countryclass/classgroups.htm#High-incomehttp://www.worldbank.org/data/countryclass/classgroups.htm#High-incomehttp://www.worldbank.org/data/countryclass/classgroups.htm#High-income


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Part 1

Developing Asia and the world

Update

Outlook2005

ASIAN DEVELOPMENT


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Developing Asia and the world

Prospects or developing Asia, 2005 and 2006

Developing Asias gross domestic product(GDP) is now expected to grow at 6.6%in 2005, a very small upward revision on

the Asian Development Outlook 2005 (ADO 2005)projection made in April. Growth in 2006 is alsoexpected to be about that level. Te solid regionalperormance masks some important revisionsat country and subregional levels. Tis Updaterevises up growth projections or the PeoplesRepublic o China (PRC), which carries a large

weight in the regional aggregate, or both 2005and 2006.Likewise, the ADO 2005 growth projection

or India, another large economy, has beenrevised higher or 2006. But slower growth is nowexpected in a number o countries, particularlyin Southeast Asia, partly as a consequence ohigher oil prices. A key message o this Updateis that developing Asia must begin to adjust tothe possibility that higher oil prices will persistor some time. Prospects or 2006 and beyondare contingent not just on the evolution o oilprices, but also on policy responses to them(Box 1.1). Te risks associated with the ADO 2005projections are not new, but appear more tilted tothe downside in this Update.

Resilience to higher oil prices has been anotable eature in developing Asia over the pastew years. Growth averaged 6.7% between 2002and 2004, despite a doubling in oil prices to $40per barrel (/bbl). In this period, surging demandhelped drive oil prices much higher. A buoyant

global economic climate, including continuedstrong demand or Asian exports rom the UnitedStates (US), low ination, and strong externalpayments positions modulated the potentiallyharmul impacts o elevated petroleum prices.Gains rom underlying structural improvementsmay also have partly oset negative impactscoming through rom higher oil prices. Drawingon scal resources, governments in some countriestook concerted measures to shield consumersrom these higher prices, and the pass-through ohigher costs to nal goods prices was limited.

Looking ahead, oil prices are now being drivenas much by cost and supply considerations as bydemand, and prospects or a reversion o oil pricesto lower, historical levels appear to be ading.Pressures that have been pent up over the pastew years are now beginning to surace. Acrossdeveloping Asia, import bills are rising sharply.In some countries, ination is inching up (despiteextensive oil price subsidization). Localizedoil shortages are also on the increase. In a ewcountries, currency reserves are beginning to all.I oil prices continue rising, there is a risk that aninexion point could be reached at which investorand consumer condence, not just in developingAsia but in the global economy, could begin toebb quickly. In these circumstances, the drag oneconomic growth would be more pronounced thanin the recent past. Structurally higher oil pricescall or policy responses both to acilitate neededmacroeconomic adjustments and to promotelonger-run energy eciency.

Against this, several positive developments


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AsianDevelopmentOutlook2005Update

The price o world crude hasrisen by nearly 75% since

the beginning o 2005. Althoughprices at todays level were notanticipated, markets now suggestthat they will stay high or sometime. As a large net oil importerand a comparatively energy-ine-cient region, Asia is vulnerable tohigh oil prices. Net oil exportersin the region, such as Kazakhstan,Papua New Guinea, and VietNam, also ace challenges when oilprices soar.

In nominal terms, oil prices

have now broken all records, butthey would have to increase byanother $30 on the year-to-dateaverage or Brent crude ($53 perbarrel) to reach the peak averageo $83 per barrel (in rst-hal 2005prices) o 1979.

Unlike in 20022004, whendemand was the most signicantactor driving up prices, supplyconstraints (downstream andupstream) and uncertainty overthe uture costs o oil productionloom behind the most recentrises. Large cost overruns in majorprojects already under way havecaused the oil industry to delay

new projects. Although there ispossibly a large risk premium in

prices, and traders appear panicky,recent price increases wouldappear to have a large permanentor long-lasting component. Tisis a signicant development, sinceconsumers and producers aremore likely to adjust their behaviorwhen they believe that prices willnot revert quickly to lower, his-torical norms.

At a global level, higher oilprices transer income rom netoil importers to net oil exporters,

and, since net oil exporters donot recycle all o this additionalincome, the overall impact onglobal activity is negative. As Asiaconsumes more than 20% o theworlds oil but only produces about11% o it, rising oil prices willrestrain income growth (comparedto what it would have been at lowerprices). Higher oil prices also addto inationary pressures.

In some countries, governmentshave increased subsidies or reducedtaxes to shield consumers againsthigher prices. Where retail pricesor oil products have been allowedto all below border prices, this has

created nancial strains either onthe budget or on the accounts o

state-owned distributors. Supplyshortages have also begun to appearas in, or example, Indonesia andsouthern parts o the PRC. Low-income countries that are heavilyreliant on oil imports to meet theirenergy needs, and that have highlevels o debt and no access tointernational capital markets, willace the most dicult adjustments.

In Tailand, gasoline and dieselsubsidies have been completelyremoved, but in other countries a

phased approach to reducing sub-sidies has been taken. In Indonesia,Malaysia, and Viet Nam graduatedsteps have now been taken tocontain ballooning subsidy bills.

Although the case or removinggasoline and diesel subsidies isstrong, both on considerations oeciency and equity, the removalo subsidies on products on whichthe poor depend, such as kerosene,is more complicated.

Sometimes there may be com-pelling second-best arguments orthe retention o well-targeted andlimited subsidies, such as when thealternative uel source to kerosene

Box 1.1 The challenge o high oil prices

should help sustain growth in developing Asia.Global economic conditions remain largelybenign. In particular, the global electronics cycleshould soon bottom out and more avorableconditions can be expected in 2006. In SouthAsia, the momentum o reorm is continuing andimportant structural changes are being made thatwill help propel growth over the medium term. Inthe PRC, steps taken by the Government to coolinvestment growth have met with some success,and reorms continue to move orward. Te newexchange rate regimes introduced in the PRC andMalaysia on 21 July oer the potential or utureeciency gains and greater scope or domesticmonetary control. In Southeast Asia, particularlyin Tailand, an early phasing out o oil subsidies

will help protect scal integrity and, over thelong run, will promote more ecient energy use.Finally, higher oil revenues, i managed wisely,should help accelerate development or net oil-exporting countries in the region.

GrowthIn the rst hal o 2005, developing Asiacontinued to grow at a robust pace. Net oilexporters in Central Asia have beneted romhigher oil prices and new production capacity,and subregional growth in 2005 is now expectedto be over 9% (able 1.1). Growth projectionshave also been revised up or East Asia or 2005.Propelled by ast investment growth and surgingnet exports, economic momentum in the PRC was


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DevelopingAsiaandtheworld5

is biomass. Although direct incometransers are, in principle, more

appealing, they are oen dicultto implement eectively. On theother hand, price subsidies thatare intended or the poor can becaptured by other groups whenthere are regulatory and otherailures. Tere is, or example, alarge gap between the regulated(i.e., subsidized) price o kerosenein India and the actual price paidby most poor people. A middleapproach might be to graduallyscale back subsidies on kerosene

and visibly earmark some portiono scal savings or ast-disbursingdevelopment projects that directlybenet the poorest.

A number o countries, suchas Indonesia and the Philippines,have responded to higher oil pricesthrough a variety o administrativemethods that are intended to cutuel consumption, including thecurtailment o working hours.Previous experience with suchinitiatives suggests that while theymay work or a while, they areoen unsuccessul in the longterm. Administrative controls aredicult to implement and oen

come at a heavy cost in terms oeciency. It is o note that Asia

has some o the most stringentphysical pollution controls andstandards, yet is the most highlypolluted region in the world.

Over the longer run, mecha-nisms that rely on price incen-tives are likely to work best. Forexample, across developing Asia,excise taxes on oil products allwell below international bench-marks (see Box 3.4, Part 3).High taxes on uel are a largelyuntapped source o scal revenues

in developing Asia and, ultimately,will be necessary to promote amore diverse energy mix thatavors cleaner and renewableenergy alternatives.

An immediate challenge orgovernments is to ormulateappropriate monetary and scalresponses to higher oil prices.Where there is a danger o higheroil prices triggering more generalcost-push pressures, the monetaryauthorities should respond bytightening. Te costs o not payingadequate attention to inationarythreats could be serious. Indonesia,Philippines, and Tailand have all

lied policy interest rates.On the scal side, automatic

accommodation o the incomeimpacts o higher prices makessense but discretionary increases inexpenditure, especially those thatcannot easily be reversed, shouldbe avoided.

For net oil exporters, higherprices provide additional incomesand a scal windall. A boomingoil sector can, however, be a sourceo some problems and may, orexample, cause demand-side ina-tionary pressures. I higher oil prices

are prolonged, net exporters mayalso have to contend with an appre-ciation o the real exchange ratethat can squeeze out traded goodsactivity. Such exchange rate appre-ciation or oil producers in CentralAsia is already apparent. For netoil-exporting governments, it maymake sense to consider investingpart o the proceeds rom increasedoil prices in oreign currency assetsheld in a special oil und, whichcan then help meet the utureoreign currency costs o devel-opment projects, which have beenprioritized according to a long-termnational investment program.

Box 1.1 (continued)

aster than expected in the rst hal. Full-yeargrowth o 9.2% is now anticipated, an upwardrevision o 0.7 percentage point on ADO 2005.Elsewhere in East Asia (other than Mongolia),slower than anticipated export growth is takingits toll on GDP. For East Asia outside the PRC,projected growth is now 3.8%, a signicantdownward revision rom 4.4% in ADO 2005.

In South Asia, too, growth has surprised onthe upside. Pakistan, in scal year 2005 (whichended on 30 June 2005), posted its astest growthin over two decades: an expansive macroeconomicreorm program o recent years is beginningto bear economic ruit, and improvements arenow being seen in a variety o indicators osocial and human development. Over the rst

5 months o 2005, Bangladesh, contrary toexpectations, continued its rapid growth in thegarment industry, despite the ending o MultibreArrangement quotas. India continues to expand ata brisk but manageable pace.

Te picture over the rst hal o 2005 has beenless upbeat in Southeast Asia. A variety o actorsconspired to slow growth, including poor harvests(Philippines and Tailand), a cyclical downturnin the global electronics sector (Malaysia andPhilippines), and higher oil prices (Philippinesand Tailand). Against this, a successul politicaltransition and an improving investment climateare likely to li growth in Indonesia in 2005,and robust growth in Viet Nam is expected tocontinue. Overall, the ADO 2005 projection or


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DevelopingAsiaandtheworld

goods prices. In some countries, this is becauseo signicant reductions in oil subsidies. As protmargins are squeezed by higher oil prices, rmscan also be expected to begin to pass on cost

increases to customers. In Central Asia, strongdemand, primed by oil export income, is puttingpressure on prices. Across developing Asia, tominimize the risks o a cost-push inationaryspiral and heightened inationary expectations,a number o central banks have already raisedinterest rates, but in many countries, real policyrates remain low and in some places negative.Further monetary tightening can be expectedthrough 2005 and into 2006. In addition, domesticpressures or monetary tightening are likely to bereinorced by rising US dollar interest rates.

External payments balances

Developing Asias current account surplus withthe rest o the world is expected to narrow a littlein 2005, and some more in 2006, rom the 2004level. Current account surpluses are expected togradually diminish in Southeast Asia, and decitsto widen in South Asia. A substantial increasein the cost o oil is being elt in many countries.In East Asia, a smaller surplus is expected inboth 2005 and 2006. However, the PRCs currentaccount surplus is likely to widen in 2005 on the

basis o strong export growth, beore comingdown somewhat in 2006. Central Asia, which isa net exporter o oil, is likely to run a smallercurrent account decit in 2005 and may moveinto surplus in 2006.

Capital inows have continued at a brisk pacein 2005. Developing Asia remains a avored desti-nation or oreign direct investment. Te PRCstill attracts the lions share o such investment,but other countries are beneting, too. Long-terminvestment has been encouraged by prospects ocontinued strong growth and improvements inthe business investment climate. Portolio capitalinows have also been strong in 2005, thoughlending by private creditors has shrunk. Expec-tations o an appreciation o regional currenciesbuoyed short-term inows in the rst hal o2005, and these inows may continue or the resto the year.

A combination o current and capital accountsurpluses will eed urther accumulation ocurrency reserves in 2005 and through 2006. In the

PRC, reserves had climbed to $711 billion by end-June 2005. Despite a current account decit, capitalinows have supported reserves accumulation inIndia. However, trends in reserves positions are not

uniorm and in some countries the accumulationo reserves is tapering o, or reserves are evenedging down (Box 1.2). Te path taken by oreignexchange reserves will depend on the extent oregional currency appreciation, internationalinterest rate movements, investor appetite or risk,current account balances, oreign direct investmentinows, and any measures that countries taketo limit currency speculation. Te recent movestoward more exible currency regimes by the PRCand Malaysia have so ar resulted in only smallappreciations o their currencies, but pave the way

or more signicant adjustments over the mediumterm and provide a basis or greater leverage overdomestic monetary policy.

Investment and savingLarge current account surpluses and associatedreserves accumulation in developing Asia havebeen taken as evidence o a savings glut inthe region. But, outside the PRC, it has beenchanges in investment rather than saving thathave been most closely associated with externalsurpluses. Following the Asian currency and

banking crisis o 1997, investment rates collapsedin many countries and still remain well belowtheir precrisis peaks. Measured against longer-runaverages, current investment rates are also low.On the other hand, gross domestic and privatesavings rates do not seem to vary much withshort-run changes in economic growth, nancialconditions, or the real exchange rate. Savingsbehavior appears to be driven more by slowlychanging structural and institutional actors. Inthe PRC, or example, saving has climbed withlong-run alls in ertility and a strengtheningprecautionary motive linked to the transitionrom state to market provision o jobs and socialservices. In helping redress external imbalances,a challenge or many countries remains to boostinvestment rates rom their current low levels.

In India, Malaysia, Pakistan, and Tailand, aswell as in some other countries, measures are nowin place to scale up inrastructure investment.Tese programs have the potential to boostproductivity growth over the medium term and


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Box 1.2 Foreign exchange reserves in developing Asia

Developing Asias oreignexchange reserves rose by

about $136 billion over the rsthal o 2005 to $1.74 trillion,according to preliminary availabledata (Box table). Tis aggregateincrease is little dierent rom theapproximately $139 billion advancein the rst hal o 2004, thoughthe pattern o gains and losseshas changed somewhat: the PRCaccounted or about 75% o the2005 gain versus just less than 50%in the 2004 period; gains in otherlarge reserves holders were more

modest; and a ew more countrieshave experienced some reserveslosses.

iming and lumpiness o capitalows can inuence reserves move-ments during the course o a year,but declines are oen symptoms oemerging pressures in the externalaccounts. Te second hal o 2004saw a much larger reserves gain($231 billion) than the rst hal,marking the largest expansion

achieved by the region to date.Developing Asias oreignexchange reserves more thandoubled in the 3 years betweenend-2001 and end-2004, oran increase o $815 billion to

$1.6 trillion. Tese annual incre-ments are very much larger than

in previous years, as shown in Boxgure 1. Tis surge has attractedgreat attention, especially in thecontext o growing global paymentsimbalances.

Nearly one hal o this increasein reserves in that 3-year period isaccounted or by the PRC (raisingits share in the regional total toabout 40%, rom 27% at end-2001). Tree other economiesindescending order aipei,China;Republic o Korea; and India

accounted or most o the rest,such that these our economiesaccounted or just over 85% o thereserves buildup in the period.

For the PRC, the main balance-o-payments components since1995 are traced out in Box gure 2,and indicate the changing patterno actors that have shaped the evo-lution in reserves. As shown, mod-erate current account surpluses andlarge FDI inows have been rela-

tively stable over the period, whilenet non-FDI (including errorsand omissions) turned to a largepositive balance rom 2002. Tisitem has been an important con-tributor to recent reserves gains,

accounting or just over 40% o theincrease in reserves in 2004. Te

timing o this abrupt change sug-gests that it reects speculative ele-ments in ordinary transactions (i.e.,avoidance o exchange controls) inanticipation o appreciation in theyuan exchange rate. FDI and othernet capital ows accounted or justover 60% o the recent buildup inthe countrys external reserves. Itis not yet clear what immediateimpact the 21 July adjustment inthe exchange system will have onnet non-FDI capital inows.

In the case o aipei,China;Republic o Korea; and India as agroup, FDI was not a major actorin their aggregated net capitalaccount, but even then net non-FDI (including errors and omis-sions) moved markedly higher aer2001 (see Box gure 3), contrib-uting about 55% o the reservesincrease in the 3 years.

In India, the current accountsurplus was a small actorone

sixthin reserves accumulation,partly reecting the success oattracting capital through non-resident Indian deposit schemes,while in the other two economies itaccounted or about one hal.

Box gure 2 Factors aecting reserves, Peoples Republico China, 19952004

-75

0

75

150

225

Reserves accumulation

Net non-FDI plus E&O

Net FDI

Current account

2004200320022001200019991998199719961995

$ billion

FDI = oreign direct investment, E&O = errors and omissions.

Source: CEIC Data Company Ltd.

Box gure 1 Developing Asias oreign exchange reserves,change rom previous year, 19952004

0 50 100 150 200 250 300 350 400

2004

2003

2002

2001

20001999

1998

1997

1996

1995

$ billion

Sources:International Monetary Fund, International Financial

Statistics online database, available: http://is.apdi.net/im/

isbrowser.aspx?branch=ROOT; sta estimates.


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Figure 1.1 Real GDP growth rate, United States,

Japan, and euro zone, Q1 2003Q2 2005

United States

-4

-2

0

2

4

6

8

Q2Q1

2005

Q4Q3Q2Q1

2004

Q4Q3Q2Q1

2003

%,

seasonally adjusted

annualized rate

Japan Euro zone

Sources: US Department o Commerce, Bureau o Economic

Analysis, available: http://www.bea.gov, downloaded1 September 2005; Economic and Social Research Institute

o Japan, available: www.esri.cao.go.jp, downloaded

12 August 2005; Eurostat, available: http://epp.eurostat.cec.eu.int, downloaded 1 September 2005.

average price or 1979 was $83/bbl. Even i oilprices continue to climb, a replay o earlier crisesis unlikely, primarily because the global economyis now considerably more oil ecient than beore

and is better able to cope with inationarythreats. But i oil prices continue to rise andpersist at a level considerably above the baselinelevels assumed in this Update, the outlook orgrowth o the international economy would bedowngraded, with consequent knock-on eects ordeveloping Asia.

United States

Brisk growth continues on the back o strongprivate consumption and a booming housingmarket. In the rst hal o 2005, growth was3.6%, measured year on year (able 1.3). Under-pinning the broad-based economic expansion,the trade balance, which was a major drag ongrowth in the second hal o 2004, also improved.Exports surged by 13.2% in the second quarter,at a seasonally adjusted annualized rate, buildingon a 7.5% increase in the rst. Growth o importdemand slumped, partly related to a largedestocking o inventories. I business investmentcontinues to pick up, helped by healthy corporate

prots, imports will likely gain strength again,eliminating the net contribution o the externalsector. Higher oil prices will also hoist the USimport bill.

Strong consumer spending, reecting highconsumer condence and buoyancy in thehousing market, has been a major actor in thecurrent expansion. But household nances arestretched and the household debt-service burdenhas soared to record highs. Although mortgagerates remain low, continued tightening by theFederal Reservein a context o a return to aneutral policy stance amid heightened inationconcernsmay now continue into 2006. Tis mayeventually show up in higher longer-term interestrates and housing nance charges. An end to

house price asset ination would tell on privateconsumption and weaken growth. In such anenvironment, investment demand would probablyeel the downdra, too.

In summary, provided that oil prices do notjump urther and the housing market cools gently,the overall outlook is mildly positive or the USeconomy. Tis Updates baseline GDP projectionis 3.6% or 2005. A smaller scal stimulus, tightermonetary conditions, and a more sedate housingmarket are likely to mean that growth will edgecloser toward its long-term trend rate o 3.3%

in 2006. High oil prices could also help quellconsumer spending.It is too early to estimate the likely impacts

o Hurricane Katrina. While the devastation andloss o lives were extreme, earlier experiences withnatural disasters suggest that long-lasting eectson overall US growth are likely to be small, butoil supply disruptions could cause urther spikesin prices and weaken condence.

JapanFollowing a mild recession in 2004, GDP grewby 1.3% (year on year) in the rst hal o theyear (able 1.3). Domestic demand has rmedup on both household and corporate ronts.Household income has expanded gradually andthe unemployment rate has allen to its lowestlevel since August 1998. Tis has helped supportprivate consumption, which rose by 1.3% (yearon year) in the rst hal. Business investmentalso rebounded, by 4.6% on the same period othe previous year. Capital spending may grow


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12AsianDevelopmentOutlook2005Update

Table 1.3 GDP growth rates, 20032005

H1 2003 H2 2003 H1 2004 H2 2004 H1 2005

GDP growth (%, year on year)United States 1.8 3.6 4.7 3.8 3.6

Japan 1.2 1.6 3.6 1.7 1.3

Euro zone 0.6 0.8 1.9 1.7 1.2

Sources: US Department o Commerce, Bureau o Economic Analysis, available: http://www.bea.gov, downloaded 1 September 2005;Economic and Social Research Institute o Japan, available: http://www.esri.cao.go.jp, downloaded 12 August 2005; Eurostat, available:

http://epp.eurostat.cec.eu.int, downloaded 1 September 2005.

urther i activity in the electronics sector recoversand this should encourage urther labor hiring.Despite rm growth in the PRC and the US,

Japans major trading partners, continued exportweakness has partly oset these positive devel-opments. However, renewed inventory buildingin the second part o the year in the PRC and USmay support a recovery in exports in the latterhal o this year. Exports would also benet roma pickup in the electronics cycle.

Given the better outlook or domestic demandand recovering exports, GDP is expected to growat 1.6% in 2005. However, long-term potentialgrowth is limited by Japans aging population andlingering structural weaknesses. With its high

level o energy eciency, Japan may not be asbadly aected as other regional economies by highoil prices.

Euro zoneTe euro zone economy grew by 1.2% (year onyear) in the rst hal o 2005 (able 1.3). Althoughthe economy is recovering rom a cyclical lowin the last quarter o 2004, the growth outlookremains bleak, as persistently high unemploymentcontinues to erode consumer condence andconsumption demand. Following Germany, wheredomestic demand had already soened, Francehas seen consumer strength beginning to seepaway, with household consumption contracting by1.0% (on a seasonally adjusted annualized basis)in the second quarter, down rom 3.2% growth inthe previous 3 months.

Given weakening export growth and slackdomestic demand, growth in euro zone GDPis projected to slow to 1.3% in 2005. In 2006,growth is expected to recover to 1.8%, closer to

its potential rate. Although the impact o higheroil prices will also be elt in the euro zone, earlysigns o cyclical recovery are now apparent in

some economies, including Italy and the Neth-erlands. Economic perormance across the zoneremains uneven making more dicult the tasko monetary management. Te European CentralBank seems likely to maintain its broadly neutralstance and keep its key policy rate at 2.0% orthe remainder o the year. Neither is there muchroom or scal maneuver, due to continuing scaldecits that are over the Maastricht limits, and tolarge public debt and pension burdens.

World trade and commodity prices

Robust expansion in world trade continuedinto the rst hal o 2005, though with somepullback rom the vigorous expansion o 2004.Te downswing in the production cycle o high-technology industries has negatively aectedindustrial production and world trade. Recentmonthly data on semiconductor orders, semicon-ductor sales, and chip prices have been volatile,rst improving and then alling back toward themiddle o the year. But the inventory cycle in elec-tronics is short, and other leading indicators, suchas equity prices or semiconductor manuacturers,suggest that recovery may come soon. Demandprospects or next year are also brightening,as global demand or inormation-technologyproducts, such as wireless communications andconsumer electronics products, gradually gainsground, particularly in the US.

Aer the run-up in the past couple o years,prices o nonenergy commodities stabilized in therst hal o 2005 (Figure 1.2). Tis was a result othe moderating global demand and easier supply


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conditions. Te prices o so commodities (agri-cultural ood and beverages) continued to all onavorable harvests and increased supply. Prices ometals and minerals, though marginally declining

in recent months, are expected to remain robuston the back o rm growth in Asia. Overall,nonenergy commodity prices are expected toregister a modest gain o about 23%, beoreexpanded supply and increased stocks peg backprices in 2006. Rising US dollar interest ratescould also impact adversely on commodity prices.

Emerging market fnancial developmentsRising short-term US interest rates have barelyregistered in emerging nancial markets.Emerging markets, particularly Asian equity and

bond markets, are expected to continue to benetrom capital inows in 2005 (Figure 1.3). Aera brie retreat in mid-March and April, capitalows resumed by midyear, with equity portolioinvestment showing particular strength. With lowlong-term US interest rates, credit spreads havealso begun to narrow again.

Emerging markets prospects or externalnancing conditions remain broadly avorable in2005, given their robust economic growth andavorable macroeconomic conditions, but i long-term dollar rates begin to climb, as seems likely,

Figure 1.3 Net capital ows to emerging markets and

Asia-Pacic, 20002005

-100

-50

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005

$ billion

66%,directinvestment

34%,

portfolioinvestment

Private equity

Private cred it

Official lending

Emerging markets Asia-Pacific

Note: Emerging markets and Asia-Pacic ollow the denitiono the Institute o International Finance, Inc., available: http://

www.ii.com/emr/coverage.quagga.

Source: Capital Flows to Emerging Market Economies, various

issues, Institute o International Finance, Inc., available: http://www.ii.com.

Figure 1.2 Commodity prices,

January 2003July 2005

Index,

1990=100

70

80

90

100

110

120

130

140

150

100

120

140

160

180

200

220

240

260

Metals and minerals (left scale)

Agriculture (left scale)

Nonenergy commodities (left scale)

Energy (right scale)

JulAprJan

2005

OctJulAprJan

2004

OctJulAprJan

2003

Index,

1990=100

Source: World Bank Commodity Price Data (Pink Sheets),various issues, available: http://web.worldbank.org,

downloaded 4 August 2005.

these markets are likely to ace more dicultcircumstances moving through 2006.

Risks

Te relevance o the global and regional risksidentied in ADO 2005 in April are undi-minished. Indeed, the assessment o this Updateis that the overall outlook or developing Asia ismore uncertain than earlier in the year, with somerisks now being more accentuated. In particular,rising oil prices and the possible ramications oincreasing US interest rates on the region nowmerit closer attention. Other risks could alsoare up. Tere is still little indication that globalpayments imbalances are receding. At a domesticlevel, structural vulnerabilities are still presentin many countries in the region. Finally, thereare risks to the outlook that are inherently moredicult to assess, and to respond to. For example,previous ADOs have drawn attention to thepotentially devastating consequences o the spread


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o virulent diseases. errorist attacks also have thepotential to seriously disrupt economic prospects.

Oil prices

Oil prices breached $70/bbl on 29 Augustreecting concerns about Hurricane Katrinasimpact on petroleum supplies rom the Gulo Mexico. In nominal terms, oil prices in lateAugust are now over three times as high asthey were in 2002 and are about 75% aboveADO 2005s projection or average prices in 2005and 2006. Oil prices sustained at current levelsover a protracted period would have the potentialto cut developing Asias growth and would posechallenges or economic management (Part 3).Te longer oil prices remain elevated, the more

likely it becomes that consumers and producerswill adjust their spending plans in anticipationo a lasting reduction in their potential income(relative to a situation o lower oil prices).

As developing Asia is a large net oil importer,sustained high oil prices would inevitably restrainoutput growth. Asias major industrial tradingpartners would also suer, ampliying directnegative eects through indirect trade channels.But the magnitude, incidence, and timing othese eects are not easy to predict. Impacts canonly be detected indirectlyother changes are

occurring at the same timeand they dependboth on underlying structural characteristics oan economy and induced policy responses. Terisks posed by sustained prices o $70/bbl aresignicant, but with appropriate policy responsesshould be contained in size and duration. But at acountry level pressure points and room or policymaneuver will vary depending on underlyingstructure, nancial strength, and policy cred-ibility. Policy inertia and delays in adjusting tohigher prices would certainly raise costs.

I real oil prices continue to ramp up and wereto approach levels o over $80/bblthe highestannual average price ever attained was $83/bbl(in rst-hal 2005 prices) in 1979consumer andinvestor condence could begin to ebb quickly,and the consequences or the global economy andor developing Asia would be more severe. Ina-tionary impacts would be elt rst, but negativeoutput eects would quickly ollow. Asia wouldnot only have to contend with the direct impactson costs and demands but would also eel a

sizable aershock as negative eects are trans-mitted rom major industrial trading partners.However, even in these dicult circumstances,signicant and long-lasting reversals would be

unlikely. Although developing Asias energyconsumption remains highly oil intensive, energyconsumption per unit o GDP has allen steadilyover the past 25 years. In most countries, scaland oreign exchange positions are also stronger,and central banks would move quickly to avertthe threat o a cost-push inationary spiral.

For net oil exporters, high oil prices providevaluable oreign exchange resources that, i wiselymanaged, can be used to expand and acceleratedevelopment opportunities. Te risk or thesecountries is that the oil bonus is not managed

prudently and, instead, encourages unsustainableconsumption or wasteul investment. Net oilexporters must also take care to ensure thatactivity in the non-oil, traded goods sector is notsmothered either by domestic cost pressures, or byexcessive appreciation o the real exchange rate.

United States interest ratesFor a number o years, strong demand in theUS economy, particularly private consumptiondemand, has been critical in sustaining rapidexpansion o developing Asias exports which,

in turn, have primed the regions growth.Consumption demand in the US has beensupported by historically low interest rates, taxcuts, and a booming housing market that hasallowed households to cash in some o the equityvalue o their property to support spending.

Although the outlook or US growth remainsgenerally bright, uncertainties loom. TeFederal Reserve now looks likely to respond toongoing inationary pressures by continuingto tighten more and over a longer period thanhad been expected by markets in April. Te UShousing market boom also looks increasinglyunsustainable and is raising concern overmounting household debt, and associated nancialrisks. Even a so landing, in which pricesstabilize rather than all, removes the stimulusthat capital gains give to consumption. Consumercondence is also weighed down by rapidlyescalating gasoline prices and may be adverselyaected by disruptions to supply caused byHurricane Katrina. For many households, sharp


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price increases will create budgetary dicultiesas they have little or no saving and are alreadyhighly indebted.

aken together, these actors cast a shadow

over prospects or continued robust growth oUS consumption and, by extension, demand orAsias exports.

In addition to their demand eects, rising USinterest rates could spell an end to the unusuallyavorable nancing conditions that borrowers inAsia, and other emerging markets, have enjoyed.In 2005, emerging market debt has traded at verylow spreads to historical norms. I long-term rateswere to rise, countries with high levels o externaldebt would, in particular, ace increasing debtservicing burdens and would have their scope

or scal maneuver constrained. Te prospect ocapital outows in search o higher, saer yieldscould also put pressure on some Asian currenciesand, at a time o rising oil costs, aggravate ina-tionary pressures.

Global payments imbalancesDivergent growth, savings, and investment acrossthe major regions o the world are unlikely tocorrect themselves quickly. Tere is generalagreement that the resolution o these imbalanceswill require coordinated global actions. In Asia,

domestic demand needs to play a larger role insupporting growth. Outside the PRC, investmentdemand is still anemic. In the PRC, consumptiondemand remains subdued. Responses are neededacross a broad ront to ensure that uture growthin developing Asia is better balanced in terms oits domestic and external components. I theseadjustments are not made, the eciency costs, andthe risks to uture growth, could be high.

Tere is also general agreement that theresolution o imbalances would be aided by a allin the real value o the US dollar. Indeed, sucha all is needed to help persuade internationalinvestors to digest an increasing supply o dollarassets, and to encourage a shi o resourcestoward the traded goods sector in the US, andout o the traded goods sector o other countries.But views vary about the extent o the requireddepreciation and its timing, and about whetheradjustments are likely to be smooth or abrupt. Telonger the real sector has to adjust, the smallerthe required depreciation and the smoother

adjustments might be. Te risk is that nancialmarkets, which have so ar accommodatedwidening imbalances, could yet become impatientand orce abrupt and painul changes.

One possible, but still unlikely, scenario isthat there is a sudden dip in international investordemand or US dollar assets. Tis would likelyprecipitate a sharp all in the value o the USdollar, requiring an increase in US interest ratesto combat attendant inationary pressures. But isharp monetary tightening and an eort to shiout o a wide class o US dollar assets were to spillover into US house prices, this could smother USconsumption demand and economic growth. Withanemic growth in both Japan and the euro zone,such a turn o events would have serious reper-

cussions or growth prospects in developing Asia.Other developments that could trigger

disorderly and costly adjustments would includean escalation o trade sanctions. Tese wouldbe to the detriment o global consumers andwould limit scope or benecial specialization oproduction across countries.

Structural reorms

Concerted reorm eorts are continuing in manycountries in developing Asia, and economicstructures are being strengthened. Despite this,

weaknesses remain, with the sources o vulner-ability varying across countries.In South Asia, large scal decits and di-

culties in mobilizing revenues may constrainthe public investments that will be needed tosupport broad-based advances in productivity andgrowth. In the PRC, the investment boom hasbeen highly concentrated and has cloaked ine-ciencies. I excess capacity and alling prots cutinto investment demand, this would remove animportant driver o growth, and would weakena ragile nancial system. In Southeast Asia, avariety o indicators suggests that nancial sectorsare now much stronger than they were at thetime o the Asian crisis in 1997. But there is noroom or complacency. Some countries still havehigh debt levels and although bank balance sheetshave strengthened considerably, asset qualityremains vulnerable to changes in interest ratesand economic buoyancy. Tere remains scopeor improving banking regulation and super-vision and, over the longer run, the deepening


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o domestic bond markets will be important inpromoting the eciency and saety o domesticnancial systems.

Avian uA nal risk relates to health. Experts continueto warn o the possibility that some virulentdiseases, particularly avian u, could becomeendemic among humans. Te possibility o thevirus being transmitted rom human to humanis still regarded as small, but nonetheless su-ciently large to warrant concerted preventivemeasures. In 2003, severe acute respiratorysyndrome (SARS) is estimated to have cost theregion about $18 billion in lost income, or theequivalent o 0.6% o regional GDP (ADO 2003

Update). In Hong Kong, China it has beenestimated that SARS cut growth by 2.6 percentagepoints. Te sizable impacts occurred despite quickcontainment and the low incidence o SARS inthe general population. By contrast, i avian uwere to pass easily rom person to person, itmight afict millions, i not hundreds o millions,o people.

Besides the direct costs o loss o lie andtreatment o the sick, productivity would beseriously aected. Even healthy workers wouldlikely stay at home, and global supply chains

would be seriously disrupted. Consumersentiment and investment condence wouldnosedive as would asset and commodity prices.Te associated costs would be colossal and theirincidence would be elt globally. By comparison,the costs o providing antiviral drugs, inoculatingowl, and educating armers about the risks andcompensating them or losses, estimated at about$100 million, appear modest.

Subregional trends and prospects

Central AsiaTe six Central Asian republics (CARs) willcontinue in 2005 with the rapid economic growtho recent years, on the basis o developments tomidyear. Economic growth in the CARs as agroup is estimated at 9.2%in 2005 (Figure 1.4),which is above the 8.7% projected in ADO 2005.

Emphasizing the importance o an expandingoil and gas sector, the pattern o growth dividesthe countries into two setsthose that are major

hydrocarbon exporters and those that are not. Teormer group will perorm better than the latter.Hence, Azerbaijan is projected to grow at 17.0%in 2005, Kazakhstan at 9.0%, and urkmenistan

at 10.0%. A combination o higher oil and gasprices, buoyant international energy demand,inows o FDI, and investments in modern inra-structure has propelled rapid growth in thesethree countries. Growth there will be largelylimited to the oil and gas sectors and to relatedsectors such as hotels, catering, and transport andcommunications.

Te latter groupwith lower per capitaincomeswill turn in a less impressiveperormance, with growth in ajikistan projectedat 8%, Uzbekistan at 5% and in the Kyrgyz

Republic at 3%. Political unrest resulted in theelection o a new president by a strong majorityin the Kyrgyz Republic; however, continuingeconomic uncertainty and weakness in goldproduction in the rst hal o the year is nowexpected to take growth below the 5% projectedin ADO 2005. Favorable prices or non-oil exportcommodities (such as cotton, gold, aluminum,and other metals), expansion in the servicessector, and economic reorms underlie growth inthis group o CARs.

Te medium-term outlook or the CARs as

a whole is positive and points to strong GDPgrowth o 9.4% in 2006. Tis is above the orecastgiven in ADO 2005. In response to higher oiland gas prices as well as to increased production,the oil and gas exporting CARs will continue towitness rapid GDP growth, but likely with notabledierences in growth trajectories.

A sharp acceleration in growth in Azerbaijanto 22.0% in 2006 is expected, related to thephasing-in o production rom investments in itsoil and gas elds and pipeline acilities as wellas a booming construction sector. Te countryseconomic expansion will be supported bycontinued large increases in FDI into the hydro-carbon sector.

Kazakhstan, the largest economy in theregion, will see a mild soening o growth to 8.5%in 2006 in response to additional oil productionbuilding on a larger base and to real exchange rateappreciation damping manuacturing expansion.Te Government will continue actively osteringeconomic diversication under the Innovative


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Industrial Development Strategy. In 2006 it plansto allocate more resources to the development oindustrial clusters in ood, textiles, machinery,metallurgy, construction materials, and tourism.

Furthermore, it has approved an expansionarymedium-term scal policy or 20062008 inwhich the general budget decit target (excludingthe National Fund which saves part o oilrevenues) has been raised to nearly 2% o GDP.

Risks or these two countries includecontinuing political unrest in Azerbaijan andpossible disruptions in Kazakhstan in thelead-up to an expected presidential election inDecember 2005.

In urkmenistan, GDP growth is projectedto moderate to 7.0% in 2006. Tis large naturalgas producers economic outlook is closely linkedto long-term export contracts with the RussianFederation and Ukraine and to the need orstructural reorms to stimulate private sectordevelopment.

Te other three CARs will see moremoderate growth in 2006. Te outlook orthe Kyrgyz Republic is or a mild economicrecovery (projected growth at 5.0%) with theexpected maintenance o political stability by

Figure 1.4 GDP growth, Central Asia, 20042006

0 2 4 6 8 10 12 14 16 18 20 22

Uzbekistan

Turkmenistan

Tajikistan

Kyrgyz Republic

Kazakhstan

Azerbaijan

Central Asia

20062004 2005

%

Sources:Asian Development Outlookdatabase; sta estimates.

the new administration and the continuation oa pro-growth economic program that has beensupported by increased oreign aid in recent years.

In Uzbekistan, the prospects are or a small

improvement in growth to 6.0% in 2006. Growthwill be supported by increased investment romthe PRC in the countrys natural gas sector andthe expected implementation o measures torevitalize the private sector (including simpliedtaxation, stronger legal protection, and improvedaccess to industrial nance through bankingsector liberalization). In an economic envi-ronment o stringent state control and regulation,however, it will take time or these measuresto eed through into a private sector response.Heightened political tensions could be a risk to

the economic outlook.ajikistan is projected to see a slowdown in

growth to 7.0% in 2006. Tis is explained by atapering o o growth due to capacity limits onthe expansion in the countrys two main economicactivities (export o cotton and aluminumproduction), a large arm debt overhang in thecotton sector, and a weak response rom thenascent private sector.

Ination in the six CARs will increase in 2005rom both the actual level in 2004 (6.0%) and theADO 2005 projected level, to 7.4%. Azerbaijan

will experience the highest rate at 10.0% andthe Kyrgyz Republic the lowest o 4.6%. Teremaining our CARs will see ination o around7.0%. Nevertheless, with the possible exceptiono Azerbaijan, ination in the CARs in 2005will remain within manageable levels. In the oiland gas exporting economies, higher ination issymptomatic o a tendency or overheating in thewake o resource windalls, and, together withupward pressures on the nominal exchange rate,has resulted in appreciation o the real exchangerate in Azerbaijan and Kazakhstan. Tis is likelyto erode the price competitiveness o domesticproducers in both these economies, but partic-ularly in Azerbaijan, which has the more ragilemanuacturing base. Tese are classic early signso Dutch disease that seems to characterizemany natural resource-based economies and is achallenge to their policy makers.

Inationary pressures in the CARs are alsopartly associated with expansion in investmentand consumer demand. Cost-push impulses


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arising rom strong growth in public sector wages,and in prices o producer goods and utilities havealso played a role. Public sector wage increaseshave been signicant in the hydrocarbon-

exporting CARsKazakhstan, or instance,awarded a 32% public sector wage increase in July2005. In the non-oil CARS, wage increases havealso been sizable but have oen been made in thecontext o eorts to improve productivity in thepublic sector.

Over time, however, inationary pressures inthe CARs are expected to ease as the authoritiesexert greater control over the money supply and,more important, over expectations or publicsector wages. Aggregate ination is expected toall to 6.6% in 2006 and the variation between the

individual countries is expected to narrow, thoughthe oil and gas exporters will have somewhathigher ination than the other three countries.

Te current account decit o our o theCARs (as no projections are made or urk-menistan and Uzbekistan) will continue in 2005but at an estimated 1.7% o GDP, substantially lessthan the ADO 2005 projection o a 3.2% decitor these our countries. Tis revision is largelydue to Kazakhstan, with an estimated currentaccount surplus increased rom 1.0% to 3.0% oGDP in 2005. Higher oil, gas, and commodity

prices, along with increased production, haveled to export earnings in the CARs exceedingexpectations, but they have been oset by higherconsumer and capital goods imports and largerdecits on invisibles (oil sector payments orservices, prot outows, and labor remittances).Te current account decit in Azerbaijan has beencovered by oreign investment, and in the otherCARs by oreign aid.

Te current account position or the ourCARs as a whole is expected to improve in themedium term with their decit projected todisappear in 2006 and perhaps even turn intoa larger surplus in 2007. Underpinning thisimprovement are expectations o signicantincreases in oil exports rom Azerbaijan andKazakhstan. Tere are also likely to be someincreases in manuactured exports (e.g., metalproducts and chemicals) rom Kazakhstanas cluster development under the InnovativeIndustrial Development Strategy begins to takeeect.

Current account decits are expected tocontinue in the Kyrgyz Republic and ajikistan,reecting a combination o moderate perormancein commodity exports and sustained demand or

imports. Imports will continue to be buttressedby development assistance and by some increasein FDI as the countries implement economic andstructural reorm programs that are designed toraise growth rates and reduce poverty.

East Asia

Te economies o East Asia are projected to growin aggregate by 6.9% in 2005 (Figure 1.5), in linewith their strong average expansion rate o thepast 5 years. Tis will represent a slowdown onearly 1 percentage point rom the high growth

rate o 2004. All ve economies are expected todecelerate.

Te overall 2005 projection or East Asia inthis Update is little changed rom ADO 2005,butthis hides some signicant revisions within thesubregion: the growth orecast or the PRC, by arthe largest economy, is revised up, while orecastsor Hong Kong, China; Republic o Korea; andaipei,China are lowered. Te estimate orMongolia is unchanged rom ADO 2005.

In 2006, subregional growth is projected toremain at around the 2005 level. Te PRC will

slow a little (by an estimated 0.4 percentage point)as will Hong Kong, China and Mongolia. Koreaseconomy is expected to rebound (by 1 percentagepoint), as is aipei,Chinas.

Tis year in the PRC, a surge in net exportsanddespite government eortsstubbornly highgrowth in investment resulted in stronger thanexpected 9.5% growth in the rst hal, the samerapid pace recorded in the whole o 2004. Exportscontinued to power ahead, by 32% in the rst7 months o the year, a rate much stronger thanin other subregional economies. One reason wasa surge in textile exports in the rst quarter, aerthe abolition o textile quotas under the MultibreArrangement. Another was the continued buildupo highly competitive manuacturing capacityin the PRC, supported by strong oreign anddomestic investment and by the PRCs 2001 entryinto the World rade Organization.

In addition, an excess supply o some productson the domestic market, such as steel, was divertedabroad, which urther raised exports. Finally,


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Figure 1.5 GDP growth, East Asia, 20042006

0 2 4 6 8 10 12

Taipei,China

Mongolia

Korea, Rep. of

Hong Kong, China

China, People's Rep. of

East Asia

20062004 2005

%


price controls on domestic energy led to a rise inexports o products such as gasoline and naphthain the rst hal as oil companies sought the muchhigher prices paid or energy outside the PRC.

Import growth, in contrast, slowed to 14%

in the rst 7 months, rom about 35% over theprevious 2 years. Te imports that were mostaected included agricultural and mineralproducts, base metals, machinery, and motorvehicles. A slight slowdown in investment inxed assets was behind the deceleration in someimports, such as machinery. Other reasons orreduced imports included a better domesticharvest and a drawdown on oil inventories. Tebuildup in manuacturing capacity also appearsto have contributed, as the economy now has thecapacity to make products, in industries such aselectronics, that it previously imported. Expec-tations o a currency appreciation also played arole, as some companies brought orward exportsand delayed imports.

Te result o these diverging trendsrisingexports and decelerating importswas a recordrst-hal trade surplus o nearly $40 billion.Increasing concern among industrial tradingpartners led to agreements to limit PRC textileexports.

Another strut or growth was investment inxed assets. Te Government has been takingsteps since September 2003 to rein in investmentin industries it considered to be overheated, such

as steel, automobiles, and real estate. Tis eortstarted to have an impact in the rst hal o 2005.However, investment still rose by more than 25%,down just 3 percentage points rom a year earlier.In the second hal, investment is expected to slowurther as administrative steps gain traction.ighter credit and moderation in prot growthwill also curb investment appetites.

Reecting the strong perormance in the rsthal, the PRC GDP growth orecast is upgraded to9.2%, rom 8.5% in ADO 2005. In 2006, growth isexpected to soen to a still-robust 8.8%, a touch

higher than orecast in ADO 2005. Investmentexpansion will likely ease urther on moderatecredit expansion and deteriorating protability.External demand will ease as global tradegrowth slows and as a result o recent steps toconstrain exports o energy-intensive products,such as aluminum and steel. Te decision in Julyto manage the exchange rate based on marketorces, with reerence to a basket o currencies,and to revalue the yuan by 2.1% against the USdollar could have a moderating eect on exportgrowth and on investment in export industries. It

should also improve the terms o trade and helpconstrain any inationary pressures.Tis years strong trade perormance has led to

an increase in the orecast or the PRCs currentaccount surplus to 4.7% o GDP in 2005 and 3.6%in 2006. Inationary pressures in the PRC, andindeed in most o East Asia, have been lower thanexpected this year. A better harvest and excesscapacity o many consumer products explain thePRCs orecast 2.5% ination rate or all o 2005,down more than a percentage point rom 2004and lower than expected previously. Te orecastor 2006 is or a similar ination rate.

Korea, the second-largest economy in EastAsia, posted growth o 3.0% in the rst hal o2005, well below the 4.6% rate or the whole o2004. Its export growth rate in US dollars ellto 11%, rom 38% in the year-earlier hal. As amajor producer o electronic products, Korea hasollowed the global electronics cycle, benetingrom a strong upswing in 2004, then sueringrom the downswing in the rst hal o 2005. Te


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drop in Koreas export growth also reects tosome degree the slowdown in the PRCs imports,because the PRC buys capital equipment, steel,and other industrial materials rom Korea.

Te growth rate o imports into Korea slowedin the rst hal, to 15% rom 26% a year earlier.(Tis slowdown would have been sharper exceptor higher prices paid or imported oil andother energy.) Te trade surplus ell by 18% to$12.5 billion and the contribution o net exports toGDP growth is expected to decline in the ull year.

Domestic demand in Korea has picked uprom the prolonged slump in consumption causedby the 2003 credit card crisis, when householddebt exceeded 70% o GDP and about 8% othe population were delinquent on credit card

payments. By mid-2005, private consumption hadincreased consecutively in 4 quarters. However,corporate investment remained weak because othe slowdown in exports, high global oil prices,and a stronger local currency. Tis Update lowersthe 2005 orecast growth rate or Korea by a halpercentage point to 3.6%, nearly 2 percentagepoints below the average or the past 5 years.

In 2006, Koreas growth rate is projected torebound by 1 percentage point to 4.6%, inuencedby the expected upturn in the global electronicscycle. Domestic demand will continue to recover,

but at a modest pace. Lackluster job creation andplanned new taxes will weigh on consumptiongrowth, and new property regulations and taxesare likely to damp investment in housing.

Koreas current account surplus is seendeclining to 2.4% o GDP this year and urtherto 2.2% next yearboth sharper declines thanpreviously expectedbecause o the eect ohigher oil import costs and expected moderateexport growth. Ination is likely to be around 3%this year and next.

Te rst-hal slowdown was even more abruptin aipei,China, which recorded growth o 2.8%,or hal the growth rate experienced in 2004. Tiseconomy, also dependent on global electronicsdemand, saw its export growth rate, measuredin US dollars, plunge to 7% in the rst hal o2005, rom 26% in the year-earlier period. Terelocation over recent years o some electronicsproduction to the PRC, where labor costs arelower, has reduced aipei,Chinas export capacitywhile liing exports rom the mainland. Import

growth ell sharply, too, although high oil pricestempered that decline to 11%. Te trade surplusdwindled in the rst hal and the authoritieshave warned that the ull-year surplus could be

the lowest since 1981. Net exports will barelycontribute to GDP growth.

As in Korea, private consumption haspicked up a little, supported by a recovery in theproperty market, rising incomes, and employmentgrowth. Private investment is expected to slowa little during the year but public investment ininrastructure is orecast to increase. Te growthorecast or 2005 is lowered by a hal percentagepoint to 3.7%, which is just above the economys5-year average. For 2006, growth is expected topick up by 0.4 percentage point to 4.1%, slightly

below that predicted in ADO 2005.aipei,Chinas current account surplus is

seen easing to 4.8% o GDP in 2005 and 4.6% in2006, lower than previously expected, as high oilprices bring down the trade surplus. Ination islikely to stay at around 1.6%, constrained by morecompetition in the economy since it joined theWorld rade Organization, increases in the ocialdiscount rate this year, and an expected slightappreciation o the currency.

Hong Kong, China grew by 6.5% in the rsthal o 2005, compared with 8.1% in all o 2004.

Its export growth eased to 12% rom about15% in the year-earlier period. Tis compara-tively stronger export result was attributed tothe economys close integration with the rapidlydeveloping Pearl River Delta, and to stronggrowth in reexports originating in the mainland.Growth o imports slowed to 9% in the rst halrom 19% a year earlier, and the trade decitnarrowed. Services exports, a major earner or theeconomy, grew strongly. Net exports are expectedto contribute to growth in 2005. Consumptionand investment have held up, reecting gradualgrowth in employment and wages, and rmerasset markets. Share prices reached their highestlevels in more than 4 years in August, andproperty prices have rebounded about 70% sincethe housing market bottomed out in August 2003.

Te orecast or Hong Kong, Chinas growth in2005 is trimmed by 0.3 percentage point to 5.4%.Second-hal economic activity will be damped byinterest rate increases over recent months and bythe expected cooling in the PRC. For 2006, these


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actors will remain in place, such that growthis expected to moderate to 4.3%. Te currentaccount surplus will decline rom the high levelso the past 2 years, but still exceed 7% o GDP

this year and next. Ination is orecast at 1.2% in2005, rising to 2.2% in 2006.

Mongolia, the least-developed economy in thesubregion, is expected to grow at 7.0% this year,an unchanged orecast rom ADO 2005. Data orindustrial production, mining, and trade suggestrobust growth in the rst ew months o this year.A relatively mild winter and good summer rainsaugur well or agriculture. However, ination hasspurted and the ull-year orecast or prices isrevised up to 10.0%.

Te projections or East Asias economies,

which are increasingly linked to the PRC, arevulnerable to changes in that large economysperormance. While the PRC has expanded by7.59.5% annually over the past 5 years andlooks set to stay at the top end o this rangeover the next 2 years, there are downside risksthat center on banking system weaknesses,energy bottlenecks, and overcapacity in certainindustries.

South Asia

Te economies in South Asia continue to prosper.

Regional GDP growth in this Update is projectedat 6.8% or 2005 and 6.6% in 2006 (Figure 1.6), orslightly better than the perormance expected inADO 2005. Tis revision rests largely on upwardadjustments or Pakistan in 2005 and India in2006. Te region as a whole is beneting romits urther integration into an expanding globaleconomy, rising consumer spending, generallyaccommodative monetary policies, and continuedmarket liberalization policies that oster businessactivity and investment.

Ination or the region is now projected tobe about a hal point higher than in ADO 2005at 5.5% in 2005 and 4.1% in 2006. Pressure onprices, however, has been eased by a limited pass-through o the large increase in internationalcrude oil prices to the prices o domestic oilproducts. Political reluctance to raise domesticprices appreciably has been made possible mainlyby state-owned reners and distributors takinglarge losses and also by budget subsidies and cutsin oil product taxation. Financial pressures rom

losses are growing, though, and securing priceadjustments in this sensitive area while avoidingabrupt impacts on prices and output is a crucialtask or most country policy makers in the period

ahead.Projections or the aggregate current account

decit in South Asia have been raised by up to0.5 percentage point o GDP to 1.5% in 2005 and2.0% in 2006. Export growth in this period isexpected to moderate rom 2004 rates but stillstay robust. Te envisaged downside or somecountries rom loss o garment quotas applicableunder the Multibre Arrangement has not yetbeen seen in the subregion. Indeed, data or therst 5 months o 2005 in the important US marketshow Bangladesh, India, Pakistan, and Sri Lanka

with double-digit expansion in apparel/knitwearimports on the same period a year earlier, whilemany other supplying countries recorded declines.

Te outlook or India (accounting or aboutour hs o the subregions GDP) is or GDPgrowth o 6.9% in FY2005 and 6.8% in FY2006.

Figure 1.6 GDP growth, South Asia, 20042006

0 2 4 6 8 10 12 14 16

Sri Lanka

Pakistan

Nepal

Maldives

India

Bhutan

Bangladesh

Afghanistan

South Asia

20062004 2005

%



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Recently the Government announced the BharatNirman (Building India) program, which willspend Rs1,740 billion (US$40 billion, equivalent to5% o FY2005 GDP) in six critical areas o rural

inrastructure investment over the next 4 years.Tis initiative upgrades growth prospects orFY2006, and adds to the continuing underlyingorces or a positive outlook, including an accel-eration in private investment activity, a rise inconsumerism by a growing middle class, a moreaggressive competitive nancial sector, a recordo business opportunities demonstrated in exportsales, and the continuing impact o market liber-alization policies.

Ination was a moderate 4.1% in mid-2005 andmonetary growth was within the Reserve Bank

o India target. Projected ination in this Updatehas edged up to 4.8% or FY2005 and 3.3% inFY2006, though the outlook is clouded by uncer-tainty stemming rom the very limited adjustmento domestic oil product prices to higher globaloil prices over the past two scal years and intoFY2005. Tis divergence has been nanced mainlyby losses o state-owned oil marketing companies.Such losses or FY2005 are estimated at 1.1% oGDP (up rom 0.6% in FY2004) in the absence ourther price adjustments.

Forecasts or imports and the current account

decit are revised upward to account or higherinternational oil prices now specied in thebaseline assumptions. Accordingly, the currentaccount decit is raised to 1.5% o GDP inFY2005 and 1.8% in FY2006, about 0.5 percentagepoint above the ADO 2005 orecast. Despite thewidening o the decit, continued strong capitalows are expected to keep the overall balance opayments in surplus.

Pakistans GDP growth at 8.4% in FY2005(ended 30 June 2005) exceeded expectations,with output in manuacturing and agriculturesurprising on the upside. Favorable weather andexpanded availability o credit and ertilizerboosted agricultural growth to 7.5%, a 9-yearhigh. Growth was underpinned by strongdomestic demand ueled by record growth inprivate credit, higher arm incomes, and strongerinows o workers remittances. Mainly reectingdemand conditions but aggravated by oodshortages, average CPI ination jumped to 9.3%,the highest rate in 8 years. Robust growth and

higher oil prices pushed imports up by 38.1%and, though export growth was robust at 16%,the trade decit widened sharply to $4.5 billion.Remittances and ocial transers held the current

account decit to $1.5 billion, or 1.4% o GDP.Sound macroeconomic undamentals,

enhanced private investment, and a signicantexpansion in the public sector developmentprogram will bolster Pakistans economy inFY2006, though their positive impact is expectedto be diminished by the increase in global oilprices. Te net result is that the economy is nowprojected to grow by 6.5%, i.e., 0.5 percentagepoint lower than orecast in ADO 2005. Havingpeaked in FY2005, ination is expected to declinesomewhat to 8.5% during FY2006, in response

to monetary tightening and the opening upto imports o essential ood items rom India.However, a large monetary overhang, higher worldoil prices, and an expansionary scal policy willmake it dicult to contain price increases.

While price adjustments have been made,high oil prices are likely to have a negative scalimpact o about PRs30 billion (0.4% o GDP) inthe orm o revenue loss due to lower petroleumsurcharges and additional subsidies to oilmarketing companies and reneries. Moreover,large rises projected in development spending and

in government servants salaries and pensions willcontribute to a higher scal decit in FY2006,though it will remain below 4.0% o GDP.

Imports are orecast to grow at about 18%in FY2006 because o continuing ast economicgrowth and a steeper oil bill, while exports areexpected to grow by about 15%, beneting romliberal incentives or export industries announcedin the FY2006 budget and the ending o textilequotas at the start o 2005. Expansion o thetrade decit and higher shipping charges pointto the current account decit widening to about$3.5 billion, or 2.8% o GDP, though nancingis not expected to present a problem because oanticipated substantially larger privatization-related FDI in FY2006.

In Bangladesh, GDP growth or FY2005(ended June 2005) slowed to 5.4%, mainlyreecting the adverse impact o devastatingooding in JulySeptember 2004. Inationpicked up to 6.5% due to higher ood prices, and,amplied by a 4% depreciation o the taka, higher


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prices or commodity imports. Imports grewrapidly (up 20.6%), reecting a 54% jump in theoil import bill (to $1.5 billion) and a strong rise innon-oil imports. Although exports and workers

remittances grew rapidly, the current accountposition moved to a decit o 0.9% o GDP inFY2005 rom a 0.2% surplus a year earlier. Tejump in the oil import bill caused much largerlosses (estimated at $445 million, equivalentto 0.7% o GDP in FY2005) at the state-ownedBangladesh Petroleum Corporation as theGovernment has allowed very little adjustment indomestic prices or oil products. Te losses havebeen entirely nanced by domestic and oreignborrowing. Policy in the year ahead will needto grapple with an even higher oil bill and the

appropriate means or greater price adjustment.A reduction in oil taxation in the FY2006 budgetwill help stem oil company losses but will placeurther pressure on revenue mobilization tocontinue to meet budget decit targets.

Te outlook is or GDP growth to stay levelat 5.5% in FY2006, a hal point lower than theADO 2005 projection. Growth will be aided byrecovery in agriculture but some moderation inproduction and export o garments is expected asglobal competition becomes more intense. Moregenerally, the outlook points to the need to tighten

monetary policy, both to keep a lid on marketpressures on the exchange rate as the currentaccount decit widens and to contain ination, andthis will restrain growth. Although both importand export growth is orecast to slow, the currentaccount decit or FY2006 is now projected at1.7% o GDP, 0.7 points larger than in ADO 2005.Ination is expected to be contained at 6.0%.

For Sri Lanka, this Update edges projectedGDP growth down to 5.1% in 2005 and 5.5%in 2006, slightly lower than in ADO 2005, buteven then the medium-term outlook or a solidaid-assisted recovery rom the December 2004tsunami (Box 1.3) is essentially unchanged romthat April orecast. Te central bank again raisedpolicy rates in May and June and price pressureshave eased such that CPI ination (year on year)ell rom 14.1% in March to 9.4% in June. TisUpdate adjusts projected ination in 2006 to 7.1%,rom 9.0%.

Changes in oil product prices have been madebut subsidies o about 1% o GDP remain, adding

to budget strains. While the major risk remainsuncertainty over the cease-re and peace processwith the Liberation igers o amil Eelam (amiligers), ssures in the Governments parlia-

mentary coalition over reaching an aid-sharingarrangement with the amil igers and theAugust decision o the Supreme Court requiringa presidential election in 2005 (to be held between22 October and 22 November) add greater politicalrisk to the economic outlook.

Te outlook or the Maldives is unchanged1.0% growth in 2005 and a sharp recovery in2006 at 9.0%. Data through July 2005 show touristarrivals steadily recovering rom the shock o thetsunami, continued price stability, and a balance-o-payments current account decit being nanced

without loss in oreign exchange reserves.Tis Update raises Aghanistans projected

GDP growth rom 11.3% to 13.6% in FY2005(ended 20 March 2006) on the basis o anapparent rebound in agricultural production.Te 10.0% expansion or FY2006 projected inADO 2005 is maintained. Year-on-year inationdeclined to 11.5% in June 2005 (rom 16.3% at theend o FY2004) and is expected to moderate to10.0% by end-FY2005, according to the IMF sta-monitored program. Te Government continuesto implement sound macroeconomic policies and

structural reorms in the context o a dicultsecurity environment.Bhutans outlook or GDP growth at 8.0%

in FY2005 (ended June 2005) and FY2006 ismaintained. National accounts estimates wererecently rebased to 2000 prices and, with moreweight given to the power sector, outcomes onthis new basis could be higher. Te medium-term outlook continues to be avorable because odevelopment o new luxury resorts or high-endtourism and export revenue rom the startup othe 1-gigawatt ala hydroelectric project.

In Nepal, GDP growth or FY2005 (endedmid-July 2005) was only 2.0% (against anADO 2005 projection o 3.0%) owing to theimpact o the insurgency and political instabilityon the economy generally. For FY2006, thisUpdate marks down growth to 3.0%. Althoughtourism remained weak in FY2005, the currentaccount surplus increased substantially to 3.5%o GDP as imports were subdued and workersremittances remained buoyant.


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The Indian Ocean tsunamilast December devastated

coastal areas in Indonesia, India,Sri Lanka, Maldives, and Tailand,destroying amilies and commu-nities, houses, shing boats, arms,and other assets, and dragging atleast 2 million people into poverty(Asian Development Outlook 2005).In the 8 months since then, sig-nicant nancial resources havebeen directed at providing initialrelie and on starting to restore localeconomies.

Tere has been a stronger ocus

on generati

Documents

Asian Development Outlook 2005 Update