Emerging economies notch up strongest growth since 1997

World Bank report also warns of new challenges that could hit growth

By Anthony Rowley In Tokyo
April 6, 2007
The Business Times

ASIA's 'emerging' economies enjoyed their strongest overall growth last year since crisis struck the region in 1997 and growth should moderate only slightly this year, the World Bank reported yesterday.

But strong growth is bringing wider income gaps, especially in China, while some economies are finding themselves caught in a 'middle income trap', the bank said in its latest East Asia and Pacific Update report.

The report noted that growth in emerging East Asia - defined as China, Indonesia, Malaysia, the Philippines, Thailand, Vietnam, Hong Kong, South Korea, Singapore and Taiwan plus some smaller regional economies - reached 8.1 per cent in 2006, and forecast that it would moderate to 7.3 per cent this year as exports slow somewhat.

But even though the region has overcome the 1997 financial crisis and returned to overall health, 'new challenges are arising which could slow or even derail growth if not handled properly', the bank said. 'Income inequality is rising in many East Asian economies - in some cases sharply.' This could become a 'source of political and social unrest which stymies investment and growth'.

In the case of China, income inequality has risen sharply with economic development, Bert Hoffman, chief of the economics unit and lead economist in the World Bank's Beijing office, said yesterday during the official launch of the latest Economic Update at the Foreign Correspondents Club of Japan in Tokyo.

Whereas China had very high income equality - on a par with that of Sweden or Germany - when it began its current economic expansion, inequality has now risen to the relatively high levels seen in Argentina or Brazil, he said.

Investment in some emerging East Asian economies has been weak, the World Bank noted, and growth has been below pre-1997 crisis levels.

Business firms have been 'facing big competitive pressures in world markets, not least from China's booming economy'.

Milan Brahmbhatt, World Bank lead adviser for East Asia and the Pacific region, noted that China's imports have recently been rising more slowly than its exports, implying that it is relying less on suppliers in South-east Asia and elsewhere and producing more parts and components itself.

An increasing number of Asian countries are meanwhile caught in a 'middle income trap', Mr Brahmbhatt said. 'Strategies that allow countries to grow from low income to middle income status are not enough to get them to high income,' he said. 'Few have mastered the complex technical, social and political challenges' involved in taking this next step.

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'Ten years after confronting the reforms needed to rebound from the (1997) financial crisis, East Asia must now confront a new wave of reforms, some of which will be at least as challenging as those enacted in the months after July 1997,' he said.

Specifically, East Asia 'needs to push ahead with reforms to improve the governance and investment climate, develop more diversified capital markets including credit access for the poor, liberalise services trade, boost education systems to address skilled labour shortage and emphasise prudent macro economic policies', he said.

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