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World Economic and Financial Surveys

Regional Economic Outlook: Asia and Pacific

Consolidating the Recovery and Building Sustainable Growth

October 2010

One year after the deepest recession in recent history, Asia is leading the global recovery. The Regional Economic Outlook: Asia and Pacific discusses the near-term outlook for the region, as well as the medium-term policy challenges that countries face. As in many emerging and developing markets, Asia rebounded swiftly during 2009 and in the first quarter of 2010, and in the near term the region is expected to continue leading the global recovery. In the medium term, the global crisis has highlighted the importance for Asia of ensuring that private domestic demand becomes a more prominent engine of growth.

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Contents

Definitions
Executive Summary
I. Moving to Sustainable Growth: Risks and Challenges
A. Recent Developments and Emerging Pressures
B. Economic Outlook
C. Risks
D. Policy Challenges
II. Inflation Dynamics in Asia
A. Introduction
B. Explaining Inflation Dynamics in Asia
C. A Closer Look at Inflation Dynamics in China and India
D. Conclusions and Policy Implications
Appendix 2.1. Global VAR
Appendix 2.2. Structural VAR (SVAR)
III. Investment and Rebalancing in Asia
A. Introduction
B. Investment Trends in Asia
C. What Drives Investment in Asia?
D. Policy Implications: How Can Asia Facilitate Rebalancing Through Investment?
E. Summary
Appendix 3.1. Firm-Level Analysis
IV. Low-Income Countries and the Pacific Islands
A. Introduction
B. Postcrisis Fiscal Adjustment in Asian Low-Income Countries
C. Sri Lanka: At a Crossroads
D. Mongolia: A Remarkable Turnaround
E. Fiscal Challenges for Compact Countries—Marshall Islands, Micronesia, and Palau
References
Boxes
Chart Data 1.1 Global Volatility and Forex Returns in East Asia
Chart Data 1.2 The Yen’s Appreciation and Its Implications for Japan’s Outlook
Chart Data 1.3 A Financial Conditions Index for Asia
Chart Data 1.4 Are House Prices Rising Too Fast in China?
Chart Data 1.5 Capital Flows and Domestic Demand in Emerging Asia
Chart Data 1.6 Asia and Global Financial Reforms 21
Chart Data 1.7 Sovereign Spreads and the Risk of Contagion for Asia
Chart Data 1.8 Fiscal Policy in Commodity-Exporting Countries
Chart Data 1.9 Bank Funding and Liquidity Rules in Australia and New Zealand
Chart Data 2.1 Persistence of Food Price Inflation
Tables
1.1 Asia: Real GDP Growth
1.2 Selected Asia: Medium-Term Fiscal Objectives
2.1 Selected Asia: Pass-Through from Output Gap to Core Inflation
2.2 China: NKPC—Baseline GMM Estimates with Nonfood Inflation
2.3 India: NKPC—Baseline GMM Estimates with Core Inflation
2.4 India: NKPC—Baseline GMM Estimates with Wholesale Price Inflation
2.5 India: NKPC—Open Economy GMM Estimates with Core Inflation
3.1 Determinants of Private Investment Spending
3.2 Effect of Infrastructure on Private Investment Spending
3.3 How Would an Improvement in Fundamentals Affect Investment in Asia?
3.4 NIEs and Japan: Changes in Fundamentals, 1990–97 versus 2000–07 by Firm
3.A1 Selected Financial Indicators for Firms
3.A2 Investment Equations, Full Sample (1991–2008)
3.A3 Asia: Investment Equations, Sub-Sample Analysis
4.1 Asian LICs: Planned and Ongoing Fiscal Reforms
Figures
Chart Data 1.1 Selected Asia: Contributions to GDP Growth
Chart Data 1.2 Export-Oriented Asia: Real GDP
Chart Data 1.3 China: Urban Real Fixed Asset Investment
Chart Data 1.4 Asia: Merchandise Exports
Chart Data 1.5 Asia: Industrial Production
Chart Data 1.6 Selected Asia: Manufacturing Inventories and Shipments
Chart Data 1.7 United States: Electronics Inventories-to-Sales Ratio
Chart Data 1.8 Asia: Direction of Exports
Chart Data 1.9 Asia: Retail Sales Volume
Chart Data 1.10 Asia: Net Capital Inflows
Chart Data 1.11 Selected Emerging Asia: Net Foreign Investment in Equity Markets
Chart Data 1.12 Emerging Asia: Foreign Currency Bond Issuance and Foreign Holdings of Government Bonds
Chart Data 1.13 Asia: Stock Markets
Chart Data 1.14 Selected Asia: Real Effective Exchange Rate
Chart Data 1.15 Asia: Real Policy Rates
Chart Data 1.16 Asia: Credit to Private Sector
Chart Data 1.17 Selected Asia: Bank Spreads
Chart Data 1.18 Asia: Contributions to Change in Financial Conditions Index (FCI) since 2009:Q4
Chart Data 1.19 Asia: Estimated Output Gap Closure Dates
Chart Data 1.20 Asia: Headline Consumer Prices
Chart Data 1.21 Selected Asia: Property Prices
Chart Data 1.22 Asia: Fiscal Impulse
Chart Data 1.23 Asia: Cyclically Adjusted General Government Balance
Chart Data 1.24 Selected Asia: Unemployment Rate
Chart Data 1.25 Selected Asia: Real Wage/Earnings
Chart Data 1.26 Selected Export-Oriented Emerging Asia: Link Between Exports and Employment
Chart Data 1.27 Emerging Asia: Contribution to Recovery of Private Investment (2009:Q1–2010:Q1)
Chart Data 1.28 Asia: Real Cost of Equity
Chart Data 1.29 Selected Asia: Manufacturing Capacity Utilization
Chart Data 1.30 Commercial Banks’ Loan-to-Deposit Ratio
Chart Data 1.31 China and India: Contributions to Growth
Chart Data 1.32 NIEs and ASEAN-5: Contributions to Growth
Chart Data 1.33 Industrial Asia: Contributions to Growth
Chart Data 1.34 Asia: Consumer Prices
Chart Data 1.35 Asia: Current Account Balance
Chart 1.36 Asia: GDP Growth
Chart Data 1.37 Selected Asia: Share of Non-Asian Final Demand in Asian Value Added
Chart Data 1.38 Selected Asia: Impact of 1 Percentage Point Decline in G-2 Final Demand on GDP Growth
Chart Data 1.39 Outstanding Cross-Border Claims of Asian Banks, 2009
Chart Data 1.40 Outstanding Claims of BIS Reporting Banks on Asia, 2009
Chart Data 1.41 Foreign Currency Refinancing Need for Nonfinancial Private Corporations
Chart Data 1.42 Asia: Local Currency Refinancing Need for Nonfinancial Private Corporations
Chart Data 1.43 Gross Public Debt, 2009
Chart Data 1.44 Emerging Asia: Stock Market Movements and Global Risk Aversion
Chart Data 1.45 Asia: Monetary Tightening since 2009:Q3
Chart Data 1.46 Emerging Asia: Excess Liquidity
Chart Data 1.47 Asia: Policy Rates and Estimated Taylor-Rule Rates
Chart Data 1.48 Asia: Household Debt, 2009
Chart Data 1.49 Emerging Asia (excl. China): Exchange Market Pressure Index
Chart Data 1.50 Asia: Projected General Government Gross Debt (2010–15)
Chart Data 1.51 Equity and Debt Portfolio Inflows
Chart Data 1.52 Global Imbalances
Chart Data 2.1 Asia (excl. Japan): Headline Consumer Price Index
Chart Data 2.2 Asia (excl. Japan): Core Consumer Price Index
Chart Data 2.3 Emerging Asia: Food and Energy Weights in Consumer Price Index Baskets
Chart Data 2.4 Asia (excl. Japan): Headline Inflation and Global Commodity Price Inflation
Chart Data 2.5 United States and Emerging Asia: Oil Demand
Chart Data 2.6 Emerging Asia: Metal and Soy Demand
Chart Data 2.7 Selected Asia: Contribution of Supply Shocks to Inflation Variation
Chart Data 2.8 Selected Asia: Contribution of Commodity Price Shocks to Inflation Variation and Oil Intensity
Chart Data 2.9 Selected Asia: Contribution of Aggregate Demand Shocks to Inflation Variation
Chart Data 2.10 Asia (excl. Japan): Year-on-Year Inflation and Output Gap
Chart Data 2.11 Change in the Relative Contribution of Shocks Between 1986–99 and 2000–10
Chart Data 2.12 Selected Asia: Relative Contributions of Domestic, Regional, and Global Factors to Inflation Variation
Chart Data 2.13 Selected Asia: Contribution of Domestic Demand Shocks to Inflation and Opennes
Chart Data 2.14 Contribution of Regional Demand Factor to Fuel and Food Price Inflation
Chart Data 2.15 China: Consumer Price Inflation
Chart Data 2.16 India: Headline Inflation (WPI) and Inflation Volatility
Chart Data 2.17 China: Impact of Foreign Output Gap
Chart Data 2.18 China: Impact of Monetary Policy
Chart Data 2.19 China: Variance Decomposition of Inflation
Chart Data 2.20 India: Inflation and Output Gap
Chart Data 2.21 India: Actual and Simulated Inflation
Chart Data 3.1 Asia: Gross Fixed Capital Formation (GFCF) and Gross Saving
Chart Data 3.2 Export-Oriented Asia: Contribution to Change in Average Share of GFCF in GDP
Chart Data 3.3 Selected Asia: Change in Investment by Type
Chart Data 3.4 Phone Connections
Chart Data 3.5 Electricity Generation
Chart Data 3.6 Firm-Level Investment Rate, 2000–07
Chart Data 3.7 Composition of Investment by Sector
Chart Data 3.8 NIEs: Firm-Level Investment Rate, by Size and by Sector
Chart Data 3.9 Export-Oriented Asia: GFCF—Change in Share versus Change in Relative Prices
Chart Data 3.10 Corporate Sector Leverage: 2000–08
Chart Data 3.11 Uncertainty: 2000–08
Chart Data 3.12 Effective Corporate Tax Rates in OECD
Chart Data 3.13 Selected Asia: Size of the Corporate Bond Market, 2009
Chart Data 3.14 Selected Advanced Economies: Venture Capital Investment
Chart Data 4.1 Asia: Changes in Fiscal Balance Relative to Precrisis Level
Chart Data 4.2 Asian LICs: Expenditure versus Revenue
Chart Data 4.3 Asian LICs: Public Debt
Chart Data 4.4 Sri Lanka: Gross Official Reserves
Chart Data 4.5 Sri Lanka: Inflation and GDP Growth
Chart Data 4.6 Mongolia: Real GDP
Chart Data 4.7 Mongolia: Mineral Exports
Chart Data 4.8 Compact Countries: Share of Grants in Overall Revenue, FY2008
Chart Data 4.9 Compact Countries: Fiscal Balance, FY2008
Chart Data 4.10 Pacific Island Economies: Public Wage Expenditure, 2007
Chart Data 4.11 Pacific Island Economies: Tax Revenue, 2007
Chart Data 4.12 Compact Trust Fund Balance