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Asian Development
Outlook 2011 South-South Economic Links
Joseph E. Zveglich, Jr.
Assistant Chief Economist
Economics and Research Department
OECD Development Centre
Paris
8 April 2011
Outline
Economic outlook Global outlook
Developing Asia’s outlook
Key challenges Managing inflation
Finding new growth source: South-South economic links?
2
3
Key Messages
Asia’s recovery is firm, with growth nearing 8% in the next 2 years
Asia is leading the global recovery
Rising inflation is a concern
Expanding South-South links present a supplementary growth source
But structural weaknesses need to be addressed to maximize their potential
Economic outlook
4
Modest growth expected in
major industrial economies
2009 2010 2011 2012
Actual Actual ADO 2011 projection
ADO 2011
projection
GDP Growth
Major industrial economies (%) -3.8 2.6 2.1 2.1
United States (%) -2.6 2.9 2.8 2.6
Eurozone (%) -4.1 1.7 1.6 1.6
Japan (%) -6.3 3.9 1.5 1.8
World trade
Merchandise exports
(% change) -12.2 13.5 7.5 8.5
Inflation
Inflation (G3 average, %) -0.2 1.2 1.3 1.8
5
6
But risks remain
Recent surge in oil and food prices
Sovereign debt problems in the eurozone periphery
High unemployment and weak housing market in the US
Impacts of the Japan earthquake
Developing Asia’s recovery is
firming
7
…due to robust domestic demand
9,4 10,1
6,7 5,9
9,0
7,8 7,7
0
4
8
12
2006 2007 2008 2009 2010 2011 2012
GDP growth
5-year moving average
8
-5
0
5
10
15
20
PRC INO KOR MAL PHI SIN THA
Percentage points
Contributions to GDP growth
Private consumption Government consumption
Investment Net exports
Statistical discrepancy GDP growth
Propelled by robust domestic
demand
PRC=People’s Republic of China; INO=Indonesia; KOR=Republic of Korea; MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand.
9
Region’s recovery is widespread
GDP growth
0
2
4
6
8
10
Central
Asia
East Asia South Asia Southeast
Asia
The Pacific Developing
Asia
%2010 2011 2012
10
Southeast Asia moderating
SEA=Southeast Asia INO=Indonesia
SIN=Singapore THA=Thailand
MAL=Malaysia PHI=Philippines
VIE=Viet Nam
0
5
10
15
SEA INO MAL PHI SIN THA VIE
%GDP growth
2010 2011 2012
Asia contributed to the
global recovery
11
-8 0 8 16 24 32
Brazil
Mexico
Saudi Arabia
South Africa
France
Germany
Japan
United States
%
Asia-10 Rest of the World
Average quarterly growth rates of exports to developing Asia (Q3 2008–Q3 2010, y-o-y)
Key challenge:
Managing inflation
12
Inflation pressures are building…
13
3,3
4,4
6,9
1,2
4,4
5,3 4,6
0
2
4
6
8
2006 2007 2008 2009 2010 2011 2012
%
Inflation
5-year moving average
…with some signs of overheating
14
-16
-12
-8
-4
0
4
8
%
Real Interest Rates People's Rep. of China India
Indonesia Rep. of Korea
Malaysia Philippines
Taipei,China Thailand
Viet Nam
o Negative real interest rates
o Output near or above its potential
Inflation matters more for Asia
Bangladesh 58.8
Philippines 46.6
India 46.2
Sri Lanka 45.5
Cambodia 44.9
Pakistan 40.3
Viet Nam 39.9
Indonesia 36.2
Thailand 33.0
Malaysia 31.4
PRC 30.2
United States 14.8
Eurozone 14.0
Japan 25.9
15
Food share in CPI (%)
o The poor are especially vulnerable
o Rising in part to Asia’s faster recovery
o Inflation expectations can fuel wage-price spiral
But managing inflation is not easy
Higher policy rates attract more capital inflows
16
71 9245 27 39 -22 49
24 68 -4257
207
111
-225
-150
-75
0
75
150
225
H104 H105 H106 H107 H108 H109 H110
$ billion
Net flows in emerging Asian economies
FDI Portfolio Other Net flows
Coherent policy mix is key to success
For countries with persistent current account imbalances and misaligned exchange rates: More flexible exchange rates
For countries without the above symptoms: Internationally coordinated temporary measures, such as capital controls
G20 could provide useful tools: practical indicative guidelines and principles for capital controls
17
Key challenge:
South-South economic links
18
Share of the South in global GDP is
rising
Share of South in world GDP (%)
27
32 33
37
45
0
10
20
30
40
50
1990 1995 2000 2005 2010
Developing Asia’s share in South GDP, 2010
PRC 30%
Other Asia 34%
Other South 36%
Developing Asia 64%
19
PRC = People’s Republic of China
20
South-South trade is growing
Developing Asia’s share in South-South trade, 2009
Other South 26%
Other Asia 34%
PRC 40%
Developing Asia 74%
Note: Merchandise trade, non-fuel
7
10
15 16
17
1990—91* 2000—01* 2006—07* 2008 2009
South-South trade as share of world merchandise trade (%)
PRC = People’s Rep. of China
But developing Asia’s trade is driven
by factory Asia
0
10
20
30
40
50
60
97 99 01 03 05 07 09
(%)
Developing Asia PRC
Africa Latin America
0
10
20
30
40
50
60
97 99 01 03 05 07 09
(%)
Developing Asia PRC
Africa Latin America
Exports Imports
Share of parts and components (%)
21
• Factory Asia: intermediate goods sourced from South for assembly and subsequent export to North
• Growing South-South links do not necessarily mean greater economic independence!
Structural weaknesses need to be
addressed
22
4,2 5,5 5,1
3,7 3,2
19,6 20,6
16,0
12,1
9,3
0
5
10
15
20
25
1985-89 1990-94 1995-99 2000-04 2005-08
%
Applied tariffs, simple mean
North South
Other barriers remain too
Trade-related
infrastructure and
logistics performance
of the South lag
considerably behind
the North
South-South FTAs
are generally less
consistent with WTO
and other global rules
23
2,0
2,5
3,0
3,5
North South
Average Logistic Performance Index scores, North and South
2007 2010
Potential gains from stronger
South-South links are large
Lowering tariffs could increase South-South trade by 6% points
Industrial migration among the South could boost global growth
Recycling South savings for investment could help global rebalancing
24
25
Key Messages
Asia’s recovery is firm, with growth nearing 8% in the next 2 years
Asia is leading the global recovery
Rising inflation is a concern
Expanding South-South links present a supplementary growth source
But structural weaknesses need to be addressed to maximize their potential