Asian Development Outlook 2011 South-South Economic Links

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

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 3

4 Economic outlook

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

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 6

Developing Asia s recovery is firming GDP growth 12 8 9,4 10,1 6,7 5-year moving average 5,9 9,0 7,8 7,7 4 0 2006 2007 2008 2009 2010 2011 2012 due to robust domestic demand 7

Propelled by robust domestic demand Contributions to GDP growth Private consumption Government consumption Investment Net exports Statistical discrepancy GDP growth Percentage points 20 15 10 5 0-5 PRC INO KOR MAL PHI SIN THA PRC=People s Republic of China; INO=Indonesia; KOR=Republic of Korea; MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand. 8

Region s recovery is widespread GDP growth % 10 8 6 4 2 0 Central Asia 2010 2011 2012 East Asia South Asia Southeast Asia The Pacific Developing Asia 9

Southeast Asia moderating % 15 GDP growth 10 5 0 SEA INO MAL PHI SIN THA VIE 2010 2011 2012 SEA=Southeast Asia INO=Indonesia MAL=Malaysia PHI=Philippines SIN=Singapore THA=Thailand VIE=Viet Nam 10

Asia contributed to the global recovery Average quarterly growth rates of exports to developing Asia (Q3 2008 Q3 2010, y-o-y) Brazil Mexico Saudi Arabia South Africa France Germany Japan United States -8 0 8 16 24 32 % Asia-10 Rest of the World 11

Key challenge: Managing inflation 12

Inflation pressures are building Inflation 8 % 6,9 5-year moving average 6 4 3,3 4,4 4,4 5,3 4,6 2 0 1,2 2006 2007 2008 2009 2010 2011 2012 13

with some signs of overheating Real Interest Rates People's Rep. of China Indonesia % Malaysia Taipei,China Viet Nam 8 4 India Rep. of Korea Philippines Thailand o Negative real interest rates o Output near or above its potential 0-4 -8-12 -16 14

Inflation matters more for Asia Food share in CPI (%) 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 o The poor are especially vulnerable o Rising in part to Asia s faster recovery o Inflation expectations can fuel wage-price spiral 15

But managing inflation is not easy Higher policy rates attract more capital inflows Net flows in emerging Asian economies FDI Portfolio Other Net flows 207 $ billion 225 71 92 45 27 39-22 49 24 68-42 57 111 150 75 0-75 -150 H104 H105 H106 H107 H108 H109 H110-225 16

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 50 Share of South in world GDP (%) 45 Developing Asia s share in South GDP, 2010 40 30 20 10 27 32 33 37 Other South 36% Developing Asia 64% PRC 30% Other Asia 34% 0 1990 1995 2000 2005 2010 PRC = People s Republic of China 19

South-South trade is growing South-South trade as share of world merchandise trade (%) Developing Asia s share in South-South trade, 2009 17 16 15 10 7 1990 91* 2000 01* 2006 07* 2008 2009 Other South 26% Developing Asia 74% PRC 40% Other Asia 34% Note: Merchandise trade, non-fuel PRC = People s Rep. of China 20

But developing Asia s trade is driven by factory Asia Exports Share of parts and components (%) Imports Developing Asia PRC Developing Asia PRC Africa Latin America Africa Latin America 60 50 40 30 20 10 (%) (%) 60 50 40 30 20 10 0 97 99 01 03 05 07 09 0 97 99 01 03 05 07 09 Factory Asia: intermediate goods sourced from South for assembly and subsequent export to North Growing South-South links do not necessarily mean greater economic independence! 21

Structural weaknesses need to be addressed Applied tariffs, simple mean % 25 20 15 10 5 4,2 19,6 North 20,6 5,5 5,1 16,0 South 12,1 3,7 3,2 9,3 0 1985-89 1990-94 1995-99 2000-04 2005-08 22

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 3,5 3,0 2,5 2,0 Average Logistic Performance Index scores, North and South North 2007 2010 South 23

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

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 25