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 Asias outlook

Managing inflation Finding new growth source: South-South economic links?

Key challenges

Key Messages

Asias 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

Modest growth expected in major industrial economies

2009 2010 2011 2012

Actual

Actual

ADO 2011 projection

2.1 2.8 1.6 1.5

ADO 2011 projection

2.1 2.6 1.6 1.8

GDP Growth
Major industrial economies (%) -3.8 -2.6 -4.1 -6.3 2.6 2.9 1.7 3.9

United States (%)

Eurozone (%) Japan (%)

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

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 Asias recovery is firming

GDP growth
5-year moving average

12 9,4 8 10,1 9,0 7,8 6,7 5,9 7,7

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 Investment Statistical discrepancy
Percentage points

Government consumption Net exports GDP growth

20 15 10 5 0 -5 PRC INO KOR MAL PHI SIN THA

PRC=Peoples Republic of China; INO=Indonesia; KOR=Republic of Korea; MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand.
8

Regions recovery is widespread

GDP growth

% 10 8 6 4 2 0
Central Asia

2010

2011

2012

East Asia South Asia Southeast The Pacific Developing Asia Asia

Southeast Asia moderating

% 15
10

GDP growth

5
0
SEA INO MAL PHI SIN THA VIE

2010
SEA=Southeast Asia INO=Indonesia
10

2011
SIN=Singapore THA=Thailand

2012
VIE=Viet Nam

MAL=Malaysia PHI=Philippines

Asia contributed to the global recovery

Average quarterly growth rates of exports to developing Asia (Q3 2008Q3 2010, y-o-y) Brazil Mexico Saudi Arabia South Africa

France Germany Japan United States -8 0 8 % Asia-10

11

16

24

32

Rest of the World

Key challenge: Managing inflation

12

Inflation pressures are building

Inflation
%

8
6 4,4 4 2 0 2006 2007 3,3

6,9

5-year moving average

5,3 4,4 4,6

1,2

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 India Rep. of Korea Philippines Thailand

o Negative real interest rates o Output near or above its potential

8
4 0 -4 -8 -12 -16

14

Inflation matters more for Asia

Food share in CPI (%)

Bangladesh Philippines India Sri Lanka Cambodia Pakistan Viet Nam Indonesia Thailand Malaysia PRC
15

58.8 46.6 46.2 45.5 44.9 40.3 39.9 36.2 33.0 31.4 30.2

United States Eurozone Japan

14.8 14.0 25.9

o The poor are especially vulnerable o Rising in part to Asias faster recovery o Inflation expectations can fuel wage-price spiral

But managing inflation is not easy

Higher policy rates attract more capital inflows

Net flows in emerging Asian economies
FDI Portfolio Other Net flows 207 111 $ billion 225 150 75 0 -75

71

92

45

27

39

-22

49

24

68

-42

57

-150 -225 H104 H105 H106 H107 H108 H109 H110

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

Share of South in world GDP (%)
50 45 37 32 30 27 33 Other South 36% PRC 30% Developing Asia 64% Other Asia 34%

Developing Asias share in South GDP, 2010

40

20

10

0 1990 1995 2000 2005 2010

PRC = Peoples Republic of China

19

South-South trade is growing

South-South trade as share of world merchandise trade (%) Developing Asias share in South-South trade, 2009

15 10 7

16

17

Other South 26%

PRC 40%

Developing Asia 74%

Other Asia 34%

199091* 200001* 200607*

2008

2009 Note: Merchandise trade, non-fuel PRC = Peoples Rep. of China

20

But developing Asias trade is driven by factory Asia

Share of parts and components (%)
Exports
Developing Asia Africa PRC Latin America Africa

Imports
Developing Asia PRC Latin America

60 (%) 50 40 30 20 10 0
97 99 01 03 05 07 09

60 50 40 30 20

(%)

10
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 0 1985-89 1990-94 1995-99 2000-04 2005-08 4,2 5,5 19,6 20,6 16,0 12,1

North

South

9,3 5,1
3,7 3,2

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

Average Logistic Performance Index scores, North and South

2007 3,5

2010

3,0

2,5

2,0 North 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

Asias 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