The strong global recovery that was widely expected to take place in the latter half of 2002 has not materialized. On the contrary, increasing uncertainties are undermining the confidence of consumers and investors worldwide, and the speed of economic recovery in the industrialized world is likely to be slower than anticipated several months ago.
Developing countries in the Asia-Pacific region, however, have shown their resilience and are projected to register higher GDP growth rates in 2002 and 2003. According to a recent forecast made by the Asian Development Bank, the average growth rate of developing Asia is expected to accelerate from 3.7 percent in 2001 to 5 percent in 2002, and 5.7 percent in 2003.
Many countries are projected to have a GDP growth rate of over 5 percent this year, including China, South Korea, Laos, Vietnam, Bhutan, Azerbaijan, Kazakstan, Tajikistan and Turkmenistan. In most of these countries, both domestic and external demand have contributed to the high GDP growth. Many adopted an expansionary fiscal policy and accommodative monetary policy to boost domestic demand. At the same time, they have been able to increase their exports, taking advantage of the global economic recovery, however weak it might have been. Furthermore, some of these countries are increasingly engaging in trade with other Asian countries, raising the share of intraregional trade in their total trade.
While it is gratifying to know that developing Asia — where 900 million people live in absolute poverty — is projected to enjoy an accelerating growth rate, the question arises of whether this economic recovery will be sustainable in the changing global economic environment.
The substantial progress of globalization in Asia means that economic prospects for developing Asia will depend very much on future developments in the industrialized world. Three scenarios among many are considered here in regard to the future path of industrialized economies. The first scenario assumes that industrialized countries will continue to grow, but at a slower rate than was expected several months ago. The second scenario is that the industrialized economies will fall into recession again before they regain strength, the so-called “double-dip.” The third scenario is that a long-term recession will set in as industrialized countries are affected by the post-bubble adjustment, prolonged war against Iraq and exorbitantly high oil prices.
Developing Asia may survive the first scenario unscathed. A mild acceleration of growth may even be possible, as the Asian Development Bank has predicted. In the case of the second scenario, developing Asia could be hurt seriously. However, it is likely that it will be the first developing region to come out of the dip. There are at least three reasons for this optimism. First, many Asian developing countries have undergone serious structural reforms in the financial, corporate and public sectors, and their efficiency has improved in recent years. Second, there is still room for these countries to adopt expansionary fiscal and monetary policies so that they can promote domestic demand. Third, as Asian countries move out of the dip, a positive cycle of growth and trade could emerge, particularly in relation to intraregional trade.
Developing Asia may, however, be quite vulnerable in the case of the third scenario, particularly those countries that rely heavily on imported oil. The factors for optimism mentioned above may not apply in this case. The financial and corporate sectors may need another round of structural reform as they face sharp increases in their nonperforming loans.
At the same time, it will not be possible for developing countries in the Asia-Pacific region to maintain expansionary fiscal and monetary policies for a long time. Furthermore, a deteriorating economic situation in developing Asia would likely reduce trade among Asian countries, which could create a vicious circle of recession and a drop in trade. Economic recovery in developing Asia would be derailed under this scenario.
In conclusion, there is no guarantee that economic recovery in developing Asia will be sustained in the face of the deteriorating global economic environment. If the world falls into a long-term recession, poor and vulnerable people will suffer the most. For the rich, recession may simply mean a decline in the value of their wealth. But for the poor, it could mean the loss of their jobs and significant cuts in social support for their education and health; it could even become a matter of life and death, as we painfully experienced during the Asian financial crisis. The utmost effort should be made by industrialized countries to avoid long-term recession. More than ever, international cooperation is needed not only in political and diplomatic areas, but also in macroeconomic management to avoid long-term global recession.
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