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Donghyun Park Principal Economist Economics and Research Department Asian Development Bank National Asset-Liability Management Conference Singapore 29 September 2010

Outline 1. Economic prospects Fragile global recovery Vibrant regional outlook 2. Special chapter: The future of growth in Asia 3

Key messages Developing Asia is rebounding solidly with growth expected to reach 8.2% in 2010 Growth momentum is slowing in major industrial economies and significant downside risks remain Developing Asia must again focus on long-term growth Structural policies are needed to promote productive capacity via 4 core elements – trade, human capital, infrastructure, and financial development 4

Global conditions improved, but still fragile 6 saar: seasonally adjusted annualized rate

Risks to the global outlook Threat of another contraction Continued weakness of the US housing market Risk of insolvency and default in eurozone Spikes in commodity prices 7

Developing Asia recovered with speed and vigor… Forecast 8

…due to a favorable mix of factors Strong export recovery Robust private demand Sustained effects of stimulus policies 9 SIN=Singapore; MAL=Malaysia; THA=Thailand; INO=Indonesia; PHI=Philippines; KOR=Republic of Korea; HKG=Hong Kong, China; IND=India; TAP=Taipei,China

But variations remain across subregions… f: forecast 10

…as well as across economies Subregion/Economy ADO 2010UpdateADO 2010Update Central Asia East Asia China, People’s Rep. of Hong Kong, China Korea, Rep. of Taipei,China South Asia India Pakistan Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Viet Nam The Pacific Developing Asia

Inflation remained stable Forecast 12

Yet uneven across subregions f: forecast 13

Current account surplus declining f: forecast 14

Strong rebound in capital flows 15 Refers to aggregate data for the People’s Republic of China; Hong Kong, China; Indonesia; Republic of Korea; Philippines; Singapore; Taipei,China; and Thailand.

Exchange rates under appreciation pressure 16 % change from Sep2008-Sep2010 % Depreciation% Appreciation Note: Based on monthly average of $ value of local currency as of 15 September PRC=People's Republic of China. 1

Foreign exchange holdings rising 17 ASEAN4=Indonesia, Malaysia, Philippines, and Thailand.

Sustaining growth in the medium- to long-term matters Living standards in the region remain below those of the industrialized countries No guarantee that developing Asia’s stellar growth record will carry over into the post-crisis period The region’s long-term growth potential is not pre-defined 19

It’s time to improve Asia’s long- term productive capacity Four core elements of Asia’s future growth Trade Human capital Infrastructure Financial development 20

Trade Promotes exploitation of economies of scale and better resource allocation through specialization 21 Central Asia=Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. Southeast Asia=Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam. South Asia=Afghanistan, Bangladesh, India, Maldives, Pakistan, and Sri Lanka. Northeast Asia=Hong Kong, China; People’s Republic of China; Japan; Republic of Korea; Mongolia; and Taipei,China. The Pacific=Fiji Islands, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu. East Asia=Northeast and Southeast Asia.

Trade policy should: Take full advantage of potentially large domestic consumption and intraregional trade Expand the base of domestic production and diversify exports for Asia’s weaker economies 22

Human capital Improves labor productivity and facilitates technology adoption and innovation 23 Educational Attainment (average years of schooling) PrimarySecondaryTertiary

Education reform agenda should: Increase investment to improve enrollment (especially secondary and tertiary) and ensure quality education Take account of how educational systems can produce outcomes that meet the standards and skill sets required by the labor market 24

Infrastructure Provides key intermediate inputs for production and final consumption services to households 25 SIN=Singapore; HKG=Hong Kong, China; TAP=Taipei,China; KOR=Republic of Korea; MAL=Malaysia; THA=Thailand; AZE=Azerbaijan; SRI=Sri Lanka; PRC=People’s Republic of China; KAZ=Kazakhstan; CAM=Cambodia; TAJ=Tajikistan; PAK=Pakistan; IND=India; INO=Indonesia; PHI=Philippines; VIE=Viet Nam; BAN=Bangladesh; NEP=Nepal; MON=Mongolia; JPN=Japan; USA=United States

Infrastructure investment should: Address congestion, environmental degradation, and other costs associated with urban agglomeration Close the wide urban-rural infrastructure divide 26

Financial development Fosters efficient allocation of resources, speeds up accumulation of physical capital, and promotes dynamic efficiency 27 PRC=People’s Republic of China; BAN=Bangladesh; IND=India; INO=Indonesia; PAK=Pakistan; PHI=Philippines; THA=Thailand; OECD=high-income economies of the Organisation for Economic Co-operation and Development

Financial reforms should: Deepen and broaden financial systems Safeguard financial stability through strong prudential regulation and bond market development Increase accessibility of financial services 28

Baseline Reform CHINA INDIA KOREA INDONESIA THAILAND MALAYSIA SINGAPORE Asia’s Actual Growth and Future Growth Projections SOURCE: LEE AND HONG (2010)

Key messages Developing Asia is rebounding solidly with growth expected to reach 8.2% in 2010 Growth momentum is slowing in major industrial economies and significant downside risks remain Developing Asia must again focus on long-term growth Structural policies are needed to promote productive capacity via 4 core elements – trade, human capital, infrastructure, and financial development 30