1. Global Economic Trends Bert Hofman World Bank Office Manila Implications of the ASEAN Charter for East Asian Integration March 12, 2008

2. Developing Countries GDP Growth A Good Decade Thus Far

3. Forecasts for 2008 GDP growth have been revised downwards Date of projection for 2008 Projection

4. Region/country20072008 WBConsensus Forecasts Feb 2008 IMF WEO Update Oxford Econ High income OECD USA Euro-zone Japan Developing 2.5 2.2 2.7 2.1 7.4 1.8 1.6 1.7 1.5 6.7.. 1.6 1.4.. 1.8 1.5 1.6 1.5 6.9.. 1.8 1.7 1.5.. Sizable slowdown in industrial country GDP growth is now expected

5. Private capital flows are also expected to ease $ billions Net private capital flows to developing countries Percent of GDP (right axis) Percent Projected 2008-09 $998 billion in 2007 (7.3% of GDP) 5.25% 3.5% of GDP average 1990-02 Source: World Bank, DECPG

6. has been limited But so far the impact on East Asia has been limited Source: World Bank

7. is well placed to weather a US recession Several factors suggest East Asia is well placed to weather a US recession Current accounts are in surpluses. Debt outstanding due within a year is below 10 percent of GDP in all SE Asian economies. Reserve levels are very high—at end January 2008 total reserves for the nine largest economies in the region stood at US$ 2.74 trillion. Domestic conditions are much stronger: domestic demand is robust, corporate balance sheets are healthy, and capacity utilization is high, which could encourage investment. Fiscal positions are also relatively strong in most economies in the region—enabling them to undertake counter-cyclical policies to stimulate demand if needed.

8. Perceived riskiness of EM bonds, especially East Asian bonds, rose by much less than high-yield corporate bonds Source: Bloomberg, JPMorgan-Chase. High-yield spread High-income countries EMBI spread spreads, basis points East Asia spreads

9. ...and in historical perspective the present widening of spreads is modest Bond spreads (basis points) Emerging market bond spread (EMBIG) Source: JPMorgan.

10. Developing countries have become key drivers of global import growth United States Developing countries Source: World Bank, DECPG. Contribution to global nominal import growth in US$, y/y %-points

11. Trend developing country growth has become decoupled from trend high-income growth Developing countries High-income countries Developing and high-income growth and trend growth Source: World Bank, DECPG.

12. But the cyclical component of developing and high-income country growth remains coupled Deviation from trend GDP growth (percent) Developing country cycle High-income country cycle Source: World Bank, DECPG.

13. Short Term Outlook Anticipated slowdown should help reduce some current global economic tensions: rising commodity prices, inflationary pressure, global imbalances. Difficult challenges remain for some developing countries, with vulnerability to the possibility of capital flow reversals or the impacts of increased food and energy prices. In East Asia the latter is likely to be of much greater concern. –Overall food prices in US$ have increased by 75 percent in 2000 due to high energy and fertilizer prices, increased use of food crops for bio- fuels and world grain carryover stocks at record low levels – Food prices are expected to remain elevated although some decline in real terms may be expected. Demand for bio-fuels will probably increase, energy and fertilizer prices expected to remain high and pasture lands will take years before it can be cropped.

14. Short Term Outlook cont’d Overall outlook remains relatively strong for the East Asia region But a severe recession in the US and other developed countries would clearly impact the region. East Asia is the region that participates most actively in the global and regional production networks associated with MNCs. Many EA countries are involved in the assembly process at different stages, leading to product parts and components crossing borders repeatedly before they are incorporated into the final product. The final products however, are still destined primarily for the US and European Union.

15. Long Term Outlook More prudent macroeconomic management and technological progress have contributed to an increase in total factor productivity (TFP) and real income growth over the past 15 years. Over the next 10 years, these same factors are expected to enable developing countries to achieve annual per capita income gains of 3.9 percent, and perhaps as much as 3.4 percent in the decade following the next. These projections imply per capita income growth that is more than twice as fast as that in high-income countries. Growth of such magnitude would reduce the number of people living on less than a dollar a day from 1.2 billion in 1990 and 970 million in 2004 to 624 million by 2015. Such aggregate outcomes are not guaranteed, of course, and performance across individual countries is likely to be diverse.