Growth in developing economies to decline this year

The developing economies of the Asia-Pacific region will see their growth fall in 2009 as the global financial and economic crisis hits home. But the measures they put in place since the last regional financial crisis may put them in a more resilience position.

Kanaga RAJA

Against the backdrop of the global financial and economic crisis, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) has forecast a slowdown in growth in the developing economies of the region to 3.6% in 2009, from an estimated 5.8% in 2008.

In its latest annual survey, ESCAP said that for the region as a whole, performance for the first half of 2008 showed resilience. Exports grew at 24%, thus remaining strong and riding on the back of weakening currencies and relatively robust external demand. But the full effect of a slowdown in developed country markets on exports will surface in 2009.

Economies that are highly dependent on exports, such as those of East and North-East Asia and South-East Asia, will inevitably be more vulnerable. The extent of deceleration will depend on the extent to which domestic demand, stimulated by expansionary fiscal policy, can offset the setback in exports.

Still, said ESCAP, it is important not to lose sight of the fact that aggregate growth in Asia and the Pacific will remain higher than in other global regions. While difficulties in the region will be important at the domestic level due to the enormous social consequences of even moderate decreases in growth rates, the region is relatively strong compared with the rest of the world.

The ESCAP report, however, warned that the possibility of a deeper economic setback in the United States and consequently in the European Union and Japan cannot be ruled out, given the highly fluid financial conditions and the uncertain impact of expansionary monetary policy and fiscal rescue programs. Failure to jump-start the economy and trigger economic growth is the biggest downside risk for the regional forecast.

The ESCAP region encompasses all the countries in the Asia-Pacific region including the Central Asian republics of Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. The developed economies in the region are Australia, Japan and New Zealand.

Noting that this is the second time in a decade that Asia and the Pacific has been hit by a financial crisis, the report found that reforms undertaken since 1997 - implementation of prudent macroeconomic policies, improved fiscal balances, banking reforms and foreign exchange reserve accumulation - made the region more resilient at the beginning of the current crisis. That resilience started to erode, however, when in the fourth quarter of 2008, trade - the region’s engine of growth - moved from double digit growth to double digit declines.

It also said that while most governments are focused on dealing with the worst economic crisis in many decades, two other longer term crises should not be forgotten. Food-fuel price volatility and climate change are converging with the present economic crisis to create what is now being referred to as the triple threat. With almost two-thirds of the world’s poor and half of its natural disasters, Asia and the Pacific is at the epicentre of the triple crises. According to the report, a major baseline assumption is that the United States economy will contract by 1.0% in 2009, following estimated growth of 1.3% in 2008. If a more pronounced setback in the United States occurs, growth in the economy would fall by another 2 percentage points, from -1% to -3%.

The more severe deceleration in growth is based mainly on steeper reductions in investment and consumption, with a significant increase in bankruptcies and layoffs, job insecurity for those who are still employed, a further fall in asset prices and a tighter policy on lending to households. If there is a deeper United States downturn, economic growth in Japan and the Euro zone will also fall into more negative territory.

Under this more severe scenario, said the report, the Republic of Korea, Singapore, Hong Kong-China, and Taiwan Province of China would feel the pinch most. Third World Network Features