World Bank Expects Slower Growth in Developing East Asia Pacific in 2014

Forecast Shows Region to Grow Nearly 7% This Year and Next

SINGAPORE, October 6, 2014 – Developing countries in East Asia Pacific will see slightly slower economic growth this year, but the pace of growth in the region, excluding China, will pick up next year, as the gradual recovery in high-income economies boosts demand for exports from the region, according to the East Asia Pacific Economic Update released today by the World Bank. Still, developing East Asia Pacific remains the fastest-growing region in the world.

Developing East Asia will grow by 6.9% this year and next, down from 7.2% in 2013, the report says. In China, growth will ease slightly to 7.4% this year and 7.2% in 2015, as the government seeks to put the economy on a more sustainable path with policies addressing financial vulnerabilities and structural constraints. Excluding China, growth in developing countries in the region is expected to bottom out at 4.8% this year, before rising to 5.3% in 2015, as exports rise and domestic economic reforms advance in the large Southeast Asian economies.

“East Asia Pacific will continue to have the potential to grow at a higher rate—and faster than other developing regions—if policy makers implement an ambitious domestic reform agenda, which includes removing barriers to domestic investment, improving export competitiveness and rationalizing public spending,” said Axel van Trotsenburg, World Bank East Asia and Pacific Regional Vice President.

While the region as a whole will benefit more than any other region from the recovery of the global economy, the impact will vary across countries, depending on their investment and export environment. China, Malaysia, Vietnam and Cambodia are well positioned to increase their exports, reflecting their deepening integration into the global and regional value chains that have driven global trade in the last 20 years.

The report revised the World Bank’s 2014 forecast for Malaysia to 5.7%, up from 4.9% in April, because of robust exports in the first half of the year. Cambodia is expected to grow at 7.2% in 2014, boosted by rising garment exports. Thailand is also expected to benefit from the global recovery, given its strong integration into global value chains – if the respite in political unrest is sustained.

But in Indonesia, which still relies on exporting commodities, growth will drop to 5.2% this year from 5.8% in 2013, constrained by falling commodity prices, lower-than-expected government consumption and slower credit expansion.

A bright spot for the region’s economies: robust private consumption, supported by various factors such as election-related spending in Indonesia and a strong labor market

in Malaysia. In the Philippines, buoyant remittances pushed up private consumption, which accounts for more than half of the country’s overall growth, forecasted to be at 6.4% this year and 6.7% in 2015. Economic growth in Myanmar, with recent institutional and policy reforms and international re-engagement, will be at 8.5% this year and next.

Significant uncertainties remain that could affect the region’s growth. High-income economies, especially in the euro zone and Japan, could face downside risks in the near term. Global financial conditions could tighten sharply, and international and regional geopolitical tensions could affect prospects. The region also remains vulnerable to a sharp slowdown in China, which, though unlikely to happen, could hurt commodity producers especially hard, such as metal exporters in Mongolia and coal exporters in Indonesia.

“The best way for countries in the region to deal with these risks is to address vulnerabilities caused by past financial and fiscal policies, and complement these measures with structural reforms to enhance export competitiveness,” said Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region.

The report identifies policy recommendations for different countries to deal with risk and embark on a path of sustainable growth. Mongolia and Lao PDR, for example, need to reduce the fiscal deficit and tighten monetary policy. In Indonesia, Malaysia, the Philippines, and Thailand, measures to bolster revenues and reduce poorly targeted subsidies will help create space for productivity-enhancing investments and poverty-reducing spending, while gradually rebuilding fiscal buffers.

In China, as the government seeks to strike a balance between containing growing risks and meeting growth targets, the report indicates that structural reforms in sectors previously reserved for state enterprises and services could help offset the impact of measures to contain local government debt and curb shadow banking.

The report also discusses long-term structural reforms that will help countries maximize the benefits from the global recovery. Key reforms include investing more in infrastructure, improving trade logistics, and liberalizing services and foreign direct investment. And, as many education systems in the region aren’t producing skills demanded in the labor market, the report recommends a comprehensive strategy to address issues ranging from early childhood development to higher education and lifelong learning.

The East Asia and Pacific Update is the World Bank’s comprehensive review of the region’s economies. It is published twice yearly and is available free of charge at www.worldbank.org/eapupdate

1. What is the only thing that makes an economy grow in the long run?

(A) Increases in labor productivity growth

(B) Increases in the price level

(C) Increases in the interest rate

(D) Increases in the labor force

2. Through which of the following combinations do firms produce output?

(A) Capital and productivity

(B) Capital and labor

(C) Labor and productivity

(D) Labor and workers

3. Which of the following is not a form of capital?

(A) Machinery

(B) Knowledge

(C) Workers

(D) Tools

4. Which of the following is not a form of labor?

(A) Children’s work

(B) Adult’s work

(C) Immigrant’s work

(D) Machine’s work

6. What do you call the change in the growth level from year to year?

(A) The growth level

(B) The growth rate

(C) The starting level

(D) The starting rate

7. An increase in the capital utilized in the production process leads to what?

(A) An increase in the price level

(B) An increase in workers’ productivity

(C) An increase in the interest rate

(D) An increase in the savings rate

8.When we state that the economy grows at 3% per year over a period of 30 years, what does the 3% represent?

(A) The growth rate

(B) The growth speed

(C) The growth acceleration

(D) The growth level

9. Why would a politician undertake an economic policy that increases the growth rate but ultimately decreases the growth level?

(A) To improve short term public opinion

(B) To improve the long term economy

(C) To improve the standard of living

(D) To improve the savings rate

DISCUSSION

Activity 1 — The Universal Replicator

This assignment explores the economic implications of an imaginary new technology, called the Universal Replicator. Many issues about growth and change are raised.

Instructions

The Universal Replicator is a machine that can replicate any physical good. If a car is put into the Universal Replicator, the machine will create an exact working duplicate at the touch of a button. It will work on any non-living object.

Assume this technology becomes widely adopted throughout the country by manufacturers of all types of products.

Ask the class to answer the following questions. Give them time to write an answer to a question, then discuss their answers before moving to the next question.

Common Answers, Questions, and Points for Discussion

1. What impact would the Universal Replicator have on the economy?Most students focus on the negative aspects of this technology: job loss, disruption of institutions, chaos.

Some will also see the positive side: the elimination of poverty, the ability to meet all material needs, the elimination of tedious and unsafe jobs.

2. What jobs would not be needed?manufacturing, mining, agriculture, any assembly line job

3. What would happen to the price of goods? The price of goods would drop dramatically.

4. What kinds of problems would you expect?Structural unemployment, recession, waste disposal, idleness, income distribution may become less equitable, skills become obsolete, new legal structures needed.

5. What benefits do you see?More material goods, more leisure time, the ability to devote resources to social problems.

6. What kinds of jobs would still be necessary?Designers, inventors, doctors, teachers, lawyers, police, barbers, etc. Most service jobs will still be needed.

Of course, the Universal Replicator doesn’t really exist but technological change has had very similar effects. For example, look at the long-term advances in agriculture. Two hundred years ago, 80% of the U.S. labor force worked in farming. Today, farming accounts for only 2% of U.S. jobs. Agricultural production has increased tremendously and food prices have decreased substantially.

Manufacturing has followed a similar, but less extreme path. Fewer workers are able to produce more goods at lower costs. The “Deindustrialization of America” has been accompanied by increased industrial output.

As agricultural and manufacturing employment decline, we find more workers in the service sector. Lower prices for agricultural and manufactured goods mean services become relatively expensive. Many public issues, such as concerns about health care, education, and police protection, are affected by this increase in the relative cost of services.

Like the Universal Replicator, technological progress increases material well-being. The same questions remain: What happens to displaced workers? What happens to the distribution of income? How are by-products, wastes, and pollution handled?

Activity 2:

Start out by asking students what factors they believe will lead to greater economic growth in the future.

Question: Are Natural Resources a Limit to Growth? This section points out that as the population has grown over time, we have discovered ways to lower our use of natural resources. Thus, most economists are not worried about shortages of natural resources.