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Thursday, November 15, 2007

Southeast Asia faces challenges in time of prosperity

The gathering of Asian leaders around the 13th Association of Southeast Asian Nations Summit next week in Singapore comes at a moment of historic challenge in a region which, despite great progress in recent years, remains home to most of the world's poor.

Published on November 15, 2007

The year ahead promises another strong economic performance - though in an environment more fraught with risks and uncertainties. According to the World Bank's latest East Asia and Pacific Update, developing East Asia is set to notch 9.7 per cent growth in 2008 (down from 10.1 per cent in 2007) as the world economy hovers around 3.4 per cent this year and the next. But behind the encouraging projection for East Asia are several critical concerns that will occupy policymakers' attention, even as they press ahead with signing the new Asean Charter and implement the blueprint for an Asean Economic Community by 2015.

While Asean and the other Asian leaders meet, attention will also focus on the complex task facing the leadership of China and India. China, having sustained better than 10 per cent growth for 25 years now faces an uncomfortable disparity between income levels on the prosperous coastal zone and the more remote western provinces and generally between urban and rural areas. At the same time, China's environment policy has not been able to cope with its rapid growth. Maintaining high growth while closing the income gap and restoring the environment is a delicate balancing act, and one with implications far beyond China's borders.

India, which has growing engagement with the economies of East Asia, is also confronting a large agenda of reforms as it seeks to maintain high growth rates and lift hundreds of millions more people from poverty.

These could include strengthening policies that improve infrastructure performance, better-designed labour regulations to attract more labour-intensive investment and the creation of jobs for India's under-employed millions.

For the 10 members of Asean, the big questions at the summit will centre first on the cohesion of the grouping itself, both in response to internal issues and growing external competitive challenges.

High on the agenda will be the recent events in Burma, where millions remain in poverty while the rest of the region has been opening and growing. For years, Asean has been concerned about the so-called CLBV group - Cambodia, the Lao PDR, Burma and Vietnam.

Today, the focus is narrower: Vietnam is closer to the wealthier six members and growing strongly; Cambodia is registering double-digit growth and about to receive large revenues from oil and gas discoveries, and the Lao PDR is receiving new investments and reducing poverty after a period of steady reform. Burma remains the most serious cause for concern and the world is looking to the collective counsel of Asean and the broader East Asia Summit members (China, Korea, Japan, India, Australia, New Zealand) to help the United Nations and Burma chart a peaceful way forward - an outcome that could open the way for new economic opportunity and international assistance for the people of Burma.

Each country faces its own set of reform questions, made more pressing by the competitive pressure of China and India in an increasingly fast-paced, open and global marketplace.

The forces which Southeast Asia rode to prosperity in the 1970s, 80s and 90s now have the ability to work against the region unless it accelerates reforms which make it a more attractive and open investment destination. The challenges range from raising the skills and innovativeness of the labour force, to creating sophisticated financial systems, to maintaining social cohesion, to greatly reducing corruption. Without tough policy and institutional changes, countries now at the middle-income level stay where they are.

Malaysia, which has successfully achieved middle-income status, now faces the challenge of accelerating growth to reach developed country status by 2020 while maintaining national cohesion in a multi-racial society. Thailand, after recovering strongly from the financial crisis, has seen international confidence in its economic management shaken by the 2006 coup.

The country is now contending not just with the complexities of an election based on a new constitution, but with the challenge of restoring investor confidence necessary for strong economic growth. Indonesia, having brought the debt burden down spectacularly and generated increasing rates of growth faces the continuing challenge of creating sufficient new jobs for labour market entrants and spreading benefits to the poor. The most populous nation of Asean finds itself with 105.3 million people clustered around the $2-a-day income level, still highly vulnerable to shocks.

Challenges exist also for the smaller economies, with none looming larger than Cambodia's ability to benefit from oil and gas revenues. In many countries, the so-called resources curse has seen such revenues undermine good governance and generate instability.

There are, however, a number of positive examples of managing such resources, and Cambodia's medium-term efforts to reduce rural poverty and improve governance standards will depend heavily on decisions made about productive and transparent management of these additional revenues from oil and gas.

The year ahead is also likely to be memorable as the turning point in the global cycle. After five years of sustained and accelerating expansion, the US economy is slowing and global monetary policies are being tightened. The outlook remains for a "soft landing" and continued expansion, but

one that is weighted with more uncertainties and with greater volatility.

Peter Stephens

Peter Stephens is regional communications manager of the World Bank's East Asia and Pacific Region.


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