macroeconomic performance and policy challenges at the subregional level

8/10/2019 MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES AT THE SUBREGIONAL LEVEL

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ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC2012

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MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES AT THE SUBREGIONAL LEVEL CHAPTER 2

Growth momentum of the developing economies of Asia and thePaci c slowed to 7% in 2011 as compared to 8.9% in 2010. However,as this region is very vast and diverse, aggregate gures maskthe wide differences in performance and challenges being faced atthe subregion and country levels. This chapter, therefore, providesa more disaggregated analysis of macroeconomic performance

and policy challenges at the subregional level with some details atthe country level. In the Survey , the Asia-Paci c region is dividedinto ve geographic subregions, namely East and North-East Asia,North and Central Asia, Paci c, South and South-West Asia andSouth-East Asia. An overview of the macroeconomic performanceand policy challenges of all the subregions is followed by a moredetailed analysis.

MACROECONOMIC PERFORMANCE AND POLICY CHALLENGES

AT THE SUBREGIONAL LEVEL

In terms of crises ...the most and worst impacted ...are somUN recognized vulnerable groups, the least developed coun

the small island developing states

Tuilaepa Sailele Malielegaoi, Prime Minister of Sa

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has the potential to transform our world into one where our future generations may prosper and live in happiness.

Sheikh Hasina, Prime Minister of Bangladesh


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Diverse performance of subregions

The economies of East and North-East Asia grewrobustly in 2011 with the exception of Japan whoseeconomy suffered severely and contracted as a

result of a devastating earthquake and tsunami inMarch 2011 and the ensuing nuclear crisis. Stronggrowth performance early in the year led theGovernments of China and the Republic of Korea topursue normalization of scal policy and tighteningof monetary policy to combat rising consumer prices.Export growth and domestic demand supportedeconomic growth in China, Hong Kong, Chinaand the Republic of Korea, while the steep risein commodity prices and increased mining sectoractivity largely contributed to exceptional economicgrowth in Mongolia. Macao, China also recordeda double-digit growth rate as a result of stronggaming sector performance. However, growth ratesfor many economies in the subregion were lowerthan their 2010 levels, due to the weakening ofthe global economy in the second half of 2011.The deepening debt crisis in Europe increasedvolatility in financial and commodity marketsglobally, leading to a weaker economic outlook andgreater uncertainty for the following export-oriented

economies: China; Hong Kong, China; Japan andthe Republic of Korea.

Most of the economies in North and Central Asiadepend on commodities exports, including oil and gas.Energy exporters, namely Kazakhstan, the RussianFederation, Turkmenistan and Uzbekistan, bene tedfrom favourable external conditions, such as highoil and gas prices and strong global demand forresources, though growth moderated towards the

end of the year as external demand for commoditiesweakened and energy prices started to stabilize.The economic activities in some energy-importingeconomies, such as Armenia and Georgia, werestill subdued in comparison to the pre-crisis period,owing to rising import prices and constrained banklending. Improved labour market conditions in theRussian Federation and Kazakhstan had positivespillover effects through increased remittance owsto the recipient economies, such as Armenia,

Georgia, Kyrgyzstan and Tajikistan. In ation rosein most economies in the subregion, attributed tothe increasing trends in food and commodity prices,though in ationary pressures eased towards the endof the year as global commodity prices deceleratedand food supplies recovered. Energy exporters, ingeneral, enjoyed current account surpluses. However,the reliance of these economies mostly on a singlecommodity is a source of great vulnerability toexternal economic developments.

The Paci c island developing economies generallyface dif culties in generating sustainable economicgrowth given their small populations and remotenessfrom their more developed trading partners and theperiodic effects of natural disasters. The growthperformance of most of these economies improved in2011, dominated by the strong performance of PapuaNew Guinea, the resource rich and largest economyof the subregion. Due to the global slowdown,a slight deceleration in growth performance ofthese economies is expected in 2012. In ationarypressures increased in 2011, with the Marshall Islandsrecording the highest in ation. The budgetary situationimproved generally with a number of economieshaving a surplus budget and others experiencing a

decrease in their budget de cits. On the externalsector side, these economies faced high and risingcurrent account deficits, due mainly to the poorperformance of their merchandise exports. Australiaand New Zealand, the two developed economiesof the subregion, suffered from natural disasters in2011; Australia was hit by oods and New Zealandwas struck by a powerful earthquake. As a result,GDP growth slowed in both countries in 2011 butis expected to improve in 2012.

South and South-West Asia remains one of thefastest growing subregions. Nonetheless, spilloverand uncertainty from elsewhere in the world havemoderated the subregions prospects. Growth, whilestill strong in 2011, was lower than the previousyear, and is expected to moderate further in 2012.However, the growth performance of India is expectedto improve in 2012 from the previous year asmoderating in ation would allow the unwinding of


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the cycle of monetary tightening in the current year,thus unleashing growth impulses. In ation remainsstubbornly high, particularly in goods that directlyaffect the livelihoods of people living in poverty, suchas foodstuffs. However, it has begun to decelerate ina number of countries. Monetary policy in a numberof the countries is shifting towards some form ofmonetary easing. The sizable and growing budgetde cits in many countries in the subregion limit thescope for scal policy measures. Widening currentaccount de cits in a number of countries re ect thesubregions vulnerability to external shocks in therest of the world. As policy focus shifts towardstackling the cyclical effects of a global slowdownon the subregions economies, there is a risk thatlooming structural policy challenges may be ignored.Concerted efforts need to be maintained to tacklethe subregions sizeable poverty headcount andgrowing inequalities, particularly through creatingbetter employment opportunities and overcominginfrastructure bottlenecks.

In 2011, major export-led economies of South-East Asia saw growth moderate from a strong rebound in2010, owing to the base effect but also to generallyweaker global demand for key export items, such

as electronics. Natural disasters also had a severeimpact, especially in Thailand but also in Cambodia

and the Philippines. Meanwhile, Indonesia recordedits fastest growth since the 1997 nancial crisis.In ation edged up in nearly all countries on theback of higher food and commodity prices aswell as robust domestic demand. Fiscal deficitsnarrowed across the subregion, albeit marginally insome countries due to higher subsidy bills. Currentaccount surpluses generally narrowed, but foreigninvestment in ows continued to be strong. In 2012,the subregions open economies should feel thespillover effects of global uncertainties and growthmoderation in China, but domestic demand andpolicy support, coupled with Thailands post- oodrebound, should help the subregion to grow at afaster rate than in 2011.

EAST AND NORTH-EAST ASIA

Resilient growth in 2011 amidgrowing uncertainty

The economies of East and North-East Asia grew3.3% in 2011, down from 6.6% in the previousyear. The slower growth rate can be attributedto the contraction of the Japanese economy andslower growth of several other economies (see

table 2.1).

Table 2.1. Rates of economic growth and in ation in selected East and North-East Asian economies, 2010

(Percentage)Real GDP growth In ation a

2010 2011 b 2012 c 2010 2011 b 2012 c

East and Nort h-East Asia d 6.6 3.3 4.5 1.1 2.2 2.0East and North-East Asia (excluding Japan) d 9.6 7.6 7.1 3.0 4.8 3.7

China 10.4 9.2 8.6 3.3 5.4 4.0Democratic People's Republic of Korea .. .. .. .. .. ..Hong Kong, China 7.0 5.0 3.1 2.4 5.3 3.5Japan 3.9 -0.7 2.1 -0.7 -0.3 0.5Macao, China 26.4 20.0 12.0 2.8 5.8 4.8Mongolia 6.4 17.3 16.0 10.1 9.2 9.2Republic of Korea 6.1 3.6 3.5 2.9 4.0 3.3

Sources : ESCAP, based on national sources; and CEIC Data company Limited. Available from http://ceicdata.com (accessed 19 April 2012).a Changes in the consumer price index.b Estimates.c Forecasts (as of 19 April 2012).d GDP gures at market prices in US dollars in 2010 (at 2000 prices) are used as weights to calculate the subregional growth rates.


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Twelfth Five-Year Plan of Chinamarks a turning point from

emphasizing GDP growth towardsa more sustainable and equitable

growth path

The Chinese economy continued to post stronggrowth in 2011, with its GDP expanding by 9.2%.The slowdown from 10.4% growth in 2010 wasmainly due to the scaling back of public spending,tightening of monetary policy and measures thatwere put in place to cool down the rise in propertyprices. Domestic consumption and gross capitalformation (fixed assets investment plus changein inventory) contributed approximately equally toGDP growth with net trade provided a negligiblecontribution. The share of merchandise exports as apercentage of GDP dropped considerably to about30% from the pre-crisis gure of 38% recorded in2007. Retail sales expanded by 17.1% and xed-assetinvestment grew by 23.8% in 2011 (China, NationalBureau of Statistics, 2012). As the first year ofimplementing the Twelfth Five-Year Plan, 2011 alsomarks a turning point from emphasizing GDP growth

towards a more sustainable and equitable growthpath, for example quality of growth. Accordingly,the Government lowered its average annual GDPgrowth target to 7% for the Plan period (2011-2015)and deepened structural reforms to shift its exportand investment-led growth model to one driven bytechnology and domestic consumption.

In Hong Kong, China, GDP in the first quarterof 2011 grew by 7.5% year-on-year on the back

of a very strong increase in private consumption.In subsequent quarters, GDP growth moderatedsigni cantly as a result of a sharp decrease in exportsof goods as external conditions for trade deteriorated.Meanwhile, export of services and domestic demandprovided impetus for GDP growth and favourablelabour market conditions helped sustain privateconsumption demand and investment spending. Asa result, GDP growth for 2011 moderated to 5%, ascompared to 7% in the previous year. In contrast, the

tourism-based economy of Macao, China recordeddouble-digit growth in 2010 and 2011, supported bya boom in in-bound tourists from mainland China.GDP growth reached 20% in 2011, aided by theincreased arrivals of tourists, higher gaming revenuesand a strong gain in retail sales.

In the Democratic Peoples Republic of Korea, littleor no change in the strained relations with theRepublic of Korea, its largest trading partner afterChina, continued to depress trading activity betweenthe two economies. However, trade with China islikely to have grown. In June 2011, China and theDemocratic Peoples Republic of Korea agreed to buildthree special economic zones on HwanggumpyongIsland, followed by other ones in Rason and Wihwa. 1 The economic zones are expected to strengthen tiesand promote economic cooperation between Chinaand the Democratic Peoples Republic of Korea.In addition, the country signed a memorandum ofunderstanding on 15 September 2011 with Gazprom,a Russian energy company, to construct a trans-Korean gas pipeline. 2 This investment is expectedto provide a big boost to the economy of theDemocratic Peoples Republic of Korea.

In contrast to other economies in the subregion, theJapanese economy contracted in 2011, by about 0.7%as compared to expanding by 3.9% in the previousyear. Following the massive earthquake in March2011 and the ensuing tsunami and nuclear crisis, theeconomy experienced two quarters of contraction dueto disruptions in production, a reduction in consumerspending and a weakened trade balance. Largereductions in electricity supply also hampered therecovery of production activities in the rst half of

2011. The GDP growth rate moved back into positiveterritory in the third quarter of 2011 on the back oflarge-scale reconstruction and rehabilitation efforts.Consumer spending and net exports also postedgains during this period. Nevertheless, maintainingthe growth momentum proved to be challenging ina deteriorating global economic environment. Weakdemand for Japanese exports, exacerbated by theappreciation of the Japanese currency, and fragilelabour market conditions put consumer spending under


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pressure while overseas production of key Japaneseproducts, especially automobiles were greatly affectedby the ooding in Thailand. 3

The Mongolian economy, on the other hand, expandedrapidly, rising 17.3% in 2011 compared to 6.4% in2010. The main contributors of growth were a betterperformance in the mining and extractive industryand increased consumption due to rising incomelevels. Steep rises in the price of copper, gold andespecially coal, the countrys key export commodities,during the first half of the year contributed to amore than 50% increase in exports. The agriculturesector, which accounts for about 20% of GDP, alsoshowed signs of recovery after suffering severely asa result of the dzud 4 in 2009 and 2010.

The economy of the Republic of Korea expandedby 3.6% in 2011 as compared to 6.1% in the yearbefore. It bene ted from strong household spendingand export growth in 2011. While investment in realestate remained at as a result of weak propertymarkets, overall investment rose due to higher outlaysin machinery and equipment. In light of strong privatesector demand and economic activity in the earlymonths of 2011, authorities restrained the growth of

public expenditure to ease in ationary pressure and

normalize its scal policy stance. However, towardsthe end of 2011, as the growth momentum faltereddue to weakening demand from major tradingpartners in developed countries, especially Europe,as well as slower growth in China, its largest tradingpartner, the Government increased public spendingto support economic growth.

Persistently high in ation poseschallenge for policymakers

Following a modest rise in inflation in 2010,consumer prices started to climb more rapidly in2011. Strong demand pull in ation in addition tosupply-push cost rises, especially for food and fuel,led to higher-than-expected in ation. Excess liquiditycreated by loose monetary policy in the aftermathof the economic crisis also contributed to the risein consumer prices.

In China, in ation in 2011 peaked at 6.5% in July,the highest monthly level in three years, and foodprices rose at a much faster rate, climbing 14.8%year-on-year in July, with the price of pork surging56.7%. In subsequent months, in ationary pressureeased slightly and average in ation for 2011 stood

at 5.4% (see gure 2.1). Meanwhile, government

Source : ESCAP, based on national sources; and CEIC Data company Limited. Available from http://ceicdata.com (accessed 19 April 2012).

Note : Data for 2011 are estimates.

Figure 2.1. In ation in selected East and North-East Asian economies, 2009-2011

C h i n a

H o n g

K o n g ,

C h i n a

J a p a n

M a c a o ,

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efforts to slow real estate price rises succeeded instabilizing the market. By the end of 2011, some25.1% of total investment had been deployed intoreal estate development. Notably, the oor area underconstruction increased by 26.4% year-on-year, butsales rose only by 5% (China, National Bureau ofStatistics, 2012). The increased supply coupled withrestrictions on home purchases led to a atteningof residential real estate prices in large cities.

High in ation posed an even larger challenge forpolicymakers in Hong Kong, China and Macao, China.These economies have xed exchange rates, whichconsequently precluded the use of many tools formonetary tightening. In Hong Kong, China in ationrose to 5.3% in 2011 from 2.4% in 2010. The maindrivers of in ation were rising food prices and higherreal estate prices. Low interest rates combined withstrong economic recovery has been fuelling the risein asset prices since 2010. In Macao, China, in ationclimbed to 5.8% in 2011 from 2.8% in the previousyear. As the economy mostly relies on imports foreveryday goods, including food, imported in ationwas the main driver of rising prices .

In ation in the Republic of Korea remained above

the Bank of Koreas target range of 2-3% for mostof the year despite the introduction of various pricestabilization measures, which included freezingpublic utility prices and temporary reductions incustom tariffs. Consumer prices rose 4% in 2011as compared to 2.9% in the previous year.

The Mongolian economy returned todouble-digit in ation during the rst

half of 2011

The economy of Mongolia returned to double-digitin ation during the rst half of 2011, due to highimported food costs, increased economic activity,especially in the mining sector, and a boost ingovernment spending. In ationary pressures easedsomewhat in the second half of 2011 as food pricesstabilized and import demand from China moderated.

Overall, average in ation for 2011 is estimated at9.2% following a rise of 10.1% in 2010.

Japan continued to experience de ation. However,the year-on-year rate of decline in consumer pricesslowed and consumer prices recorded a rise of0.2% in September 2011. As the pace of economicrecovery increases with more funds being deployedfor reconstruction and exports recovering, in ationis likely to turn positive in 2012, after consumerprices contracted about 0.3% in 2011.

Fiscal policy normalizes as private sectordemand replaces government spending

On the back of strong household consumption andprivate sector investment that accompanied theeconomic recovery, Governments of economies ofthe subregion focused on normalizing scal policyto prevent putting additional upward pressure onprices. For example, in 2011, the Government ofChina considerably reduced its investments in xedassets.

In China, the budget de cit in 2011 was about 2%of GDP, higher than the 1.7% recorded in 2010

but an improvement from 2.8% in 2009 (see gure2.2), (IMF, 2012a). The improvement in 2011 resultedfrom increased tax receipts and the Governmentwithdrawal of stimulus spending. The Governmentannounced plans to reform the income tax systemto improve growing income disparity. Also, as part ofthe harmonious society programme, the Governmentplans to increase spending on social securitymeasures, education and health care, which is likely tolead to increased spending in the near future. While

the national Governments budget de cit is kept ata relatively low level, there is growing concern overthe scal situation of local governments.

Hong Kong, China recorded a budget surplus ofabout 4% of GDP in 2011, after posting a surplusof 4.9% of GDP in the previous year. The surplusresulted despite the 6,000 Hong Kong dollar(US$772) cash hand-out given to all permanentresidents to provide temporary relief from rising


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to battle strong in ationary pressure. As discussedearlier, a combination of factors pushed consumerprices to uncomfortably high levels during the year.Striking a balance between containing price rises andsupporting economic activity, given the deepeningdebt crisis in Europe and weak recovery in theUnited States of America and Japan, presented akey challenge for monetary authorities.

The Peoples Bank of China raised interest ratesve times in 2011, lifting benchmark rates to 6.56%,

starting from 5.81% at the beginning of 2011, inresponse to the high levels of in ation. Additionally,reserve requirement ratios were increased ninetimes during the year to absorb excess liquidity.Inflation peaked in July 2011. Since then, it hasdecreased slightly as a result of weakened demandfrom developed countries and stabilization in thesupply of staple food products and the real estatemarket. Looking ahead, monetary policy may not beeased in 2012 in order to further contain in ationarypressures to protect low-income households from thedisproportionately negative impact of rising prices.The monetary authorities of Hong Kong, China, haveput in place stricter restrictions on mortgage lendingby nancial institutions as a way to lower borrowing

and limit property price rises from transmitting toin ation. However, given the continued loose monetarystance in the United States, upward pressure onprices is likely to persist for the time being. Macao,China is likely to face the same situation due tothe authorities limited ability to impose quantitativetightening measures to tackle in ation .

In contrast, persistent de ation continues to plaguethe Japanese economy. Even before the disaster,

the Bank of Japan announced a comprehensivemonetary easing programme to inject more liquidityinto the market by purchasing government securities,corporate bonds, commercial paper and real estateinvestment trusts and to keep the interest ratebetween 0-0.1% until prices stabilize.

The monetary authority of the Republic of Koreaannounced that it would take small steps towardsnormalizing monetary policy. Following the

announcement, the Bank of Korea hiked interestrates in increments of 25 basis points ve timessince mid-2010. However, growing concern overthe global economy and deteriorating demand ledto a halt in tightening. The main policy rate hasbeen kept at 3.25% since July 2011. The Bank ofMongolia also actively tackled high in ation throughmonetary tightening and in 2011 the main policyrate was increased several times.

Rise in trade moderates amid weakeningglobal economic environment

Export and import growth of merchandise in thesubregion moderated signi cantly during the secondhalf of 2011, re ecting broad-based weakening indemand from the United States and developedcountries in Europe. Growth of exports of China, fellfrom 23.4% recorded in July to 14.4% in October,mainly due to declining demand from Europe.Imports also moderated in line with exports, but toa lesser degree. While a large proportion of importsconsist of raw material and intermediate parts usedin the production of goods destined for developedmarkets, import of consumer products has alsoincreased, re ecting the growing purchasing power

of Chinese households. In addition, the servicesde cit increased in 2011 due to a large increasein outward travel by Chinese tourists. These factorstogether contributed to the fall in the current accountsurplus to 3% of GDP in 2011 from 5.2% of GDPin 2010 (see gure 2.3).

The normally large current accountsurplus of Japan shrank in 2011 as

a result of the adverse impact ofearthquake and tsunami

Export of goods also moderated considerably in HongKong, China in the second half of 2011 but export ofservices remained strong due to double-digit growth oftourism-related earnings. The large surplus in servicestrade kept the economys current account surplus ata high level of 5.1% of GDP in 2011. Strong inbound


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Sources : ESCAP, based on national sources; and CEIC Data Company Limited. Available from http://ceicdata.com (accessed 19 April 2012).


C h i n a

H o n g

K o n g ,

C h i n a

J a p a n

M o n g o

l i a R e p u

b l i c o

f K o r e a

2009 2010 2011-35

-30

-25

-20

-15

-10

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0

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f G D P

Figure 2.3. Current account balance in selected East and North-East Asian economies, 2009-2011

tourism also was the key factor driving the hugecurrent account surplus in Macao, China.

The normally large current account surplus of Japanshrank in 2011 as a result of the earthquake andtsunami. As a percentage of GDP, the current accountsurplus decreased to 2.1% in 2011 from 3.6% in2010. Import demand to aid reconstruction efforts andto make up for the shortfall in production increased

signi cantly. The disruptions in production coupled withthe extraordinarily strong yen led to a fall in exportsthrough the second quarter of 2011. The tourism sectoralso struggled as inbound tourism stalled in the wakeof the natural disaster and due to the strong yen.Export levels returned to pre-crisis levels in July withmanufacturing activity picking up in the third quarter.However, as was the case in other export-orientedeconomies of the Asia-Paci c region, Japanese exportgrowth moderated in the later months of 2011 .

The Republic of Korea, after experiencing verystrong growth in manufactured exports during theearly months of 2011, saw signi cant declines inexport growth in the second half of 2011. Mainmanufactured exports bene ted from the relativelyweak currency and the disruptions to productionexperienced by rival Japanese exporters. However,export growth decreased from 29.6% in the rstquarter to 9.3% in the month of October due to

the fall-off of demand from major trading partnersin Europe, the United States and especially China.Import growth was sustained at relatively high levelsduring the year, leading to the narrowing of thetrade surplus. Overall, the current account surplusdecreased to 2.2% of GDP in 2011 from 3.4% ofGDP in 2010 (OECD, 2012).

Mongolian exports saw strong growth in 2011

on the back of rising demand for coal and othermining products as well as the steep increase inthe price of gold. Export earnings are expectedto get another boost with the start of operationsat the Oyu Tolgoi mines in 2013. Import demandincreased to a greater extent due to surging demandfor equipment and machinery required to developthe Oyu Tolgoi mines. As a result, the trade de citincreased sharply in 2011 and the current accountde cit widened to 30% of GDP from 14% of GDP in

2010. Financing such a large current account de citwas not a problem since foreign direct investment(FDI) reached a record level of $5.3 billion in 2011(World Bank, 2012c).

Capital in ows to the subregionnegatively affected

During the rst half of 2011, capital in ows to thesubregion surged as a result of a strong economic


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Future outlook and policy challenges

The economies of the East and North-East Asiasubregion in general are expected to expand atslower rates in 2012 with the growth momentum setto stall due to the impact of the likely recession inEurope and sluggish growth in the United States.

Although governments have shown a commitmenttowards containing the European debt crisis, austeritymeasures that are likely to be placed in the eurozone economies will reduce demand for exports fromthe subregion. Also, similar to the situation during theglobal economic crisis, risk aversion among investorsand the banking sector could lead to tightening oftrade nancing in emerging economies. Given thecurrent trend of weakening global growth, the keypolicy challenges for most of the economies in thesubregion are balancing in ation risk with short-termgrowth concerns, and coping with a slowdown ineconomic activity in China.

Economic growth in China is forecast to slowto 8.6% in 2012. The Government of China hasbeen steering the economy towards a soft landingin order to combat upward pressure on prices.The focus of policy will be to rebalance growth

in support of domestic consumption. Governmentefforts to increase consumption as a share of GDPmade some headway in 2011 and the economystraditionally large current account surplus as apercentage of GDP narrowed. As in ationary pressuresubsides in 2012, the authorities will have moreroom to ease monetary and scal policy to supportgrowth if needed. Economic growth in Hong Kong,China is also expected to moderate in 2012, withGDP projected to expand by 3.1%. While private

consumption and inbound tourism from mainlandChina is forecast to remain strong, export demandis likely to contract, leading to slower growth. ForMacao, China, GDP growth is projected to remainstrong but moderate to 12% in 2012.

The Japanese economy is expected to beginexpanding again, with the GDP projected to grow2.1%, aided by reconstruction demand and a recoveryin the export manufacturing sector. While industries

in Japan are rapidly recovering, the disaster acted asa catalyst, hastening the move of many productionfacilities overseas. On the one hand, the expansionof Japanese rms overseas production is a strategicdecision to better meet growing overseas demandand reduce production costs as well as to hedgeagainst large-scale disasters in the future. However,on the other hand, there is risk that growingoverseas production will lead to a contraction ofdomestic production activity and job loss. Given thatthis trend is likely to continue, growth of innovativehigh-value added product manufacturing will becomeincreasingly important for the economy. Also, theissue of the Governments scal position continuesto weigh heavily on the economy. The governmentbond market still enjoys the support of domestichouseholds and firms. However, fresh demandsfor reconstruction and the countrys rapidly ageingpopulation raise the need for greater governmentsupport. It is critical for the government to developa credible plan for scal consolidation.

Mongolia, in contrast to other economies in thesubregion, is expected to record double-digit growthin 2012, of around 16%. Although, the downsiderisk of rapidly falling commodity prices due to a

global downturn in economic activity remains, largeincreases in the supply of minerals could providea respite and even outpace the deterioration in theterms of trade. Also, rapidly growing investment inthe mining sector and infrastructure connected tomining activities is set to continue, contributing todomestic demand.

The economy of the Republic of Korea faces verystrong headwinds in 2012 with the GDP growth rate

projected to fall to 3.5%. The sharp slowdown inprivate consumption and investment, which began inthe third quarter of 2011, is poised to continue wellinto 2012. One of the key concerns for policymakersis the rapidly ballooning household debt. The gradualrise in interest rates since 2010 has compoundedthe household debt problem by increasing the debtservicing cost for households. Moreover, data indicatethat a large portion of household debt is owed bythe lowest 20% income bracket, with their disposable


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income to debt ratio exceeding 300%. Measures tocurb further rises in household debt could have anadverse effect of sti ing private consumption at atime when it is most needed to support the economydue to weak external demand. Furthermore, stagnantproperty markets continue to put a damper on theeconomy, resulting in a rapid slowdown in xedasset investment and the construction sector. Thegovernment is responding with various measures torevive the property market but thus far, they havehad only a limited impact. The key to solving themixed bag of policy challenges lies in supportingincome growth of low- to middle-income householdsby widening the scope of social protection measuresand providing incentives to rms to create moredecent jobs.

Despite improving labour market conditions in thesubregion, wage increases have not kept up withthe rising cost of living. The lagged responseof the labour market carries dual risks in the

coming months. The rst risk is that a worseningglobal economic outlook would keep real wagessuppressed and in the face of falling real wages,households would cut back on spending, leadingto a fall in domestic demand. The second risk isthat wages would rise, which in turn spur a secondround of price hikes throughout the economy. Inaddition to the overall impact on the economy,from a socio-economic standpoint, high in ation,especially the steep rise in the price of food andfuel experienced in 2011, disproportionately affectedlow-income families and widened the incomegap (see box 2.1). Given that domestic demandwill have to replace the loss in demand fromdeveloped countries, supporting domestic demandshould be a top priority. It is therefore important

that government policy aims to broaden supportto low-income households in order to address theissue of both strengthening domestic demand andpreventing the deterioration of living standards fora large number of households.

In the a ermath of the global economic crisis, the visible rise in income inequality has become the focus of a en on for policymakersworldwide. The East and North-East Asian subregion is not an excep on. Despite the subregions economic resilience and the targetedmeasures that were put in place to protect the vulnerable groups from the impact of the crisis, the economic crisis resulted in awidening of the income gaps in the countries which had been deteriora ng during the last two decades (see table A). The erosionof the spending power of low- and middle-income groups and the concentra on of wealth at the top will have an increasinglynega ve impact on the growth poten al of not only the subregional economies but the global economy also. This is because low-

Box 2.1. Growing income inequality in East and North-East Asia

Table A. Gini coef cient of selected economies of East and North-East Asia

China a Japan b Mongolia Republic of Korea b

1985 0.32 0.35 - -

1990 0.35 - - 0.271995 0.41 0.40 0.31 c 0.272000 0.43 0.43 0.35 c 0.282005 0.46 0.44 0.33 d 0.302010 0.47 0.46 0.37 d 0.32

Sources : As given below.a Juandong Chen, Dai Dai, Ming Pu, Wenxuan Hou and Qiaobin Feng (2010). The Trend of the Gini Coef cient in China, Brooks World Poverty

Institute Working Paper 109. Available from http://www.bwpi.manchester.ac.uk/resources/Working-Papers/bwpi-wp-10910.pdf.b OECD StatExtracts. Calculations based on equivalized household market income before taxes and transfers.c Frederick Nixson and Bernard Walters (2004). Privatisation, Income Distribution and Poverty: the Mongolian Experience, Report

submitted to UNDP M ongolia.d World Bank, World Development Indicators and Global Development Finance online database. Available from http://databank.worldbank.

org/ddp/home.do?Step=12&id=4&CNO=2.


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and middle-income groups are required to play a cri cal role in rebalancing and sustaining growth by genera ng domes c demandin the face of sluggish exports.

Impact of the global economic crisis on income distribu on

The subregions high dependence on trade with developed countries resulted in a massive decrease in aggregate demand forexports during the global economic crisis. This, in turn, led to a signi cant rise in unemployment, especially in the construc onand manufacturing industries whose labour force is mainly composed of low-skilled and low-income workers. At the same me,the slowdown of the economy put downward pressure on wages which did not bounce back fully despite the economic recoveryand improvements in the labour market. A sluggish recovery in advanced economies, intensive price compe on and the limitedbargaining power of labour unions due to growing economic uncertainty all contributed to capping the rise in real wages, par cularlyfor vulnerable workers including youth and less-skilled workers. Moreover, high in a on in 2011 meant that many workers in the

low- and medium-income groups experienced a net fall in real wages. In contrast, rapid increases in the value of nancial assetsaided by loose monetary policy greatly contributed to the rise in household incomes at the higher end of the income distribu on.In other words, the economic crisis accelerated the trend of growing inequality by nega vely a ec ng the wages of the low- andmiddle-income groups and inadvertently transferring wealth to the higher-income groups during post-crisis periods by fuelling assetbubbles that almost exclusively bene ted these groups.

Addressing growing inequality through promo ng job-rich growth

Growing inequality is a mul faceted and complex issue. It is driven by such factors as demographic shi s, such as popula on ageing,which is occurring most rapidly in the East and North-East Asia subregion, and persistent income gaps between rural and urban

areas, which is prevalent in China. However, the primary driver of inequality is the shortage of decent jobs, especially for less-skilledworkers. Looking at annual growth of GDP in East and North-East Asian economies (see table B), it is clear that economic growthhas not been job-rich. In fact, available data show that economic growth alone is not su cient to generate decent jobs for all. InMongolia, for example, between 1996 and 2006, the share of the workforce engaged in the agricultural sector fell from 49.5% to38.8% but their share of na onal income fell even further from 37% to 18.8%, indica ng a rela ve fall in income of those workingin the agricultural sector. In comparison, the share of GDP produced by the industrial sector, including mining, went up from 20.6%to 40.3% while employment in that sector increased by less than 2 percentage points from 15.5% to 17.3% (World Bank, 2011b). Thereason for slow job growth in the mining sector is due to the capital intensive nature of the work as well as the highly specializedskills-set required. In this sense, growing inequality is in many ways the result of increasing demand for and higher returns to highlyskilled and highly educated workers.

Box 2.1. (continued)

Table B. Annual growth of GDP and employment in East and North-East Asian economies, 2001-200

(Percentage) Aver age GDP g rowth Aver age employmen t growth

China 10.5 0.9Japan 1.4 -0.1Mongolia 8.2 3.2Republic of Korea 4.4 1.4

Source : ESCAP (2011). Economic and Social Survey of Asia and the Paci c 2011 . United Nations publication Sales No. E.11.II.F.2.


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Table 2.2. Rates of economic growth and in ation in North and Central Asian economies, 2010-2012


2010 2011 b 2012 c 2010 2011 b 2012 c

North and Central Asia d 4.6 4.7 4.3 7.1 8.8 5.5 Armenia 2.6 4.3 3.8 8.2 7.8 4.8 Azerbaijan 5.0 0.1 4.0 5.7 8.1 5.1Georgia 6.4 6.8 6.0 7.1 8.5 2.9Kazakhstan 7.0 7.5 6.2 7.1 8.3 5.5Kyrgyzstan -1.4 5.7 5.0 8.0 16.9 4.0Russian Federation 4.0 4.3 3.8 6.9 8.4 5.0Tajikistan 6.5 7.4 6.0 6.5 12.5 8.0Turkmenistan 9.2 9.9 7.2 12.0 15.0 10.0Uzbekistan 8.5 8.3 8.0 9.4 13.5 12.5

Sources : ESCAP calculations based on national sources; data from the Interstate Statistical Committee of the Commonwealth of Independent States. Available from www.cisstat.com (accessed 30 March 2012); and CEIC Data Company Limited. Available from http://ceicdata.com (accessed 19 Apr il2012).

a Changes in the consumer price index.b Estimates.c Forecasts (as of 19 April 2012).d GDP gures at market prices in US dollars in 2010 (at 2000 prices) are used as weights to calculate the subregional growth rates.

NORTH AND CENTRAL ASIA

GDP growth bene ts from highcommodity prices, while risks mount

With favourable terms of trade supporting growthof domestic demand, the North and Central Asiansubregion registered an average GDP growth of

4.7% in 2011, after growing by 4.6% in 2010,


In recent years, the rapid convergence in technology has led to intensifying price compe on in the global market for manufacturedproducts in par cular. This, in turn, has created demand for a exible labour force in the subregion, leading to a vast increase inthe share of part- me and temporary workers who are mostly underemployed and underpaid. In the Republic of Korea, between2002 and 2006, the share of non-regular employment increased from 27% to 37%. This translated into a loss of 400,000 regular jobs and the crea on of more than 1.8 million non-regular jobs (Kim, 2011). To tackle the growing income disparity between thosewith regular jobs and non-regular jobs and the underlying issue of unemployment, the Government recently proposed greater job-sharing by the countrys large rms.

Fundamentally, the crea on of decent jobs has the most poten al for reversing the trend of growing inequality. Also, addressingthe educa on inequality or the inequality in opportunity that prohibits social mobility is far more e ec ve in narrowing the incomegap than redistribu on policies alone.

Source : ESCAP.

despite the deterioration of the global economicenvironment (see table 2.2). Energy exporters inthe subregion - with the exception of Azerbaijanwhere oil and gas production slowed - bene tedfrom favourable external conditions, such as highoil prices and strong global demand for resources.However, growth moderated towards the end of theyear as external demand for commodities weakened

and energy prices started to stabilize. The economic


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mainly driven by the nancial and manufacturingsectors. A recovery of the agriculture sector from thepoor harvest in the previous season and increasedremittance ows from the Russian Federation, whichaccounted for more than half of the total remittances,also contributed to growth.

In Kazakhstan, the economic recovery continuedto be strong, supported by robust external demandfor oil and mineral products and improved domesticconditions, including, among other factors, decentreal wage growth, low unemployment and continuedgovernment investment. A sharp increase in thegrain harvest boosted agricultural output, enablingthe sector to rebound from the 2010 drought. Theeconomy expanded by 7.5% in 2011, mainly drivenby the oil-related manufacturing and services sectors.To boost competitiveness, the country needs to putmore effort in industrial restructuring for diversi cationand institute more market-based reforms.

The Russian Federation has alarge impact on other economies

in the subregion through trade andinvestment channels

After suffering from political and social instability in2010, the Kyrgyzstan economy bounced back quicklyin 2011, expanding 5.7% on the back of stronggrowth in the mining sector in response to record-high gold prices and increased public spending onconstruction. The economy also bene ted from thereopening of borders with Kazakhstan and Uzbekistanafter they were shut in 2010 due to the politicalturmoil. Rising international assistance also playeda supportive role in economic expansion. However,the economy continued to be highly dependent onthe economic performance of the Russian Federationand Kazakhstan as sources of external demandand remittance in ows.

The economy of the Russian Federation, which hasa large impact on other economies in the subregionthrough trade, investment and remittance channels,

activities in some energy-importing economies,such as Armenia and Georgia, were still subduedin comparison to the pre-crisis period, owing torising import prices and constrained bank lending.Improved labour market conditions in Kazakhstanand the Russian Federation had positive spillovereffects through increased remittance ows to therecipient economies, such as Armenia, Georgia,Kyrgyzstan and Tajikistan.

In Armenia, the economy grew by 4.3% in 2011,following a 2.6% expansion in 2010. Growth was ledby the industrial sector, which bene ted from highglobal prices for mining and metallurgy products. Arebound of the agriculture sector from the severedrought in 2010 as well as increased remittance

ows from the Russian Federation also contributedto growth, while the construction sector remainedsubdued. Nevertheless, the country remains highlyexposed to external shocks as it relies heavily onremittances and of cial transfers, and much of itsexport revenue is generated from commodities. Anarrow export base, geographical isolation due toclosed borders with Turkey and Azerbaijan, andhigh dependence on the Russian Federation andthe Islamic Republic of Iran for its energy supplies

are sources of vulnerability. 5

Economic growth of Azerbaijan slowed to only 0.1%in 2011, after growing by 9.3% in 2009 and 5%in 2010, as oil and gas production was temporarilyinterrupted due to maintenance to several majoroil elds. The oil sector had been the main driverto the economy in recent years with its productionaccounting for more than half of GDP and 90% of totalexports. In contrast, a buoyant performance of the

non-oil sector propelled by public investment projectsand the implementation of policies to minimize thecountrys dependence on the oil sector contributedto the expansion of the economy in 2011.

Georgia, which suffered from a contraction ineconomic growth in 2009 as a result of a militarycon ict during the previous year, saw its economyrebound to positive growth of 6.4% in 2010. Theeconomy maintained robust growth at 6.8% in 2011,


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continued to grow modestly, expanding by 4.3% in2011 with a slightly higher rate than in the previousyear. High in ation dampened private consumptionin the first half of 2011, while lowered inflation,favourable oil prices and a good harvest contributedto the stronger economic activity in the second half.Labour market conditions improved as evidencedby a decline in the unemployment rate from 7.5%in 2010 to 6.6% in 2011, 6 though it still remainedabove the level seen prior to the 2008-2009 nancialcrisis. Investment activities also remained subdued,and the stock market was affected heavily by theworsening global risk climate.

In Tajikistan, economic growth remained strong at7.4% in 2011, up from 6.5% in the previous year.The high level of growth in 2011 was supportedby consumer demand resulting from increasedremittances from overseas workers as nearly half ofthe labour force works abroad, mainly in Kazakhstanand the Russian Federation. It was also driven bya surge in export earnings on the back of strongerglobal demand for the countrys main exports, suchas aluminium and cotton. However, the industrialsector continued to grow at a low rate and willremain susceptible to problems in the power sector,

with the country facing periodic blackouts. In addition,Tajikistan is highly dependent on international aidfor food supplies and infrastructure projects, makingit particularly vulnerable to deteriorating globaleconomic conditions.

Turkmenistan has been one of the fastest growingeconomies in the subregion. Its robust growthmomentum continued in 2011, with the economyexpanding by 9.9% after growing by 9.2% in

previous year. This high growth was fuelled bya rise in gas exports to China and the IslamicRepublic of Iran. The increase in gas sales boostedgovernment revenue, paving the way for largepublic investment in construction and infrastructureprojects, which also contributed to the economysrobust expansion. Gas exports are expected tocontinue to be the major driver of the countryseconomic expansion as well as the main sourceof government revenue.

Uzbekistan continued to be the steadiest economyin the subregion, with its GDP growing by 8.3% in2011, following growth of 8.5% in 2010 and 8.1%in 2009. The economic expansion was supportedby a strong performance of the services sectorand favourable global prices for the countrys mainexports, including cotton, gas and gold. A sharprise in remittance ows, a reduction in personalincome tax, hikes in public-sector wages and socialbene ts helped sustain private consumption growth.

Also contributing to the expansion of the economywas increased FDI ows as well as funding fromthe Fund for Reconstruction and Development ofUzbekistan for investment in infrastructure and thedevelopment of the hydrocarbon sector.

In ation remains high but starts todecelerate

In ation rose in all countries in the subregion exceptfor Armenia (see gure 2.4). In ationary pressureswere particularly high during the rst half of 2011due to the rising trends in commodity prices.The impact of domestic food inflation has beenespecially drastic as food comprises about half ofthe consumption basket in the subregions economies,

some of which are highly dependent on importedfood. In ationary pressures eased towards the endof the year as global commodity prices deceleratedand food supplies recovered.

Consumer prices in the Russian Federationincreased by 8.4% in 2011, partly due to strongnominal wage growth. Inflation deceleratedsomewhat in the second half of the year as theimpact of the 2010 drought diminished. Nevertheless,

increased demand, the weakening of the roubleand further adjustments in regulated prices weresome of the main sources of sticky in ation. InKazakhstan, in ation also remained high at 8.3%in 2011, above the central banks in ation targetband of 6-8%. In Azerbaijan and Georgia, in ationaccelerated in 2011 but remained at a single-digitlevel. In ationary pressures resulted from boomingglobal commodity prices as well as rising domesticprices of agricultural products, though they eased


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Sources : ESCAP, based on national sources; data from the Interstate Statistical Committee of the Commonwealth of Independent States. Availablefrom www.cisstat.com (accessed 30 March 2012); and CEIC Data Company Limited. Available from http://ceicdata.com (accessed 19 April 2012).


A r m e n i a

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Figure 2.4. In ation in North and Central Asian economies, 2009-2011

slightly towards the end of the year due to agradual decline in food prices coupled with slowereconomic growth and weaker domestic demand.

Armenia is the only country in the subregion that

experienced slower in ation than 2010. A strongrecovery in the agricultural sector served to containfood price in ation, especially in the second halfof 2011.

Consumer price inflation reached double-digitrates in Kyrgyzstan, Tajikistan, Turkmenistanand Uzbekistan in 2011. Inflation in Kyrgyzstanaccelerated to 16.9%, the highest level in thesubregion, triggered by the economys return to

positive growth and the pass-through of highimport prices for food and fuel. Notably, thecountry experienced this high rate of in ation eventhough in ationary pressures trended downwardsin the second half of 2011. In ation in Tajikistanshot up by 12.5% in 2011, from 6.5% in 2010,due to rising global prices of food and oil asthe country imports most of its food and fuel.Inflationary pressures were further exacerbatedby an increase in gasoline export duty set by

the Russian Federation. Despite the Governmentsprice controls and subsidies on utilities and basicfoodstuffs, in ationary pressures remained strongin Turkmenistan, owing to high global food and

commodity prices and increased investment inthe energy sector development. In Uzbekistan, theGovernments price controls on food and energyhelped limit in ationary pressures. However, elevatedcommodity prices and the depreciation of the localcurrency heightened imported in ation. The gradualwithdrawal of subsidies on electricity and hikesin public-sector wages and bene ts also exertedupward pressure on in ation.

Key macroeconomic policy developmentsand impacts

Improvement in scal balances

Energy-exporting countries, in general, had relativelylow budget de cits or surplus budgets in 2011 whilemost of the other countries experienced lower budgetde cits in 2011 (see gure 2.5). Notably, Tajikistan hada small surplus while Kyrgyzstan was the only country


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in the subregion that had a large budget de cit in2011, which also increased from the previous year.

Among the four countries with a surplus budget,Turkmenistan witnessed a boost in its revenues dueto higher gas sales. Even though the Governmentdeployed substancial funds for construction andinfrastructure projects, the budget remained in surplus,

equivalent to 0.5% of GDP in 2011. Regulatoryreforms, such as the introduction of international

nancial reporting standards in the banking system,have helped increase the countrys transparency.Despite extensive social spending and the grantingof salary increases for public sector employees,Tajikistan had a fiscal surplus of 0.8% of GDP2011, thanks to increased tax revenue stemmingfrom its strong economic growth.

The Russian Federation had a modest budget surplusof 0.8% of GDP in 2011 after registering a de citof 4% in 2010. However, the budget continued torely on revenues from the hydrocarbon sector asits non-oil de cit was about 10% of GDP in 2011.Uzbekistan continued to post a small surplus,equivalent to 0.4% of GDP in 2011 as higherrevenues stemming from strong economic growthmore than compensated for increased infrastructureand social spending and a one percentage point

reduction in the pro t and personal income tax,which came into effect in 2011.

Among energy exporters, Azerbaijan was able tomaintain its scal de cit at 0.9% of GDP in 2011.The State Oil Fund of the Republic of Azerbaijan(SOFAZ) continued to be a major source of thestate budget revenue, providing nearly 60% of the

proceeds. It also helped to nance social spendingand infrastructure projects. In Kazakhstan, the budgetde cit slightly improved to 2.2% of GDP in 2011from 2.5% of GDP the year before. The increasedgovernment expenditure mainly targeted socialsecurity bene ts and education. Government revenuealso rose, supported by higher oil prices and a hikein the oil export duty as well as sustained strongeconomic growth. An increase in tax revenue wasfurther supported by the introduction of a progressive

income tax, which came into effect at the start of2011 and replaced the old at-rate income tax.

The energy importing countries registered budgetde cits, but balances improved due to increasedtax revenue. The budget de cit of Armenia wasequivalent to 2.8% of GDP in 2011, down from4.9% in 2010, owing to improved tax and customsadministration, which included a crackdown on taxevasion. In Georgia, the budget de cit dropped to

Sources : ESCAP, based on national sources; Asian Development Bank, Key Indicators for Asia and the Paci c 2011 (Manila, 2011); and International

Monetary Fund, 2011 Article IV Consultations . Available from www.imf.org/external/ns/cs.aspx?id=51 (accessed 30 March 2012).Note : Data for 2011 are estimates.

-12

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Figure 2.5. Budget balance in North and Central Asian economies, 2009-2011


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3% of GDP in 2011 as compared to 6.6% of GDPin the previous year, due to a large increase intax revenue. The Government of Georgia increasedspending on infrastructure in 2011, partly nancedby loans from international organizations. In contrast,Kyrgyzstan struggled with a widening budget de cit,which stood at 8.3% of GDP in 2011 as comparedto 6.5% in 2010. The wider de cit can be attributedto continuing high social spending and the costsfor reconstruction in the south. Also, an increase inpublic sector salaries added to already-high publicspending, while sales of public assets served tonarrow the nancing gap.

Central banks gradually shifting their focus fromcombating in ation to supporting growth

Most central banks in the subregion implementedmonetary tightening measures to combat in ationarypressures and maintain exchange rate stability,particularly during the rst half of 2011. However, asgrowth momentum moderated and downside risksto the global economic growth increased towardsthe end of the year, the subregions central bankstended to shift their policy stance to a wait-and-seeapproach. A loosening of monetary conditions has

already taken place in Armenia, Georgia, Kazakhstan,the Russian Federation and Tajikistan, and furthereasing is possible throughout the subregion.

In 2011, central banks in the subregion took varioussteps to support their respective economies. Thecentral bank of Azerbaijan lifted its policy rate, there nancing rate, by 200 basis points in March and by25 basis points in May to 5.25%, and also increasedthe reserve requirements on banks liabilities from

2% to 3% in May. The central bank of Kyrgyzstanraised its policy rate and the reserve requirementratio and increased sales of its short-term notes tocombat rising in ationary pressures. However, theeffectiveness of banks actions continued to be limiteddue to the countrys underdeveloped nancial sector.In Uzbekistan, the central bank continued to allow itscurrency som to depreciate in an attempt to supportexports and boost the countrys competitiveness inboth the global and regional markets .

As downside risks to the global economy startedto grow and inflationary pressures eased in thesecond half of 2011, the central banks in thesubregion shifted their focus from taming in ationto supporting growth. The central bank of Armeniaraised its re nancing rate by a total of 125 basispoints from February to April 2011 over concerns ofin ationary pressures stemming from higher globalfood and energy prices. However, as in ationarypressures eased, the bank reduced the rate by 50basis points to 8% in September. Notably, movementsin the re nance rate have only a limited impacton in ation due to the countrys underdevelopeddomestic financial market. Monetary tighteningcontinued in Georgia in early 2011 with the countryscentral bank boosting the reserve requirements forforeign currency liabilities in January and raisingthe re nancing rate by 50 basis points to 8% inFebruary. As in ation concerns abated in midyear,the central bank shifted its policy stance towardssupporting growth and lowered the re nancing rateby a total of 150 basis points to 6.5% between June2011 and January 2012. The bank also loweredthe reserve requirements to stimulate the long-term

nancing for commercial banks.

The central bank of Kazakhstan formally abolished itstrading band for the national currency and introduceda managed oat system in February 2011, thoughit continued to intervene in the foreign exchangemarket for fear of rapid appreciation. The bankraised the re nancing rate by 50 basis points to7.5% in March 2011, but easing in ationary pressuresallowed it to cut the rate back to 7% in February2012. The central bank of the Russian Federationis gradually moving towards a oating exchange

rate from a dual-currency basket consisting of 55%dollars and 45% euros, with the bank interventioncon ned to preventing excessive currency volatility.In ation-targeting was introduced for the rst time,with a target band of 5-6% for 2011. The bankundertook monetary tightening during the firsthalf of 2011, including lifting its policy rate andraising the reserve requirements. The policy ratewas lowered to 8% in December 2011 as pricepressures moderated. This action implied that the


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2009 2010 2011

A r m e n

i a

A z e r b a

i j a n

G e o r g

i a K a z a

k h s t a n

K y r g y z s t a n

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i a n

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d e r a

t i o n

T a

j i k i s t a n

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Sources : ESCAP, based on national sources; and International Monetary Fund, International Financial Statistics online database. Available from http://elibrary-data.imf.org/ (accessed 30 March 2012).


Figure 2.6. Current account balance in North and Central Asian economies, 2009-2011

banks concerns had shifted towards the increasingrisks to growth due to the deteriorating economicoutlook. The central bank of Tajikistan increasedits re nancing rate by a total of 175 basis pointsto 10% in March and October 2011 to cope withhigher in ationary pressure and excess liquidity inthe banking sector. Despite the banks intervention inthe currency market to slow the pace of depreciation,the national currency declined about 8% against thedollar in 2011. After in ation eased at the end ofthe year, the central bank reversed the direction ofre nancing rate, cutting it by a total of 100 basispoints to 9% by February 2012 to keep a stablemoney supply in circulation.

Robust export growth, but outpaced byimports

Most energy exporters continued to enjoy a boostin export earnings and trade as well as currentaccount surpluses due to increased export volumesand favourable export prices, while energy importerssuffered current account de cits (see gure 2.6).

Among the net energy exporters, Kazakhstan, theRussian Federation and Uzbekistan recorded positiveand improved current account balances.

Energy exporters continued to enjoya boost in export earnings, whileenergy importers suffered current

account de cits

Kazakhstan maintained its current account surplusin 2011, equivalent to 4.4% of GDP, owing to alarge trade surplus that was boosted by rising oilproduction volumes. In August 2011, the countryscentral bank started to buy re ned gold products inthe country to restock its gold reserves and to easeits exposure to the dollar. This action pertains to thecountrys increasing concern about the sovereign debtcrisis in the euro zone and its potential effects onthe developed world. In the Russian Federation, thecurrent account surplus increased to 5.5% of GDPin 2011 from 4.8% in 2010. High oil prices werethe main reason behind the higher surplus as thehydrocarbon sector accounted for around two-thirds ofexport revenues. Imports also grew, boosted by theeconomic recovery and appreciation of the nationalcurrency during the rst half of 2011. The Russianrouble changed course in the second half of 2011,dropping by more than 10% against the dollar. Thecurrent account surplus of Uzbekistan is estimated


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to be 7.4% of GDP in 2011, owing to a large tradesurplus and increased remittances from Kazakhstanand the Russian Federation. Favourable global pricesfor gold, gas and cotton and strong manufacturingexports, especially automotive products, boostedexport revenues.

Even though the current account surplus of Azerbaijanfell in 2011, it was still 24.2% of GDP. During theyear, exports benefited from high oil prices butimports grew faster due to high import prices ofcommodities. The current account of Turkmenistanremained in de cit but improved signi cantly in 2011,thanks to the rapid rise in gas earnings. Following adisruption of gas exports to the Russian Federationin 2009, the Government of Turkmenistan sought todiversify its gas exports to alternative destinations.China started importing gas from Turkmenistanthrough the new Central Asia-China gas pipelinein 2010, with levels set to increase gradually inthe coming years. The opening of the secondgas pipeline to the Islamic Republic of Iran alsocontributed to the rise in gas exports. The increasedexports to these two countries have not been largeenough to cover the loss of contracted volume tothe Russian Federation, but have compensated for

the reduction to a great extent.

In contrast to the improved current account balancesof the net energy exporters, the net energyimporters continued to post large de cits in 2011. InKyrgyzstan, import growth outpaced export growthin 2011, widening the trade deficit. Rising foodand oil prices as well as the recovery of domesticdemand contributed to import growth, while highergold output and prices raised exports. In Tajikistan,

export earnings rose, re ecting the high prices ofaluminium and cotton, which accounted for nearly80% of total exports. However, the growth of exportrevenues was outpaced by a rise in import costs,driven by higher food and fuel prices in combinationwith thriving domestic demand. An increase inthe workers remittances was not enough to fullyoffset the widening of this gap, resulting in a sharpdeterioration of the current account balance, whichreverted to a de cit of 4.1% of GDP in 2011 .

Among the energy importers in the subregion, Armeniaand Georgia showed a slight improvement in theircurrent account balance. The current account de citof Armenia narrowed from 14.7% of GDP in 2010 to12.2% in 2011. Higher prices and demand for metaland mineral products increased export revenues andhelped to reduce the trade de cit. Sharply higherremittance in ows from the Russian Federation alsohelped narrow the current account balance. Thecurrent account balance of Georgia improved froma de cit of 12.6% of GDP in 2010 to a de cit of10.4% in 2011. Costs associated with rising importprices of oil and gas were offset by higher pricesfor the economys main exports, such as gold andbase metals, an increase in the remittance in owsand surpluses from the services sector.

Future outlook and policy challenges

Economic growth in the subregion is expected tobe slightly slower in 2012 than in 2011 due to thedeterioration of the global economic situation. Weakexternal demand and volatile commodity prices arelikely to have a negative impact on the subregiongiven its continued high reliance on exports ofnatural resources, mostly on a single commodity.

The growth prospects of the Russian Federation arelikely to remain dependent on global energy prices.In addition, downside risks are increasing as the eurozone may be heading for a further slowdown. GDPgrowth of the Russian Federation is forecast to be3.8% in 2012. In Kazakhstan, GDP is expected tocontinue to be robust, at 6.2% in 2012, owing toongoing strongly funded investment projects in theoil and mining sectors. The Turkmenistan economyis also expected to maintain a high growth rate of

7.2% in 2012, which is somewhat lower that the ratereached in 2011. Economic growth in Uzbekistanis projected to slow slightly to 8% in 2012, due todeterioration in external demand. Export prices ingeneral are expected to remain favourable with theexception of those for cotton, which are forecast toplunge. The economy of Azerbaijan is expected toexpand by 4% in 2012 as the oil sector returns topositive growth, with the reopening of oil platformsshut for maintenance work.


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The economy of Georgia is likely to be affected bythe weakening performance of the European Unioncountries, which are important export destinations aswell as sources of investment in ows. The countrysGDP is projected to grow by 6% in 2012. Assumingpolitical stability holds in Kyrgyzstan, the economy isexpected to continue to recover at a growth rate of5% in 2012, driven by high gold prices and remittancesfrom Kazakhstan and the Russian Federation.However, the economy could contract if a renewedoutbreak or political instability occurs, or trade andremittance in ows are affected due to problems inRussian Federation or Kazakhstan stemming from theeffects of the global economic turmoil. In Tajikistan,the economy is forecast to grow by 6% in 2012 ascommodity prices are likely to fall sharply, leadingto a reduction in overseas sales of aluminium andcotton, two key sources of export revenues.

Diversi cation is important forachieving higher and sustainablegrowth as well as greater socio-

economic stability

The economies of the subregion are highlydependent on exports of oil, gas, metals andother commodities. Consequently, a sharp fall inexternal demand or commodity prices would leadto a severe decline in economic activities and, inturn, have a strong negative impact on economicgrowth. Based on this, further diversification ofthe economies is important for achieving higherand sustainable growth as well as greater socio-economic stability (see box 2.2).

The subregions high dependence on the RussianFederation through trade and remittances also makesit sensitive to economic conditions and policy changesimplemented by the country. During 2010 and early2011, the poor harvest in the Russian Federation andthe subsequent export ban on cereals had an adverseimpact on in ation in the subregion because of thelarge weight of food in the consumption baskets andits high dependence on imported food.

Foreign financing remains a cause for concern,especially for energy-importing economies in thesubregion, namely Armenia, Georgia, Kyrgyzstan, andTajikistan, all of which continue to receive supportfrom the International Monetary Fund (IMF). Eventhough the nancial sectors of most economies arenot internationally exposed to any great extent, adownside risk remains if commodity prices wereto fall sharply, or if the economic outlook of theRussian Federation were to deteriorate further.

As the continued fragility of the financial sectorremains a critical issue in the subregion, enhancingregulation of financial markets could be verybeneficial. Some of the relevant measures arein ation targeting, restructuring of banking systemsand reducing dollarization. Local authorities in thesubregion are increasingly interested in potential waysto restructure their economies, enhance regulationand improve the investment climate in order tocreate better prospects for foreign capital and makelocal projects more attractive and also to create aproper basis for sustainable growth both from amedium-term and long-term perspective.

Another challenge lies in food securi ty. Some

economies in the subregion face relatively high levelsof poverty and are vulnerable to earthquakes, oods,land degradation and scarcity of water. Despite positivedynamics of food production, the employment andincome levels in the agricultural sector are lower thanin the rest of Asia, which combined with high shareof food items in household expenditure, results inundernourishment and, therefore, a low quality of lifeand greater poverty. Access to adequate nutrition isessential for good health, the fundamental basis for

human capital development. Recent high food priceshave added an additional risk to the deteriorationof the nutrition status in the subregion. To counterthese threats, governments need to allocate additionalresources and undertake the following significantinterventions: to strengthen safety nets to ensurehousehold food security; to lower domestic foodprices through short-run trade policy measures oradministrative action; and to enhance longer-termfood supply.


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The key long-term priority of countries in the North and Central Asia subregion is to diversify their economies away from growingdependence on commodity exports. The importance of this is enhanced in the current economic environment of rela vely high andvola le commodity prices as well as by projec ons that these prices will likely remain vola le in the coming years.

The economies in North and Central Asia can be broadly classi ed into two groups based on the type of commodity dependenceof the external sectors, which is typically measured by the share of export earnings of the top single commodity (or top threecommodi es) in total exports. The rst group comprises energy exporters, namely Azerbaijan, Kazakhstan, the Russian Federa on,Turkmenistan and Uzbekistan. In these countries, energy-related products7 are the single most important category of their exports.The other group consists of metal and mineral exporters, namely Armenia, Georgia, Kyrgyzstan, and Tajikistan. The main exports ofthese economies are, for example, gold, aluminium and copper.8

Box 2.2. Heavy dependence on export of few commodities and vulnerabilities of economies in Nort

Sources : ESCAP calculations based on data from United Nations, International Merchandise Trade Statistics . Available from http://comtrade.un.org/; International Trade Centre. Available from http://www.intracen.org/; and United Nations Conference on Trade and Development,UNCTADstat. Available from http://unct adstat.unctad.org/.

40%

50%

60%

70%

Energy exporters Metal and mineral exporters

2001 2010

0

0.1

0.2

0.3

0.4

0.5

0.6

Developing AsiaEnergy exporters in North and Central AsiaMetal and mineral exporters in North and Central Asia

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

Figure A. Shares of commodity exports, 2001 and 2010Figure B. Merchandise export concentration index in selected groups of countries

The subregion as a whole has become more exposed to commodi es-related risks than a decade ago, making the domes c economiesvulnerable to a sharp decline in commodity prices (see gure A). For energy exporters, the share of energy-related products in totalmerchandise exports increased from 53% in 2001 to 67% in 2010. Similarly, for metal and mineral exporters, the share increasedfrom 49% to 52% over the same period.

Rising commodity dependence is a result of their high prices and strong demand. Most economies and governments in the subregionhave enjoyed large export earnings and increased tax revenues. However, heavy reliance on limited commodi es makes an economyvulnerable to price swings. Energy and metal prices are especially sensi ve to the global economic condi ons. In addi on, commodityexporters su er from Dutch disease, which is the nega ve impact arising from the exploita on and export of natural resources. Alarge increase in commodity prices causes a real apprecia on of the exchange rate, making other sectors of commodity-dependenteconomies less compe ve, which could lead to even greater dependence on commodity exports and harm development in thelong run.9


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The subregions high commodity dependence is also evidenced by the Merchandise Export Concentra on Index, which measures thesectoral concentra on of merchandise exports. The value of this index lies between 0 and 1, with 0 being the least concentratedand 1 being the most concentrated (UNCTAD, 2011c). A higher value of the index indicates less diversi ca on of exports and morevulnerability to external shocks. From 1995 to 2010 the indices for energy exporters and metal and mineral exporters in Northand Central Asia stayed consistently above the average of developing Asian economies, indica ng that the subregion has a highlyconcentrated export structure compared to other Asian economies (see gure B). It also shows that the subregion is highly vulnerableto external shocks, such as commodity price busts. Vola le behaviour of the indices over me further exempli es the vulnerabili esof these economies to uctua ons in commodi es prices.

Changes in the exports composi on of the economies of the subregion have varied markedly over me among the countries (seetable). Among energy exporters, such as Azerbaijan, Kazakhstan, the Russian Federa on and Turkmenistan, energy products haveremained the single dominant commodity among exports and the level of dependence has generally increased since 2001. However,

in Turkmenistan, a decline in the share of energy products was partly replaced by the increased share of co on exports. Apart froma highly vola le energy share, Uzbekistan has exhibited a signi cant drop in the share of co on exports, owing to the governmentslong-term plan to move the co on sector away from just growing the crop to include producing nished products. Among the metaland mineral exporters, the shares of metal and mineral exports in total merchandise exports have been high but vola le, signifyingtheir vulnerabili es to external shocks.

Table. Shares of major groups of commodities in selected countries, 2001-2010

(Percentage of total merchandise exports) 2001 2006 2007 2008 2009 2010

Energy exports (oil and gas) Azerbaijan 91 85 81 97 93 95Kazakhstan 55 69 66 69 70 72Russian Federation 52 63 61 66 63 65Turkmenistan 89 87 92 82 72 71Uzbekistan 17 16 15 36 49 23

Metal and mi neral exports (gold, aluminium , copper, etc.) Armenia 56 69 64 61 66 69Georgia 37 38 39 47 37 42Kyrgyzstan 51 31 25 33 47 47Tajikistan 49 66 71 59 58 59Uzbekistan 15 14 16 16 12 17

Cotton exportsTajikistan 32 19 14 13 10 13Turkmenistan 6 4 5 3 8 17Uzbekistan 43 27 22 11 10 20

Sources : ESCAP calculations based on data from United Nations, International Merchandise Trade Statistics. Available from http://comtrade.un.org/; and International Trade Centre. Available from http://www.intracen.org/.



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Almost all of the governments in the subregionneed to prepare for the re-emergence of theglobal crisis and protect their economies. However,protectionist trends in economic policy would preventforeign investors from entering local capital marketsand, therefore, leave local economies without vitalfunding, up-to-date technologies and resources forsustainable development. The obvious solution is togradually liberalize the economies of the subregionin a way that takes into account national interestsand utilizes the most successful foreign experiences

in that regard as a model. Moreover, promotingregional integration is a possible way to uniteresources and experiences in order to enhance thecompetitiveness of the economies in the subregionto better function in the globalized world. At thesame time, regional integration could also fosterinnovation and cooperation in dealing with issuesrelated to food and energy security, the environmentand border and migration management.

Countries with heavy commodity dependence must design and implement policies aimed at reducing their dependency. This is easierto accomplish during the boom years when scal and external posi ons are healthy. Progress towards diversi ca on requires strongenforcement of market compe on laws and relevant investment in infrastructure, which could poten ally improve the businessenvironment and contribute to the development of new high value-added export-oriented sectors. Governments of countries ofthe subregion are aware of the need to diversify their economies to achieve sustainable growth. For example, the Government ofKazakhstan announced a ve-year industrial development plan, which aims to make the economy less dependent on commodityexports, improve labour produc vity through investment in training and upgrade infrastructure. A social and economic developmentprogramme for 2012-2016 set by the Government of Turkmenistan also aims to diversify the economy away from its reliance onnatural gas, oil, lique ed natural gas, co on and tex les.

Moreover, the subregion needs to make more e cient use of its resources and generate a permanent income stream, rather thanrely on a limited stock of resources. Transparency and accountability in decision-making as well as implementa on, which would entailmonitoring the extrac on of resources and pu ng in place an -corrup on reforms, are also vital. The establishment or strengtheningof natural resource funds or sovereign wealth funds, which already exist in Azerbaijan, Kazakhstan, and the Russian Federa on, couldfacilitate good revenue management, counter poli cal pressures and reduce domes c demand pressures by boos ng savings andinvestments both within the country and aboard.

Source : ESCAP.


PACIFIC

The subregion has been divided into two distinctgroups for analytical purposes. One group comprisesPaci c island developing economies and the other

Australia and New Zealand.

Paci c island developing economies

Diverse economic performance

Paci c island developing economies as a groupachieved GDP growth of 6.5% in 2011, up from

4.6% in 2010 (see table 2.3). However, the relativelyhigh growth is dominated by resource-rich PapuaNew Guinea, which continues to bene t from highcommodity prices for its exports. Some otherPaci c island economies also bene ted from highercommodity prices and a rebound in the tourismsector in mid-2011. Excluding Papua New Guinea,Paci c island economies as a group grew only by3.5% in 2011 but this was an improvement on the2010 performance of 1.6%.


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GDP growth in Papua New Guinea remained strongas a result of high demand and prices for its majorexports, namely oil, gold, copper, coffee, cocoa andpalm oil. Growth at 7.1% in 2010 was underpinned bya large investment in a lique ed natural gas (LNG)project. In 2011 the economy expanded by 8.9%,as construction of the LNG project continued andthe knock-on effect of this bene ted other sectors,such as wholesale and retail trade.

The economy of Fiji contracted by 0.2% in 2010 asthe country was plagued by low investor con dencethat has existed since the military coup in 2006and the adverse effect stemming from cyclone thatoccurred early in the year. It picked up in 2011 witha growth of 2.1%, led by a strong performance inthe agriculture and forestry, manufacturing and shingsectors and an impressive pickup in the tourismsector. Annual visitor arrivals to Fiji were up by9% year-on-year in the rst half of 2011. However,

Table 2.3. Rates of economic growth and in ation in selected economies in Paci c, 2010-2012


2010 2011 b 2012 c 2010 2011 b 2012 c

Paci c d 2.5 2.0 3.4 2.8 3.5 2.1Paci c island developing economies d 4.6 6.5 5.7 4.8 7.8 6.1

Cook Islands 0.2 3.4 5.4 1.8 0.6 3.0Fiji -0.2 2.1 2.3 5.4 8.7 4.0Kiribati 1.8 3.0 3.5 -2.8 7.7 5.5Marshall Islands 5.2 5.0 5.4 1.6 9.5 2.5Micronesia (Federated States of) 3.1 1.4 1.0 4.3 7.9 3.5Nauru 0.0 4.0 4.8 -0.6 -3.5 1.5Palau 0.3 5.8 3.0 1.2 2.1 2.0Papua New Guinea 7.1 8.9 7.8 6.0 8.7 7.6Samoa 0.2 2.1 2.5 -0.2 2.9 5.0Solomon Islands 7.1 9.3 6.0 1.0 7.4 5.5

Tonga 0.3 -0.3 0.4 3.6 6.1 6.0Tuvalu -0.5 1.0 1.4 -1.9 0.5 2.6Vanuatu 2.2 4.3 4.5 2.8 0.8 3.0

Developed countr ies d 2.5 1.9 3.4 2.7 3.5 3.1 Australia 2.5 2.0 3.5 2.8 3.4 3.3New Zealand 2.4 1.4 2.4 2.3 4.0 2.0

Sources : ESCAP, based on national sources; International Monetary Fund, 2011 Article IV Consultations . Available from www.imf.org/external/ns/cs.aspx?id=51; Asian Development Bank, Asian De

macroeconomic performance and policy challenges at the subregional level

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