Section Four

1996 Regional Perspectives

EAST ASIA AND PACIFIC

 East Asia and the Pacific is a region of spectacular development success and huge development challenges. In 1995, the region outperformed other developing regions again and posted the most rapid growth rate in the world: 9.2 percent, up slightly from 8.9 percent in 1994. Growth in gross domestic product (GDP) accelerated in most countries: The Republic of Korea, Malaysia, and Vietnam were in the 9 percent range, while the economies of Indonesia and Thailand grew from between 7 percent and 8 percent. The Philippines recorded a satisfying increase in its growth rate to 4.8 percent, while Mongolia's economy advanced by 6 percent. China cooled an overheated economy without stalling growth: Inflation declined from 22 percent in 1994 to 15 percent, and growth eased from 12 percent to 10 percent. Growth in Fiji also eased, down from 4.5 percent in 1994 to 2.5 percent. Papua New Guinea was the only country in the region that experienced economic decline (4.7 percent).

 The region is faced with many development challenges as it moves toward the Twenty-first Century. It has immense diversity and contains the world's largest and smallest developing countries, landlocked states and both large and small island countries, some of the most prosperous nations, and some of the poorest. Despite huge successes, it is still, on average, a low-income region with an estimated per capita gross national product of $940. Eighty percent of its people, about 1.3 billion, live in low-income countries, almost entirely accounted for by the six economies in transition (Cambodia, China, the Lao People's Democratic Republic, Mongolia, Myanmar, and Vietnam). Reducing poverty and developing the institutions for a market economy are the primary challenges facing these countries. Throughout the region, rapid growth and urbanization are placing heavy pressures on infrastructure, and environmental degradation threatens to undermine the hard-fought gains made to date. Under these circumstances, the Bank's role in East Asia has become increasingly diverse, complex, and challenging.

The Record

 Market-based East Asian economies have been exemplars of fast and relatively equitable growth that leads to rapid reduction in poverty; the mixed economies of China and Vietnam have experienced rapid poverty reduction early in their transitions. Although the number of people who live on incomes below $1 a day has declined from 413 million in 1990 to 392 million in 1993, equivalent to a quarter of the population in East Asia, that number nevertheless represents about 34 percent of the poor in all developing countries (4 percent if China's total number of poor are excluded). Social indicators have improved remarkably. The infant mortality rate (per 1,000 live births) has declined from an already low 44 in 1987 to 35 in 1993, compared with 54 in all developing countries. Life expectancy has risen from 67 to 68 years in the same period, compared with 64 years for all developing countries. Adult illiteracy has been reduced from 29 percent in 1985 to 24 percent in 1990, and given the current secondary enrollment rate of 52 percent (46 percent for girls), the region is likely to achieve the Bankwide objective--set by Bank President James Wolfensohn at the United Nations Conference on Women in Beijing--of providing access to secondary education to 60 percent of children by 2010.

 East Asian countries have been successful in integrating with the world market for both capital and goods. Since 1990, the region has become the predominant destination of private capital flows. In 1995 alone, developing countries in the region received an estimated $108 billion in foreign capital flows, of which $98 billion was from private sources, including $54 billion in direct investment. The surge in foreign capital flows was induced by rapid economic growth, sound economic fundamentals, and a high level of integration with the world market. East Asians are large investors in both their own economies and in their neighbors: Domestic savings rates have been 35 percent or higher of GDP, and more than 70 percent of foreign direct investment is from within the region. Furthermore, these countries have been able to use the foreign capital inflows more effectively than other developing regions, thereby contributing to rapid technological upgrading. Foreign direct investment has also wrought structural changes by increasing manufacturing output as a share of GDP and exports; for example, in China, exports of foreign-invested enterprises (mostly joint ventures) account for nearly 40 percent of all exports.

Table 4-4

 The past year witnessed further rapid growth in trade throughout the region. Exports and imports grew at annual rates of 21 percent and 18 percent, respectively. East Asian developing countries currently account for over one third of all developing country trade and just under 10 percent of total world trade. It is projected that these countries will account for over one third of all incremental trade between 1992 and 2002, and their share in world trade is likely to continue to expand. The determination of these countries to liberalize their trade was reconfirmed by (nonbinding) commitments undertaken at the Asia Pacific Economic Cooperation (APEC) meeting in Tokyo in November 1995. China announced plans to cut tariffs from an average of 36 percent to 23 percent during 1996. The seven members of the Association of Southeast Asian Nations (ASEAN)1 agreed to shorten the timeframe for tariff cuts under the ASEAN Free Trade Agreement (AFTA) to reduce tariffs to the 0 percent-to-5 percent range by the end of 2002 (instead of 2007) and to expand the coverage to include the agriculture sector (with Vietnam phasing in its liberalization over a somewhat longer period). APEC is becoming a unique forum of both developing and industrial countries with implications encompassing cooperation in areas that go far beyond trade issues, including financial flows, human resources, and the environment.2

 Continued strong commitment to international integration; high levels of saving and investment; emphasis on health, education, and human capital development; plus a stable macroeconomic environment have enabled East Asian countries to propel themselves successfully on a rapid poverty-reducing growth path. Its rapid growth will continue to effect the global economy and serve as an important source of stability for the rest of the world.

Challenges Ahead

 Several global and regional economic and social processes underlie the present situation and future outlook for East Asia and Pacific. The processes include:

 All countries are facing policy and institutional challenges even though most have been successful in implementing the fundamentals of development policy. Future challenges are likely to be more complex and difficult. The character of the challenges varies greatly between the transition and market economies, and among the low-, middle-, and high-income countries. Yet because they also have many common issues, a common agenda within the region is emerging, of which the key ingredients are: reducing poverty and achieving growth with equity; meeting growing infrastructure needs; developing the institutions for market economies; providing social insurance; managing structural change and upgrading labor; and dealing with environmental problems.

 The challenges faced by the Pacific island economies differ in many important respects from most of East Asia. While life is relatively safe and secure, economic growth has been slow. Unless the island economies achieve moderate sustainable economic growth, improvements in the quality of life may not be possible. The island economies face major constraints to development, such as long distances to large external markets, a narrow resource and production base, high unit costs of infrastructure, limitations in the skilled work force, and vulnerability to external shocks and natural disasters. To build a more resilient base, these countries will need to diversify their economic base and obtain higher return for their natural capital, principally forest and marine resources.

 There are a number of ways in which the Bank can make a significant contribution in helping the Pacific Islands build a more resilient economic base and move toward a higher and more sustainable growth path. Although support is tailored to the specific needs of each economy, it may include: high-level policy advice; economic and sector analyses; technical assistance in specific areas in which the Bank has a comparative advantage; strengthening partnerships with key stakeholders, including NGOs; and selected lending activities in areas where the Bank can provide positive support to national development strategies.

The Bank's Strategy and Activities

 The Bank's activities in the region have been directed by this emerging development agenda. There has been a shift in its lending activities from the region's middle-income countries to the low-income Indochinese countries. Total commitments in fiscal 1996 were $5.4 billion, while gross disbursements and net disbursements were $4.1 billion and $1.3 billion, respectively. Net transfers, taking account of interest as well as of principal repayment, were a negative $925 million (see table 4-5). Lending to China, a "blend" country, accounted for 55 percent of the total. Thirteen percent of the lending volume was to low-income, IDA-only countries (Cambodia, Lao PDR, Mongolia, and Vietnam), compared with 6 percent in the period fiscal 1993­95. Net transfers to China and the three Indochinese nations--Cambodia, Lao PDR, and Vietnam--amounted to almost $1.4 billion, while the mature borrowers--Korea (which "graduated" from IBRD lending in fiscal 1995), Malaysia, and Thailand--became net repayers as their share of new lending from the Bank either stabilized or declined. These borrowers, however, continue to make use of the Bank for special studies and projects in innovative areas.

Table 4-5

 Nonlending services are becoming broader based, since they cover not only middle- and low-income countries but also activities in high-income countries. For example, the regional study, East Asia's Trade and Investment, was widely used at the 1994 APEC meeting, and policy recommendations for a concerted unilateral trade liberalization were accepted.4

 Reducing poverty remains a central priority of the Bank's activities in East Asia. While much lending has strong indirect effects on poverty reduction, 18 percent of total new commitments in fiscal 1996 was included in the Program of Targeted Interventions. The Bank's poverty-reduction strategy varies across countries. In low- income countries, projects aim at generating effective rural development and delivering social services to the poor. For example, a poverty-reduction project approved during the past year in China facilitated "market-friendly" income generation and labor mobility so that higher-income opportunities could be generated for the rural poor. Two health projects in Vietnam and a disease-prevention project in China are helping to provide basic health care to vulnerable groups such as poor women and their children. Rural finance and land-titling projects in Vietnam and Lao PDR, respectively, are helping to strengthen institutions that support the poor and other vulnerable groups. In several countries, the need is to focus on the special difficulties of groups at risk of being left out of the development process due to geographic isolation, ethnicity, or lack of skills. In the Population and Family Health Project in Vietnam, for example, a model outreach system will be tested to supplement commune health-center (the country's lowest-level health facility) services in remote mountainous areas where most disadvantaged ethnic minority populations live. Village-based health posts will be established in remote mountainous areas in the fifteen provinces covered by the project and then extended to cover all such areas in the provinces if evaluated as being successful. The Bank continued to monitor and provide policy advice by conducting poverty assessments in Lao PDR, Mongolia, and the Philippines, and through dissemination of the Vietnam poverty assessment in provincial participatory workshops. Other recently completed studies--on health, education, and rural development--also included a poverty-reduction component. A regional paper on poverty is currently under preparation, with publication targeted for late in calendar year 1996.

 Meeting the infrastructure needs of the region has become the most significant component of the Bank's lending program, accounting for about two fifths of the new commitments (by volume) in fiscal 1996. To cope with rapid modernization, rising urbanization, and international integration, it is estimated that developing East Asian countries will need to invest between $1.2 trillion and $1.5 trillion, or 7 percent of regional GDP, in transportation, power, telecommunications, and water and sanitation facilities in the next decade. Meeting this challenge will require large-scale private sector involvement for financing and efficiency. During the past year, in "Infrastructure Development in East Asia and Pacific: Towards a New Public-Private Partnership," the Bank laid out an overall agenda to enhance private sector participation. The Bank explored the possibility of establishing an Infrastructure Fund in the Philippines, developed a cofinancing strategy with the private sector, and undertook a large number of other activities at the project, sector, and country level to enhance private sector involvement. In addition, recent economic and sector work has included infrastructure studies for China, Indonesia, Mongolia, and Vietnam.

Table 4-6

 Building market-oriented institutions in the financial and enterprise sectors is another priority for East Asia. Well-functioning market economies require effective and increasingly sophisticated institutions. These include efficient financial systems, sound structure for corporate governance and industrial relations, and well-functioning governmental institutions. To this end, the Bank has recently conducted studies and provided policy advice on banking sector reforms, capital market development, and state-owned enterprise (SOE) reforms in China, Indonesia, the Philippines, and Vietnam. Two regional studies, Managing Capital Flows in East Asia and The Emerging Asian Bond Market, were widely disseminated in an international conference in Hong Kong in mid 1995.5 The conference was a success on all fronts: Participation was greater than expected, both public and private sectors showed keen interest, and press coverage was comprehensive and highly favorable.

 Providing social insurance systems is an emerging issue in the region. Urbanization, movement of labor into the formal sector, and aging populations create the need and demand for formal mechanisms of social insurance. The design of social insurance systems is critical because poorly designed systems can have large and potentially adverse fiscal and labor-market consequences. There are potentially significant benefits from sharing experience in developing sound systems of old age, health, unemployment, and disability insurance. To this end, the Bank has recently carried out formal and informal studies on pension reforms in China, Indonesia, and Thailand, and provided policy advice on the design of these systems based on its worldwide experience. A Health Care Financing study was conducted for China, and Education Cost and Financing studies were undertaken for the Philippines and Vietnam. Because development of social insurance systems is still at an early stage, lending projects were few and accounted for less than 1 percent of the past year's commitments. In the $20 million Labor Market Development Project in China, employee benefits--pensions, unemployment insurance, and medical coverage--are being transferred on a pilot basis from soes to the administration of five municipalities. This action is the first step in overall social insurance reform and is intended to accelerate the redeployment of surplus labor to other productive activities.

 Managing structural change and upgrading labor are also emerging issues in the region. Rising integration and swift technological change are encouraging rapid structural changes and shifting workers from rural to urban areas and from informal to formal sectors. Labor reallocation and career changes for workers raise the issue of how to design education and training systems that provide flexible skills and mechanisms to support workers' mobility. During fiscal 1996, the Bank published a report, Involving Workers in East Asian Growth, a by-product of World Development Report 1995;6 a labor-market study in Indonesia; and an education financing study in Vietnam.

 Dealing with environmental problems continues to be a top priority of the Bank's activity. The Bank's strategy is to help the region's countries correct the underpricing of environmental costs and to build the institutional capacity for sound environmental management and a healthy and attractive urban environment. A study, East Asia's Environment: Principles and Priorities for Action, focused on underpricing, proposed market-based instruments for government regulations, and recommended priorities for action.7 Subjects of economic and sector work (ESW) included industrial pollution control (Indonesia and Vietnam), renewable energy (China), and biodiversity and forestry (Cambodia).

 Maintaining macroeconomic stability has been at the heart of East Asia's success. The Bank continues to analyze the macroeconomic situation in relation to structural reforms. For example, it is helping China build institutional capacities to deal with an overheated economy and is supporting government efforts at economic recovery and growth in the Philippines. In addition to country economic memoranda, which each year analyze individual macroeconomic conditions, the Bank conducted public expenditure reviews in the Lao PDR and the Philippines and provided public investment analysis to China on ways to maintain a sound fiscal and macroeconomic policy environment. It also provided advice on how to manage the macroeconomic impact of large capital flows.

 The Bank's strategies for the Pacific island nations were articulated in the 1996 economic report, "Pacific Island Economies." Recommendations were made on helping these economies maintain an enabling macroeconomic environment, reducing anti-export biases in trade policy and the tax regime, and reducing barriers to domestic and foreign direct investment.

Mainstreaming Business Innovations

 The Bank's East Asia and Pacific Regional Office began to mainstream comprehensive business innovations at the beginning of fiscal 1996. These innovations, which were based on pilot work completed during the previous year, are designed to allow the Bank to provide member countries with increased operational outputs and a mix of products and services that better respond to their fast-changing needs.

 The initial results of these innovations have been encouraging. Elapsed time and staff costs of preparing projects and economic and sector work under the new procedures are about one third lower. Simultaneously, greater emphasis is being placed on preparing focused policy notes in response to urgent government requests. Overhead costs have been reduced significantly, as a larger proportion of staff time is being devoted to direct client work. Results during fiscal 1997 are likely to be even more dramatic as the full benefits of the business innovations are harvested.

 Greater attention is being given to portfolio management. Portfolio performance in the East Asia and Pacific region has traditionally been strong and it remains so. Studies by the Bank's Operations Evaluation Department (OED) of completed projects approved since 1980 show that 81 percent of projects in the region have met their development objectives. While this showing is a good one, there can be no sense of complacency.

 Two complementary objectives have been adopted to improve the performance of the portfolio: first, to focus on project quality at entry by better defining project objectives and simplifying designs at the concept stage, improving economic analysis, and introducing key performance impact indicators; second, to improve the overall quality of the existing stock of projects, with major and visible results in the "development objectives" ratings and disbursement ratios.8 The Regional Office has stepped up the attention it pays to the semiannual portfolio reviews and is looking hard at every problem project and the proposed action plan designed to move it out of the unsatisfactory category within six to twelve months.

1996 Regional Perspectives

Africa
South Asia
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa

Footnotes

1. Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

2. apec membership includes Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, Singapore, Thailand, the United States of America, and Taiwan, China.

3. The population in developing East Asian countries is aging at a relatively faster pace than did the population in today's industrial countries. In thirty-four years, for example, China will double its share of elderly in the population (from 9 percent to 18 pecent), a process that took place over a span of 100 years in Belgium.

4. World Bank. 1994. East Asia's Trade and Investment: Regional and Global Gains from Liberalization. Development in Practice Series. Washington, D.C.

5. World Bank. 1996. Managing Capital Flows in East Asia. Washington, D.C.; World Bank. 1995. The Emerging Asian Bond Market. Washington, D.C.

6. World Bank. 1995. Involving Workers in East Asian Growth. Washington, D.C.

7. Hammer, Jeffrey S., and Sudhir Shetty. 1995. East Asia's Environment: Principles and Priorities for Action. World Bank Discussion Paper No. 287. Washington, D.C.

8. Disbursement ratio is the amount of loans disbursed during the fiscal year as a percentage of the outstanding commitments at the beginning of the year.

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