Introduction

East Asia's capacity to sustain rapid growth is without precedent. The only significant group of countries to close the gap with the industrialized economies over the past few decades, their growth has averaged 7 percent per year in real terms since the mid-1970s, accelerating to 9 percent per year in the 1990s. China's growth has been astonishing, with per capita income rising 270 percent in seventeen years. But even the lesser-developed Indochinese economies have shared the rapid growth during the past several years, with Vietnam growing at 8 percent and Cambodia and Lao PDR at 6 percent per year in the first half of the 1990s.

While the region continued to be a major recipient of private capital flows and a growing world trade player, a slowdown of exports and macroeconomic performance in 1996 raised questions about whether the East Asian "miracle" is over. After years of double-digit growth, export growth slowed, and some countries experienced large current account deficits. Although this highlighted some structural issues, it mostly reflected one-off, or cyclical events, and the successful cooling of overheated economies rather than an end to sustained economic growth. Indeed, exports and overall economic growth recovered in the first half 1997, albeit below past levels. The large current account deficits, driven by high private inflows rather than low domestic savings, reflect some short-run vulnerabilities. And although there are some concerns about the fragility of the region's banking systems, the risks of loss of confidence in banking systems would be easy to overstate, since most East Asian countries have a more robust external and fiscal position than countries that have faced banking crises elsewhere. The prospects for continued high growth in coming years remain sound, provided countries undertake the necessary important reforms.

East Asia enjoys enviable macroeconomic conditions and an unprecedented growth momentum, but both the low- and middle-income countries face several structural constraints to maintaining future growth at historic rates. A new round of policy reforms and institutional development is necessary to sustain rapid, socially responsible, environmentally sound, and quality development into the next century. Addressing these challenges underpinned the Bank's lending and advisory services strategy for assisting its clients in the East Asia and Pacific region during fiscal 1997.