Growth is still strong in developing East Asia, but the region faces risks from global uncertainty and natural disasters.
This only underscores the need for governments to refocus on reforms to increase domestic demand and productivity, and to reassess strategies for disaster resilient cities to sustain growth says the World Bank in its latest East Asia and Pacific Economic Update released today.
Looking ahead, East Asia's growth prospects are constrained by global uncertainties and by the impacts of natural disasters. The slow progress towards resolution of debt problems in the Eurozone intensified investors' concerns over global growth and stability.
As capital flowed out of emerging markets into relatively safer havens, portfolio investments reversed and stock markets lost value in East Asia
The loss of investment finance is a critical problem. Investments are needed to reduce the impact and costs of natural disasters, says the report. East Asia and Pacific region represents 85 percent of all people affected by natural disasters since 2007.
'That exposure is likely to double by 2050 due to climate change and rapid urbanization that concentrates the lives and assets in ways that can, but need not always, leave them vulnerable to the effects of climate change and other natural hazards,' says the report.
Moreover, when those urban areas host international manufacturing and trading hubs, local disasters can have global impacts-as has been clearly demonstrated by the recent earthquake and tsunami in Japan and by the flooding in Thailand. (See Special Section The Recent Earthquake and Tsunami in Japan: Implications for East Asia )
The effects of flooding in several countries are also likely to take a toll on growth this year. While damage estimates are not complete, Thailand's GDP growth in 2011 was revised downwards to 2.4 percent due to widespread flooding.
Losses in production are felt in the entire region, as the impacts of the disaster are spreading through industrial supply chains. While reconstruction after the flood in 2012 is likely to contribute to growth, recovery of production to pre-disaster levels in the region will depend in part on the strength of global demand for electronics and cars.
While it is not possible to control natural hazards, says the report, it is possible to reduce their costs through proactive policies and investments aimed at disaster management and prevention.
Sometimes the required policy changes can be simple. Well-maintained roads, for example are essential for disaster management, allowing people to be evacuated to safety and relief supplies to be brought to devastated areas.
Another important option is to use regulation to coordinate commercial and public investment decisions. For example, commercial investments in rural land clearing often result in downstream flooding of urban areas, thus requiring heavy public expenditures in flood control systems.
Yet, thoughtful regulation can balance these commercial and public interests. Investing in information systems for easy access by firms and households would also help.
Information about where flood plains and earthquake zones are located can usefully inform decisions about where to locate factories and homes, how to build-in resiliency against disasters, how to value property, and how to insure that property. This process works best when markets, while regulated, are not distorted through excessive taxation, subsidies or controls. This is particularly important given anticipated growth rates for Asia's major cities .
The report, issued biannually, projects that amid uncertainties in Europe and a global growth slowdown, real GDP in developing East Asia will increase by 8.2 percent in 2011 (4.7 percent excluding China) and by 7.8 percent in 2012.
Domestic demand in middle-income countries was the largest contributor to growth in the region, although it is easing driven by the normalization of fiscal and monetary policy.
'Lower growth in Europe in the course of fiscal austerity and the banks' needs to increase capital coverage would affect East Asia. Less credit from European banks can also affect capital flows to East Asia, but high reserves and current account surpluses protect most countries in the region against the impact of possible renewed financial stress,' said Bert Hofman, World Bank Chief Economist for the East Asia and Pacific Region.
'Based on current growth forecasts, 38 million people in developing East Asia are expected to move out of poverty by the end of 2011. We are concerned about the possible effects of the global economic situation on the vulnerable in the region, as poverty reduction efforts may be hampered by events such as a sudden increase in food prices, in combination with sluggish income growth' said Hofman.
According to the report, the region's growth slow-down was more pronounced in industrial production.
Exports of major regional industrial supply chains, especially electronics, have started to decline. Demand for commodities and raw materials remained strong, helping resource-rich economies maintain high levels of export and GDP growth.
The complete report - EAP Economic Update - Navigating Turbulence, Sustaining Growth is available here
At GLOBE 2012,taking place March 14-16, 2012, Experts from government and the private sector will discuss concepts being applied in some of the world's most eco-friendly cities in order to create more liveable, sustainable urban spaces. Get More information on GLOBE 2012 here