World Bank sees recovery later in 2002


China will again be the region's main growth engine in 2001

By CNN's Geoff Hiscock
Asia business editor

SINGAPORE (CNN) -- The September 11 terror attacks in the United States and the subsequent decline in economic activity will push back East Asia's recovery by six to nine months, the World Bank said Wednesday.

The bank now sees a global rebound in the second half of 2002, leading to a full-blown recovery in 2003. It says lower interest rates in the U.S., tax cuts and increased government spending will lead to a far-reaching recovery.

But even so, by prolonging East Asia's economic slump into 2002, the terror attacks will hurt the region's poor.

To minimize the economic damage, the bank said it was even more critical for countries in Asia to press ahead with reforms, particularly to their banking, financial and legal systems.

Growth to reach 5 percent next year

In its half-yearly regional update, the bank predicts growth in the developing East Asia region will fall from 7.3 percent last year to 4.6 percent this year and to recover only mildly to about 5 percent next year.

It sees Japan's economy contracting 0.8 percent this year and growing at a miniscule 0.1 percent next year. This prediction is slightly more optimistic than most other forecasts, many of which see Japan shrinking by between 1 percent and 1.5 percent this year.

It is widely accepted that Japan is now in its fourth recession in a decade, and the economies of Singapore, Hong Kong, Taiwan and Malaysia also will likely shrink this year.

The bank said the September 11 attacks, coming at a time when the region was already suffering from the sudden end of the technology boom, would slow investment decisions, dampen consumer confidence in export markets such as the U.S. and reduce tourism to the region.

Bad news for region's poor

"The outcome will certainly be bad news for the region's poor," the World Bank's chief economist for East Asia and the Pacific, Homi Kharas, said in a statement.

Kharas said it was no longer likely that the region would pull out of the slump this year.

"The recovery is at least six months further off, perhaps nine months," Kharas said. "It is important to remember we are talking about a direct impact on the lives of people. This delay will mean fewer jobs and less household income."

The bank says the proportion of people in developing East Asia living below the $2 a day poverty line will still likely fall from 47 percent in 2000 to 46 percent this year.

But it points out that this reduction in poverty is at a much slower rate compared to the trend in the region before the 1997 Asian financial crisis.

Earlier this month, World Bank president James Wolfensohn painted a grim picture of the global impact of the terror attacks, warning on October 2 that they could put as many as 10 million more people in poverty next year, and trigger the deaths of 40,000 children.

Wolfensohn said the impact would be felt across the developing world, but particularly in Africa.

China's growth wil be key determinant

In the outlook released Wednesday, the bank says that the main determinant regionally will be China's continued growth. It sees economic expansion in China of 7.1 percent this year and 6.8 percent next year.

This compares with a 7.6 percent figure for the first nine months of the year, released earlier this week by China's National Bureau of Statistics.

Even though the growth rate had slowed to 7 percent by the third quarter, the bureau said it was still confident of hitting its 7 percent target for 2001.

The World Bank's Kharas said there might be a temptation for governments to ease up on assets sales, corporate restructuring and reforms of banking, financial and legal systems when economic prospects turned down.

But he said the best way to safeguard against future downturns was to push ahead with reforms.