Professional Documents
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No.
95
Cyn-Young Park
June 2007
US Slowdown?
Cyn-Young Park
June 2007
Cyn-Young Park is Senior Economist in the Macroeconomics and Finance Research Division, Economics and Research Department, Asian Development Bank. The author is grateful for helpful comments from Frank Harrigan and wishes to acknowledge valuable assistance from Lea Sumulong for the simulation. All remaining errors are the authors.
Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics 2007 by Asian Development Bank June 2007 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank.
Foreword
The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books.
Contents
Abstract I. II. III. Introduction Asias External Dependency Impact of a US Slowdown A. B. C. Baseline Scenario Three Alternative Scenarios of a US Downturn Simulation Results vii 1 2 3 3 3 6 10 11 12
IV.
Concluding Remarks
Appendix References
Abstract
The expected slowdown in the economy of the United States (US) has ignited increasing concerns over the short-term growth prospect of East Asia. Historically, a US slowdown has often been associated with a global slowdown. East Asia has been particularly vulnerable to slowing US growth, given its relatively high export reliance on the US market. During the last slump in 20012002, a drop in US imports immediately translated into falling exports, cuts in industrial production, and declining growth rates in East Asia. Using the Oxford Economics Global Model, this paper examines the possible impacts on East Asia of a sharper and longer US slowdown than is currently anticipated by the Asian Development Bank in its Asian Development Outlook 2007. The results of the simulation exercises suggest that the impact of a US slowdown on its own would not significantly impact growth in East Asia. However, if a US slowdown instigates disorderly adjustments in international financial markets and spills over into the Peoples Republic of China, the remainder of East Asia would not be spared.
I. Introduction
A slowdown in the United States (US) in 2007 has become more of a fact than a conjecture. The US economy registered the lowest growth rate in 4 years in the first quarter at 1.3%, sparking increased concern over its 2007 growth prospects. A downturn in the US housing market, which has already dented US economic performance through declines in residential investment and construction activity, is expected to further the slowdown before it improves. Historically, a US slowdown has often been associated with a global slowdown. The US is by far the largest single economy in the world, accounting for nearly one third of global economic activity. A slowdown in the US economy could thus represent a significant downside risk to the global economy. In the past, East Asia has proven particularly vulnerable to slowing growth in the US economy given its relatively high export reliance on the US market. During the last slump in 20012002, US imports fell by a cumulative 4.2% and this fall was translated into falling exports, cuts in industrial production, and declining growth rates in East Asia. Although a sharp downturn in the US economy is not a part of the baseline scenario for the global economy presented in the Asian Development Outlook (ADO) 2007 (ADB 2007), there is increasing concern about further weakness in the US economy and its potential impact on the East Asian economy. Using the Oxford Economics Global Model (the Oxford model) (see Appendix for the model description), this paper examines the possible impacts on East Asia of a sharper and longer US slowdown than is currently anticipated in the ADO 2007. Additional scenarios where a sharper US slowdown triggers an unwinding of global imbalances or a hard landing in the Peoples Republic of China (PRC) economy will also be considered. A deeper slowdown in the US economy could spark fear over the sustainability of large US current account deficits, thus leading to a sharp depreciation in the US dollar. Also, there are concerns about overheating in investments of the PRC. The PRC reported another strong growth in investment in the first quarter of 2007, with fixed asset investment rising about 25% from a year ago. Tightening measures intended to rein in booming asset demands in the PRC continue. Combined with this, if a sharper slowdown in the US instigates instability in global financial markets, a sudden shift in investors sentiment may lead to a sharp reduction in the PRC investment. The results of these exercises suggest that the impact of a US slowdown on its own would not significantly impact growth in East Asia. However, if a US slowdown instigates disorderly adjustments in international financial markets and spills over into the PRC, the remainder of East Asia would not be spared.
Throughout this paper, East Asia refers to nine economies in East and Southeast Asia:
Peoples Republic of China; Hong Kong, China; Indonesia; Korea; Malaysia; Philippines; Singapore; Taipei,China; and Thailand.
June 2007
except Hong Kong, China where the currency is fixed. Finally, Scenario 1B considers the possibility that slower US growth acts as a drag on global investment, leading to a reduction in gross fixed investment by 10% over the baseline level in the PRC. Figures 1ac demonstrate the changes implied by these scenarios compared to the baseline. The first panel of Figure 1 shows that US growth rates fall by 1 percentage point from the baseline growth rates for two consecutive years. This implies that US growth slows to 1.5% in 2007 and 2.0% in 2008, compared with 2.5% and 3.0% respectively presented in the baseline scenario. The second panel shows that the US dollar depreciates by 10 percent. This one-step depreciation against all currencies leaves the effective exchange rate for the US dollar permanently lower than the baseline level by 10 percent. Likewise, the third panel illustrates a permanent reduction in the PRC investment by 10% compared to the baseline level. Scenario 1B is again a one-step adjustment in the level. In terms of growth rates, it is only a temporary shock and investment growth rates return to the baseline scenario values immediately after one year. For example, investment growth drops from the baseline growth rate in 2007 by nearly 12 percentage points, but from 2008 onward, growth resumes at the baseline pace. Figure 1a corresponds to Scenario 1. A combination of Figure 1a and 1b represents Scenario 1A, whereas Figure 1a and 1c together express Scenario 1B. Scenario 1 envisions a sharper US slowdown than currently anticipated in the baseline scenario. While a sharper than anticipated slowdown may warrant more aggressive monetary and fiscal easing, there may not be enough room for these policies to deal with the slowdown globally this time around, as opposed to the last global downturn in 2001. First, persistently high oil prices continue to feed into underlying inflationary pressures, which may prevent affected countries from exercising expansionary monetary policy corresponding to a further slowdown. Second, fiscal expansion as well may not be easily accommodated, as many countries remain stretched in their fiscal balances and are now committed to long-term consolidation plans. The simulation exercise is therefore based on the assumption that there is no further change in domestic and international policies, global interest rates, and exchange rates beyond which are already embedded in the baseline scenario. Scenario 1A considers an additional risk that a sharper US slowdown triggers dollar depreciation by motivating international investors to restructure their portfolios away from dollar assets. The US current account deficit reached $856.7 billion in 2006, accounting for about 7% of GDP. As a result of steady rises in deficits, the US has now accumulated net foreign debt of about $3 trillion at the end of 2006. This implies that the US economy must attract large capital inflows from the rest of the world to finance its deficit. A disorderly resolution of large US current account imbalances could lead to a sharp depreciation in the US dollar. Scenario 1B imagines another case where a sharper US slowdown undermines investor confidence and adversely affects emerging Asian financial markets and investment. As seen in late February, trouble in the US stockmarket often triggers a broad sell-off in emerging Asian markets. Furthermore, previous studies find that there exists an important relationship between intraregional trade and foreign direct investment (FDI) flows (see ADB 2006 for a survey of these studies), suggesting that FDI flows to the region could be responsive to the prospect of the regions export growth. As a primary recipient of private equity investment including FDI flows, the PRC might experience a sharp fall in investment, potentially precipitating a hard landing in the PRC.
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FIGURE 1 SCENARIOS
FIGURE 1A US GDP (IN US$ BILLIONS)
2008
2009
2010
2011
100.0 90.0
FIGURE 1B US DOLLAR
Baseline
2006
2007
2008
2009
2010
2011
Baseline
Scenario 1b
2008
2009
2010
2011
C. Simulation Results
Table 1 summarizes the estimated effects of a 1 percentage point drop in US GDP growth on overall GDP along with its demand components, consumer prices, industrial production, employment, and current account balance for East Asia and East Asia excluding the PRC. The effects are shown as percentage point deviations from the baseline. For example, East Asian growth drops by a 0.5 percentage point, which can be translated into an annual growth rate of 7.0% in 2007 instead of 7.5% in the baseline projection. This amounts to an income loss of $80.3 billionabout 0.4% of total GDP in East Asiacompared to the estimated GDP level for the first year in the baseline scenario. The main transmission mechanism here is trade linkages (see Appendix for the detailed model mechanism). Slower US growth implies slower growth in exports and income for US trading partners. Reduced export earnings and income relative to the baseline level will then depress domestic consumption. This adverse income effect for the US trading partners can be further aggravated by the price effect. As domestic demand ends lower than the baseline level, excess supply will add downward pressure on domestic price levels from the baseline level. As a result, the inflation rate will fall under the baseline inflation rate, thus lifting real interest rates instantly higher relative to the baseline scenario. Higher real interest rates then curb domestic consumption and investment growth even more. In the absence of monetary and fiscal policy responses in East Asia, domestic demand growth will be further trimmed. ADB (2005) finds that significant improvements in investment and capital accumulation are also often associated with strong export growth in East Asia. It further suggests that exports act as an important growth stimulator for the East Asian economy. Slower export growth often discourages domestic production, corporate spending, and hiring, thus leading to slower domestic demand and income growth. Slower investment growth also has long-term consequences, as a reduction in the capital stock relative to the baseline will lower potential output (again relative to the baseline). Where investment growth slows significantly vis--vis the baseline scenario and recovers only gradually due to country-specific rigidities, capital stocks could end much lower than the baseline level, thus having a lasting effect on productivity and potential growth. In general, individual countries may take a different route in the return to long-term equilibrium, depending on the existing policy frameworks and structural rigidities. In some cases, a lack of central bank credibility may put an economy through high inflation during the adjustment process. In others, structural rigidities in the labor market may prolong the adjustment process until real wages drop to balance the market. Reflecting the country-specific assumptions regarding price, wage, and structural rigidities in the Oxford model, the impact on GDP growth will differ from one country to another. In Scenario 1, a deceleration in US growth has non-negligible effects on a number of East Asian economies. East Asias growth slows by 0.5 percentage point in 2007 and by a further 0.8 percentage point in 2008 in response to a 1 percentage point fall in US growth. The implied loss of income is significant, amounting to $282.2 billion or 1.5% of East Asias total GDP over 2 years. But underlying growth would remain comparatively robust and above 6% given the strong baseline projection. The impact on East Asias economic performance of slower US growth is significant, both directly through slowing US import growth and indirectly through the influence of the US slowdown
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1 PPT
for
Two Consecutive Years Asia Excluding PRC Year 1 Year 2 -0.42 -0.59 -0.23 -0.57 -0.34 -0.58 -0.97 -0.98 -0.81 -0.93 -0.01 -0.06 -0.57 -0.66 0.02 0.05 -0.11 -0.13 -2852.62 -4120.74 G3 Year 1 Year 2 -0.56 -0.65 -0.63 -0.66 -0.74 -1.18 -0.62 -0.63 -1.06 -0.95 -0.03 -0.32 -0.54 -0.90 0.18 0.31 0.07 0.12 25401.97 49309.44
GDP (%, yoy) Consumption (%, yoy) Investment (%, yoy) Exports (%, yoy) Imports (%, yoy) Consumer prices (%, yoy) Industrial production (%, yoy) Unemployment rate (%) Current account (% of GDP) Trade balance ($ million)
Asia Year 1 Year 2 -0.45 -0.76 -0.14 -0.34 -0.31 -1.11 -1.42 -0.98 -1.08 -1.11 -0.03 -0.15 -0.51 -0.78 0.05 0.10 -0.18 -0.16 -10771.02 -12193.44
in
GDP (%, yoy) Consumption (%, yoy) Investment (%, yoy) Exports (%, yoy) Imports (%, yoy) Consumer prices (%, yoy) Industrial production (%, yoy) Unemployment rate (%) Current account (% of GDP) Trade balance ($ million) Scenario 1b: 10% Reduction
in the
Addition to Scenario 1 Asia Asia Excluding PRC G3 Year 1 Year 2 Year 1 Year 2 Year 1 Year 2 -1.85 -1.73 -2.19 -1.11 -0.86 -1.05 -0.36 -1.16 -0.67 -2.28 -1.28 -1.10 -1.17 -2.70 -1.35 -1.70 -0.88 -1.70 -4.08 -2.99 -3.52 -2.21 -0.40 -1.73 -2.09 -3.75 -1.61 -3.65 -2.51 -1.90 -0.66 -0.56 -0.85 -0.04 -0.25 -0.47 -2.11 -1.52 -3.36 -0.11 0.04 -1.35 0.13 0.28 0.07 0.14 0.24 0.46 -0.61 -0.35 -0.20 0.19 0.47 0.42 -3597.68 1759.43 3005.32 12720.23 154426.41 140742.72
GDP (%, yoy) Consumption (%, yoy) Investment (%, yoy) Exports (%, yoy) Imports (%, yoy) Consumer prices (%, yoy) Industrial production (%, yoy) Unemployment rate (%) Current account (% of GDP) Trade balance ($ million)
PRC Gross Fixed Investment in Addition to Scenario 1 Asia Asia Excluding PRC G3 Year 1 Year 2 Year 1 Year 2 Year 1 Year 2 -3.42 -0.29 -0.81 -0.93 -0.61 -0.73 -0.69 -0.83 -0.43 -1.04 -0.63 -0.72 -6.50 -0.51 -0.60 -1.00 -0.78 -1.29 -1.99 -0.90 -1.92 -1.45 -0.97 -0.93 -3.57 -2.00 -1.59 -1.56 -1.19 -1.12 -0.27 -0.78 -0.02 -0.08 -0.03 -0.36 -2.60 -1.59 -1.11 -1.00 -0.64 -1.05 0.31 0.16 0.04 0.09 0.19 0.35 0.50 0.80 -0.22 -0.17 0.04 0.08 14677.82 36285.79 -6387.18 -6277.31 19480.49 39479.63
Note: PPT means percentage point; yoy means year-on-year, GDP means gross domestic product. Source: Staff estimates using the Oxford model.
on other important markets for East Asias exports. The estimated results also manifest empirical regularities that slowing exports lead to slower growth of industrial production and business investment. The level of investment and capital stocks will fall lower than the estimated levels in the baseline scenario over time, with the fall in investment tending to be most significant in PRC; Korea; Malaysia; Singapore; Taipei,China; and Thailand given their export dependence. Reflecting its relatively high exposure to external markets, a decline in East Asian export growth is more significant than that of other regions. East Asias export growth declines by a cumulative 2.4 percentage points over 2 years, compared to a drop of 1.1 percentage points in the euro-zone economy. A reduction in US imports relative to the baseline was also transmitted directly as a decline in East Asias trade surplus. The loss of the trade surpluses of these nine East Asian economies amounted to about $10.8 billion in 2007 and another $12.2 billion in 2008about one third of the gains in US trade balance owing to a reduction in its imports. But in light of relatively healthy growth in Japan and the European countries, the reduction of East Asias current account balance is still moderate and limited to only about 0.2% of GDP each year. Strong growth momentum in East Asias domestic demand, however, limits the severity of the overall impact. Consumption growth fell by 0.5 percentage point from the baseline over 2 years mainly due to a reduction in real income. Investment is hit more significantly, as its growth declined by 1.4 percentage points over 2 years from the baseline assumption. But, excluding the PRC where investment growth fell by 1.8 percentage point, the rest of the region suffers only a 0.9 percentage point drop in investment growth. The relatively modest impact of a US slowdown is generally consistent with the earlier empirical results (see IMF 2007 for a survey). This is largely because most global economic models including the Oxford model focus on trade linkages as the main mechanism through which shocks are transmitted from one economy to another, and net exports are generally only a small component of GDP no matter how open an economy is. But, conventional global economic models may miss or underestimate the working through other mechanisms. Recent studies (see ADB 2007, Kose et al. 2003, IMF 2007) have shown that global trade and financial linkages are strengthening over time, thus providing channels of increasingly rapid transmission for a global shock. In particular, increased global financial linkages appear to underpin the cross-country correlations of asset prices and related market sentiments. Past global recessions often witnessed significantly larger spillovers through reactions in global financial markets besides usual trade channels. Moreover, the impact of shocks can be amplified if they are concentrated in particular sectors. For example, a global slowdown in global durable investment, such as in 20012002, would likely hit the information technology industry, an activity in which countries in East Asia specialize. External disturbances may also impinge on domestic demand more directly by affecting consumer and investor confidence. In an increasingly integrated world, producers and investors share global product and financial markets, making them potentially susceptible to sentiments in other markets. Although the Oxford model incorporates global trade linkages with empirically calibrated short-term impulses through trade-related channels, it does not capture the behavioral effect through business and investor confidence.
The estimated results for individual countries are not reported in this study due to space limitations, but are available upon request.
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Scenario 1A and 1B explores the potential risks of a US slowdown affecting other economies more explicitly. First, in Scenario IA a weaker dollar implies a loss of competitiveness for US trading partners, which produces a more synchronized global downturn. Overall, the reduction in overall GDP growth amounts to 1.8 percentage points in 2007, compared to 0.5 in Scenario 1. Growth slows in 2008 by another 1.7 percentage points. In combination with the weaker global demand, stronger currencies in East Asia appear to exacerbate the price effect by restraining inflation further and thus pushing real interest rates even higher compared to Scenario 1. As a result, domestic consumption and investment growth falls by 1.5 and 3.9 percentage points, respectively, in the next 2 years relative to the baseline scenario. Although the trade surplus widens marginally in 2008 compared to the baseline, this mainly reflects a contraction in import growth due to weaker growth of domestic demand. Both industrial production and investment growth slow sharply, which bear potentially longer-term consequences on productivity and growth. Second, investment is assumed to fall by 10% in the PRC over the baseline in Scenario 1B. However, with investment projected to grow more than 10% a year over the next 2 years in the baseline scenario, a 10% reduction in the 2007 level means that it is still higher than the 2006 level. Nevertheless, slower growth of PRC investment has significant ripple effects on the rest of East Asia. The PRC bears the direct impact of the slowdown with growth shaved by 5.6 percentage points in 2007. But, the rest of East Asia also sees its growth clipped by about 0.8 percentage point in 2007, followed by another 0.9 percentage point off in 2008. As rapid investment growth in the PRC has been an engine of growth for the regions trade, the external sector of the rest of East Asia suffers most significantly. Regional economies that export a bulk of capital goods to the PRC such as Hong Kong,China; Korea; and Taipei,China, appear to incur proportionally large losses in trade surpluses, thus contributing most to the total loss of $12.7 billion (about $6 billion each year) over 2 years borne by the rest of East Asia relative to the baseline. It is also noteworthy that Japan, which is a major supplier of capital goods for East Asia (but not included in East Asia in this paper) suffers a substantially large loss of $7.4 billion in 2007, and an even bigger loss of $10.2 billion in 2008. In both Scenarios 1A and 1B, a loss of real income vis--vis the current baseline is substantially larger than Scenario 1 of a 1 percentage point drop in US growth alone. In all cases, however, overall economic impacts exhibit diverse patterns across affected trading partners depending on the specifics of an individual economy, including its exposure to the US or the PRC markets; differences in price and income elasticities of export and import; and relative sizes of income effects at home and abroad. For instance in Scenario 1A, a broader global slowdown accompanied by a weaker dollar appear to have more significant effect on PRC; Hong Kong,China; Korea; Singapore; Taipei,China; and Thailand, given their high export dependency. In Scenario 1B, economies that are exposed to the PRC market appear to suffer a significant reduction in trade surpluses as mentioned above. Overall, the speed of economic adjustment will also depend on various country-specific factors, including differences in initial conditions and economic structures.
The relative sizes of the impacts are not directly comparable between the two scenarios, given the different nature of these shocks. But in both cases, the magnitude of these shocks falls between one standard deviation and two standard deviations of their respective variables, indicating the probability of each of these risks materializing may be similar. For example in Scenario 1A, one standard deviation of the dollar index against weighted global currencies over the last decade was about 7%. Thus, a 10% change in the dollar exchange rate is a shock of the magnitude greater than one standard deviation but smaller than two standard deviations.
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Appendix
Appendix
The Oxford Economics Global Model (the Oxford model) is a multi-country multi-region macroeconometric model of the world economy that is designed to capture channels of international transmission of a shock through trade and investment flows as well as relationships with other key economic variables, such as GDP, employment, inflation, interest rates, and exchange rates. The Oxford model is, therefore, well suited for the analysis of economic consequences of scenarios including changes in monetary and fiscal policies in the international context. The Oxford model is structured in a way that, while it exhibits Keynesian dynamics that stems from price rigidities in the short to medium term, its long-run properties are neo-classical, which means that the long-run equilibrium is ultimately bound by supply factors. A simulation of a fall in GDP of 1 percentage point sustained over 2 years in the scenarios presented here is based on the assumption that a fall in private consumption (a main component of final demand) is the direct cause of the GDP decrease. It should be emphasized that the results of a growth simulation depend critically on the assumption regarding how the change in GDP has been made. A reduction in GDP arising from the demand side would yield very different results compared with those when the reduction is the product of a supply side shock, which is in principal more permanent in nature. Also like most other macroeconometric models, embedded in the Oxford model are such channels of international transmission of a shock as trade and investment flows. When there is a shock, key nominal variables including inflation, interest rates, wages, and exchange rates will change to restore balance between demand and supply both at the national and global levels. Just as external shocks affect domestic economic activity and prices, the related adjustments in an individual economy will transmit to other countries through trade and investment linkages until balance is restored both domestically and internationally. In this adjustment process, however, differences in the degree of nominal rigidities and the credibility of monetary authorities, as presented in the parameters of these price reaction functions, determine how long it will take to stabilize inflation and return to a long-run equilibrium growth rate. The Oxford model comprises 44 country models including 20 emerging market countries together with six trading blocs. The country models are fully integrated through trade, prices, interest rates, and exchange rates. Individual country models are identical in basic theoretical structure, but cross-country differences are reflected in different estimated parameter values, which are meant to characterize idiosyncrasies of an individual country. The structure of individual country models is based on the income expenditure accounting framework. Consumption is a function of real income, real financial wealth, real interest rates, and inflation. Investment behavior is based on Tobins q theory, according to which the investment rate is determined by its opportunity cost, after taking significant adjustment costs into account. However, on the supply side, each of these economies behaves like a one-sector economy under Cobb-Douglas technology (with a constant rate of total factor productivity growth) using two factor inputs (labor and capital). Firms are assumed to set prices given output and the capital stock, but the labor market is imperfectly competitive. Output cycles move around a deterministic trend, where the level of potential output corresponds to a natural rate of unemployment. Inflation is a monetary phenomenon in the long run. The Oxford model embodies a vertical Phillips curve in the long run, while inflation is controlled by endogenized monetary policy. Central banks are assumed to generate credible and effective inflation targets that determine the nominal trends and also the embedded equations. The model converges to a long-run equilibrium that is determined by a natural growth rate based on productivity and population growth. The Oxford model solves each block of simultaneous equations using an iterative procedure to ensure consistency across blocks until the full system has converged. For trade links, the model operates a trade matrix based on weighted trade partner imports to drive demand for a countrys exports instead of bilateral
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trade relationships. There are also interest rates, exchange rates, risk premia, and asset price linkages identified in the model. Commodity prices, including crude oil prices, are determined by aggregate global supply and demand. Finally, due caution is necessary when interpreting the simulation results. Most macroeconomic models, including the Oxford model here, often fall short of explaining the full account of potential economic impacts, given the complexity of transmission mechanisms. At play could be many other factors, which are not fully incorporated in a macroeconomic model.
References
Asian Development Bank. 2005. Export or Domestic Demand-led Growth in Developing Asia? In Asian Development Outlook 2005. Hong Kong, China: Oxford University Press for the Asian Development Bank. . 2006. Routes for Asias Trade. In Asian Development Outlook 2006. Hong Kong, China: Oxford University Press for the Asian Development Bank. . 2007. Uncoupling Asia: Myth and Reality. In Asian Development Outlook 2007. Hong Kong, China: Oxford University Press for the Asian Development Bank. International Monetary Fund. 2007. Decoupling the Train? Spillovers and Cycles in the Global Economy. In World Economic Outlook 2007. Washington, DC. Kose, M., E. Prasad, and M. Terrones. 2003. How Does Globalization Affect the Synchronization of Business Cycles? The American Economic Review 93(2):5762.
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Economic Openness and Regional Development in the Philippines Ernesto M. Pernia and Pilipinas F. Quising, January 2003 Bond Market Development in East Asia: Issues and Challenges Raul Fabella and Srinivasa Madhur, January 2003 Environment Statistics in Central Asia: Progress and Prospects Robert Ballance and Bishnu D. Pant, March 2003 Electricity Demand in the Peoples Republic of China: Investment Requirement and Environmental Impact Bo Q. Lin, March 2003 Foreign Direct Investment in Developing Asia: Trends, Effects, and Likely Issues for the Forthcoming WTO Negotiations Douglas H. Brooks, Emma Xiaoqin Fan, and Lea R. Sumulong, April 2003 The Political Economy of Good Governance for Poverty Alleviation Policies Narayan Lakshman, April 2003 The Puzzle of Social Capital A Critical Review M. G. Quibria, May 2003 Industrial Structure, Technical Change, and the Role of Government in Development of the Electronics and Information Industry in Taipei,China Yeo Lin, May 2003 Economic Growth and Poverty Reduction in Viet Nam Arsenio M. Balisacan, Ernesto M. Pernia, and Gemma Esther B. Estrada, June 2003 Why Has Income Inequality in Thailand Increased? An Analysis Using 1975-1998 Surveys Taizo Motonishi, June 2003 Welfare Impacts of Electricity Generation Sector Reform in the Philippines Natsuko Toba, June 2003 A Review of Commitment Savings Products in Developing Countries Nava Ashraf, Nathalie Gons, Dean S. Karlan, and Wesley Yin, July 2003 Local Government Finance, Private Resources, and Local Credit Markets in Asia Roberto de Vera and Yun-Hwan Kim, October 2003 Excess Investment and Efficiency Loss During Reforms: The Case of Provincial-level Fixed-Asset Investment in Peoples Republic of China Duo Qin and Haiyan Song, October 2003 Is Export-led Growth Passe? Implications for Developing Asia Jesus Felipe, December 2003 Changing Bank Lending Behavior and Corporate Financing in AsiaSome Research Issues Emma Xiaoqin Fan and Akiko Terada-Hagiwara, December 2003 Is Peoples Republic of Chinas Rising Services Sector Leading to Cost Disease? Duo Qin, March 2004 Poverty Estimates in India: Some Key Issues Savita Sharma, May 2004 Restructuring and Regulatory Reform in the Power Sector: Review of Experience and Issues Peter Choynowski, May 2004 Competitiveness, Income Distribution, and Growth in the Philippines: What Does the Long-run Evidence Show? Jesus Felipe and Grace C. Sipin, June 2004
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Practices of Poverty Measurement and Poverty Profile of Bangladesh Faizuddin Ahmed, August 2004 Experience of Asian Asset Management Companies: Do They Increase Moral Hazard? Evidence from Thailand Akiko Terada-Hagiwara and Gloria Pasadilla, September 2004 Viet Nam: Foreign Direct Investment and Postcrisis Regional Integration Vittorio Leproux and Douglas H. Brooks, September 2004 Practices of Poverty Measurement and Poverty Profile of Nepal Devendra Chhetry, September 2004 Monetary Poverty Estimates in Sri Lanka: Selected Issues Neranjana Gunetilleke and Dinushka Senanayake, October 2004 Labor Market Distortions, Rural-Urban Inequality, and the Opening of Peoples Republic of Chinas Economy Thomas Hertel and Fan Zhai, November 2004 Measuring Competitiveness in the Worlds Smallest Economies: Introducing the SSMECI Ganeshan Wignaraja and David Joiner, November 2004 Foreign Exchange Reserves, Exchange Rate Regimes, and Monetary Policy: Issues in Asia Akiko Terada-Hagiwara, January 2005 A Small Macroeconometric Model of the Philippine Economy Geoffrey Ducanes, Marie Anne Cagas, Duo Qin, Pilipinas Quising, and Nedelyn Magtibay-Ramos, January 2005 Developing the Market for Local Currency Bonds by Foreign Issuers: Lessons from Asia Tobias Hoschka, February 2005 Empirical Assessment of Sustainability and Feasibility of Government Debt: The Philippines Case Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas Quising, February 2005 Poverty and Foreign Aid Evidence from Cross-Country Data Abuzar Asra, Gemma Estrada, Yangseom Kim, and M. G. Quibria, March 2005 Measuring Efficiency of Macro Systems: An Application to Millennium Development Goal Attainment Ajay Tandon, March 2005 Banks and Corporate Debt Market Development Paul Dickie and Emma Xiaoqin Fan, April 2005 Local Currency FinancingThe Next Frontier for MDBs? Tobias C. Hoschka, April 2005 Export or Domestic-Led Growth in Asia? Jesus Felipe and Joseph Lim, May 2005 Policy Reform in Viet Nam and the Asian Development Banks State-owned Enterprise Reform and Corporate Governance Program Loan George Abonyi, August 2005 Policy Reform in Thailand and the Asian Development Banks Agricultural Sector Program Loan George Abonyi, September 2005 Can the Poor Benefit from the Doha Agenda? The Case of Indonesia Douglas H. Brooks and Guntur Sugiyarto, October 2005 Impacts of the Doha Development Agenda on Peoples Republic of China: The Role of Complementary Education Reforms
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Fan Zhai and Thomas Hertel, October 2005 Growth and Trade Horizons for Asia: Long-term Forecasts for Regional Integration David Roland-Holst, Jean-Pierre Verbiest, and Fan Zhai, November 2005 Macroeconomic Impact of HIV/AIDS in the Asian and Pacific Region Ajay Tandon, November 2005 Policy Reform in Indonesia and the Asian Development Banks Financial Sector Governance Reforms Program Loan George Abonyi, December 2005 Dynamics of Manufacturing Competitiveness in South Asia: ANalysis through Export Data Hans-Peter Brunner and Massimiliano Cal, December 2005 Trade Facilitation Teruo Ujiie, January 2006 An Assessment of Cross-country Fiscal Consolidation Bruno Carrasco and Seung Mo Choi, February 2006 Central Asia: Mapping Future Prospects to 2015 Malcolm Dowling and Ganeshan Wignaraja, April 2006 A Small Macroeconometric Model of the Peoples Republic of China Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, Pilipinas Quising, XinHua He, Rui Liu, and Shi-Guo Liu, June 2006 Institutions and Policies for Growth and Poverty Reduction: The Role of Private Sector Development Rana Hasan, Devashish Mitra, and Mehmet Ulubasoglu, July 2006 Preferential Trade Agreements in Asia: Alternative Scenarios of Hub and Spoke Fan Zhai, October 2006 Income Disparity and Economic Growth: Evidence from Peoples Republic of China Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Xinhua He, Rui Liu, and Shiguo Liu, October 2006
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Macroeconomic Effects of Fiscal Policies: Empirical Evidence from Bangladesh, Peoples Republic of China, Indonesia, and Philippines Geoffrey Ducanes, Marie Anne Cagas, Duo Qin, Pilipinas Quising, and Mohammad Abdur Razzaque, November 2006 Economic Growth, Technological Change, and Patterns of Food and Agricultural Trade in Asia Thomas W. Hertel, Carlos E. Ludena, and Alla Golub, November 2006 Expanding Access to Basic Services in Asia and the Pacific Region: PublicPrivate Partnerships for Poverty Reduction Adrian T. P. Panggabean, November 2006 Income Volatility and Social Protection in Developing Asia Vandana Sipahimalani-Rao, November 2006 Rules of Origin: Conceptual Explorations and Lessons from the Generalized System of Preferences Teruo Ujiie, December 2006 Asias Imprint on Global Commodity Markets Cyn-Young Park and Fan Zhai, December 2006 Infrastructure as a Catalyst for Regional Integration, Growth, and Economic Convergence: Scenario Analysis for Asia David Roland-Holst, December 2006 Measuring Underemployment: Establishing the Cut-off Point Guntur Sugiyarto, March 2007 An Analysis of the Philippine Business Process Outsourcing Industry Nedelyn Magtibay-Ramos, Gemma Estrada, and Jesus Felipe, March 2007 Theory and Practice in the Choice of Social Discount Rate for CostBenefit Analysis: A Survey Juzhong Zhuang, Zhihong Liang, Tun Lin, and Franklin De Guzman, May 2007 Can East Asia Weather a US Slowdown? Cyn-Young Park, June 2007
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Contingency Calculations for Environmental Impacts with Unknown Monetary Values David Dole, February 2002 Integrating Risk into ADBs Economic Analysis of Projects Nigel Rayner, Anneli Lagman-Martin, and Keith Ward, June 2002 Measuring Willingness to Pay for Electricity Peter Choynowski, July 2002 Economic Issues in the Design and Analysis of a Wastewater Treatment Project David Dole, July 2002 An Analysis and Case Study of the Role of Environmental Economics at the Asian Development Bank David Dole and Piya Abeygunawardena, September 2002 Economic Analysis of Health Projects: A Case Study in Cambodia Erik Bloom and Peter Choynowski, May 2003 Strengthening the Economic Analysis of Natural Resource Management Projects Keith Ward, September 2003
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Testing Savings Product Innovations Using an Experimental Methodology Nava Ashraf, Dean S. Karlan, and Wesley Yin, November 2003 Setting User Charges for Public Services: Policies and Practice at the Asian Development Bank David Dole, December 2003 Beyond Cost Recovery: Setting User Charges for Financial, Economic, and Social Goals David Dole and Ian Bartlett, January 2004 Shadow Exchange Rates for Project Economic Analysis: Toward Improving Practice at the Asian Development Bank Anneli Lagman-Martin, February 2004 Improving the Relevance and Feasibility of Agriculture and Rural Development Operational Designs: How Economic Analyses Can Help Richard Bolt, September 2005 Assessing the Use of Project Distribution and Poverty Impact Analyses at the Asian Development Bank Franklin D. De Guzman, October 2005 Assessing Aid for a Sector Development Plan: Economic Analysis of a Sector Loan David Dole, November 2005
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Is Growth Good Enough for the Poor? Ernesto M. Pernia, October 2001 Indias Economic Reforms What Has Been Accomplished? What Remains to Be Done? Arvind Panagariya, November 2001 Unequal Benefits of Growth in Viet Nam Indu Bhushan, Erik Bloom, and Nguyen Minh Thang, January 2002 Is Volatility Built into Todays World Economy? J. Malcolm Dowling and J.P. Verbiest, February 2002 What Else Besides Growth Matters to Poverty Reduction? Philippines Arsenio M. Balisacan and Ernesto M. Pernia, February 2002 Achieving the Twin Objectives of Efficiency and Equity: Contracting Health Services in Cambodia Indu Bhushan, Sheryl Keller, and Brad Schwartz, March 2002 Causes of the 1997 Asian Financial Crisis: What Can an Early Warning System Model Tell Us? Juzhong Zhuang and Malcolm Dowling, June 2002 The Role of Preferential Trading Arrangements in Asia Christopher Edmonds and Jean-Pierre Verbiest, July 2002 The Doha Round: A Development Perspective Jean-Pierre Verbiest, Jeffrey Liang, and Lea Sumulong, July 2002 Is Economic Openness Good for Regional Development and Poverty Reduction? The Philippines E. M. Pernia and Pilipinas Quising, October 2002 Implications of a US Dollar Depreciation for Asian Developing Countries Emma Fan, July 2002 Dangers of Deflation D. Brooks and Pilipinas Quising, December 2002 Infrastructure and Poverty Reduction What is the Connection? Ifzal Ali and Ernesto Pernia, January 2003 Infrastructure and Poverty Reduction Making Markets Work for the Poor Xianbin Yao, May 2003 SARS: Economic Impacts and Implications Emma Xiaoqin Fan, May 2003
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Emerging Tax Issues: Implications of Globalization and Technology Kanokpan Lao Araya, May 2003 Pro-Poor Growth: What is It and Why is It Important? Ernesto M. Pernia, May 2003 PublicPrivate Partnership for Competitiveness Jesus Felipe, June 2003 Reviving Asian Economic Growth Requires Further Reforms Ifzal Ali, June 2003 The Millennium Development Goals and Poverty: Are We Counting the Worlds Poor Right? M. G. Quibria, July 2003 Trade and Poverty: What are the Connections? Douglas H. Brooks, July 2003 Adapting Education to the Global Economy Olivier Dupriez, September 2003 Avian Flu: An Economic Assessment for Selected Developing Countries in Asia Jean-Pierre Verbiest and Charissa Castillo, March 2004 Purchasing Power Parities and the International Comparison Program in a Globalized World Bishnu Pant, March 2004 A Note on Dual/Multiple Exchange Rates Emma Xiaoqin Fan, May 2004 Inclusive Growth for Sustainable Poverty Reduction in Developing Asia: The Enabling Role of Infrastructure Development Ifzal Ali and Xianbin Yao, May 2004 Higher Oil Prices: Asian Perspectives and Implications for 2004-2005 Cyn-Young Park, June 2004 Accelerating Agriculture and Rural Development for Inclusive Growth: Policy Implications for Developing Asia Richard Bolt, July 2004 Living with Higher Interest Rates: Is Asia Ready? Cyn-Young Park, August 2004 Reserve Accumulation, Sterilization, and Policy Dilemma Akiko Terada-Hagiwara, October 2004 The Primacy of Reforms in the Emergence of Peoples Republic of China and India Ifzal Ali and Emma Xiaoqin Fan, November 2004
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Population Health and Foreign Direct Investment: Does Poor Health Signal Poor Government Effectiveness? Ajay Tandon, January 2005 Financing Infrastructure Development: Asian Developing Countries Need to Tap Bond Markets More Rigorously Yun-Hwan Kim, February 2005 Attaining Millennium Development Goals in Health: Isnt Economic Growth Enough? Ajay Tandon, March 2005 Instilling Credit Culture in State-owned Banks Experience from Lao PDR Robert Boumphrey, Paul Dickie, and Samiuela Tukuafu, April 2005 Coping with Global Imbalances and Asian Currencies Cyn-Young Park, May 2005 Asias Long-term Growth and Integration: Reaching beyond Trade Policy Barriers Douglas H. Brooks, David Roland-Holst, and Fan Zhai, September 2005 Competition Policy and Development Douglas H. Brooks, October 2005 Highlighting Poverty as Vulnerability: The 2005 Earthquake in Pakistan
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Rana Hasan and Ajay Tandon, October 2005 Conceptualizing and Measuring Poverty as Vulnerability: Does It Make a Difference? Ajay Tandon and Rana Hasan, October 2005 Potential Economic Impact of an Avian Flu Pandemic on Asia Erik Bloom, Vincent de Wit, and Mary Jane Carangal-San Jose, November 2005 Creating Better and More Jobs in Indonesia: A Blueprint for Policy Action Guntur Sugiyarto, December 2005 The Challenge of Job Creation in Asia Jesus Felipe and Rana Hasan, April 2006 International Payments Imbalances Jesus Felipe, Frank Harrigan, and Aashish Mehta, April 2006 Improving Primary Enrollment Rates among the Poor Ajay Tandon, August 2006 Inclusiveness of Economic Growth in the Peoples Republic of China: What Do Population Health Outcomes Tell Us? Ajay Tandon and Juzhong Zhuang, January 2007 Pro-Poor to Inclusive Growth: Asian Prescriptions Ifzal Ali, May 2007
19. The Role of Small and Medium-Scale Manufacturing Industries in Industrial Development: The Experience of Selected Asian Countries January 1990 20. National Accounts of Vanuatu, 1983-1987 January 1990 21. National Accounts of Western Samoa, 1984-1986 February 1990 22. Human Resource Policy and Economic Development: Selected Country Studies July 1990 23. Export Finance: Some Asian Examples September 1990 24. National Accounts of the Cook Islands, 1982-1986 September 1990 25. Framework for the Economic and Financial Appraisal of Urban Development Sector Projects January 1994 26. Framework and Criteria for the Appraisal and Socioeconomic Justification of Education Projects January 1994 27. Investing in Asia 1997 (Co-published with OECD) 28. The Future of Asia in the World Economy 1998 (Copublished with OECD) 29. Financial Liberalisation in Asia: Analysis and Prospects 1999 (Co-published with OECD) 30. Sustainable Recovery in Asia: Mobilizing Resources for Development 2000 (Co-published with OECD) 31. Technology and Poverty Reduction in Asia and the Pacific 2001 (Co-published with OECD) 32. Asia and Europe 2002 (Co-published with OECD) 33. Economic Analysis: Retrospective 2003 34. Economic Analysis: Retrospective: 2003 Update 2004 35. Development Indicators Reference Manual: Concepts and Definitions 2004 35. Investment Climate and Productivity Studies Philippines: Moving Toward a Better Investment Climate 2005 The Road to Recovery: Improving the Investment Climate in Indonesia 2005 Sri Lanka: Improving the Rural and Urban Investment Climate 2005
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Emerging Issues in Asia and Social Cost Benefit Analysis I. Ali, September 1988 Shifting Revealed Comparative Advantage: Experiences of Asian and Pacific Developing Countries P.B. Rana, November 1988 Agricultural Price Policy in Asia: Issues and Areas of Reforms I. Ali, November 1988 Service Trade and Asian Developing Economies M.G. Quibria, October 1989 A Review of the Economic Analysis of Power Projects in Asia and Identification of Areas of Improvement I. Ali, November 1989 Growth Perspective and Challenges for Asia: Areas for Policy Review and Research I. Ali, November 1989 An Approach to Estimating the Poverty Alleviation Impact of an Agricultural Project I. Ali, January 1990 Economic Growth Performance of Indonesia, the Philippines, and Thailand: The Human Resource Dimension E.M. Pernia, January 1990 Foreign Exchange and Fiscal Impact of a Project: A Methodological Framework for Estimation I. Ali, February 1990 Public Investment Criteria: Financial and Economic Internal Rates of Return I. Ali, April 1990 Evaluation of Water Supply Projects: An Economic Framework Arlene M. Tadle, June 1990 Interrelationship Between Shadow Prices, Project Investment, and Policy Reforms: An Analytical Framework I. Ali, November 1990 Issues in Assessing the Impact of Project and Sector Adjustment Lending I. Ali, December 1990 Some Aspects of Urbanization and the Environment in Southeast Asia Ernesto M. Pernia, January 1991
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Financial Sector and Economic Development: A Survey Jungsoo Lee, September 1991 A Framework for Justifying Bank-Assisted Education Projects in Asia: A Review of the Socioeconomic Analysis and Identification of Areas of Improvement Etienne Van De Walle, February 1992 Medium-term Growth-Stabilization Relationship in Asian Developing Countries and Some Policy Considerations Yun-Hwan Kim, February 1993 Urbanization, Population Distribution, and Economic Development in Asia Ernesto M. Pernia, February 1993 The Need for Fiscal Consolidation in Nepal: The Results of a Simulation Filippo di Mauro and Ronald Antonio Butiong, July 1993 A Computable General Equilibrium Model of Nepal Timothy Buehrer and Filippo di Mauro, October 1993 The Role of Government in Export Expansion in the Republic of Korea: A Revisit Yun-Hwan Kim, February 1994 Rural Reforms, Structural Change, and Agricultural Growth in the Peoples Republic of China Bo Lin, August 1994 Incentives and Regulation for Pollution Abatement with an Application to Waste Water Treatment Sudipto Mundle, U. Shankar, and Shekhar Mehta, October 1995 Saving Transitions in Southeast Asia Frank Harrigan, February 1996 Total Factor Productivity Growth in East Asia: A Critical Survey Jesus Felipe, September 1997 Foreign Direct Investment in Pakistan: Policy Issues and Operational Implications Ashfaque H. Khan and Yun-Hwan Kim, July 1999 Fiscal Policy, Income Distribution and Growth Sailesh K. Jha, November 1999
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M.G. Quibria, October 1987 Domestic Adjustment to External Shocks in Developing Asia Jungsoo Lee, October 1987 Improving Domestic Resource Mobilization through Financial Development: Indonesia Philip Erquiaga, November 1987 Recent Trends and Issues on Foreign Direct Investment in Asian and Pacific Developing Countries P.B. Rana, March 1988 Manufactured Exports from the Philippines: A Sector Profile and an Agenda for Reform I. Ali, September 1988 A Framework for Evaluating the Economic Benefits of Power Projects I. Ali, August 1989 Promotion of Manufactured Exports in Pakistan Jungsoo Lee and Yoshihiro Iwasaki, September 1989 Education and Labor Markets in Indonesia: A Sector Survey Ernesto M. Pernia and David N. Wilson, September 1989 Industrial Technology Capabilities and Policies in Selected ADCs Hiroshi Kakazu, June 1990 Designing Strategies and Policies for Managing Structural Change in Asia Ifzal Ali, June 1990 The Completion of the Single European Community Market in 1992: A Tentative Assessment of its Impact on Asian Developing Countries J.P. Verbiest and Min Tang, June 1991 Economic Analysis of Investment in Power Systems Ifzal Ali, June 1991 External Finance and the Role of Multilateral Financial Institutions in South Asia: Changing Patterns, Prospects, and Challenges Jungsoo Lee, November 1991 The Gender and Poverty Nexus: Issues and Policies M.G. Quibria, November 1993 The Role of the State in Economic Development: Theory, the East Asian Experience, and the Malaysian Case Jason Brown, December 1993 The Economic Benefits of Potable Water Supply Projects to Households in Developing Countries Dale Whittington and Venkateswarlu Swarna, January 1994 Growth Triangles: Conceptual Issues and Operational Problems Min Tang and Myo Thant, February 1994 The Emerging Global Trading Environment and Developing Asia Arvind Panagariya, M.G. Quibria, and Narhari Rao, July 1996 Aspects of Urban Water and Sanitation in the Context of Rapid Urbanization in Developing Asia Ernesto M. Pernia and Stella LF. Alabastro, September 1997 Challenges for Asias Trade and Environment Douglas H. Brooks, January 1998 Economic Analysis of Health Sector ProjectsA Review of Issues, Methods, and Approaches Ramesh Adhikari, Paul Gertler, and Anneli Lagman, March 1999 The Asian Crisis: An Alternate View Rajiv Kumar and Bibek Debroy, July 1999 Social Consequences of the Financial Crisis in Asia James C. Knowles, Ernesto M. Pernia, and Mary Racelis, November 1999
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Min Tang, June 1991 Recent Trends and Prospects of External Debt Situation and Financial Flows to Asian and Pacific Developing Countries Min Tang and Aludia Pardo, June 1992 Purchasing Power Parity in Asian Developing Countries: A Co-Integration Test
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About the Paper The ongoing slowdown in the economy of the United States (US) has sparked increasing concerns over the short-term growth prospect of East Asia. Using the Oxford Economics Global Model, Cyn-Young Park examines the possible impacts on East Asia of a sharper and longer US slowdown than is currently anticipated in the Asian Development Outlook 2007. The simulation results suggest that a US slowdown on its own would not meaningfully derail East Asia's strong growth. However, in case of significant spillovers from the US slowdown through financial instability and a hard landing in investments in the Peoples Republic of China, different growth stories of East Asia may unfold.
About the Asian Development Bank The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the worlds poor. ADB is a multilateral development finance institution owned by 67 members, 48 from the region and 19 from other parts of the globe. ADBs vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens. ADBs main instruments for providing help to its developing member countries are policy dialogue, loans, technical assistance, grants, guarantees, and equity investments. ADBs annual lending volume is typically about $6 billion, with technical assistance usually totaling about $180 million a year. ADBs headquarters is in Manila. It has 26 offices around the world and has more than 2,000 employees from over 50 countries.
Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No.