Financial Crisis and Poverty in East Asia and the Pacific
James Adams
Vice President, East Asia and Pacific Region, World Bank

Speech to “Poverty Reduction and Development Forum – Financial Crisis and Poverty: Challenges and Actions”
17 October 2009, Beijing China

Your Excellency Mr. Vice Premier Hui,
Distinguished Leaders, Honored Guests, Ladies and Gentlemen!

It is my great honor to represent the World Bank at this important annual forum organized by UN China and the Chinese government.  China’s impressive record of poverty reduction over the last 30 years has not only brought great benefits to its own people, but also inspired and supported the global fight against poverty.  The World Bank is pleased to have supported China in these efforts. Our strong relationship is increasingly becoming a two-way street, under which China is also able to share its own experience with other developing countries. Today’s forum is a perfect example of such knowledge sharing.

The topics on today’s agenda are of crucial importance, especially in East Asia.  In my remarks, I will discuss (i) the impact of the economic crisis on the region, (ii) how countries and individuals are coping with the social impact of the crisis, and (iii) the role of the World Bank Group in responding to these challenges.

East Asia is Leading the Global Recovery
The world is recovering from the worst financial crisis since the Great Depression. Extraordinary macroeconomic stimulus, improved financial conditions and an upturn in inventory cycles have all contributed to the more positive economic sentiment. East Asian countries, led by China, have led the recovery for several months because of their timely and decisive policy responses against a background of well-capitalized banks and strong policy frameworks.

Nonetheless, the sharp decline in activity earlier this year will leave global output lower in 2009 than last year, with sizable falls in most developed economies and the slowest expansion among developing countries since 1982.  In East Asia, the recovery should limit the slowdown in regional growth to around 6-7 percent this year from 8 percent in 2008.  Take China out of the average, however, and the region is projected to grow at a slower pace than the Middle East and North Africa, South Asia and even Sub-Saharan Africa. Indeed, several countries will see contractions in 2009, while others will barely grow.

Although there is a notable pickup in industrial production and exports in virtually every country in the region, the recovery remains fragile.  The macro stimulus now in place and rapid inventory restocking will help propel activity through mid 2010. A sustainable recovery in private demand, however, is likely to be held back by very large excess capacity, restricted credit availability, higher unemployment and weak household incomes.  As a result, concerns about premature withdrawal of stimulus were on the agenda during the recent G20 meeting in Pittsburgh and the IMF-World Bank Annual Meetings in Istanbul.  The authorities in most countries rightly plan to sustain the fiscal stimulus until recovery is on a firmer footing, but recognize that the limits of what fiscal policy can accomplish will be reached faster unless private investors and consumers are reassured that they have viable strategies to unwind the stimulus over the medium term.

Coping with the Social Impact of the Crisis
While East Asia’s overall growth slowdown, the impact of the crisis will be disproportionate across and within countries, with poorer countries and citizens suffering most.  Globally, we estimate that because of the growth slowdown, 89 million more people will be living in extreme poverty on less than $1.25 a day by the end of 2010.  The corresponding figure on a $2 a day basis is as high as 120 million.  In East Asia, about 10 million more people will be unable to escape poverty as a result of the crisis. Hardship has also spread to those who have lost their jobs. Unemployment rates in most countries have risen, but usually by modest amounts.  Instead, people have either returned to the countryside or found informal sector jobs or jobs created through fiscal stimulus packages.  Informal sector jobs typically pay less than formal jobs, resulting in a substantial loss of income.

Evidence from past crises shows that growth collapses can also have serious effects on school enrollment, nutrition, and healthcare, especially of girls―effects that can cause irreversible damage to human development outcomes.  Governments in East Asia have worked hard to protect such programs and the amounts at risk in the region are limited.  Nonetheless, challenges for the low-income countries are numerous and sustained donor support will be needed.

Prospects for the Medium Term
While policymakers are rightly focused on near term developments, the outlook in the medium term is equally important and poses further policy challenges.  A substantial output gap will likely remain in both high-income and developing countries for five years or even longer, constraining investment and limit the scope for new job opportunities.  As a result, countries in East Asia will find it hard to grow as fast as before the crisis.  This will require changes in their earlier export-oriented growth model, with increasing attention given to developing a thriving domestic market. In China, rebalancing growth to allow robust expansion in domestic consumption will be a challenge and an opportunity.  This will require deepening of efforts to reduce the under-pricing of raw materials, energy and credit, to introduce land titling to enable farmers to pledge land as collateral for loans, and to introduce more comprehensive and better funded education systems, safety nets and anti-poverty programs.

The Role of the World Bank
Finally, let me turn to the role of the World Bank Group in helping developing countries tackle the global economic crisis. In response to the crisis, we delivered a record $59 billion of financial assistance during the fiscal year that ended in June 2009.  More than half of the total was IBRD commitments that rose three-fold from the previous fiscal year.  IDA commitments were also at a record, and half of IFC projects were also for IDA countries.  In the current fiscal year, we expect a record $40 billion in commitments from the IBRD, well on track to reach above the $100 billion level we planned a year ago.  After the crisis, the Bank intends to play an even more active role in helping developing countries secure support to boost growth and accelerate progress toward poverty reduction and meeting the other Millennium Development Goals.

Conclusion
Today’s forum takes place at a critical time.  As the world economy is recovering from a severe crisis, East Asia is emerging faster and stronger than other regions.  However, the effects of the crisis will linger for a long period of time.  This conference presents an excellent opportunity to share experiences and information, and understand better the challenges lying ahead to ensure a sustained global recovery and successful poverty reduction. Thank you again for inviting me to participate in this important annual event. I wish the forum every success.