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Despite high oil prices and the devastating tsunami, developing countries in Asia will experience robust growth in 2005 and continue a healthy expansion in 2006-07, the Asian Development Bank (ADB) says in a major report released.

ADB’s flagship annual economic publication, Asian Development Outlook (ADO), was recently launched at a press conference in Hong Kong. In it, the Manila-based multilateral development bank projects the region will achieve an overall economic expansion of 6.5% to 6.9% in 2005-07 on the back of buoyant domestic demand and further strengthening of intraregional trade.

The upbeat outlook draws on the strong growth momentum gained through spectacular economic performance in 2004, when the economies of developing Asia and Pacific registered gross domestic product (GDP) growth of 7.3% in 2004.

“Developing Asia has seen its strongest economic growth since the financial crisis of 1997-98,” says ADB chief economist Ifzal Ali. “Nearly all of the economies in the region grew by more than 5% in 2004. That is remarkable for an area that is home to about 4bn people.”

The ADO, which includes analysis and forecasts of economic trends for 42 economies in Asia and the Pacific, noted that rapid growth in the region was underpinned by strong domestic and external demand. Developing Asian economies benefited from robust growth in major industrial countries and surging intraregional trade driven by China’s dynamic economy.

The prospects for growth in major industrial countries and for world trade remain positive, although some moderation is expected. Together with this relatively benign external environment, a broadening of the recovery in the region provides a firm foothold for continued expansion. Domestic demand, which has strengthened in most economies over the past two years, and increasing regional economic integration heighten the region’s resilience against any deterioration in the external environment.

“A major feature of economic developments in 2004 was a marked revival of business investment, particularly in East Asia and Southeast Asia, where it had been lagging since the Asian crisis,” Ali says. The revival of business investment, combined with continuing or strengthening consumption demand in most countries, will continue to translate into robust rates of growth, as well as providing a basis for sustainable long-term growth.

Regional economic integration continues to move forward. Intraregional exports increased by 27.9% in the year to September. Intraregional trade is expected to continue expanding at a brisk pace as the rest of developing Asia integrates further with China and increasingly with India, offering greater opportunities for the region.

Despite the confident baseline outlook for developing Asia, there is a risk that global imbalances could unravel during the forecast period. “A much more robust growth projection for the US economy, while Japan and the euro zone go through a relatively rough patch, implies that the problem of external imbalances in the US could become worse, triggering a sharp depreciation of the dollar, a spike in inflation, and more sudden increases in interest rates, thus ultimately restraining world growth and trade,” the ADO warns.

Asia’s role remains crucial in the resolution of global economic imbalances. The region has produced large current account surpluses – with its foreign exchange reserve accumulation amounting to US$1.6tn in 2004, up from US$1.3tn in 2003 – and it finances a significant share of the US deficit, mainly through large purchases of securities. An orderly adjustment of such global imbalances through strengthening regional demand as well as proactive and coordinated regional exchange rate policies would benefit both regional and global economies.

Other potential risks to the region’s bright economic outlook include epidemics, the threat of terrorism, that the growing volatility of intraregional cross-currency exchange rates might hamper regional economic integration, and sustained high oil prices.

“As evidenced by the recent resurgence of avian flu in Vietnam and Cambodia, the risk of broader and more life-threatening epidemics remains a very serious concern to the region,” the ADO states. “In addition, the disastrous tsunami that struck the countries bordering the Indian Ocean and its impacts-including the huge loss of human life and a sharp increase in poverty in the affected areas-underscore the need to reinforce regional cooperation in Asia.”

“As the external environment runs the risk of becoming less bright over the forecast period, initiatives by developing Asian governments to enhance competitiveness and promote stronger regional integration will become more important,” the ADO states.

A special theme chapter of ADO 2005, titled Promoting Competition for Long-Term Development, elaborates that the region’s high economic growth rates can only be maintained if economic competition is fostered through effective competition policies.

The combination of competition, cooperation, and coordination will be critical as Asia-Pacific continues to strengthen its interdependence with industrial countries, deepen integration within the region, and broaden inclusiveness. Working together, the region can transform its robust medium term outlook into a strengthening Asian re-emergence for decades to come.