The overall growth rate in Asia will increase to about 6 per cent in 2002 and will be slightly higher in 2003, according to Bimal Jalan, governor of the Reserve Bank of India (RBI).
"This positive outcome is largely owing to the anticipated better growth rate of 6 per cent in India and over 7 per cent in China," the governor said at a central bank governors' conference organised by the Bank for International Settlements (BIS) in Basel on Sunday.
The general consensus is that there were positive signs of global economic recovery, he added.
"It is generally expected that countries which experienced negative growth in 2001 are likely to record positive, though modest, growth in 2002. High performers of 2001 may exhibit further improvements, with the magnitude of improvement depending on the pace of recovery in external and internal demand," Jalan said.
The recent signs of recovery in internal demands have improved the prospects of Asian countries in particular.
Jalan emphasised that each emerging market has been affected by global developments, with the transmission operating through trade flows, financial flows, deterioration in terms-of-trade and shifts in confidence.
While Asia is expected to have been affected the most through the trade account (due to the high degree of trade openness of some of these countries), Latin American countries are likely to be more affected by the shocks transmitting through financial markets (due to their reliance on substantial external financing and high external debt) and the African countries are expected to be particularly affected by the deterioration in terms-of-trade.
The prospects of developing countries in the next few years would depend largely on six factors: equity market linkages; outlook for capital flows; commodity prices; major currency alignments; outlook for official flows; structural reforms and sound macro policies.
The governor said, in the short-run, appreciation of domestic currency vis-a-vis the dollar makes domestic financing cheaper, reducing the debt servicing burden. At the same time, greater volatility of the exchange rate against major currencies can have destabilising impacts, particularly on medium-term capital flows.
The greater convergence of the US and emerging market economies' equity markets remains an important channel of transmission of shocks. If there is a sudden volatility in the Nasdaq or Dow Jones, the confidence in the emerging markets are likely to be affected, particularly in new technology sectors.
