The economic rebound in East Asia and the Pacific has been surprisingly swift and very welcome but take China out of the equation and the regional picture is less rosy, says the World Bank's half-yearly assessment of the economic health of the East Asia and Pacific region.

The latest East Asia and Pacific Update, titled Transforming the Rebound into Recovery, says large and timely fiscal stimulus spending in most East Asian and Pacific countries – led by China and Korea – along with a powerful process of inventory restocking now underway, have driven the rebound in the region and contributed significantly to confidence in a global pick-up.

Developments in the East Asia & Pacific region remain strongly influenced by China, where the projected increase in GDP in 2009 will offset three quarters of the decline in the GDPs of the U.S., the Eurozone and Japan. But despite Indonesia and Vietnam performing well, developing East Asia¹ excluding China is projected to grow at around 1 percent in 2009 -- more slowly than South Asia and the Middle East and North Africa, and only slightly stronger than Sub-Saharan Africa. Some countries remain especially hard hit – GDP is contracting in Cambodia, Malaysia and Thailand and is barely growing in Mongolia and some of the Pacific Islands, the report says.

As enterprises, both formal and informal, adjusted to weaker demand earlier in the year, workers across the region have been impacted in different ways. Enterprises cut workers’ hours, eliminated extra shifts, let temporary or contract workers go, or lowered wages – but some of these measures are now being reversed. Relatively few full-time employees have been laid off as companies have tried to limit recruitment and training costs when demand picks up. Workers who have been let go have typically found jobs in services and agriculture, often in the informal sector at lower pay and in more challenging working conditions. In some countries, fiscal stimulus packages have supported the creation of temporary public employment.

The report estimates that 14 million people who would have emerged from $2-a-day poverty if the region’s economies had kept growing at pre-crisis levels, will remain in poverty in 2010.

However, with projected growth of 8.4 percent in China this year and the country’s domestic demand racing ahead of global demand, countries exporting consumer durables, electronic components and raw materials to China have felt the positive flow-on effects. As a result, the World Bank is projecting growth of 6.7 percent in 2009 for developing East Asia and the Pacific and 7.8 percent next year.

As officials, ministers and heads of state from the 21 member countries of the Asia-Pacific Economic Cooperation (APEC) forum head to Singapore later this week, the World Bank’s chief economist for the East Asia & Pacific region, Vikram Nehru warned that risks to a sustainable recovery remain.

“Some governments in the region will have the fiscal space to sustain fiscal stimulus until recovery is on a firmer footing,” he said. “The time to begin removing monetary accommodation may come earlier however, especially given concerns about asset price bubbles.”

He said looking beyond 2009, countries in the region can still grow rapidly even if growth in the advanced economies is slow. To take advantage of the growth potential ahead, countries need to resist protectionism, remain open and become more, not less integrated with the regional and global economies.

“Moving up the value-added chain in global and regional production networks should lead to further productivity gains and strong growth, and allow for new technologies and innovation to spread more widely through the region’s economies,”Nehru said.

The report’s lead author Ivailo Izvorskisaid the crisis has helped governments realize that more growth can be extracted from domestic demand if incentives that have limited expansion in private consumption and services are tackled.

“Rebalancing growth need not be presented as a choice between relying on global markets or on domestic markets,”Izvorski said. “It can be about extracting more growth from domestic demand as a complement to increasing integration within the region and the global economy. Facilitating the development of the service sector, addressing infrastructure bottlenecks, and boosting the quality of education need to be accompanied by developing better targeted and better funded social protection systems.

“Together with education and health, improved social protection systems will help reduce precautionary saving, promote domestic cohesion at a time of rapid regional and global integration, and enable countries to reap the full benefits from agglomeration economies, all of which are key to long-term economic success.”