Factors underlying Asia’s Growth Prospects First, domestic demand led growth Domestic demand in the regional economies is becoming an increasingly important driver of growth that has considerable potential to contribute further in sustaining growth prospects for the Asian region. The stronger domestic demand has also been reflected in the rising intra-regional demand for goods and services, thus providing a positive mutually-reinforcing effect for the region. While externally driven growth will continue to be important, the increased focus on strengthening domestic demand will reduce vulnerability to external developments. Second, the role of private consumption Given the focus on domestic demand to harness a more self-sustained and balanced economic growth, an important catalyst is the role played by private consumption. Private consumption is well positioned to further build the capacity of domestic demand in the region. The contribution of consumption to economic growth in regional economies has increased over time, supported by the expansion in per capita income in the region, which has increased by 4% per annum during the period 2000-2002. Consumption has also been supported by the fiscal and monetary stimulus that has been implemented in the region. This has enhanced incomes and strong credit expansion for household spending including for the purchase of housing. The tradition of high savings ranging to between 20% to 45% of GNP allows scope for encouraging a higher rate of consumption without undermining its sustainability. Household debt levels are also generally low. In addition, the household sector generally has a good track record in servicing their debt.

Policy makers in the region recognise the challenges that emanate from a more competitive environment and have continued to re-examine and redefine strategies geared towards building the capacity of domestic enterprises and thereby enhancing their contribution to growth of the domestic economy. In addition, efforts have also been made to develop new areas of growth to ensure a more diversified economy. Countries have increasingly shifted to areas of their natural comparative advantages, whether in agriculture, ICT, construction and infrastructure or services-related sectors in order to benefit from their inherent strengths. Seven, a new wave of FDI in the region Apart from intra-regional trade, intra-regional foreign direct investment (FDI) flows have increasingly operated as a strong force for growth in the East Asian region. Regional FDI has largely been traderelated. Early FDI in East Asia was mainly derived from Western multinationals, particularly the US. The second wave of FDI after the late 1970s was predominantly Japanese capital which flowed into East Asia, in search of lower costs of production. Today, the cumulative stock of Japanese FDI has surpassed that of American investments. Since the late 1980s, as Taiwan, Hong Kong and Singapore transformed into capital surplus economies that moved up the value chain, investments by these newly industrialised economies gained significance in Asia. This has represented the “third wave” of FDI in the region. The East Asian region is thus witnessing a steady inflow of FDIs from the NIEs to ASEAN and China.