| Summary: | Growth in developing East Asia and the Pacific remained strong in 2011, although it slowed from its post-crisis peaks. Strong domestic demand offset weaker external demand from the United States and Western Europe. Looking ahead, the external environment is likely to remain weak. The best prospects for the region to maintain high rates of growth, job creation, and poverty reduction are through rebalancing towards domestic demand and investing in productivity increases and further international integration. The region remains vulnerable to the continued uncertainty in Europe through trade and financial linkages. Although last December's fiscal pact and liquidity support from the European Central Bank helped stabilize financial markets, recent political events and market developments point to continued challenges. Renewed market volatility and a further slowdown in European economies cannot be ruled out. The European Union (EU), along with the US and Japan, accounts for over 40 percent of the region's direct export shipments and an estimated 60 percent if intraregional trade linked to production networks is taken into account. A serious disruption in the EU would also have knock-on effects on East Asia's exports and growth by lowering growth in other regions, particularly Eastern Europe. Moreover, European banks provide a third of trade and project finance in Asia. Policies to support the movement of labor among countries can contribute to higher productivity. Migration in developing East Asia has helped fill labor shortages in host countries and remittance flows have contributed to poverty reduction and macroeconomic stability in home countries. Yet, as in other parts of the world, existing bilateral and regional migration policies do not always allow migrants to move efficiently to where returns are highest or allow firms to obtain the workers they need, and these policies may contain incentives for undocumented migration. Improved regional migration policies could enhance the gains from regional economic integration and allow those countries facing a negative demographic drag on economic growth in the next generation to obtain much-needed labor inputs.
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