The global economic crisis and Asian developing countries: impact, policy response and medium-term prospects

The global economic crisis and Asian developing countries: impact, policy response and medium-term prospects

Asian economies and global crisis: resilience to financial turmoil but vulnerability to trade shocks

This report examines the systemic and structural weaknesses and vulnerability in Asian economies, which all were uncovered during 2008 global crisis. The paper states that the financial sector has shown a significant degree of resilience to shock from the subprime crisis in almost all Asian countries. In this respect, self-insurance provided by large stocks of international reserves and strong payments positions have been a key element in the resilience of financial system to shock.

The author notes that a common feature of Asian economies is their high degree of susceptibility to financial boom-bust cycles and gyration in equity, property and currency markets. Specifically, the paper demonstrates that the subprime boom-bust cycle has entailed gyration in intra-regional exchange rates in East Asia. The author illustrates that the inconsistent exchange rates regime in the region is a main reason for that gyration. However, this regime is a potential source of conflict and not a sound basis for deepening regional economic integration. Therefore, the paper believes that the region needs relatively close cooperation over exchange policies.

The document furthermore points that the crisis has uncovered a high degree of vulnerability of East Asian economies to trade shocks, raising the question of whether the end of export-led growth has been reached. Accordingly, the paper mentions the suggestion to develop an internal market among developing and emerging economies in order to reduce this vulnerability. Nevertheless, the author deems the solution is not to turn inward, and rather recommends to:

  • stop relying on cheap labour and currency 
  • start allowing wages and private consumption to grow in parallel with productivity 
  • underpin the expansion of productive capacity by providing growing internal and regional markets in final goods .

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