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Asian Keynesianism: It worked

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COMMENTS

23 April 2010 13:08

Back in the first half of 2009, official sector forecasters were very cautious about the prospects for an Asian recovery and keen to emphasise that a sustained pick-up in growth was conditional on a resumption of activity in the developed world. This was a reasonable judgment; in the final quarter of 2008 and the first quarter of 2009, the collapse in world trade and industrial production had taken a heavy toll across the region. 

By the second half of last year, however, optimism had started to set in, and forecasters called a V-shaped recovery for the region. That shift to optimism was on the money. As the latest World Bank regional update puts it:

East Asia has mostly recovered from the crisis.  In the space of a year, the region shifted from a collapse in exports and investment, to leading the global rebound, and returning to the pre-crisis levels of real GDP (Figure 1 and Figure 2). The region has emerged stronger in a weakened world economy, in much better shape than after the 1997-98 Asian financial crisis.

 

Similarly, for Asia as a whole, the ADB's latest Asian Development Outlook points out:

Despite the pronounced initial impact on output, most evident in the fourth quarter of 2008 and the first quarter of 2009, the region has staged a spectacular V-shaped recovery...

Granted, it's not all good news. The World Bank estimates that, as a result of the crisis, as many as 14 million more people in the region will be in poverty this year, for example. Nevertheless, the overall economic story is a strong one. So what went right?

A significant part of the explanation involves the resilience of Asia's largest economies, including Indonesia, India and especially China, where sizeable fiscal and monetary stimulus helped ensure that Chinese growth was still an impressive 8.7% last year. (On the World Bank's calculations, if you take China out of the regional averages, then growth in the rest of developing East Asia was just 1.3% in 2009.*)

More generally, however, policy stimulus, both fiscal and monetary, appears to have played a major role in supporting regional growth. For example, according to the ADB:

Governments responded decisively with sizable fiscal stimulus packages (Figure 1.3.8). Indeed, the forceful and synchronized fiscal policy response was uncharacteristic for a region in which the use of countercyclical fiscal policy is uncommon...did developing Asia’s “fiscal experiment”, as it might be called, play a key role in maintaining resilience? The answer...would seem to be “yes”.

The World Bank also awards the actions of governments a prominent role:

This remarkable recovery has been due to a large and timely policy stimulus, renewed inventory restocking, and the return of buoyant demand abroad and consumer sentiment.

The relative importance of the various policy tools deployed has differed across countries. In the case of China, for example, the World Bank points out that most of the policy stimulus was quasi-fiscal: a surge in government-led investment of about 6% of GDP and in bank lending (mainly to finance government-led projects) of about 30% of GDP. Taken overall, however, policy intervention has been critical.

Indeed, so successful has this 'Asian Keynesianism' been that now a growing challenge for the region's policymakers is the need to unwind their previous actions in a timely manner in order to avoid the dangers of overheating, inflation and asset price bubbles.

This success has also raised other fears. The ADB report, after emphasising that 'Asia's unprecedented easing of monetary and fiscal policies marked a sharp break from the region's long-standing tradition of macroeconomic prudence', worries that the 'widespread perception that the unprecedented stimulus contributed substantially to the region's unexpectedly strong recovery may foster political pressures for greater monetary and fiscal activism.' For the ADB, it seems, Asian Keynesianism should be a strictly one-off affair. 

* The World Bank points out that this performance was just slightly better than Sub-Saharan Africa's, and goes on to note that, cyclical developments during the crisis aside, growth rates in East Asia excluding China have now been lower than in Sub-Saharan Africa for more than a decade.

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