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Tuesday 20 Feb 2018 | 15:04 | SYDNEY
Tuesday 20 Feb 2018 | 15:04 | SYDNEY

Asia's crisis



2 April 2009 10:04

The final quarter GDP readings for 2008 for Asia’s economies made for depressing reading. On a seasonally adjusted, annualised basis, output contracted by more than 20% in Thailand and Taiwan, by more than 15% in Korea and Singapore, and by more than 12% in Japan. On the same basis, growth was probably flat in India and only modestly positive in China. 

Subsequently, many of the readings for trade and industrial production for the first quarter of this year have provided scant grounds for optimism, although interpreting the January and February numbers across the region was complicated by the impact of the ‘moving holidays’ effect associated with Chinese New Year. Even so, the data have shown dramatic falls in exports and industrial production across trade-dependent East Asia: in Japan, for example, exports plunged 46% year-on-year in January and then plummeted 49% year-on-year in February, marking the steepest decline since 1957. South Asia has been suffering too: in January, India reported its first back-to-back decline in industrial production in 16 years.  

The same strong international trade and financial linkages that allowed Asia, and in particular East Asia, to benefit so much from the global upturn that peaked around mid-2007 are now dragging down regional economic performance.  But while the 1997-98 crisis in East Asia was mainly about a sudden stop in capital inflows – that is, a capital account crisis – this time around the transmission mechanism has largely been international trade – a current account crisis.

As the World Bank points out in a recent update to  its Global Economic Prospects 2009, the close link between trade in manufactured products and capital expenditures has produced a vicious circle that has been taking a particularly heavy toll on economies that have specialized in the production of capital goods, including Japan, China, Korea and Taiwan. Similarly, a recent IMF paper makes the point that Japan’s vulnerability to the crisis reflects the large share of advanced manufactures – cars, IT and machinery – in its production.

The World Bank now thinks Japan’s economy will shrink by more than 5% this year, and expects growth in the developing economies of East Asia and the Pacific will slow to 5.3%. While the Bank notes that China’s economy has so far been able to cope with the financial crisis better than much of the rest of the world, it still thinks that declining exports mean that Chinese growth will slow to 6.5% in 2009, down from 9% last year. Of this reduced growth performance, the Bank estimates that government-influenced direct expenditure would contribute 4.9 percentage points to GDP growth, or three-quarters of the total. 

Several ASEAN economies, including Thailand, are forecast to fall into outright recession, although Indonesia is projected to deliver growth of 3.4%. In South Asia, the Bank reckons that declining export demand, together with lower levels of remittances and diminished capital inflows will see Indian growth slow to 4% this year.

The Asian Development Bank is only a little more optimistic. As set out in the recently released Asian Development Outlook, the ADB thinks that the hit to the region’s export prospects from the global downturn, plus subdued domestic demand, mean that developing-Asia’s economic growth this year will be the weakest since the 1997-98 financial crisis, at just 3.4%, or almost 3 percentage points lower than last year. 

The ADB expects China to grow by 7% and India by 5% this year, which is enough to keep projected growth in developing Asia in positive territory in 2009, but the economies of Hong Kong, Korea, Taiwan, Malaysia, Singapore and Thailand (along with Japan) are all forecast to shrink.

East Asia is now suffering its second major economic crisis in not much more than a decade. The lessons the region took from the capital account crisis were to purchase self-insurance in the form of large stocks of foreign exchange reserves, to avoid over-valued exchange rates, and to do its best to keep out of the hands of the IMF. What lessons will it draw from the current account crisis? The one the rest of the world wants it to draw is the much-touted case for a rebalancing of growth away from external demand and towards a greater reliance on domestic demand – a prescription that receives a lot of attention in the ADB’s Outlook. 

That prescription makes a lot of sense, but will involve some significant structural changes to the region’s current development model – a transition process that is likely not only to require a fair amount of time, but one which will demand a substantial political commitment too.

Photo by Flickr user Quan the Pooh!, used under a Creative Commons license.

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