Impact of the Global Financial Crisis on Asia and Asia’s Responses Masahiro Kawai Asia Development Bank Institute Asia-Europe Economic Forum “ Crisis Developments in Asia and Europe ” Kiel Institute for the World Economy Kiel, 7-8 July 2009

Outline Impact of the crisis on Asia –Export linkages –Financial contagion Global and Asian policy responses US consumption evaporation Agenda for Asia

Exports stabilizing in recent months (1) Source: CEIC Note: US$ basis

Exports stabilizing in recent months (2) Source: CEIC Note: US$ basis

Industrial production likewise stabilizing in recent months (1) Source: CEIC

Industrial production likewise stabilizing in recent months (2) Source: CEIC

GDP growth probably hit bottom in 2009:Q1 overall

Stock price indices rebounding in recent months (1) Source: CEIC Note: 2000:01 = 100

Stock price indices rebounding in recent months (2) Source: CEIC Note: 2000:01 = 100

Asian NPL ratios low

Foreign exchange rates show greater flexibility (1) Source: CEIC

Foreign exchange rates show greater flexibility (2) Source: CEIC

Policy responses: Fiscal stimulus of selected DMCs More than than 5% of GDP: People's Republic of China; Kazakhstan; Georgia; Malaysia; Papua New Guinea; Singapore; Viet Nam Between 2% and 5% of GDP: Armenia; Hong Kong; India; Republic of Korea; Philippines; Taipei,China; Thailand; Uzbekistan Between 0.5% and 2% of GDP: Cambodia; Indonesia; Pakistan Less than 0.5% of GDP: Sri Lanka Source: ADB Note: Based on announced fiscal stimulus packages of countries where data is available.

Some scope for further easing of monetary policy

Share of consumption and imports in US GDP likely to return to longer-term trend Source: CEIC

Impact of permanent evaporation of US consumption on Asia´s current account and production patterns Impact of permanent evaporation of US consumption on Asia´s current account and production patterns

Final demand for Asian exports still comes from the advanced economies Source: ADB, Asian Development Outlook Final demand composition of Asia’s export in 2006

A CGE simulation study Model assumptions Reduction of US consumption by 5% of GDP, which will induce US current account adjustment through real depreciation of the US dollar against the rest of the world Constant bilateral real exchange rates among non- US economies Current accounts endogenously adjusted in response to real exchange rate changes Long run full employment

Improvement in the US current account reduces Asia’s current account surpluses CA (change as % of GDP) Terms of trade (% change) Real private absorption (change as % of GDP) China &HK JPN KOR TWN IDN MYS&SGP PHL THA VNM USA Source: Kawai and Zhai (2009)

Asia’s output adjustment differs across countries and sectors East AsiaCHNJPNKORTWNASEAN6 Agriculture Textile Apparel Vehicles Electronics Machinery Other manufactg Services Percentage change in output Source: Kawai and Zhai (2009)

Findings of the CGE model simulation There will be a switch away from domestic demand-led growth to export-led growth in the US, and a switch away from export-led growth to domestic demand-led growth in non-US (particularly East Asian) economies A decline in US demand leads to structural adjustment in production and trade in East Asia East Asia’s manufacturing sectors—such as vehicles, electronics and machinery—are major losers in the adjustment process, while its agricultural and services sectors are likely to gain from the expanded domestic demand

“Trend decoupling” in real GDP growth Source: Computed from IMF, WEO (October 2008) and WEO Update (January 2009) Actual and Trends

“No decoupling” in GDP growth cycles Source: Computed from IMF, WEO (October 2008) and WEO Update (January 2009) Deviations from Trends

Asia´s Rebalancing Asia needs to rebalance sources of growth Demand side (consumption and investment) - personal consumption (social sector protection, financial sector) - corporate savings (to be channeled to households through government) - infrastructure investment Supply side - services sector - green industry (energy efficiency, environment) Regional market integration

Policy Agenda for Asia Asia´s New growth model Savings and investment correction - focus on spending (personal consumption) - focus on nontradables sector - exchange rate adjustment “Green new deal” - new sources of growth - international support needed for technology transfer, financial assistance Social sector protection initiative - key for socially sustainable growth - basis for supporting household consumption

Thank you For more information: Dr. Masahiro Kawai Dean& CEO Asian Development Bank Institute