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Contents
Foreword iv
Section 1: Introduction 1
Section 2: Impact of the Eurozone Debt Crisis on Asia 6
2.1 e Financial Channel 7
2.2 e Real Economy 13
2.3 Estimating Crisis Impact 14
Section 3: Policy Challenges 17
3.1 Safeguarding Growth in a Crisis 17
3.2 Keeping Economic Transformation on Track 20
Section 4: Conclusion 29
Appendix 30
iv
Foreword
Asia’s rapid economic and social development over the past several decades has
been an inspiration for all.
e region has signicantly boosted its share of global output and forged
strong links with the global economy. Its success in economic growth and
poverty reduction has been among its greatest achievements. Yet, sustaining its
growth momentum while confronting new and existing challenges remains a
formidable task.
Since the onset of the global nancial crisis in 2008, developing Asia has proven
its resilience. Nonetheless, some of the fundamental structural weaknesses in
developed economies are unlikely to be resolved soon, and the region might be
exposed to nancial contagion. Developing Asia therefore must adapt to what
could be a prolonged slowdown in mature markets.
Currently, the focus is on ways to contain risks emanating from trade and
nancial transmission channels. ese include ensuring adequate availability of
trade nance, sucient foreign currency liquidity, managing large and volatile
capital ows, and protecting the region’s nancial stability.
It is imperative to establish strong regional nancial safety nets to complement
both national and global nancial arrangements. I strongly believe regional
collective actions can cement our past gains and bring future shared prosperity.
In this regard, I am happy to see the progress and discussions to expand and
strengthen regional safety nets—like the Chiang Mai Initiative Multilateralization
and its surveillance arm, the ASEAN+3 Macroeconomic and Research Oce—to
enhance crisis prevention and improve mitigation.
Even as Asia deals with these immediate challenges, it must not lose sight of its
long-term development goals. To sustain its growth momentum and consolidate
its economic and social transformation, Asia needs to re-assess its own
growth model.
Foreword v
With weak demand in traditional markets in advanced economies, Asian
economies must rebalance the sources of growth toward domestic and regional
markets. is shi has already begun to happen. Regional cooperation and
integration are vital to this process. In addition, Asia should increase its economic
links with Latin America and Africa—a process which has already started. ese
regions represent markets for diversication as well as sources of sustained future
growth, given their endowments of natural resources. If regional cooperation
and integration initiatives are to succeed, whether within or across regions, their
overall goal must be to increase the welfare of people through shared prosperity.
e re-emergence of Asia as the world’s growth engine has brought enormous
responsibilities as well as opportunities. How Asia responds to the global
economic transformation is critical. Asia must pursue growth that is inclusive and
sustainable, and above all, growth that enhances the welfare of the people. Asia
also must grapple with how to eectively balance environmental considerations
against its aspirations for growth.
is monograph aims to stimulate debate on these issues. It is my hope that the
meeting will provide us with a wealth of feedback and strategic considerations to
guide ADB’s further analytical and operational work in these key areas.
I would like to express my deep appreciation to Jerey Sachs, Director of e
Earth Institute and and Professor, Columbia University; Bindu N. Lohani,
Vice President, ADB; Iwan J. Azis, Head of the Oce of Regional Economic
Integration, ADB; Masahiro Kawai, Dean, ADB Institute; and their respective
teams who contributed to the preparation of this study.
.
Haruhiko Kuroda
President
Asian Development Bank
1
The global crisis is a wake-up call for Asia.
Is its current resilience to be taken for
granted? Is the region adequately pre-
pared to deal with the opportunities and
risks of the ongoing global rebalancing?
Is there adequate policy coordination
within and across countries, to ensure
that key policy actions constantly improve
peoples’ welfare? Is regional cooperation
a pursuit only in times of stress? Authori-
ties in the region have begun asking these
questions, recognizing that there is no
room for complacency. This monograph
is designed to stir debate. Answering the
questions could lead to well-articulated
structural reforms that help sustain the
region’s growth.
Section 1
Introduction
Asia’s ongoing economic transformation has captured the world’s imagination.
Many marvel at the speed a diverse region packed with poverty has laid the
groundwork for future prosperity. ey acknowledge the massive hurdles crossed
to get this far, but are nonetheless awed by those still to be surmounted. Asia’s
role in the world economy is growing, but so too are the challenges in keeping its
transformation on track.
e genesis of Asia’s transformation is critical. History is fundamental for
thinking about the future. Yet the goal of sustained economic growth equitably
distributed remains central to the debate—and still elusive.
With the recent economic crisis and renewed recession looming in Europe—
and the United States (US) economy growing but fragile—how can Asia
weather another global economic disruption? Is there sucient monetary and
scal space to respond eectively? How will nance, production, and trade be
aected? Is Asia’s structural reform adequate—not simply to withstand another
crisis, but to augment the drive
toward continued strong, yet
more inclusive growth?
With the People’s Republic of
China (PRC)—and India—
indisputably core players in the
region, how can their disparate
yet fundamental growth
challenges be met? To rise in the
global economic rmament, how
will their trade and investment
strategies meld with those of other
economies or sub-regions such as
Southeast Asia, South Asia, and
Central Asia and other agendas?
Is regional cooperation a canard?
Or is there room for real synergy?
2 How Can Asia Respond to Global Economic Crisis and Transformation?
Many speak of a seismic shi in economic gravity to rapidly developing and
highly diverse Asia. For the region to lead global recovery and meet the multiple
challenges of forming a strategy to sustain robust yet inclusive growth, is a new
development paradigm needed? What are its components and do we have the
institutional architecture to make it work?
ese are ambitious questions. Yet they are worth investigating.
is monograph aims to build a foundation for discussion on how to confront
and use current events to clear a better path toward sustainable, inclusive growth
and development in Asia—always cognizant of the region’s growing responsibility
to help build nancial and economic stability globally.
People tend to forget that Asia’s much vaunted economic emergence over the past
few decades is a re-emergence. Prior to the Industrial Revolution, Asia accounted
for 60% of the world economy. at share declined to 15% by 1950, when Japan
began post-war reconstruction. Japan doubled its per capita income in a decade.
As countries throughout the region—most newly independent—began to set
national agendas amid an evolving technological revolution in the 1960s, the
seeds of transformation were planted. e so-called Asian miracle accelerated
in the 1970s. Natural resource exploitation returned, but more in partnership—
the precursor to a more even playing eld. Easing the regulatory environment
allowed foreign direct investment to ourish. Trade soon followed.
Import substitution gave way to export promotion. e private sector leapt to the
fore in building production networks and supply chains—as the 1980s turned
into the 1990s. Tiger economies became industrial and nancial entrepôts.
And then Asia’s economic giants—the PRC and India—entered the fray, using
market reforms to varying degrees to introduce millions upon millions of low-
cost workers to the global labor pool, using globalization to speed economic
growth—even if increasingly unequal.
e result so far—Asia’s share of global gross domestic product (GDP) reached
35% in 2010. Studies suggest it could reach as high as 52% by 2050.
e consequences of this growth have been dramatic. Not only has the middle-
class grown to become a force in the region, but hundreds of millions have been
lied out of extreme poverty. Yet Asia remains home to a majority of the world’s
poor. Polarization and inequalities are also on the rise. While there is signicant
economic momentum, Asia needs to do more in bringing opportunities for
inclusive and sustained growth to the majority of its people.
Introduction 3
e origin of the 2008/09 global nancial crisis—the worst since World War II—
sets the stage.
A long period of rapid credit growth, ush liquidity supported by easy monetary
policies, and the growth of asset market bubbles—notably in real estate—led
nancial institutions to boost leverage that exposed both real and nancial
sectors to sharp corrections in asset prices. As a result, the collapse of the US
subprime market, a small slice of the overall nancial pie, shook the edice of
the entire nancial system and exposed long-gestating global structural aws.
It laid bare the debated linkages between global imbalances and a potential
nancial meltdown.
Its roots were seeded by global structural change—the integration of Asia into
the global economy, the dissolution of the Soviet Union, and most recently,
the emergence of Africa. is wholesale liberalization more than doubled the
global labor force. Jobs, mostly unskilled, relocated from developed countries
to emerging economies—primarily the PRC and Southeast Asia. To compensate
for lost competitiveness in low-end manufacturing and assembly, high-income
countries focused on boosting non-tradable sectors. is included mortgage and
nancial deregulation to stimulate job growth.
Low and stable ination reduced macroeconomic volatility. A “Great Moderation”
led to expansionary monetary policy globally in the 1990s and early 2000s. Loose
credit plus nancial deregulation encouraged risk taking. Large real estate bubbles
in Europe and the US meant new construction jobs for displaced industrial workers.
But it also stimulated nancial innovation (like mortgage securitization) to hide
risk, supported by perverse incentives for credit-rating and deal-maker greed.
Together, the expanded global labor force and “shadow” nancial system led
to severe global structural imbalances—current account imbalances, excessive
debt in advanced economies, over-reliance on assembled and low value-added
manufactured exports in some emerging economies, and growing income
inequality across the board.
In its early days, the crisis squeezed liquidity and risk premia skyrocketed.
Financial insolvency of several institutions surfaced, but largely disguised the
wider systemic risk. It was the collapse of Lehman Brothers in September 2008
that lied the veil as condence evaporated, investors retreated, and markets
tumbled. Recession ensued.
When the global nancial system began stuttering in mid-2007, the impact on
Asia was limited. e region was neither highly exposed to the structured credit
4 How Can Asia Respond to Global Economic Crisis and Transformation?
products that caused problems for the US and European nancial institutions,
nor heavily dependent on global capital markets for funding, except for one
or two economies. Nonetheless, it was vulnerable to swings in global investor
sentiment and increasingly cautious investor appetite.
e Lehman Brothers bankruptcy was the tripwire. Asia felt the liquidity crunch,
markets plummeted, trade fell dramatically, capital ows reversed outward,
and growth slowed markedly or contracted in several economies. Massive scal
stimulus and accommodative monetary policy, liquidity injections, government
guarantees, and local currency nancing helped the region stave o the liquidity
crisis and resuscitate growth.
Recovery came rst and rapidly to emerging economies, and volatility spiked, with
growth in advanced economies anemic. By the rst half of 2009, condence had
returned and portfolio inows started trickling in. Toward the end of 2009 and
early 2010, policymakers were increasingly condent of the recovery’s traction
and turned their attention to exiting stimulus and normalizing monetary policy.
Asia’s rapid recovery was helped as global nancial markets stabilized following
US and eurozone government intervention to restore condence.
But global economic growth has stalled since the crisis. And it has gradually
exposed the unsustainable scal policies in Europe and its fragile banking
system—a second and likely more prolonged phase of the global crisis.
By 2010, important eurozone
members were struggling. Greece,
Portugal, Ireland, Italy, and Spain
struggled to convince investors they
could repay sovereign debt. e
possibility of contagion spreading
from escalating European debt
problems has kept nancial markets
and global policymakers on edge. A slew of political statements, bailouts, and
austerity packages have struggled to restore investor condence or kick-start the
economic growth needed to allow struggling economies a way out. To the end of
this decade at least, global growth—including Asia’s—will likely be lower than the
past three decades. Short-term xes do not solve structural problems.
e Great Recession and current eurozone crisis lay bare the need for Asia to
confront major challenges to its ongoing economic transformation. How should
Asia position itself—crisis or not? is monograph analyzes these challenges and
links the eects of a potential new crisis to the next steps in Asia’s continuing
The global crisis showed that while
day-to-day “fire fighting” is needed in
the short-term, policy makers should
also take time to invest more capital
in developing medium and long-term
policy options.
Introduction 5
economic transformation. e
global economy needs to readjust.
And Asia—increasingly central
to global economic growth—
must contribute by diversifying
its sources of growth, allocate its
large nancial resources more
eectively and eciently toward
productive and socially equitable
investment, and bolster domestic
and regional demand.
e next section briey examines
how a crisis would be transmitted
through nancial and trade
channels. e ongoing eurozone
debt crisis is taken as a point of
departure. Any contraction in
external demand, tighter liquidity,
rise in risk premiums, or a stricter
regulatory environment will
impact Asia’s real economies, its
companies and banking systems.
e section also provides an
estimate of the impact the
eurozone debt crisis might have on
Asia’s economic growth in 2012. It
ends with a list of potential risks
and vulnerabilities for the region’s economies.
e third section presents policy options on short-, medium-, and long-term
structural challenges central to the region’s crisis mitigation and ongoing
economic transformation, ranging from rebalancing to trade policy to regional
nancial safety nets. A conclusion follows.
Developing Asia has certainly added
resilience to the global economy to face
financial shocks. Many countries have
comfortable current account surpluses,
low external debt, and high foreign
reserves. Most of the region’s banking
systems are sound with a high capital
base and low nonperforming loan ratios.
Many countries also have adequate fiscal
space should a reintroduction of fiscal
stimulus be required.
The ongoing global uncertainties have
forced us to reevaluate the role and
structure of global finance. At the
same time, we have seen the center of
economic gravity shifting gradually to
Asia, implying more responsibilities for
our region. The challenges we face are
huge. Asia’s role in sustaining global
growth is critical—and this will be best
achieved by ensuring that Asia’s own
growth remains strong and sustainable.
For this, growth must be inclusive,
balanced, and environmentally friendly.
Excerpts from remarks made by Haruhiko
Kuroda, President, Asian Development
Bank, at the consultative workshop in
New Delhi on 1 February 2012.
6
Section 2
Impact of the Eurozone Debt Crisis
on Asia
Europe’s sovereign debt crisis
could have strong repercussions
on developing Asia. Both the
United Stated (US) and eurozone
are major markets for the region’s
exports and sources of nancial
capital and portfolio investments.
Memories of the sharp slowdown
from the 2008/09 “Great Recession”
remain fresh. e region’s nancial
sector and stock markets were
battered as foreign investors ed
to “safe havens” elsewhere. Many
Asian economies suered large
declines in trade and output. Still,
the region recovered quickly due
to prompt and eective scal and
monetary stimulus, fairly healthy
nancial systems, and stringent
prudential regulations.
us far, the eurozone sovereign debt crisis has had limited impact on developing
Asia’s growth. While the region’s economic expansion has moderated, it remains
robust, roughly in line with recent historical trends. Financial systems have
been little aected by global nancial market volatility and have continued to
channel funds to support economic activity. e economic resilience is partly
due to the ongoing process of rebalancing sources of growth from external
to domestic demand. For now, no large or mid-sized economies will likely
experience a hard landing.
However, if conditions were to worsen in Europe, the impact on the region
could be more severe and the crisis could last longer. With advanced economies’
Asia is enjoying bright momentum of
economic prospects, with countries
maintaining rapid economic growth,
and becoming the major engine of
world economic growth. At the same
time, with the uncertainty of external
environment increasing, as well as risks
and challenges, Asian countries, in
varying degrees, are confronted with the
challenges of economic restructuring
and promoting sustainable and
equitable economic growth.
Excerpt from remarks made by Zheng
Xiaosong, Director General, International
Department, Ministry of Finance of
the People’s Republic of China at the
consultative workshop in Beijing on
1 March 2012.
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