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Asia's new financial crisis
Saturday, 28 March 2009 06:46

According to the IMF, in 2009 economic growth will be minus 2.6% in the US, minus 3.2% in Euroland and minus 5.8% in Japan.  The Asian Development Bank forecasts that the NICs (Hong Kong, Korea, Singapore and Taiwan) could have minus 3.9% growth in 2009 -- in reality it will be nore sharply negative.  And the ADB has China's 2009 growth at 6.7% (down from 9.0% in 2008) -- again, it seems to be heading lower, may be 4%.

This was not supposed to happen!  The US, which caused this financial crisis, is getting off lightly.  While East Asia, which has done most things right over the past decade, is being punished horribly.

It's not so long ago that the pundits were talking about the scenario of East Asia de-coupling from the financial crisis!  The story went like this.  Following their own crisis in 1997/98, the East Asian economies had got themselves back in shape.  They are now increasingly propelled by strong intra-regional trade and domestic demand.  Also, East Asian banks were relatively untainted by toxic assets.  Japanese banks had cleaned up their balance sheets after the lost decade of the 1990s.  And international reserves were abundant.

So, what is happening?  First, the statistics.  In the fourth quarter of 2008, Japan's real GDP crashed by 12%, with net exports contributing about 10 percentage points to this decline.  For Singapore the fall was over 15%, Korea about 20% and Taiwan about 25%!

In short, globalization is proving to be a double-edged sword.  East Asia's turbo-charged export growth has gone into turbo-reverse.  The countries most open to trade have received the biggest shock.  For the NICs, exports represent 71% on average of GDP! Japan and the NICs have exports concentrated in areas like automobiles, information technology and microelectronics -- the very areas where consumer demand in the US and Europe has been cut back.  This has adversely affected business investment. 

While intra-Asian trade has increased, this has been in the context of global supply chains.  Taking this into account, Asia's trade exposure to the US and EU has actually been growing, all the more so, given that trade represents a growing share of GDP.  Thus, the increasingly integrated global trading and financial system has magnified and accelerated the transmission process.  This has been exacerbated by a drying up of trade finance in the region.  And the ones being hit the most are women as they are the major source of labour in global supply chains.  

Stock markets in emerging Asia have also been hit harder than the US and Europe.  Global investors who had increased their holdings in Asian markets in the boom, have now reduced their exposure to the region.  For the second half of 2008, stock market valuations fell by 48% in China, 40% in Hong Kong and 36% in Korea.  

The dramatic increase in FDI which has financed much of East Asia's participation in global production networks, has also turned into reverse.  Both Asian corporates and sovereigns who had been relying on foreign funding, are now being hit by the retrenchment in cross-border lending.  The Institute of International Finance estimates that net capital flows to emerging Asia could decline from their 2007 peak by 80% in 2000.     

A new emerging Asian folklore is that it is the big globalizers that are being hit the most.  In reality, all of Asia is very globalized, but just in different ways.  For example, migrants' remittances have been a major source of revenue for countries like the Philippines and Indonesia.  Globally remittances amounted to $280 billion in 2008, and about $110 billion for Asia.  Migrants remittances already started falling in 2008, and face dire prospects this year.  And tourism is also an important source of revenue for Thailand and some other South East Asian countries, and again prospects look grim.

Countries are responding to the crisis with monetary and fiscal stimulus, and external financial suppport is also being provided.  But this will not ease all the pain. 

In short, globalization is proving a roller coaster in East Asia.  The one main exception is China.  Although China is now one of the world's leading exporters, exports represent a relatively low share of GDP by Asian standards.  And the Chinese government reacted quick smart with a fiscal stimulus package which is already having good effect.   


Global Economic Policies and Prospects, Note by the Staff of the IMF, for the Group of Twenty, Meeting of the Ministers and Central Bank Governors, 13-14 March, 2009, London, UK -- www.imf.org

Global Financial Turmoil and Emerging Market Economies: Major contagion and a shocking loss of wealth?  Asian Development Bank -- www.adb.org

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