Inclusive, Balanced, Sustained Growth in the Asia-Pacific

3. Advanced Asia: Achieving Sustained Growth

Advanced Asia: Achieving Sustained Growth 63 3 Advanced Asia: Achieving Sustained Growth Shinji Takagi I. HOW THE CRISIS AFFECTED ADVANCED ASIA1 Although individual circumstances differed, the Advanced Asian economies of theAsia-Pacific region were all hit hard by the global financial crisis when it spread to the real sector and caused the volume of world trade to collapse in the latter part of 2008. These economies immediately responded to the sharp deceleration of economic activity by easing monetary and fiscal policies substantially, which acted relatively quickly to help stabilize the economies. In fact, signs of economic recovery were already evident in the region in the first part of 2009, with some economies returning to positive growth in the early months. The biggest policy challenge most economies faced at the end of 2009 was to decide when to reverse the extraordinary stance of monetary and fiscal policies, which cannot be sustainable for a long time, in view of potential inflationary and debt sustainability concerns. How to manage the exit will not be easy, however, inasmuch as the prospect for the recovery of world trade remains uncertain. Over the short 64 Shinji Takagi term, there is a danger that pulling the stimulus prematurely may cause the nascent recovery to stall. Over the medium term, there is going to be an inevitable rebalancing of global demand that will have major implications for Advanced Asia. It will take time to restore balance sheets in advanced Western countries, notably the United States, so that the region’s net exports to these markets must decline. This means that Advanced Asia, especially those economies that had relied on high-tech exports to the West to propel growth, must find alternative engines of growth if it is to make the economic recovery firm and sustainable. The initial impact of the U.S. sub-prime crisis was relatively small on the Advanced Asian economies. For the most part, these economies had only limited exposure to sub-prime-related assets and their banking systems were relatively sound and well capitalized. In fact, the biggest challenge facing these economies in the summer of 2008 was high energy and other commodity prices. This terms of trade development adversely affected Japan, Korea and Chinese Taipei, given their high dependence on energy and commodity imports. On the other hand, Australia, benefiting from the same terms of trade shock, saw strong private investment through the fall of 2008, but had to deal with an overheating economy. Through the third quarter of 2008, the Advanced Asian economies appeared little affected by the financial crisis. Singapore registered yearon -year growth of nearly 2 per cent in the third quarter, despite the deceleration of growth in its large financial sector. Japan’s economy began to contract in the second quarter, but the cause was more likely related to the fall in stock prices (which adversely affected the willingness of banks to lend), the delayed impact of the high energy and commodity prices, and the sharp appreciation of the yen against major currencies. New Zealand had already experienced a deceleration of growth as it saw an end to its real estate boom and private investment suffered. Yet, growth remained modestly positive. It was only in the fourth quarter that output collapsed across the region (Figure 3.1). Japan, Korea and Chinese Taipei were hit hard by the global shrinkage of trade. The collapse of exports in these economies, as noted in the main report, was directly translated into a correspondingly large fall in industrial production. Korea experienced, in addition, a precipitous outflow of capital, which almost caused a currency crisis (Korea’s balance of short-term external debt and foreign ownership in the equity market exceeded the size of the country’s foreign exchange Advanced Asia: Achieving Sustained Growth 65 FIGURE 3.1 Quarterly GDP Growth in Advanced Asian Economies (% yoy) Sources: International Monetary Fund, International Financial Statistics, on-line database; for Chinese Taipei only, Central Bank of the Republic of China, Financial Statistics. 66 Shinji Takagi reserves, which created investor nervousness). Singapore was affected not so much by the collapse of exports as the collapse of global trade, given its large transport-related service sector, as well as the shrinkage of the financial sector. II. WHAT CAUSED THESE EFFECTS? The impact of the global financial crisis turned out to be greater on Japan, Korea, Singapore and Chinese Taipei than on the epicentre countries of North America...