Syndicate content

Why has developing East Asia led the global economic recovery?

Ivailo Izvorski's picture

Only a few expected in late 2008 that East Asia would lead the world economy out of the crisis. Skeptics pointed to the continued dependence of the region on exports to advanced economies. And skeptics and believers alike were predicting that all countries in the region would rethink their growth models to focus more on domestic demand rather than exports and investment.

What a difference a year and a half makes. East Asia has recovered from the economic and financial crisis, with output, exports and employment mostly at pre-crisis levels. Leading the global economy, real GDP in developing East Asia is set to grow 8.7 percent in 2010, up from 7 percent in 2009, according to the World Bank’s East Asia and Pacific Update report launched today (and of which I’m the lead author, full disclosure here). The projected growth rate for 2010 is almost a percentage point higher than our own forecast made six months ago, and is higher than the 8.5 percent expansion recorded in 2008.

Firstly and most importantly, the recovery has been influenced by China. The Chinese authorities swiftly implemented a large monetary and fiscal stimulus starting in the last quarter of 2008 (through 2010) that exceeded the one introduced after the 1997-98 Asian financial crisis. The package helped boost government-led investment by nearly 6 percent of GDP in 2009, accounting for the bulk of the 8.7 percent growth in real GDP. The surge in investment, in turn, led to a sharp increase in imports for domestic use, notably from East Asia. This surge was most pronounced in the first half of 2009, when import demand among the advanced economies was contracting fast.  

Secondly, the other countries in developing East Asia also implemented timely fiscal stimulus packages, coupled with prompt and effective monetary easing. Even the low-income countries, notably Lao PDR and Cambodia, injected a discretionary fiscal stimulus of about 3 percent of GDP each in 2009, helping cushion the impact of the crisis on economic activity. 

Thirdly, the countries of developing East Asia entered the crisis in fundamentally solid economic health. Heeding the lessons of the 1997-98 Asian financial crisis, countries had reduced government debt and fiscal deficits, cut external debt and ensured robust balance of payments positions, boosted foreign exchange reserves, and substantially improved financial supervision. The region’s well-capitalized banks helped substantially limit financial contagion and the transmission of forces of the global recession and continued to lend through the crisis, albeit at a slower pace in most countries.   

Fourthly, and this is a factor common for most developing regions, is the rebound in advanced economies. Developed countries joined the rebound in the third quarter of 2009, and their contribution to regional exports began to outpace the contribution from China.   

Last but not least, there is the importance of remittances. Unlike other developing regions and in contrast to most projections from early 2009 that suggested large contractions, remittances to developing East Asia continued growing through the crisis. In the Philippines, for example, remittances grew about 6 percent in dollar terms in 2009, while forecasters earlier in the year worried about a contraction of 10-20 percent. And such better-than-projected performance appears to have been observed in other countries heavily dependent on remittances in the region, including many of the Pacific islands.

Comments

Submitted by Wolfgang on
Ivailo, very convincing analysis and congratulations for anotehr strong "East Asia and Pacific Update" Wolfgang

I totally agree with your analysis. It has become BIC rather than BRIC, (without the "R" of crisis-prone Russia). The global economic crisis has accelerated the emergence of new trade & investment partners and routes (intra-Asian, Asia-Middle-East and South-South) partly replacing the traditional ones (Asia-Europe and Asia-U.S.). Large nations such as Brazil, India, China and Indonesia not only dominate the current trade & investment arena, but also boast impressive domestic consumption volumes. Matthijs van den Broek Editor-in-Chief http://www.businesstrendsasia.com http://businesstrendsasia.blogspot.com/

Thanks for your comments, Matthijs. I do agree that the crisis has intensified the pace at which these new linkages are strengthened. I would not go as far as saying something has been replaced, even if partly, however. We will likely see a robust increase in trade through all channels in the near term, but the relative importance of the new channels and new markets will rise.

Submitted by prabha on
It also helps that Asians save a significant proportion of their income as we have lived through many rainy days. Our generation have deeper pockets to weather economic storms thanks to our cultural and social conditioning. The 1997 financial crisis was a salutary lesson...I remember when the Government of India was selling gold bars in the international market to pay its bills. Gen Y shares non of this fiscal frugality, they want to consume with the best!

Submitted by Rashdan Radzi on
In the context of recovering from a recession, I always think of what's happening to autonomous private demand. A recovery that's being held up through fiscal stimulus/public investment is a recovery of sorts, but I have difficulties in thinking of it as being an actual recovery. If we take away the infrastructure spending, take away re-inventorising effects......what do we have left in East Asia to drive the recovery? Am I missing a consumer revolution in Asia?

Thanks for your thoughts. To answer your question directly: yes, you are missing the consumer revolution in Asia. Private consumption grew faster throughout East Asia in 2009 than in almost all other countries in the world. Many advanced economies, moreover, including the U.S., Japan and most in the EU, experienced a contraction in private consumption. For some countries in developing East Asia, the robust increase in private consumption is a relatively new development. For others, this has been an ongoing trend. Take China, for example. Private consumption contributed about 3 percentage points to GDP a year for a decade now, much more than in the U.S., Europe and Japan. An interesting fact about China is that the surge in car sales in 2009 in that country made it the largest automobile market in the world. And rapid increases in sales of consumer electronics, for example, are also elevating the country to one of the largest markets. (The Financial Times reported in mid-2009 that the average size of flat screen TVs sold in China exceeded that in the U.S. While this need not be the most accurate measure of the development of a consumer society or domestic prosperity, it is nonetheless an interesting statistic.) Now, you will recognize that most of the debate about consumption in Asia has focused on the share of private consumption in GDP, rather than on its very strong increase. This may lead some observers to conclusions that private consumption is very constrained in East Asia. The issue is more complex: while rapid, the increase in private consumption in China has been slower than real GDP, leading to a declining share in GDP over the last decade. How to rebalance the economy to allow for an even larger role for private consumption is a key government priority. While private consumption has been strong in East Asia despite the global recession, private investment suffered in 2009, as lower capacity utilization and tighter financing constrained companies. But this year things began differently. In the first quarter of 2010, private fixed investment in Thailand, for example, surged nearly 16 percent from a year earlier. In Malaysia, the increase in fixed investment was almost 5.5 percent from a year before (fixed investment means investment excluding inventories). And I can give more examples. Evidence, as a result, points to private domestic demand picking up throughout East Asia. The key issue is how to sustain it over the medium term. And this is where policymakers will be focusing their attention, notably through advancing structural reforms.

Submitted by VOERN, Savann (Mr.) on
I, VOERN, Savannt in 3rd year at Build Bright University, am a cambodian, live in Siemreap Angkor in Cambodia, Kingdom of Wonder. I would like to express my profound thanks to World Bank for giving the best information for all over the world. My suggession is that, We would like the World Bank have all languages as reaching to. Example: Cambodia is Khmer Languege or others.

Add new comment