Introduction

The global financial crisis severely impacted Asia from late 2008 to early 2009 (Figure 1 [ PDF 283.8KB | 1 page ]). Although the initial impact appeared limited, the region was directly hit when the crisis spread to the real sector and caused the volume of world trade to collapse. According to the latest projection by the International Monetary Fund (2009), real gross domestic product (GDP) growth is forecast to decline in industrial Asia (Japan, Australia, and New Zealand) from 3.2% in 2007 to -2.3% in 2009¹; from 5.7% to -2.4% in Asian newly industrialized economies (Hong Kong, China; Republic of Korea [hereafter Korea]; Singapore; and Taipei,China); and from 6.3% to 0.7% in ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Viet Nam). Even the People's Republic of China (PRC) and India were severely affected, with growth in those countries expected to fall from 13% to 8.5% and from 9.4% to 5.4%, respectively. Particularly hit hard among these economies were Singapore and Taipei,China, as their openness made them vulnerable to the sudden collapse of global trade.

Almost all countries in Asia responded to the sudden collapse of real activity by easing both monetary and fiscal policies. With the financial sector in reasonable health, the expansionary macroeconomic policies for the most part appear to have succeeded in preventing the economies from falling further. On the brighter side, there are budding signs of nascent recovery, though their durability remains uncertain. The IMF forecasts the volume of global trade to grow only by 2.5% in 2010 after contracting by 12% in 2009. It is also unclear how much longer the current extraordinary stance of monetary and fiscal policies could be maintained. Given the fragility of the situation, a premature withdrawal of stimulus could cause recovery to halt; at the same time, the continuation of expansionary macroeconomic policies could also raise inflationary and debt sustainability concerns.

The purpose of this policy brief is to draw lessons from the recent and ongoing macroeconomic policy experience of Asia's economies. To do so, in each of three policy areas (monetary, fiscal, and exchange rate/reserve management policies), I review the principal measures taken by Asian economies during recent months in response to the global financial crisis, and discuss issues that have emerged out of the experience. I then conclude with a forward-looking discussion of medium- to longer-term measures to improve the effectiveness of macroeconomic policies and to make the world and the region a safer place.

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