East Asian Response Measures

Falling export revenues, the inability of the private sector to generate growth, and the fears of a prolonged contraction have led East Asian governments to take a leading role in expanding domestic demand by introducing stimulus measures, as shown in Table 4 [ PDF 16.7KB | 1 page ]. This strong public sector response is remarkable because of its unusually large size, scope, and number of countries involved. Japan has the largest stimulus package both in terms of total size and as a percentage of its GDP (US$568 billion), followed by the PRC (US$585 billion), and the Republic of Korea (US$84 billion). Malaysia and Singapore also had sizeable stimulus packages, indicating the severity of the economic contraction. Details of the individual stimulus measures are given in Table 5 [ PDF 82.5KB | 4 page ]. As a result of the stimulus packages, East Asian government budget surpluses have deteriorated into deficits of between 2% and 8%.

Japan announced a series of stimulus packages, which totaled 11.5% of its GDP. However, Japan's announcement of its stimulus package may have been made less effective by the fact that it was injected in several small doses every three to four months. The first package was introduced in August 2008 and amounted to US$107.5 billion, which was equivalent to 2.2% of Japan's GDP. It was comprised of mainly non-spending measures such as lower road tolls, fuel subsidies, loans to businesses, assistance to farms, and help for part-time workers to find better jobs.

The second stimulus package was announced in October 2008. From a total of US$275 billion, US$51 billion was new spending. More than US$20 billion, or 40% of the total new spending, was a bank rescue plan; the other US$20 billion (40%) was issued in US$600 handouts to every household of four. The third package amounted to US$255 billion, of which 44% (US$111 billion) was tax breaks, public financing, and corporate tax cuts from 22% to 18% for small and medium enterprises (SMEs). The other 56% (US$144 billion) went to capital injections. A fourth package amounting to US$154.5 billion, equivalent to 3.2% of the GDP, was announced on 4 April 2009. The measures were aimed at stimulating the green economy, creating four million new jobs, and helping corporate finance. The package also involved strategies to reinforce Japan's competitiveness.

Faced with an aging population and high public debt, Japan may have introduced substantially more non-spending measures in their stimulus packages. However, the government may face difficulties reversing those policy decisions, especially those to lower toll rates, provide fuel subsidies, and introduce corporate tax cuts for SMEs. The Japanese banking system is also one of the few in East Asia to be affected by the global financial crisis, and part of the second stimulus package included US$20 billion in capital injection to stabilize the financial system. This raised controversies over the support for zombie banks that lend to inefficient sectors; a practice that is unlikely to lead the country out of recession. According to ADB, Japan's fiscal deficit is expected to widen from 1.4% of the GDP in 2008 to 6.8% of the GDP in 2009.

On 22 October 2009, the new Japanese government under control of the Democratic Party of Japan retracted the use of about US$32 billion from the fourth US$154.5 billion stimulus package previously announced. It is likely that the money will be redirected toward alternative projects.

The PRC announced the largest single fiscal stimulus package in November 2008, which was equivalent to 13.3% of its GDP. The PRC was the East Asian nation to spend the most on infrastructure. Slightly more than 86% of the PRC's stimulus package went to infrastructure spending, out of which 45% was for road, rail, and airport infrastructure (CNY1.8 trillion), 9.5% was for improving electricity, water, and road infrastructure in rural areas (CNY370 billion), 7% was for low income housing (CNY280 billion), and 24.7% was for the reconstruction of towns devastated by the May 12, 2008, earthquake. The remainder of the stimulus package went to healthcare and education (CNY40 billion or 1% of the total package), ecological and environmental protection (CNY350 billion or 8.8%), and technical innovation (CNY160 billion or 4%).

It is not clear exactly how much of the PRC's US$586 billion stimulus package was actually new spending and not just infrastructure plans that were brought forward in 2009. There is probably less contention on the long-term sustainability of the PRC's fiscal deficit as the type of spending appears to be non-recurring reconstruction and infrastructure expenditure, although a smaller percentage of this may be needed for future maintenance. Despite its large fiscal stimulus, only 1% of the PRC's stimulus package was allocated for irreversible spending on healthcare and education. In January 2009, however, the Government of the People's Republic of China undertook a fiscal expenditure of US$124.3 billion and significant steps on healthcare reform were taken to provide basic medical security for all citizens, improve the quality of medical services, and make medical services more accessible. Although the PRC's first stimulus package was large, its fiscal deficit remains relatively low within the region, rising from 0.4% in 2008 to 3.2% in 2009.

The Republic of Korea announced three stimulus packages in quick succession (December 2008, January 2009, and March 2009). The US$26 billion stimulus in December 2008 was called the “2009 Budget and Public Fund Operations Plan to Overcome Economic Difficulties” and was focused on infrastructure. It included projects to advance the metropolitan economy and expand the provincial traffic network. The Republic of Korea's second stimulus package was called the “Green New Deal Job Creation Plan” and it involved infrastructure spending on green transportation networks and clean water supplies, carbon reduction and stable supply of water resources, and new industrial and information infrastructure and technology development.

For the third stimulus package, the Government of the Republic of Korea amended tax laws by including incentives for the restructuring of financially distressed companies, establishing a bank recapitalization fund, and providing investment incentives for Korean expatriates.

Malaysia's first stimulus package (US$1.9 billion) was introduced in November 2008, followed by another (US$16.2 billion) in March 2009. Nearly 43% of the first package was for infrastructure, providing for the upgrade, repair, and maintenance of public amenities (such as schools, hospitals, roads, quarters for police and armed forces, and police stations), the building of more low-cost houses, improvements in public transport, and the implementation of broadband Internet access.

Malaysia's second stimulus package was 8.5 times larger than the first and equivalent to 7.3% of its GDP. Nearly half (48%, RM25 billion) went to assist the private sector as bank guarantees for SMEs. Another 32% went to infrastructure, but of this sum, a substantial portion went to maintenance rather than new spending on public facilities. Seventeen percent of the spending from the second stimulus was targeted at the vulnerable through food, toll, and fuel subsidies, and support for low-cost housing and for retrenched workers; while the remaining 3% was directed towards reducing unemployment and increasing job and training opportunities. Although a total sum of RM60 billion was announced for this second stimulus, the actual spending in 2009 and 2010 was only RM10 billion. Tax incentives amounted to RM3 billion and RM10 billion was for strategic investment by the national sovereign wealth fund. With the stimulus package relatively large compared to its GDP, Malaysia's fiscal deficit is estimated to be much higher than the other countries in ASEAN, rising from 4.8% in 2008 to 7.6% in 2009.

Singapore introduced a US$13.8 billion stimulus package in January 2009. Twenty-one percent was for spending on public sector infrastructure such as on the Mass Rapid Transit system and road network, basic amenities such as drainage and sewerage, and for education and health infrastructure. The spending is also intended to develop suburban nodes that will de-centralize economic activity and rejuvenate old public housing neighborhoods. US$1 billion is targeted to be spent over the next five years on support programs for sustainable development initiatives focusing on energy efficiency for industry and households, green transport, clean energy, and the greening of living spaces. US$4 billion is targeted for healthcare infrastructure.

Twenty-five percent of Singapore's stimulus package was spent on infrastructure, 12.5% on enhancing future capacity, 25% was spent as loan guarantees to SMEs, 12.5% was allocated as tax breaks in the form of corporate tax cuts and grants, and the balance was used to support households through personal income tax rebates and the securing of jobs by subsiding wages. Actual spending accounted for 62.5% of Singapore's stimulus package. Singapore was able to draw from its S$300 billion reserves to meet its record S$20.5 billion (US$13.7 billion) spending. Even with this financial strength, Singapore will for the first time incur a fiscal deficit of 4.1% of its GDP in 2009.

Indonesia introduced a US$6.3 billion stimulus package in February 2009 amounting to 1.2% of its GDP. From that, 16.6% was for spending on infrastructure. The bulk of this stimulus (58.6%) was tax breaks for individuals and companies. Individual tax was lowered for workers having a monthly income of less than Rp5 million. Waived import duties and taxes comprised 18% of the package (Rp13.3 trillion), and diesel subsidies 3.8%. The stimulus package is expected to increase the fiscal deficit of Indonesia from 0.1% in 2008 to over 2% of its GDP in 2009.

The Philippines announced a US$6.5 billion package in January 2009 (3.9% of its GDP) that focused on infrastructure and social services, job generation, and increased social protection, especially in health and tax cuts for businesses and individuals. With this spending, the fiscal deficit of the Philippines is estimated to rise from 0.9% to 2.3% in 2009.

Thailand introduced two stimulus packages, in January and then March 2009. The first US$3 billion package included infrastructure measures; social safety nets for the unemployed, those working below a certain wage level (B15,000 per month), the elderly, and students; and tax measures to boost SMEs, the real estate sector, and the tourism industry. The second, US$42 billion stimulus will see 73% of the package spent on infrastructure, 15% on farm irrigation, and 6% on increasing income and quality of life in the southern provinces. The government will source 39.2% from its budget, 17% from domestic borrowing, 27.1% from foreign borrowing, and 16.6% from other income sources. The two stimulus packages are estimated to increase the fiscal deficit from 1.1% in 2008 to over 6% of the GDP in 2009.

Viet Nam announced its first stimulus package totaling US$960 million in December 2008, which included an interest subsidy on loans, a reduction in corporate income tax for SMEs, and exemptions for personal income tax. About 10% of the package was for small-scale infrastructure programs for 61 of the poorest districts. In March 2009, Viet Nam proposed a second stimulus package totaling US$17.6 billion, but its relevance was called into question. Viet Nam grew in the first nine months of 2009 and the Government of Viet Nam expects its GDP growth rate to be between 5% and 5.5% in 2009. Discussions indicated that the second stimulus package, if any, would be smaller than the first, and on 30 October 2009, the Government of Viet Nam pledged to continue with a second stimulus package of US$8 billion, equivalent to about 12% of 2008's GDP. The bulk of this stimulus package will be for infrastructure and development projects while some measures will be in the form of tax breaks for enterprises and individuals as well as welfare spending.

3.1 Monetary Policy

The most immediate response to the global financial crisis was for countries to reduce interest rates, lower the reserve and liquidity requirements for the banking sector, and to lend directly to financial institutions. In some cases, quantitative easing or the purchase of investment grade securities by monetary authorities was also carried out. These measures amounted to what was probably the most aggressive monetary easing ever undertaken and were justified by the need to avoid financial collapses, calm jittery credit markets, and avoid the onset of further economic recession. Studies by the International Monetary Fund, such as Rabanal (2004) and IMF World Economic Outlook (2008), suggest that monetary policies are effective and consistent in shortening the duration of recessions. With output growth plunging, there was also little fear of inflation or inflationary expectations building up and this gave rise to the opportunity.

In East Asia, to increase liquidity and support domestic consumption, most countries have sharply cut their central bank or indicative interest rates. The interest rate cuts from their peak were mostly in excess of 200 basis points as shown in Table 6 [ PDF 14.3KB | 1 page ], with the exception of Japan, which had followed a course of very low interest rates for a long time and, therefore, had little room to maneuver. The Bank of Japan cut its key interest rate from 0.3% to 0.1% in December 2008, and it is now among the lowest of any economy. The Republic of Korea's interest rate cuts were the most frequent and dramatic, having been adjusted downwards seven times starting in October 2008 and falling by a total of 325 basis points from the peak. In comparison, the cut by the PRC was less, dropping by 216 points to 5.3%. This has to be seen, however, in the context of the PRC's still relatively robust economy and large fiscal stimulus plan. As of July 2009, virtually all the East Asian countries affected by the crisis are either at or near their historical lows. At these levels, there would appear to be much less scope for effective monetary policy, and no further interest rate cuts have been undertaken.

The effects of these drastic interest rate cuts have yet to be ascertained because disappearing demand, rather than interest levels, is more likely to be the important determinant of demand for loans. The liquidity trap experience of Japan during the 1990s provides an example of ineffective interest rate cuts in a situation of low business and consumer confidence.

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