Introduction

The recent global economic crisis hit the Asian tiger economies of Hong Kong, China; Korea; Singapore; and Taipei,China hard, in spite of their strong macroeconomic fundamentals and sound financial systems. Following the 1997 Asian financial crisis, these economies had strengthened current accounts and had significant buildups in foreign reserves. Meanwhile, their financial systems had become more resilient, with the restructuring of balance sheets and the enhancement of surveillance. Nevertheless, each tiger economy experienced a collapse in exports and an attendant sharp contraction of Gross Domestic Product (GDP) in the second half of 2008 as global demand faltered. The GDP growth rates for Hong Kong, China; Korea; Singapore; and Taipei,China hit lows of -7.8%, -4.2%, -9.5% and -10.1%, respectively, in the first quarter of 2009. Such developments reflect the small open nature of these economies¹ and highlight their vulnerability to external shocks. There were also signs of financial contagion in the case of the Republic of Korea (hereafter Korea) which at one juncture suffered from currency turmoil.

Subsequently, towards the end of 2009, the Asian tigers rapidly rebounded, with the support of swift domestic policy responses on both the fiscal and monetary fronts. Fiscal stimulus measures amounted to around 2.6% of GDP for this group of countries and by the first half of 2009, nearly 40% of the fiscal stimulus was implemented (IMF, 2009a). Meanwhile, massive policy stimulation in the advanced countries led to the normalization of global trade, while pubic support of their financial sectors lifted financial market sentiment. The 2010 and 2011 growth projections by IMF (2010) for the Asian tigers as a whole stand at 4.8% and 4.7%, respectively. There has also been a resurgence of private capital flows into these economies in search of high yielding investments, underscoring international investor optimism about the region's growth prospects. Consequently, stock prices and property prices have been trending up amid the flood of global liquidity inflows and these developments have started to raise concerns about the emergence of asset prices bubbles in these economies.

By contrast, the recovery in the advanced economies is expected to remain subdued, being weighed down by various factors such as high unemployment rates, high public debt, difficult financial conditions, and weak household balance sheets. In light of these challenges, the advanced economies will probably experience sluggish growth and consequently their demand for Asian exports will likely remain subdued in comparison with the pre-crisis period. Hence, in order to sustain the ongoing economic recovery, it is imperative for the Asian tigers to rely on domestic and regional demand for growth. In other words, policymakers in these countries would need to work towards the rebalancing of demand from say the United States (US) that has large current account deficits in relation to the Asian countries that have big current account surpluses. More importantly, such global imbalances are deemed to be unsustainable and may unwind in a disorderly manner—involving a sharp fall in the US dollar or a protracted economic downturn in the industrialized countries—which would have adverse consequences for the world economy, not least the Asian tigers.

The purpose of this overview paper is to explore the choices faced by the Asian tigers in terms of growth strategies that aid global rebalancing. To this end, we examine the trends of the imbalances in these economies and consider the prospects of reducing such imbalances. The rest of this article is organized as follows: The next section investigates the evolution of saving and investment in the Asian tigers over the past decade and relates the changes in the magnitude of the S-I gap to exchange rate movements. Section 3 discusses the prospect of domestic demand taking on the role of a growth driver in these economies, while section 4 focuses on the potential of targeting final demand in the regional markets. This is followed by an examination of policy issues pertaining to rebalancing the Asian tiger economies in section 5. Section 6 concludes.

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