National Policy Responses to the Crisis

4.1 Fiscal Policy: Size

In the second half of 2008, the rapid spread of the financial crisis through global credit markets prompted unprecedented initiatives (capital injections, liquidity measures, and deposit guarantees) aimed at restoring confidence in the financial system, especially in those economies in Asia and the Pacific that were closely integrated into global financial markets. Many central banks in the region began lowering interest rates, and rates have continued a downward march, though inflation concerns and currency weakness have prevented some central banks from more aggressive easing rates. In November 2008, however, evaporating orders for exports, decelerating output growth, and the grim outlook for 2009 shifted the policy focus to fiscal measures to increase aggregate demand.

Several countries in the region that had entered the crisis on a fairly solid footing—with large reserves and relatively little foreign or domestic debt—announced fiscal stimulus packages. By December, the PRC, India, Korea, Malaysia, and Philippines had already rolled out bold policies to increase aggregate demand. Within less than a month, India announced a second package. Indonesia, Thailand, and Singapore also unveiled fiscal stimulus programs, and Malaysia announced its second package in March 2009.

The size of fiscal stimulus packages varies greatly, ranging from US$586 billion in the PRC to Viet Nam’s US$1 billion. The PRC measure accounts for 12% of the economy’s GDP (Figure 9 [ PDF 38.8KB | 1 page ]). Singapore and Malaysia each plan to spend 8%–10% of their GDP to increase demand. At the other end of the spectrum, India’s two fiscal packages together equal less than 1% of the GDP.

Estimates of size must be viewed with some caution, however. First, it is not always clear how much of a package is new spending versus previously planned spending. Second, packages in some countries, notably the PRC and the Philippines, are financed not only from public resources but also from nongovernment investment that may or may not become available in a timely manner. Third, the timeframe in which stimulus packages will be implemented varies. For most economies, the timeframe is 1 year. But for some, like the PRC, the time frame is 2 years, and for Singapore and Korea it is even longer. Fourth, some packages include measures such as loan guarantees that are primarily the task of monetary policy not fiscal policy, making it difficult to disentangle fiscal measures from financial efforts. Fifth, some governments had already put in place policies and programs that are now mitigating the crisis but are not considered part of the fiscal response.

4.2 Fiscal Policy: Composition

As does the size of the fiscal packages, their composition varies greatly across developing Asia. Most stimulus packages emphasize public spending, especially investment in infrastructure and maintenance. Public spending accounts for over 90% of the stimulus package in the PRC, over 65% in Thailand and Viet Nam, and 40%–50% in Korea, Malaysia, and Singapore (World Bank 2009).

The emphasis on public spending on infrastructure reflects the widely shared assessment that such measures tend to have a significant direct and indirect multiplier effects in the short run on both output and employment.¹³ The direct employment effect is evidenced as new jobs are created by a particular spending measure. The indirect effect arises partly from increased consumption on the part of newly recruited workers, which stimulates other industries, and from spillover of increased public spending into other sectors through intermediate inputs. Infrastructure investments provide additional benefits, as they contribute to eliminating growth bottlenecks and reducing rural–urban development gaps and thereby boost domestic consumption.

Public spending to support the poor and vulnerable has expanded in many countries, but these measures constitute on average a small share of additional public spending. Measures include unconditional and conditional cash transfers to poor and low-income families (PRC, Indonesia, Philippines, Thailand, and Singapore), various schemes supporting child education and health (Indonesia and Philippines), subsidized utilities (Thailand), as well as support for housing in many economies. The PRC has also begun to tackle longer-term challenges, including closing the rural–urban divide by extending medical coverage to 200 million uninsured people through an additional package for health-care reform (Hornby and Chiang 2009). Even countries with limited or no fiscal space have taken measures to increase the budget allocations for social-transfer programs.¹⁴

Tax reductions and income transfers, on the other hand, rarely have direct output or employment effects. Their indirect impact depends on how firms and households react to increased income. In the current environment, firms face not only a sharp fall in demand but also unprecedented uncertainty regarding the future. In such a situation, they often take a wait-and-see attitude with respect to investment, and households are likely to exhibit similar behavior in consumption (Spilimbergo et al. 2008). Therefore, across-the-board incentives aimed at businesses or households, such as subsidies to firms and reductions in corporate and income taxes, are likely to have only a moderate, short-term effect on growth and jobs. Moreover, in developing Asian countries with a large informal economy, tax and income policy tools have limited reach to businesses and workers operating in the informal economy or impact on them. Despite the weak multiplier effect of tax measures, cuts in corporate, sales, and income taxes have been the second-largest component of the stimulus measures.

If fiscal measures target credit-constrained businesses (including small firms) and liquidity-constrained consumers who are likely to spend more (notably the poor, the unemployed, and low-income households), then the short-term multiplier effect of the stimulus is likely to be higher. Measures along these lines include loans for credit-constrained small firms in India, Korea, Thailand, and Viet Nam; increased budget allocation for microfinance in Indonesia; and various schemes to assist specific industries in several economies.

In undertaking fiscal stimulus policy measures, it is also critical to take into account both the short-term impact on aggregate demand and measures to enhance economies’ growth potential in the medium and long term, so that the increase in fiscal spending today is covered by higher fiscal revenues without requiring prohibitively high taxes in the future. In this respect, a focus on maintaining productive employment, income, and household purchasing power, combined with supply-side measures including education and skills training and other active labor market policies, could provide for more comprehensive crisis response and recovery measures.

4.3 Fiscal Stimulus and Productive Jobs

Some governments have announced explicit measures to assist workers and employers as part of their fiscal package. Examples include subsidized employment inKorea, training programs in Singapore, and reduction in unemployment insurance contributions and other payroll taxes to minimize job losses in Indonesia; temporary job-loss subsidies to assist laid-off workers in Viet Nam; skills training for retrenched workers in Malaysia and Thailand; job-search assistance and financial support to laid-off migrant workers to relocate to rural areas in the PRC; and direct public sector job creation for unemployed and graduates in many economies.

These measures are often relatively small components of stimulus packages, however, and longer-term measures to enhance productivity such as skills training are often lacking. Further, few fiscal packages have explicit targets for job creation. The exceptions are Indonesia (2.6 million jobs), Korea (creating green jobs under the Green New Deal initiative), and Singapore, where a key objective of the stimulus is helping Singaporeans keep their jobs and support their families.

While the policy response has been swift, a number of challenges remain. First, support for employment, skills development, and social protection is clearly insufficient. Second, in some economies, there have been efforts to engage employers’ and workers’ organizations, but more could be done.¹⁵ Third, weak administrative and institutional capacity to implement packages rapidly and effectively appears to be a major constraint in some economies. Fourth, if current packages fail to boost domestic demand (see Box [ PDF 46.9KB | 2 page ]) and protect the poor, many governments will not have resources for subsequent measures. The current crisis is already reducing government revenues and weakening fiscal positions. There is, therefore, a need for transparency and impact evaluation. The results of such an assessment could boost public confidence that the fiscal stimulus measures will deliver sufficient employment and support for the poor and vulnerable. It would also help policy makers to refine the stimulus packages to maximize their economic, employment, and welfare impact.

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