The Economic Impact of the Global Crisis in Asia and the Pacific

2.1 Economic Impact and Forecast

While many Asian economies continued to grow very rapidly in 2008, recent data indicate that the region is under significant stress from the global economic crisis. Economic growth in the Asia and Pacific region declined to 5.1% in 2008, down from 8.0% in 2007 (International Monetary Fund [IMF] World Economic Outlook Database April 2009). Asia’s developing economies fared far better than the region’s industrialized economies. In developing Asia, growth declined to a still robust 7.7% in 2008, down from very rapid growth of 10.6% in 2007, while, in the region’s newly industrialized economies, growth slowed to 1.5%—less than one third the rate of 5.7% achieved the previous year.¹ And growth in Japan plunged to -0.6% in 2008, down from 2.4% in 2007.

Annual figures fail, however, to reveal how suddenly the crisis emerged. Most developing economies in Asia and the Pacific initially saw only moderate deceleration in growth. But, as the crisis intensified and demand sharply slowed in the United States, European Union, and Japan, a substantial decline in economic activity took place in many Asian economies in the closing months of the year and in the first quarter of 2009. In the People’s Republic of China (PRC), growth slowed to 6.1% in the first quarter of 2009, down sharply from 10.6% in the first quarter of 2008 (China National Bureau of Statistics 2009). In the Republic of Korea (hereafter Korea), growth tumbled from 5.5 to -4.3% (Korea National Statistical Office 2009), and in Singapore output plummeted from 6.7% to –11.5% over the same period (Singapore Department of Statistics 2009). Meanwhile, growth in Thailand dropped from 6.0% in the first quarter of 2008 to –7.1% in the first quarter of 2009, reflecting both contraction in external demand and heightened political instability (Thailand Office of the National Economic and Social Development Board 2009a).

By April 2009, the outlook for Asia and the Pacific had deteriorated significantly (Figure 1 [ PDF 38.9KB | 1 page ]). Current forecasts indicate that economic growth in the region as a whole will drop to only 1.4% in 2009, down sharply from 5.1% in 2008 and the very rapid growth rate of 8% achieved in 2007. The International Monetary Fund (IMF) prediction in October 2008 that the region would grow by 5.6% in 2009 highlights the rapid and substantial deterioration that has taken place.

Asia’s developed economies have seen the largest shock to economic growth. The developed economies of Japan, Australia, and New Zealand are, together, projected to shrink by 5.4% this year. The export-dependent Southeast Asia and Pacific subregion is projected to shrink by –0.7%, with a steep decline of –10% forecast for Singapore, –7.5% for Taipei,China, –3.5% for Malaysia, and –3% for Thailand. East Asia and South Asia are expected to fare comparatively better, with growth of 4.0% and 4.3% respectively. This resilience is due to a number of factors, ranging from less reliance on exports in many South Asian economies to the PRC’s large fiscal stimulus package to boost domestic demand.

Growth is expected to rebound in the region in 2010 and beyond, with a current forecast of 4.2% regional economic growth in 2010, with modestly positive growth of 0.5% forecast for the developed economies in Asia, growth of 2.2% predicted for Southeast Asia and the Pacific, growth of 5.0% for South Asia, and growth of 6.1% for East Asia.

2.2 Key Transmission Mechanisms to Asian Economies

There are a number of ways in which the current crisis is being transmitted to Asian economies. Understanding the specific mechanisms through which industries and economies are affected is essential for assessing the likely labor market impacts and for designing appropriate policies to mitigate the adverse effects.

Exports have played a major role in Asia’s phenomenal growth, with many Asian economies highly reliant on exports to earn foreign currency and fuel domestic development. Heading into the crisis, the value of manufacturing exports equaled more than 140% of gross domestic product (GDP) in Singapore, nearly 70% in Malaysia, more than 40% in Cambodia and Thailand, and more than 30% in the PRC, Korea, Philippines, and Viet Nam. At the other end of the spectrum, manufacturing exports make up less than 10% of the GDP in India and Pakistan and only around 11% in Indonesia (Figure A.1 [ PDF 35.7KB | 1 page ] in the Appendix [ PDF 23.5KB | 2 pages ]).

As consumers in developed economies abruptly cut back on spending in 2008 and the beginning of 2009, demand for Asia’s exports fell sharply (Figure 2 [ PDF 32.9KB | 1 page ]). In April 2009, exports from the PRC fell by 23% and from Thailand by 25%. Similarly, March 2009 export data from Indonesia, Malaysia, and Philippines indicated a year-on-year drop of 26–32%. Sales of labor-intensive manufacturing products including toys, games, footwear, and clothing are down sharply in the United States and Europe, as are sales of higher value-added goods such as computers and related equipment and automobiles (James et al. 2008). As total world trade volumes are expected to contract in 2009 by 11% (IMF 2009), this important source of growth in many Asian economies is unlikely to recover soon.

Accordingly, many Asian firms are sharply cutting production, causing an unmistakable rise in factory closures. After having plummeted in late 2008 and early 2009, industrial production has recently shown early signs of recovery in some economies such as the PRC and Indonesia, but factory output remains depressed in Malaysia, Philippines, and Thailand.

Foreign direct investment (FDI) has been an important contributor to growth in many Asian economies, allowing them to move up the value chain through increased access to capital and to more advanced technologies. As a share of gross fixed capital formation, FDI comprises some 60% in Singapore, 52% in Cambodia, more than 40% in Fiji, and 25% in Viet Nam (Figure A.2 [ PDF 14.5KB | 1 page ]). FDI accounts for a large share of capital formation also in Malaysia, Pakistan, Thailand, and Philippines. In 2008, growth in FDI turned negative in several Asian economies, including Indonesia, Singapore, and Thailand (UNCTAD 2009). Current estimates are that global FDI to developing countries will shrink by more than 30% in 2009, and, while Asia and the Pacific may continue to outperform other developing regions with regard to attracting FDI, the chance is slim that the region can avoid a decline in foreign investment (Lui 2009). In Cambodia, for example, FDI in 2009 is forecast to contract to US$390 million, about half the amount in 2008 (World Bank 2009).

As migrant workers’ incomes are at risk in the current economic downturn, so too are remittances, which are a vital source of income and foreign exchange for many Asian economies, particularly for poor households. Remittances comprise one-third of GDP in Tonga, 11% in the Philippines, and 5%–10% in Bangladesh, Sri Lanka, Viet Nam, and Mongolia (Figure A.3 [ PDF 14.5KB | 1 page ]).

Remittance flows to developing economies began to slow in the third quarter of 2008, and the World Bank now forecasts an overall fall in remittances to these economies in 2009 of approximately 5% (Ratha and Mohapatra 2009). Compounding reduced remittances, official aid flows are likely to be affected by tighter budgets in advanced economies. This is likely to add pressure in the region’s least-developed economies to government budget items directed toward economic development and poverty reduction.

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