A Resilient Asia Amidst Global Financial Crisis: From Crisis Management to Global Leadership

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Edited by: Harinder S. Kohli & Ashok Sharma

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    List of Figures, Tables, and Boxes

    Figures
    Opening Address
    • 1 Causes of the crisis
    • 2 Private financial flow in global markets
    • 2.1 Global economy growing now…
    • 2.2 …and lead indicators suggest this will last
    • 2.3 Smaller European economies doing well…
    • 2.4 …Japan lags but the Republic of Korea rebounds strongly
    • 2.5 Business conditions indicators up sharply
    • 2.6 Recovery in manufacturing beginning
    • 2.7 Equity markets led the recovery…
    • 2.8 …with fewer banks recording losses
    • 2.9 Recovery in consumer confidence losing steam…
    • 2.10 …as well as home builders confidence
    • 2.11 Record rates of growth of excess liquidity
    • 2.12 US: budget deficits remain high…
    • 2.13 …with sharp increase in public debt
    • 2.14 Number of discriminatory measures implemented since November 2008
    • 2.15 Companies restructuring → more jobless…
    • 2.16 …and no meaningful recovery in capex
    • 2.17 Increased resilience in most economies
    • 2.18 Reliance on domestic demand
    • 2.19 Quicker pass-through = more effective policy
    • 2.20 Impact of the global crisis on Asian economies
    • 2.21 Asian banks have lost negligible capital
    • 2.22 Breakdown of Asian exports
    • 2.23 Asian electronics exports picking up…
    • 2.24 …Possibly reflecting inventory changes in US
    • 2.25 Commodity prices sensitive to global cycle…
    • 2.26 …as were oil prices
    • 2.27 East Asia recovery is evident…
    • 2.28 …the case is similar in India and Indonesia
    • 2.29 ASEAN lead indicators turn positive…
    • 2.30 …Singapore recovering but still negative
    • 2.31 Varying degrees of fiscal stimulus
    • 2.32 India: major adjustment for sustainability
    • 2.33 PRC monetary conditions easy…
    • 2.34 …as is the case in Thailand…
    • 2.35 …and in the Philippines.
    • 2.36 …and in Indonesia
    • 2.37 PRC raising its market share in US.
    • 2.38 …as well as in Europe
    • 2.39 Flat RMB vs. US$…
    • 2.40 …has allowed RMB to be more competitive
    • 3.1 Exports collapsed amid global crisis.
    • 3.2 Industrial production decelerated sharply
    • 3.3 Retail sales decelerated briefly
    • 3.4 Sharp pullback in real estate investment
    • 3.5 Economic growth fell to a record low
    • 3.6 Net export had adverse impact on growth
    • 3.7 Fiscal impulse of unprecedented scale…
    • 3.8 …and planned over 2009–2010
    • 3.9 Steep cuts in interest rates.
    • 3.10 …plus depreciating exchange rate
    • 3.11 Stimulus package inspired a lending frenzy…
    • 3.12 …driving up fixed asset investment
    • 3.13 OECD CLI for PRC is looking up…
    • 3.14 …and PMI looks promising
    • 3.15 Loans shifting to the real sector
    • 3.16 Private investment picking up
    • 3.17 External environment slowly recovering.
    • 3.18 …and global tech rebound would help
    • 3.19 Inflationary gap set to widen fast
    • 3.20 Surging money supply; non-tradable inflation
    • 3.21 Rising oil price to push up imported inflation
    • 3.22 Rapid pace of FX reserves accumulation
    • 3.23 PRC exports gaining shares in global markets
    • 3.24 CN: Monetary conditions index
    • 4.1 Indonesia—among least hurt by crisis…
    • 4.2 …despite sharp fall in exports…
    • 4.3 …which hit industrial production
    • 4.4 Tourist arrivals also took a hit but rebounded
    • 4.5 …but investments held up well…
    • 4.6 …with consumption and rebounding
    • 4.7 Equity prices fell sharply, then bounced up…
    • 4.8 … in line with portfolio flows
    • 4.9 …prompting a sharp fall in the Rupiah…
    • 4.10 … which raised inflation, but only slightly
    • 4.11 External accounts held up as well…
    • 4.12 …as did bank lending deceleration
    • 4.13 OECD lead indicator shows turning point…
    • 4.14 …consumers also remain optimistic
    • 4.15 Property prices continued to rise…
    • 4.16 …while FDI surge will boost growth
    • 4.17 Loose monetary conditions…
    • 4.18 …but output gap is expanding
    • 4.19 Relatively benign impact from global crisis…
    • 4.20 …despite sharp fall in exports
    • 4.21 …reducing industrial production…
    • 4.22 …but capacity utilization fell marginally
    • 4.23 Growth rate of remittances eased then rose…
    • 4.24 …with only US/EU sources weakening
    • 4.25 Equity prices fell and rose with global equities
    • 4.26 Portfolio inflows fell and then rebounded
    • 4.27 Labor market did not take a big hit
    • 4.28 …though spending on durables fell
    • 4.29 Credit extension weakened but did not fall…
    • 4.30 …and broad money growth continued
    • 4.31 Weaker balance of payments…
    • 4.32 …but foreign reserves roles markedly
    • 4.33 Lead indicator negative…
    • 4.34 …but businesses point to growth
    • 4.35 Investors risk aversion to Philippines down…
    • 4.36 …and consumers are less negative
    • 4.37 Inflation has eased…
    • 4.38 …but considerable slack in resource utilization
    • 4.39 GDP growth sank as global crisis deepened…
    • 4.40 …and exports contracted…
    • 4.41 …which caused manufacturing to decline
    • 4.42 Falling tourism deepened impact on GDP
    • 4.43 Equity correction would have been worse…
    • 4.44 …if portfolio inflows had been substantial
    • 4.45 Consumer confidence already down
    • 4.46 Retail sales recovery reversed abruptly
    • 4.47 Businesses slashed capital spending…
    • 4.48 …but FDI remained steady until August 2009
    • 4.49 Banks continued to grow lending…
    • 4.50 …and broad money accelerated after easing
    • 4.51 Current account held up strongly…
    • 4.52 …allowing foreign reserves to rise
    • 4.53 Business sentiments up strongly
    • 4.54 Lead indicator points to smart recovery
    • 4.55 Inflation remains subdued…
    • 4.56 …with substantial slack in resource utilization
    • 5.1 Growth recovery is underway
    • 5.2 Goods exports contraction easing…
    • 5.3 …helped by rebound in production…
    • 5.4 …with software exports bottoming too
    • 5.5 Consumer confidence recovering smartly…
    • 5.6 …helping boost domestic sales
    • 5.7 Remittances have helped support growth
    • 5.8 Tentative recovery in tourism
    • 5.9 Inflation dived until early 2009, now rising…
    • 5.10 …with non-tradeables leading the way
    • 5.11 Improvement in trade account reversing…
    • 5.12 …worsening current/capital account deficit
    • 5.13 Credit growth eased a tad.
    • 5.14 …with monetary aggregates well behaved
    • 5.15 Monetary policy well calibrated
    • 5.16 Domestic banks’ loan book quality stable
    • 5.17 OECD indicators rebounded sharply.
    • 5.18 …so are other lead indicators
    • 6.1 Exports fell sharply…
    • 6.2 …causing manufacturing to slow but not fall
    • 6.3 Textile/garment exports held up well…
    • 6.4 …as did remittances
    • 6.5 Mild fall in the stock market…
    • 6.6 …mainly driven by foreign investors
    • 6.7 Sharp fall in loan disbursements
    • 6.8 Current account in good shape
    • 6.9 Exchange rate remained stable vs. US$…
    • 6.10 …and reserves accumulated
    • 6.11 A large part of remittance goes into consumption
    • 6.12 Inflation has fallen but could rise again
    • 6.13 A boom in tourism following end of civil war…
    • 6.14 …increased inflows of tourists from Europe, US…
    • 6.15 …exports contracted sharply with crisis onset…
    • 6.16 …with major exports hit hard
    • 6.17 Industrial production dragged down by exports
    • 6.18 Capital outflows but not substantial
    • 6.19 Sri Lankan equities fell with global equities…
    • 6.20 …but the resulting fall in reserves was drastic
    • 6.21 Remittances held up fairly well…
    • 6.22 …supporting the balance of payments
    • 6.23 Inflation fell sharply…
    • 6.24 …and the Rupee was basically stable
    • 6.25 Credit growth is weak…
    • 6.26 …but monetary growth has recovered
    • 6.27 Need to do more to reduce budget deficit
    • 6.28 Current account weighed down by oil import
    • 6.29 Nepal's economy looks fairly resilient
    • 6.30 Tourism took a hit from the crisis
    • 6.31 Remittance flows remain strong
    • 6.32 Trade held up fairly well
    • 6.33 Nepalese Rupee depreciated sharply
    • 6.34 Inflation pushed up by rising food prices
    • 6.35 Tourism revenues declined
    • 6.36 Disinflationary pressure rising
    • 6.37 Fall in exports to India a cyclical factor
    • 6.38 Fiscal deficit remains manageable
    • 6.39 Growth decelerating sharply
    • 6.40 Tourism took a hit amid crisis
    • 6.41 Deterioration in fish export earnings
    • 6.42 Inflation still on a downward trend
    • 6.43 Current account position looking bad
    • 6.44 Import cover improving
    • 7.1 Growth slowed, manufacturing hit hard…
    • 7.2 …as investment rate fell
    • 7.3 Services fell in line with investment
    • 7.4 Remittances remained a source of growth
    • 7.5 Stocks: domestic more than global concerns
    • 7.6 Current account deficit fell, still high
    • 7.7 Volatility of currency has fallen
    • 7.8 Pakistan: Infected loans
    • 7.9 Inflation has fallen but still too high
    • 7.10 Pakistan: Broad money
    • 7.11 Pakistan: Major crop production
    • 7.12 FDI falling at a slower rate
    • 7.13 Spending on autos up
    • 7.14 Low tax revenues to GDP
    • 7.15 Excessive dependence on textiles
    • 7.16 Oil imports are key as well
    • 7.17 Alternative scenarios suggesting dependence on oil
    • 7.18 Collapse in growth mainly due to drought
    • 7.19 Opium production showed signs of falling
    • 7.20 Inflation corrected sharply from spike
    • 7.21 Exchange rate maintains stability
    • 7.22 FDI remains robust, not affected by crisis
    • 7.23 External budget falling—a positive
    • 8.1 Trade openness index
    • 8.2 Factor intensity of merchandize exports
    • 8.3 Financial Integration Index
    • 8.4 Private credit to GDP versus GDP per capita—ECA's transition economies versus other regions, 1995 and 2007
    • 8.5 Total capital flows, net (% of GDP)
    • 8.6 Real GDP growth (% of GDP)
    • 8.7 Inflation, end of period consumer prices (annual percent change)
    • 8.8 Current account balance (% of GDP)
    • 8.9 Terms of trade, goods (index)
    • 8.10 Fiscal balance (% of GDP)
    • 8.11 External debt to GDP
    • 8.12 Short-term debt to foreign exchange reserves
    • 8.13 Exchange rate regimes
    • 8.14 Private sector credit to GDP ratio
    • 8.15 Loan to deposit ratio
    • 8.16 Foreign exchange assets to liabilities ratio
    • 8.16 Liabilities to equity ratio
    • 8.17 Means-tested safety nets: targeting accuracy, coverage, and transfers to the poorest quintile
    • 8.18 Average business environment constraint: transition economies in 1999, 2002, 2005, 2008, and non-transition economies
    • 8.19 Infrastructure composite bottlenecks, 1999–2008
    • 8.20 Skills bottlenecks, 1999–2008
    • 8.21 Tax administration: priority measure, 1999–2008
    • 8.22 Customs regulations: priority measure, 1999–2008
    • 10.1 Oil prices are headed higher…
    • 10.2 …as supply comes under strain
    • 10.3 US potential growth slows…
    • 10.4 …as it does in advanced (but not emerging) economies
    Tables
    Opening Address
    • 1 Economic Forecasts for 2010
    • 2 Assessment of Asian Economy
    • 2.1 Overview of Growth Projections by Various Agencies
    • 2.2 Time Necessary to Bring US Household Debt Back to Sustainable Levels
    • 2.3 What Drives Resilience?
    • 2.4 Changes in Economic Resilience in Asia 2000–2008
    • 2.5 Key Transmission Mechanisms
    • 2.6 Changes in Stock Market Indices Across Asia (as of October 2009)
    • 2.7 Linkages between Emerging and Mature Equity Markets
    • 2.8 Capital Flows into Emerging Asia
    • 2.9 Changes in Currencies Across Asia (as of October 2009)
    • 2.10 Risk-weighted Capital Adequacy Ratio
    • 2.11 Stress Tests: Tier 1 Capital and Shortfall
    • 2.12 Moody's Average Bank Financial Strength Ratings
    • 2.13 World Trade Projections
    • 2.14 Remittances Outlook: World Bank Forecasts
    • 2.15 International Tourist Arrivals
    • 2.16 FDI Inflows and Cross-border M&As
    • 2.17 World Investment Prospects Survey 2009–2011—Main Indicators
    • 2.18 Overview of Growth Projections for Asian Markets
    • 2.19 Forecasts for Growth and Inflation in Selected Asian Economies
    • 2.20 Projected Fiscal Deficits
    • 2.21 Projected Output Gaps in Selected Asian Economies
    • 2A.1 CAA Resilience Index 2008 Using 9 Parameters
    • 2A.2 CAA Resilience Index 2008 Using 9 Parameters
    • 3.1 Analysis of PRC's Economic Resilience
    • 3.2 Transmission Mechanisms—PRC
    • 4.1 Indonesia GDP Breakdown
    • 4.2 Analysis of Indonesia's Economic Resilience
    • 4.3 Rising Foreign Direct Investment Approvals
    • 4.4 Transmission Mechanisms—Indonesia
    • 4.5 Philippines GDP Breakdown
    • 4.6 Transmission Mechanisms—Philippines
    • 4.7 Analysis of the Philippines’ Economic Resilience
    • 4.8 Survey results about OFW Households, 2009
    • 4.9 Thailand GDP Breakdown
    • 4.10 Transmission Mechanisms—Thailand
    • 4.11 Analysis of Thailand's Economic Resilience
    • 4.12 Stimulus Package 1
    • 4.12 Spending Allocation Plan for Thai Khem Kaeng
    • 5.1 India GDP Breakdown
    • 5.2 Transmission Mechanisms—India
    • 5.3 Analysis of India's Economic Resilience
    • 5.4 Adjustment in Central Government Finances, 2003/2004–2008/2009
    • 6.1 Bangladesh GDP Breakdown
    • 6.2 Transmission Mechanisms—Bangladesh
    • 6.3 Analysis of Bangladesh's Economic Resilience
    • 6.4 Concentration of Exported Goods (Share of top 10 exports)
    • 6.5 Banking Sector Financial Soundness Indicators
    • 6.6 Sri Lanka GDP Breakdown
    • 6.7 Transmission Mechanisms—Sri Lanka
    • 6.8 Analysis of Sri Lanka's Economic Resilience
    • 6.9 Nepal GDP Breakdown
    • 6.10 Transmission Mechanisms—Nepal
    • 6.11 Comparing Nepal's Strengths and Weaknesses
    • 6.12 Bhutan GDP Breakdown
    • 6.13 Transmission Mechanisms—Bhutan
    • 6.14 Comparing Bhutan's Strengths and Weaknesses
    • 6.15 Maldives GDP Breakdown
    • 6.16 Transmission Mechanisms—Maldives
    • 6.17 Comparing Maldives’ Strengths and Weaknesses
    • 7.1 Pakistan GDP Breakdown
    • 7.2 Large-scale Manufacturing Sector (2008/2009)
    • 7.3 Corporate Profits
    • 7.4 Pakistan Sovereign Ratings (S&Ps)
    • 7.5 Transmission Mechanisms—Pakistan
    • 7.6 Analysis of Pakistan's Economic Resilience
    • 7.7 Buoyancies of Taxes (2000–2007)
    • 7.8 Tax Expenditures
    • 7.9 Analysis of Federal Subsidies
    • 7.10 Burden of Federal Subsidies
    • 7.11 Afghanistan GDP Breakdown
    • 7.12 Transmission Mechanisms—Afghanistan
    • 7.13 Comparing Afghanistan's Strengths and Weaknesses
    • 7.14 Enterprise Survey (percent of firms citing constraint as major or very severe)
    • 8.1 Savings-Investment Balance (% of GDP)
    • 10.1 Changing Drivers of Global Economic Growth
    • 10.2 Rising OPEC Share of World Oil Production
    • 10.3 Employment Conditions in Asian Economies
    Boxes
    • 8.1 Aiming High to Serve the Poor: Georgia's New Targeted Social Assistance Program
    • 8.2 Tajikistan's Declining Remittances Can Hurt the Poor Disproportionately

    Foreword

    Since the onset of the global economic and financial crisis, the Asian Development Bank (ADB) has acted aggressively to help its developing member countries respond to the crisis through regular and emergency lending, guarantees, and policy advice. As part of the crisis response, ADB also sponsored several expert discussions and the exchange of ideas to facilitate appropriate policy responses.

    Top policy makers from twenty developing member countries as well as private sector executives and leading experts from within and outside Asia joined the ADB-sponsored Regional Forum on the Impact of the Global Economic and Financial Crisis in Manila during 14–15 January 2010. The Forum was organized as a platform for developing member countries’ officials and the private sector to discuss the implications of the global economic and financial crisis, share insights and experiences on the unfolding impacts (including social impacts), discuss measures taken to mitigate the adverse impacts of the crisis, and, equally as important, to take stock of the longer term implications of the global turmoil for our region.

    The Forum was a sequel to the South Asia Forum on the Impact of the Global Economic and Financial Crisis held in Manila in March 2009. The successful transition of a sub-regional event to a regional event led to a greater engagement between ADB and the developing member countries for mitigating the impacts of the crisis. The Forum was structured to start with a broad global perspective and cross-cutting themes followed by country and sub-region specific issues. The background papers prepared for the Forum facilitated candid discussions. The presence of distinguished resources persons, panelists, and discussants added to the depth and quality of interaction.

    Overall, as an event focused on sharing knowledge and experiences, the Regional Forum provided a better understanding of the dynamics and challenges of the global financial crisis, as well as the ways in which economies and financial systems can be made more responsive and resilient. While the Asia-Pacific Region can derive much satisfaction on the V-shaped recovery by the region as a whole, it cannot rest on its laurels since recovery remains fragile and governments in the region must remain mindful of the risk and challenges ahead. Overall, the recent developments suggest that Asia can aspire to move from crisis management to gradually assuming global economic leadership.

    This publication puts together the thought-provoking issues, responses, and views that emerged from the Forum. While there is no uniform policy that can address the needs of all of the countries, the Forum set out key principles for strengthening recovery efforts, ensuring inclusive growth and open regionalism, rebalancing Asia's growth model, and creating greater regional cooperation for a prosperous and resilient Asia.

    I wish to express deep appreciation to participants, authors, and organizers, both outside and within ADB, who contributed to the success of the Forum.

    HaruhikoKuroda President Asian Development Bank

    Acknowledgments

    This book originates from an Asian Development Bank (ADB) regional technical assistance project executed by the Centennial Group, under the overall direction and management of Harinder S. Kohli, with support from Yanbei Yao. Within ADB, Ashok Sharma coordinated the project under the guidance of Vice President Xiaoyu Zhao and Managing Director General, Rajat Nag.

    Harinder S. Kohli and Ashok Sharma are also co-editors of the book. All but two of the substantive chapters are based on background papers prepared by Centennial Group staff, associates, and consultants. The authors of the papers, in alphabetic order, are: Suman Bery (National Council for Applied Economic Research), Manu Bhaskaran (Centennial Asia Advisors), Harinder S. Kohli (Centennial Group International), Pradeep K. Mitra (Centennial Group International), Rajat M. Nag (Asian Development Bank), Andrew Sheng (Consultant), and Hiroshi Watanabe (Japan Bank for International Cooperation). Ritwick Ghosh provided valuable research support to Manu Bhaskaran throughout the project. Session summaries and comments were prepared by Y. Aaron Szyf (Centennial Group International) based on the summary of proceedings prepared by Wai-Kuen Tan (consultant).

    Aaron Szyf, Ali-Hassan Ayub, and Charlotte Hess from Centennial Group and Tadateru Hayashi, Mohammad Zahid Hossain, Yolanda Fernandez Lommen, Hiranya Mukhopadhyay, Shamsur Rahman, Vivek Rao, Jennifer Romero-Torres, Raju Tuladhar, Sujatha Viswanathan, and Hongwei Zhang from ADB worked tirelessly to prepare a high quality manuscript under an extremely tight deadline.

    The editors wish to thank Sunanda Ghosh, Sugata Ghosh, and their colleagues at SAGE Publications for their advice and help throughout, and for agreeing to publish this volume in record time.

    Finally, we are grateful to Haruhiko Kuroda, President of the Asian Development Bank for his inspiration and support for this entire work as well as his active participation in the discussions at the Regional Forum on the Global Economic and Financial Crisis.

    Harinder S.Kohli
    AshokSharma

    Overview

    Harinder S.Kohli

    This book is based on the papers presented and discussions held at a high level Regional Forum organized by the Asian Development Bank (ADB) in January 2010 to discuss the impact of the global financial and economic crisis of 2007–2009 (often also referred to as the Great Recession) on developing Asia. The papers analyse the: genesis of the crisis and the global response; impact on and policy responses in the region as a whole; developments in 19 specific countries;1 issues and challenges facing Asian policy makers immediately; and finally, implications of the crisis for the longer term development strategies of the countries in the Asia-Pacific region. To ensure sustained growth over the long term, policy makers need to focus particularly on reinforcing resilience to future external shocks, rebalancing demand, rethinking the growth models, and enhancing regional cooperation.

    This Overview is followed by the Opening Address by Hiroshi Watanabe, President of the Japan Bank for International Cooperation (JBIC). Thereafter, the book comprises of 12 chapters. Individual chapters start with updated and edited versions of the papers presented at the Regional Forum, followed by a summary of the discussions and conclusions of the corresponding sessions. We have adopted this format so as to provide the readers with a flavor of the rich discussion and debate that took place at the Forum. The book ends with the concluding remarks of Haruhiko Kuroda, President, ADB, which reflect the broad consensus and conclusions of the Forum.

    The Global Economic and Financial Crisis: Genesis and Global Response

    The Great Recession has been the most severe economic and financial crisis since the Great Depression of the 1930s. It can be traced to the excessive consumption in the developed countries—especially the US and UK—financed essentially by excessive leverage, which was embedded primarily in the financial sector through financial derivatives in the unregulated or under-regulated areas of the banking sector. The combination of excessively loose monetary policy, low interest rates, growing fiscal deficits, and lax regulation, allowed asset bubbles to emerge between 2003–2007. The unraveling of this model started with the bursting of the housing bubble in the United States in 2007 which created problems in the subprime mortgage sector.

    The subsequent collapse of the asset securitization market both in market prices and liquidity led to the drying up of wholesale market funding for the large complex financial institutions (LCFIs) in 2007/2008, culminating in the rescue of Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008. This, in turn, led to a systemic failure in the financial markets in the US and much of Europe. Additionally, sudden cutbacks in commercial credit had a chain reaction on global trade, which declined nearly 10 percent in 2009. Emerging markets did not decouple as expected and export-oriented countries actually experienced an even more severe economic decline than the crisis economies. The end result was a global economic and financial crisis. The scale, depth, and complexity of the global crisis, as well as the speed at which it spread worldwide, was truly unprecedented.

    The Western financial authorities were forced to rescue the systemically critical (the so-called “too big to fail”) institutions through sovereign guarantees of the entire deposit base of commercial banks, the provision of funding to investment banks and insurance companies, etc. In the process, the central banks increased their balance sheets nearly 2–3 folds and lowered interest rates to almost zero. In order to stem the shocks to employment, the global fiscal stimulus was both immediate and massive, with governments running fiscal deficits of up to 10 percent or more of GDP (excluding quasi-fiscal deficits through guarantees). Such a stimulus was able to stop the decline in confidence, but could not reverse the de-leveraging process that is still underway.

    As the financial crisis in the West escalated into a full-blown global crisis, so did the need to globally coordinate the policy responses. Leaders in large Western countries harnessed immediate international support, through the activation of the G20 as the primary decision maker on global economic issues. In addition to taking immediate globally coordinated monetary and fiscal policy measures (stimulus programs), major reforms were announced in the international financial regulation and supervision area. However, the implementation of these agreed institutional reforms at the national level has been controversial and uneven.

    The financial panic phase of the global financial crisis seems to be over by now. Financial markets have recovered almost to pre-crisis levels, with the surviving financial institutions making record profits due to reduced competition, higher spreads and cost cutting. The bonuses given to the bank management at a time of rising unemployment in the real sector were highly controversial and caused some pay curbs. By early 2010, the downward slide in the volume of activities in the real sector, employment, and international trade appeared to have been arrested, with Asia leading the nascent recovery in the global economy.

    Even though the world has avoided an economic and social catastrophe—and despite recent signs of “green shoots” in most large economies like US, Germany, PRC, India, Indonesia, Republic of Korea, and Brazil—policy makers and business executives cannot afford to be complacent.

    The basic structural problems that precipitated the financial crisis remain, particularly in the regulation and supervision of financial institutions that operate across national boundaries. In the past two decades, financial markets have become highly integrated and global, but financial regulation and supervision remains not only largely national but also compartmentalized into separate jurisdictions within countries. The result is that no single body is responsible or accountable for the system as a whole.

    Perhaps one constructive outcome of this global crisis is that it has revealed very forcefully to all concerned the fact that there is currently no global architecture or mechanism to deal with these problems—there is no global monetary policy, no global central bank, no global regulation, and no global fiscal system. As a result, the G20 leaders have become personally seized of this issue. Hopefully, they will keep working together until an effective mechanism is implemented to plug this gaping hole in the global financial system.

    There is another substantive reason for having such a global mechanism. Global oversight will become an integral part of the global financial system. Because of differences in demographic profiles, resource endowments, and governance practices, there will always be differences in levels of savings, and therefore, current account imbalances will remain, albeit, hopefully at a smaller scale.

    Spread of the Global Financial Crisis to Developing Asia: Transmission Mechanisms, Sequencing, and Diversity of Impact

    Until September 2008, many economic observers remained cautiously optimistic about the prospects for most emerging markets. Even though the G7 countries were mired in a serious recession, the emerging markets appeared quite resilient. Many economists ascribed this to the hypothesis that the emerging market economies, especially in Asia, had effectively decoupled from the G7 and therefore could continue to grow fast despite the recession in the developed countries.

    But all this changed dramatically in September 2008 as the global financial system appeared headed towards a total meltdown in the aftermath of the collapse of Lehman Brothers. The resulting freezing of the global financial system adversely affected economies worldwide rapidly, irrespective of their size, level of development, or degree of globalization. This phenomenon also engulfed—directly or indirectly—almost all countries in Asia, though at different speeds depending on the way individual economies are structured and connected to the global financial system and economy.

    The Great Recession affected developing Asia through five main transmission mechanisms:

    • A drop in equity markets dependent on international portfolio flows as major international financial institutions and institutional investors withdrew funds to contract their balance sheets and build their capital base because of the large losses incurred by the parent institutions during the financial crisis;
    • The freezing up of credit flows through international bank credits and bond markets in the aftermath of the seizing of international credit markets, loss of confidence, and “flight to safety” worldwide;
    • A drop in exports as a result of a contraction in economic activity in the developed countries, except that in many cases the drop in Asian exports was a multiple of the contraction in real sector activities in the importing countries as buyers sharply curtailed their inventories and forward orders;
    • Adverse effects on remittances and tourism receipts; and finally,
    • Job losses and ensuing deterioration in consumer confidence, causing a self-aggravating feed back to the rest of the economy, e.g., cut backs in domestic investments and more risk-averse banking practices.

    The Asia-Pacific region comprises of a very heterogeneous group of economies in terms of the: size of the economy (ranging from the PRC and India on the one hand to Armenia and the Pacific Islands on the other); connectivity with the global financial system (India vs. Bhutan or Maldives); size and importance of domestic demand and consumption vis-à-vis exports (India vs. Singapore); dominance of commodities or individual sectors of the economy as against broad-based and diversified economies (Mongolia or Maldives vs. Indonesia or India); and so on. This heterogeneity means that the impact of the above transmission mechanisms greatly varied between the countries not only in terms of the overall magnitude but also in the timing.

    Broadly, it is possible to discern three distinct phases in the impact of the Great Recession on Asia:

    • In the first phase, countries most affected were the ones with the strongest links to the global financial system: private capital flows, credit availability through international banks, and bond markets, etc. While countries such as India and the PRC saw a drop in domestic equity markets, the overall impact on domestic economic activity was marginal. This, of course, changed dramatically after the collapse of Lehman Brothers.
    • Immediately thereafter, in the second phase, demand for most Asian exports products to Western countries dropped suddenly. As a result, export-oriented countries—such as Japan, Republic of Korea, PRC, Thailand, Mongolia, Sri Lanka, and Singapore—almost immediately suffered significant drops in the exports ranging from 20–60 percent and, depending on the weight of exports in their overall economy, a significant drop in their GDP.
    • Finally, in the third phase, smaller and relatively less open economies such as the Maldives, Bangladesh, Azerbaijan, and Tajikistan also suffered because of sharp drops in remittances, tourism receipts, and/or exports earnings from commodity exports.

    The Forum papers and discussions revealed an equal diversity in the policy measures—including monetary and fiscal stimulus—taken by the authorities and their impact as well as the speed at which the countries are returning to their pre-crisis growth trajectories. These are discussed in detail in individual papers and session summaries in Chapters 3 to 8: PRC (Chapter 3); Indonesia, Philippines, and Thailand (Chapter 4); India (Chapter 5); Bhutan, Bangladesh, Maldives, and Sri Lanka (Chapter 6); Afghanistan and Pakistan (Chapter 7); and the Caucasus, Central Asia, and Mongolia (Chapter 8).

    Global Economy in Early 2010: Stabilization and Gradual Recovery

    The stabilization and gradual recovery of the global economy have been underway since late 2009. In early 2010, all major indicators pointed in the direction that the process of contraction had most likely stopped and the global economy had slowly but surely embarked on a process of recovery. There were encouraging signs in the financial sector and the property market—the two sectors from which the crisis erupted.

    However, the recovery has still remained overly dependent on policy support in the developed economies. In the US and some other Western countries consumer confidence lost steam once tax rebates were absorbed. Similarly, as the forces of restocking cannot drive production at the same pace, some moderation of production is likely to occur later in 2010 or early 2011, unless there is a pick up in the fundamental drivers of global economic activity.

    Unfortunately, the key adjustments needed for a durable turnaround in the US—Asia's largest market—were not happening quickly or convincingly enough. US households need more time to rebuild their balance sheets by cutting consumption and raising savings. The US trade deficit was not falling fast enough, de-leveraging continued, and financial sector cleaning required more time.

    Also, notwithstanding the recovery, there were signs of new tensions building up in the global economy, which could crystallize into challenges later in 2010. These included: the lingering aftermath of Dubai's debt woes, the continuing rise in gold prices symptomatic of investors’ continued extreme risk aversion, the depreciation of the US Dollar (recently reversed), a large drop in short-term treasury bill rates, and spikes in Japanese long-term bond yields. Finally, there has been rapid unprecedented growth in the already large global excess liquidity in recent months. This reflects the extraordinary monetary stimulus during 2008–09.

    The Forum deliberations suggested that the average growth in 2010 is expected to be better than 2009, with recovery likely to continue into 2011. But the recovery is likely to be volatile and new financial stresses and other policy challenges are likely to appear. Furthermore, several unresolved issues could threaten sustained recovery. These issues include: risks in real estate markets, with commercial property loans facing a major risk of default; liquidity issues in emerging European economies and smaller economies within the European Union; the enormous size of public debt in major economies that will limit the viability of stimulus packages should there be a double dip in growth; the need for massive global bank debts to be refinanced; and rising fears of protectionism.

    Developing Asia in Early 2010: V-Shaped Recovery but Emerging Financial Stresses

    Thanks to the much greater resilience of the major Asian economies resulting from the far-reaching policy reforms implemented since the 1997 Crisis, developing Asian economies have withstood the “Great Recession”—the worst economic crisis in the past 70 year—surprisingly well, and made Asia the first major region in the world to bounce back.

    By early 2010, the region as a whole already showed a robust V-Shaped recovery, easily contradicting most economic forecasts until only a few months earlier. This recovery was led by the three largest developing economies—PRC, India, and Indonesia—despite the lingering problems in Europe and Japan. As a result, in 2009, developing Asia was one of the few major economic regions of the world to show positive growth while the global economy as a whole contracted.

    Economic growth in the region, currently driven primarily by internal regional demand, is poised to accelerate to 6 percent or more in 2010 and lead the global economy for a second year in a row. The paper in Chapter 3 prepared by the Centennial Group, suggests that in 2010 the eight largest developing economies in Asia would simultaneously achieve growth rates of 4.5 percent or higher: PRC with a possibility of a 11+ percent growth, followed by India (7.3 percent), Indonesia (7.1 percent), Viet Nam (6.5 percent), Republic of Korea (5.4 percent), Malaysia (4.8 percent), Philippines (4.5 percent), and Thailand (4.5 percent).

    However, this bright outlook for the largest Asian economies must not mask the far less positive prospects for many smaller Asian economies. Many smaller Asian economies were less resilient to external shocks to begin with, and they are still suffering from the lagged effects of the global crisis (e.g., a drop in remittances, tourism receipts, and/or a slowdown in private capital flows). Another set of countries is suffering from internal political turmoil, or security problems. Finally, many countries in Central Asia and the Caucasus are still facing challenges associated with economic transition. They all face another challenging year and need continued international concessional financial and technical support.

    The overall impressive performance of emerging Asian economies as a whole is due to the combination of three factors: strong economic fundamentals, the increased resilience of the economies relative to 1997, and the commendable policy responses in most countries. Overall, the crisis responses in Asia—particularly their strong monetary and fiscal stimulus measures—have been timely, well calibrated and appropriately targeted. These measures have proven effective in expanding domestic demand, protecting jobs, and stabilizing financial markets.

    In summary, the growth in Asian emerging market economies has rebounded quite smartly. But sluggish external demand (mainly from trade sources) will still constrain medium-term growth. Foreign Direct Investment will probably recover to stable levels and remittances, although still slow, will remain a major source of income for some countries. Overall, the prospects for the Asian countries are more buoyant as compared to the advanced countries. While policies to protect economic growth remain important, the real policy challenge is to manage the financial sector and other stresses that will probably be part of the global landscape for some time to come.

    Immediate Policy Challenges: Consolidating Recovery vs. Restoring Fiscal Discipline

    Heartening as this V-shaped recovery is, global economic recovery remains fragile and governments in the region must remain mindful of the risks and challenges ahead. The turnaround in the region's three largest export markets, the US, Japan, and Europe has yet to gain traction from the private sector. Asia's continued growth prospects could still be adversely affected if the public sector stimulus and other policy support in developed economies are withdrawn prematurely. The participation of Asian leaders at G20 Summits provides an ideal opportunity for them to voice their concerns.

    There are a number of other potential challenges. These include managing the rising public debt and domestic liquidity generated by the fiscal and monetary stimulus measures, and possible fluctuating exchange rates and asset bubbles. Another potential threat is the highly mobile private capital flows, which are again rushing into Asia in large amounts. If left unchecked, they can cause volatility in exchanges rates and domestic liquidity and thereby potentially pose a major risk to the emerging economies in the region. Asian policy makers must remain vigilant and ready to take corrective measures if necessary. In addition, a few large economies face increased risks of overheating, and therefore may need to adjust their monetary and fiscal policies soon to head off inflation and asset price bubbles. Skillfully addressing these challenges will also be key to preserving macroeco-nomic stability, achieving higher growth, and minimizing inflationary expectations.

    Perhaps the most important immediate policy challenge is the need to appropriately time the withdrawal of the stimulus packages. These stimuli have been key to providing resilience during the crisis and the emerging recovery we are now witnessing. Each country must consider the extent of the impact of the crisis, its fiscal space, and its monetary situation in determining the appropriate timing for exiting from the stimulus programs. Asian economies that are recovering more rapidly—for example the PRC and India—should begin their exit strategies soon by tightening their monetary and fiscal policies, to avoid the risks of inflation and overheating and to limit the accumulation of unsustainable debt.

    The Way Forward: Enhancing Resilience, Rebalancing Growth, and Regional Cooperation

    Asia has much to celebrate in having escaped the worst effects of the Great Recession thanks to having developed more resilient economies and taking swift policy actions as the global crisis unfolded. However, to ensure its longer term prosperity, developing Asia must take proactive steps, starting now, to: become even more resilient in the future; help tackle the fundamental global factors (global imbalances; and weak financial regulation and supervision) that led to the current crisis; rethink the region's growth models; and enhance regional economic cooperation.

    The Forum confirmed that no uniform policy prescription fits the needs of all countries in a region as large and diverse as Asia. Each country must tailor its response to the nature and intensity of the particular challenges it faces. Nonetheless, the Forum identified a number of key principles and common strategies to guide the way forward:

    • Making economic forecasts has become more perilous than ever before. How various factors affecting economic variables will play out is not fully understood. Policies need to be agile and flexible and lead indicators carefully watched to better anticipate turning points.
    • Maintaining macroeconomic stability through well orchestrated and effectively coordinated monetary, fiscal, and exchange rate policies is crucial for all countries.
    • Reinforcing Asia's resilience by strengthening shock absorbers and mitigating shock amplifiers is essential to meet future global shocks. This means continuing and building on the reforms launched after the 1997 crisis at the country level. In addition, the region should consider taking additional steps at the sub-regional and regional levels; policy coordination is of particular importance.
    • Carefully calibrating policy adjustments to proactively address emerging risks country by country. For example, countries with large savings rates and investment driven growth, need to take steps to boost domestic consumption. On the other hand, countries with large deficits must rein in fiscal expenditures and cut subsidies.
    • Carefully designing and targeting fiscal programs to meet growth, human development, and sustainability objectives is an appropriate common approach to generate demand and protect vulnerable groups. Fiscal programs should include investments in priority infrastructure facilities.
    • Putting in place or strengthening social safety nets, particularly for the vulnerable segments of the society, to act as economic stabilizers during future economic crises. Protecting and expanding public expenditures in the social sectors—particularly in education, health, and water supply and sanitation—would help contain the adverse impact of the crisis on the poor and vulnerable, and build human capital for sustained and inclusive economic growth.
    • Maintaining Asian countries’ commitment to free trade and an open economy. The fortunes of most Asian economies are closely tied to an open and free global trading system. Asia has the most to lose from a breakdown in this system because of the recent rise in the protectionist sentiments of its major trading partners. Clearly, rising unemployment and dimming economic prospects have increased the temptation to resort to protectionism. However, while protectionist policies may bring short-run benefits, they will not only increase the risk of derailing the ongoing recovery but also undermine longer term growth prospects. Asian leaders must express their strong support for an open global trading regime at every major international economic forum such as the G20, WTO, etc.
    • Revisiting growth strategies in order to mitigate an important shock amplifier in export-driven economies. The outward-oriented Asian growth model has brought tremendous benefits to the region in the past and can continue to do so in the future. But, the crisis has also highlighted the need to rebalance the sources of Asia's growth. Asia must work towards greater trade diversification. Domestic and regional demand needs to be expanded in order to strike the right balance between domestic and regional consumption.
    • Finally, Asia's policy makers need to develop policies that would enhance regional cooperation. This is necessary to bolster economic resilience and reduce vulnerability to external shocks by generating efficiencies, market demand, and investment flows within the region. Increased regional integration efforts are essential to create truly regional markets for goods and services so as to make Asia's growth more internally driven. Achieving this will require: the removal of barriers to intra-regional trade (particularly cross-border obstacles to trade); greater physical and cross border connectivity (including transit corridors to provide better connections between countries); and a more conducive business climate. Effectively managing financial globalization can help maximize the benefits of capital flows and limit potentially destabilizing effects to the region's economies. Stronger domestic financial markets and the establishment of regional capital markets will also help ensure financial stability. Regional financial integration could thus be an important concrete step forward as would be carefully designed and selected regional infrastructure (connectivity) projects.

    1 Afghanistan, Armenia, Azerbaijan, Bangladesh, Bhutan, Georgia, India, Indonesia, Kazakhstan, Maldives, Mongolia, Nepal, Pakistan, Sri Lanka, Thailand, Philippines, PRC, Tajikistan, and Uzbekistan.

    Opening Address

    HiroshiWatanabe

    In his presentation entitled “The Impact of the Global Economic and Financial Crisis,” Mr Hiroshi Watanabe, President and Chief Executive Officer, Japan Bank for International Cooperation examined the current state of the global monetary and financial markets and concluded that Asia is still the “core of world growth”. However, Asia will face challenges after the crisis and would need the support of multilateral institutions in ensuring sustained recovery and growth.

    Mr Watanabe described the causes of the crisis as being a composite of “Ds,” which began with there being too much sophistication in Derivatives which, though not understood by many, was allowed to grow under excessive Deregulation. The period 2008/2009 continued to be characterized by another set of four “Ds,” namely Deflation, Dilution of capital markets, fragility of the US Dollar and the Dubai shock.

    Figure 1 Causes of the crisis
    Table 1 Economic Forecasts for 2010

    At the height of the crisis, money was in abundance but was not circulated. The excess supply of funds over demand created a low interest rate environment, which was not always good, especially for employment and pension. Fear of counter-party risks was very much the concern of investors, who thus preferred to keep “money in the closet”. Since September 2009, money has started to move and attention is now focused on how to mobilize the abundant supply of funds into business and development.

    From the economic standpoint, low interest rates are benefiting capital-intensive industries and this is creating a different set of problems for employment, which in the past was buoyed by investments in labor-intensive industries. This time around, the positive growth in emerging countries can be dubbed as a “jobless recovery”.

    In terms of economic growth, the developed countries were in a recession in 2009, and while there would be a recovery in 2010, growth is unlikely to exceed the 2 percent forecast for the United States, 0.8 percent for Europe, and 1.2 percent for Japan. In comparison, the emerging countries maintained positive growth in 2009, especially the four high-population countries of PRC, India, Indonesia and Brazil. There are prospects for higher growth in 2010, led by growth of nearly 9 percent in the People's Republic of China, 6.6 percent in developing Asia, and 4.5 percent in ASEAN countries. It is therefore important for multilateral and bilateral institutions to support the recovery in emerging Asia with sufficient funding.

    For a better understanding and assessment of the needs and challenges of Asia, Mr Watanabe segregated Asia into the real sector and the financial sector for analysis.

    Real Sector

    The positive factors of the real sector include stable demand for daily consumption goods, a growing shift of demand to medium value-added goods and a potentially huge “middle-income class” of 700–800 million people whose consumption patterns will dictate production and investments. At the same time, there will be some negative factors such as a decline in world demand for the exports of Asia, unstable commodity prices, and a malfunctioning of the global supply chain.

    Financial Sector

    The positive factors in the financial sector include the sound capital base of Asia's banking system and their small exposure to “toxic” instruments. The negative issues center on how to avoid financial nationalism and Asia's narrower access to foreign currencies now that US banks have shrunk in size. There is also less investment in infrastructure and a smaller volume of trade finance because of shrinking private financial flows in global markets arising from financial patriotism.

    Table 2 Assessment of Asian Economy
    Figure 2 Private financial flow in global markets

    What then are the challenges in this post-crisis period? Among the most important challenges are the following:

    • How to rebalance the world economy;
    • How to promote domestic demand to make up for slackening demand in US and European markets;
    • How to assess market needs and to adjust production targets;
    • How to sustain a regional supply chain for the prosperity of countries in the region;
    • How to establish flexibility and stability in foreign exchange; and
    • How to finance infrastructure investment in both new construction and maintenance.
    Role of ADB

    ADB has established sound guidelines on future investments in Asia that meet these requirements:

    • Seamless investment cutting across time and geographical space;
    • Investment in cross-border regional projects;
    • Comprehensive consideration of small countries and the “bottom billion” of poor people;
    • Investments that are friendly to the environment; and
    • Consideration to repair and maintenance.

    Going forward, the role of ADB and multilateral institutions should include:

    • Active assessment of intra-national demand and supply versus international demand and supply;
    • More emphasis not only on funding and also on design; and
    • A comprehensive coverage in physical linkage and institutional arrangements.
  • Conclusion

    HaruhikoKuroda
    Introduction

    Your Excellencies, distinguished country delegations, ladies and gentlemen. I am very encouraged by the proceedings of this two-day Forum, particularly your deep understanding of the global financial crisis affecting our region. The Forum greatly benefited from the invigorating presentations and your perspectives on appropriate policy issues, and from your suggestions on the way forward. Let me highlight some of the important messages coming from the Forum and what lessons could be drawn.

    Genesis and Global Responses

    The Forum started with a very thought-provoking discussion on the genesis of the crisis and the global responses to it. The Forum noted with interest the perspective of an interrelation between financial excesses and global climate change. Addressing the two crises could have far-reaching policy implications—changing policy and institutional frameworks geared towards sustainable growth built on the principles of social equity and financial stability.

    Impact of the Crisis

    The Forum reinforced our view that, overall, Asia has rebounded—especially PRC, India, and Indonesia. Heartening as these are, the Forum also noted that there are also countries that are still struggling. Global economic recovery remains fragile and governments in the region must remain mindful of the risks and challenges ahead. The Forum has been unequivocal that assistance to mitigate the impacts of the crisis need to continue.

    Overall, the crisis responses—particularly the strong monetary and fiscal stimulus measures—have been timely, well calibrated, and appropriately targeted. These measures have proved to be effective in expanding domestic demand, protecting jobs, and stabilizing financial markets.

    The Forum clearly brought out the varying impacts of the crisis on individual countries. The extent of integration into the global financial markets, reliance on external demand, and sensitivity to commodity price fluctuations are some of the key factors behind the variations. The Forum reminded us that there are still gaps in our collective understanding of the various factors that will affect economic variables and how these interact with one another.

    The Forum noted the need to appropriately time the withdrawal of the stimulus packages. These stimuli have been key to resilience during the crisis and the emerging recovery we are now witnessing. I fully agree, as discussed in this Forum, that each country must consider the extent of the impact of the crisis, its fiscal space, and monetary situation in determining an appropriate timing for exiting from the stimulus programs.

    This Forum has also pointed out a number of other potential challenges. These include managing the rising public debt and domestic liquidity generated by the fiscal and monetary stimulus measures, and fluctuating exchange rates and asset bubbles in the wake of destabilizing capital flows. Skillfully addressing these challenges will also be key to preserving macroeconomic stability, achieving higher growth, and minimizing inflationary expectations.

    Global Imbalances

    I was inspired by the stimulating debate on the issue of global imbalances and how developing Asian countries should rethink their growth models based on the lessons from the crisis. I agree with the view that while there is no single model, there is a clear need for the region to boost domestic and intra-regional demand. The Forum noted that rebalancing growth is also about strengthening financial systems in order to effectively intermediate the pool of high savings in Asia to finance investment requirements.

    Social Impact of the Crisis

    The Forum has alerted that even if an economic recovery is underway, the adverse impact of the crisis on employment and its accompanying social impacts are likely to be felt for several years to come, especially in poorer countries. Emerging evidence seems to suggest that the crisis could set back the significant progress we have achieved so far toward achieving the Millennium Development Goals (MDGs). The crisis could have costly and long-lasting effects on human welfare, as families with few alternative employment opportunities and little or no access to credit are forced to reduce the quantity and quality of their food intake, withdraw children from school, or postpone health care.

    The Forum noted that many developing Asian countries have expanded their social programs to counter these adverse social impacts, particularly to support and protect dismissed workers and enhance basic social services. There are also important lessons from the minimal social impacts in countries that had strong social protection programs in place even before the crisis. Therefore, I wish to underline the message that social programs aimed at inclusive development must be an integral part of the development agenda, not only as a response to crises.

    The Way Forward

    I am very encouraged by the consensus that has emerged among us on the need to do more to mitigate the economic, financial, and social impact of the crisis, and to ensure a speedy recovery. We also fully recognize that no uniform policy can fit the needs of all countries. Each must tailor its response to the nature and intensity of the particular challenges it faces. Nonetheless, this Forum has helped to identify some key principles and common strategies to guide our way forward.

    Strengthening Recovery Efforts

    First, there is overwhelming consensus on the need to maintain macroeconomic stability through well orchestrated and effectively coordinated monetary, fiscal, and exchange rate policies. To the extent that shocks influence countries in a sub-region in a symmetric manner, the results would be better if macroeconomic policies and macroeconomic management were coordinated at the sub-regional level. In particular, carefully designed and targeted fiscal programs to meet growth, human development, and sustainability objectives can generate demand and protect vulnerable groups in the short run, while maintaining investments and progress on long-term development goals. The challenge is, of course, to strike a balance between quick demand creation and long-term fiscal sustainability. Fiscal programs should include investments in priority infrastructure facilities, which have been long neglected in many developing Asian countries.

    Ensuring Inclusive Growth

    Second, developing Asian countries must also protect and expand public expenditures in social sectors—particularly in education, health, and water supply and sanitation. This will help contain the adverse impact of the crisis on the poor and vulnerable, and build human capital for sustained and inclusive economic growth.

    Equally important, governments must help prevent millions of the vulnerable from sliding into poverty by building appropriate, effective, and sustainable social safety nets, including existing community-based mechanisms. The poverty impact of the crisis should be carefully assessed and remedied through appropriate public action, so as to limit adverse effects on the progress towards achieving the MDGs. It is also important that MDG-related efforts and the development agenda be more broadly integrated into efforts to boost growth and rebuild the global economy.

    Open Regionalism

    Third, developing Asian countries need to maintain their commitment to free trade and open economy. Clearly, rising unemployment and dimming economic prospects have increased the temptation of resorting to protectionism, which will only prolong the crisis and weaken the recovery. We need to recognize that while protectionist policies may bring short-run benefits, they also increase the risk of derailing the recovery and undermine longer term growth prospects.

    Rebalancing Growth

    Fourth, developing Asian countries need to revisit their development strategies. The outward-oriented Asian growth model has brought tremendous benefits to the region in the past and can continue to do so in future. But the crisis has also provided an opportunity to rebalance the sources of Asia's growth. Asia must work towards greater diversification in trade—including by promoting intra-regional trade—if it is to regain to its growth potential. Domestic and regional demand also needs to be expanded to strike the right balance between domestic absorption and exports.

    Greater Regional Cooperation

    Fifth, to bolster economic resilience and reduce vulnerability to external shocks, Asia's policy makers need to develop policies that can help build domestic capacity and enhance regional cooperation. Achieving this will require removal of barriers to intra-regional trade, particularly cross-border obstacles to trade, greater physical and cross border connectivity, and enhanced cooperation to institutionalize initiatives for easing intra-regional trade. Also, effectively managing financial globalization can help maximize the benefits of capital flows and limit potentially destabilizing effects to the region's economies. Improving the investment climate will help shift the composition of foreign capital to less volatile longer term inflows. Stronger domestic markets with requisite oversight mechanisms, appropriate levels of foreign exchange reserves and the establishment of regional capital markets will also help ensure financial stability. Ladies and gentlemen, now is the time for more, rather than less, regional economic cooperation.

    Conclusion

    In conclusion, I hope this Forum has been as rewarding to all of you as it has been for us at ADB. I believe we have all gained a better understanding of the dynamics of the global financial crisis and the challenges we face, as well as the ways in which economies and financial systems can be made more responsive and resilient. As Asia moves beyond this crisis, we must not lose sight of the longer term objectives of inclusive development and poverty reduction. In a region where nearly 900 million people still live in extreme poverty, any slowdown in growth is a cause of serious concern to all of us.

    ADB's vision is an Asia and Pacific region free of poverty, and its mission includes helping its developing member countries improve the quality of life of their people. Our long-term strategy, Strategy 2020, challenges us to help drive the region toward more inclusive growth, environmentally sustainable growth, and regional integration. The crisis has added to these challenges, but we remain undeterred and committed to move forward with our mission. ADB will, therefore, continue to play its role in facilitating this process of knowledge generation and sharing on the far-reaching impacts and implications of the crisis. We will also continue to support our developing member countries in their efforts to mitigate and cope with the economic and social impacts of the crisis, and return to a path of stronger and economically and environmentally sustainable growth, and accelerated poverty reduction.

    With these words, I would like to sincerely thank all of you for your active participation and the rich discussions we have had over the past two days. Your contributions have been critical to making this Forum a success. My hope is that the perspectives and ideas from this Forum have helped us to recognize that this crisis also presents an opportunity. I believe this introspection will allow developing Asian countries to strengthen policies and institutional framework, as has been done since the Asian financial crisis in 1997/1998. Not only will this address the present crisis, it will also make the region better prepared to deal with any emerging crisis in the future. On our way forward, let us think globally, coordinate regionally, and act nationally.

    Thank you.

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