This paper examines the impact of the global financial crisis on Southeast Asia, focusing on the policy responses of the various governments. The global financial crisis has had a nearly unprecedented impact on OECD countries with collapses in asset markets, failures of financial firms, and falling demand. As of January 2010, the threat of a true global depression appears to have receded, asset markets have stabilized, and some economies are showing slow recovery. There is, however, considerable uncertainty over the future course of the OECD economies and little hope of a quick rebound in employment: a "jobless" recovery is underway.
The initial section below provides a sketch of the crisis focusing on trade as the determining factor in bringing economic difficulties to Southeast Asia. The impact of the global problems on regional financial markets is reviewed in section III. Despite clear signals from OECD economies that a true crisis was developing, regional growth forecasts appeared to reflect the changing conditions only with a lag and this is reviewed in section IV. A note on the impact of this slower growth on poverty is section V. The remaining sections of the paper contrast the relatively quick response of monetary policy (section VI) with a tardy use of fiscal policy (section VII), and some final notes on trade policy (section VIII). A concluding note is section IX.
II. Southeast Asia's Reliance upon International Trade Left it Vulnerable
The collapse of asset markets and financial market failures in the OECD had echoes in Asia, but the major channel of influence for Southeast Asia was trade--a sharp fall-off in demand for exports. The OECD recession translated into a strong drop in imports from Southeast Asia, a region that had come to depend on trade to marshal robust economic growth. The OECD recession had all major economies in East Asia "suffering double-digit declines in exports". (1) The trade collapse was most evident in 2008-Q4 and 2009-Q1 with the pace of decline moderating by 2009-Q2. Figure 1 shows the situation in the Philippines.
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Although media headlines focused on the failures of iconic OECD financial market institutions and blockages in what had been normal financial market exchanges, it was the more plebian fall-off in orders for goods that transmitted the OECD crisis to Southeast Asia. In trade-dependent countries such as Malaysia and Thailand, the fall-off in exports led to lower private domestic spending, especially fixed investment. (2) That trade was the primary and lasting channel is clear. However, there were very complicated and inter-related movements in the various aspects of the different economies. Initially the freezing of short-term credit markets in the United States (3) had a sharp impact on trade finance and orders. This was exacerbated by outflows of capital, especially portfolio funds. (4) The subsequent downturn in aggregate demand in OECD economies confounded the initial shocks.
The channelling of the global crisis to Southeast Asia through trade reflects the historic dependency of this region on trade to spur growth. Especially the economies of Malaysia, Singapore and Thailand are keyed to international trade. (5) This reliance upon international trade to harness their growth potential left some countries particularly vulnerable to weaknesses in OECD outlet markets. As Figure 2 shows, it was the degree of trade dependency that explains the impact on growth of the global recession in Southeast Asia. (6) Singapore, as an economy centred on trade, showed the largest turnaround in growth with GDP falling 9.6 per cent, year-over-year in 2009-Q1. Indonesia and the Philippines, less dependent upon external demand, have skated through the crisis better than their richer neighbours. This is the double-edged sword of relying on external markets for development: it provides a tremendous boost to the efficiency of the economy and long-term growth, but increases short-term vulnerability to external shocks. …