When the financial crisis began, India, China and the tiger economies were still running well. Current account surpluses, huge reserves, high savings rates and relatively clean bank balance sheets boded well for Asian resilience.
Things have changed. All the major Asian economies have witnessed at least one month of double digit export contraction, with Japan, South Korea, Taiwan, Singapore, Philippines, Indonesia and Vietnam seeing contraction of more than 20% for several months. Asian economies' exposure to exports has risen from 36% of GDP in 1998 to 46.7% in 2007 and, during Q4 2008 and Q1 2009, Asian exports fell more than they did in 1997-98. In spite of low subprime exposure, contagion from the global credit crisis is leading to a liquidity squeeze and a jump in short-term borrowing costs.
But hope has not evaporated that Asia will be able to hold it together and Asian governments are taking action. Combined, they have introduced more than $600bn (albeit mostly in China) in fiscal stimulus to raise government spending on infrastructure and public services, cut taxes, offer subsidies, ease credit for households and firms, and offer incentives for the unemployed, to cushion domestic demand and promote investment.
India recently injected its first stimulus of $4bn including additional spending, VAT cuts, eliminated duties and refunded sales taxes. It also introduced tax-free bonds for infrastructure. It eased credit access for non-banking finance companies, infrastructure, housing, small and medium-sized enterprises and export firms. And it cut excise duty, service tax and VAT.
For perhaps the first time, China has publicly acknowledged the importance of boosting domestic demand by improving the wages and social conditions of the country's low-paid workers. As part of its $586bn stimulus package, it has promised to raise the proportion of the national income that goes to wages, and to continue to adjust income distribution and increase subsidies to farmers and low-income urban residents.
Developing trade
Focus is being placed on further developing intra-Asia trade, investment and consumption. In March, Malaysia – which also announced a stimulus package of $25bn, or nearly 9% of its gross domestic product – unveiled a Rmb40bn ($5.85bn) foreign exchange pact with China to promote trade and investment between them. China has proposed a China-ASEAN free-trade area in a bid to expand each others' markets and reduce reliance on developed economies.
These are welcome developments, but they may not translate into success. It is often difficult to ensure that stimulus does not leak; extra spending on infrastructure can easily morph into larger and less efficient public administration. And, as Asia's economies continue to scale up fiscal stimulus packages, let's hope Asian countries can afford them – and that they work.
