Global Financial Crisis: Flashback and Flashforward for Asia and the Pacific

19 September 2018

Ten years on, and the global economy is still reeling from the impact of the global financial crisis, the first crisis to originate in the United States of America. The Asia-Pacific region endured this historic event relatively unscathed, thanks to the improved macroeconomic policymaking following the 1997 Asian Financial Crisis.

Yet, the scarring effects of the crisis are still evident in lower growth and productivity, higher inequality and environment degradation-- jeopardizing the outlook to achieve the 2030 Agenda for Sustainable Development (see Figure 1). A decade later, now is the time to reflect on where we are and where we are headed.

Maintaining resilience through expedited policy responses: Macroeconomic policy responded immediately as the global economy fell on its knees. Nearly 80% of Asia-Pacific economies had adopted expansionary fiscal stances by 2009. The most notable policies were fiscal stimulus packages in China, Republic of Korea, Turkey and India. In addition, central banks from India to Thailand lowered interest rates. Hence, real GDP growth of the developing Asia-Pacific region rebounded to 8.8% in 2010 and continued to outperform its global counterparts. To strengthen economic and financial stability, financial regulations were tightened and macroprudential measures were put in place. Finally, many economies in the region are in the process of adopting the Basel banking regulatory framework.

However, this resilience has come at a cost. By now, we fully understand that crises and recessions have a lasting impact on output. Unsurprisingly, the growth in potential output has decreased in tandem with labour and total factor productivity. Expansionary fiscal and monetary policies have resulted in higher debt and excessive credit in many countries. In a more connected world, dependence on external demand leaves the region vulnerable to recent backlash against globalization. With policy interest rates in most economies lower and fiscal imbalances larger than a decade ago, the capacity to fight another crisis has waned.

The larger area of concern is the inclusiveness and environmental sustainability of the economic growth pattern. Fiscal expansion in the wake of the crisis supported capital formation rather than improving social inclusiveness, as seen in a gradual increase in inequality in developing Asia-Pacific region in the last decade. Uneven economic growth in the wake of growing inequality threatens to leave the vulnerable behind. Issues like environmental health, affecting both the rich and poor, maintain a critical stake in productivity for all. The Asia-Pacific region holds the highest rate of emissions of air pollutants and green-house gases in the world and maintains the highest rate of productivity losses due to excessive levels of air pollution.

Additionally, new risks and challenges are emerging on the horizon. With many countries facing elections in the coming year, economic and political uncertainty in the region could rise due to unknown policies of future leaders. Meanwhile, industrial revolution 4.0 may reduce the scope for industrialization in some developing countries as new frontier technologies (such as robotics and artificial intelligence) increase possibility of re-shoring. Lastly, as China rebalances its economy, growth will inevitably decelerate with profound impact on the region due to closer trade and regional financial linkages.

A pertinent question now is: how should the Asia-Pacific region prepare for the future? The crisis highlighted the importance of resilient policies and financial stability to counter a shock of that magnitude. Hence, our member states should continue to strengthen financial regulatory quality and improve policy space while the current economic growth is still stable. Our strength lies in the region itself. For example, policies that strengthen financial systems through macroprudential measures could holistically maintain the economic health of the Asia-Pacific.

But only a more inclusive and environmentally sustainable economic growth path would make the fallout from the next crisis less painful. Hence, policymakers need to persevere and pursue important medium- to long- term developmental goals, as enshrined in the 2030 Agenda for Sustainable Development. This would require economies to undergo structural changes to become more productive, including changes to social welfare systems that respond to people in need and a healthy environment that supports well-being and productivity. While long-term prosperity may come at the cost of short-term economic performance, it is the ideal to which we should aspire. With the Asia-Pacific region as the driver of global economic growth in the past decade, it can serve as a role model for inclusive and sustainable economic growth in the decade ahead.