Rapid economic growth can no longer be taken for granted

THE Asia-Pacific region is not recession proof.

In 2008, growth decelerated to 5.8 percent from 8.8 percent a year earlier, and with growth expected to decelerate further to 3.6 percent in 2009, it is clear that rapid economic growth, the hallmark of the region’s developing countries over the past decades, can no longer be taken for granted.

This is a worrisome challenge, given the hard-won reductions in income poverty achieved over the past decades.

This calls for coordinated ma­­c­roe­conomic policies that will see the region move to a more inclusive and sustainable path of economic growth.

Some countries, notably in South Asia, face strained fiscal positions together with inflationary pressures. Others, notably developed countries, continue to struggle with recession—both cyclical and structural—and obstinate deflationary pressures.

And some, less affected by the financial crisis, notably small island developing states, face other threats of a stealthier, but potentially the more virulent long-term impact of climate change.

Export-oriented countries, notably those in Southeast Asia whose manufacturing sectors account for about 90 percent of merchandise exports, could see the financial crisis evolve quickly into an industrial crisis if expansionary fiscal and monetary policies do not have the intended effects.

During the first half of 2008, Southeast Asian policymakers were preoccupied with inflation, which increased substantially as the commodity price spike was passed on to domestic food prices.

The effect of these price increases was mixed as exporters of commodities such as oil and gas, rubber, palm oil, rice and metals benefited from higher export receipts.

But by the last quarter of 2008, attention turned to a second and larger shock: the sudden onset of economic crisis. As manufacturing exports from many countries experienced double-digit declines, economic growth slowed markedly, darkening the outlook for 2009.

Overall, the rate of gross domestic product (GDP) growth dropped from 6.5 percent in 2007 to 4.3 percent in 2008, but it is expected to plummet further to 1.5 percent in 2009, the slowest expected among developing countries in Asia and the Pacific.

On the downside, there is a marked risk that the global recession driven by the financial crisis will turn into an industrial crisis for Southeast Asia, given its integrated industrial production base and a linkage to the global supply chain, thus deepening unemployment and further hurting the poor.

On the brighter side, while banking sector vulnerabilities must remain on the radar screen, the improvements in banking supervision and prudential macroeconomic policies implemented after the financial crisis of 1997, which had its origins in Southeast Asia, have strengthened the financial sector and increased its resilience to crises.

While the slowdown in export demand was pervasive across Southeast Asia, its effect on the rate of growth of GDP during 2008 varied across countries according to their trade composition.

Countries that relied most heavily on manufacturing exports to industrial countries, such as the Philippines, Cambodia and Singapore, were the most affected by the slowdown.

Domestic demand grew slower in 2008 than in 2007 in Southeast Asia. In the Philippines, Cambodia and Vietnam, the drop in domestic demand exacerbated the adverse effect of the deceleration of exports while weaker domestic demand countered the expansionary effect of exports in Malaysia.

As inflation soared, monetary policy changed from mostly neutral to contractionary by mid-2008.

As the impact of the global financial crisis on economic growth became more evident by the fourth quarter of 2008, monetary policy started to ease. Cuts in policy rates can be expected to continue in 2009.

Consistent with monetary easing and the deterioration in current account balances, Southeast Asian currencies depreciated, especially toward the end of 2008 and into 2009.

As for fiscal policy, in most countries during 2008, budget deficits were small and balances remained stable or improved slightly.

Thus, Southeast Asia has fiscal space for an expansionary and coordinated response to the global financial crisis.
–Source: ESCAP