Developing East Asia is battling the forces of global recession. The impact of the crisis in the advanced countries was transmitted to the economies of the region with unusual speed. In the region, the initial global financial turbulence was marked by sudden reversals of capital flows in the middle-income economies, rapidly declining equity market prices, a sharp increase in the price of external private capital, a shortage of dollar liquidity, and in some cases, a depreciating currency. Now with aggregate global demand falling precipitously, region-wide declines in exports and industrial production are triggering widespread factory closures, rising unemployment, and lower real wages, with disproportionate effects on the poor and near-poor. Authorities in many countries are implementing social programs and cash transfers to assist those most in need. Where possible, policymakers have responded quickly with expansionary monetary and fiscal policies, including fiscal stimulus packages, although in most cases these measures will only mitigate, not overcome, the contractionary forces operating on their economies.
There are signs that the strongest economy in the region, China, is beginning to turn the corner. If it does so, what would be the implications for the rest of East Asia and the Pacific? A return to stronger economic expansion in China next year should help support growth among the countries of the East Asia and Pacific region, but a sustainable recovery will ultimately depend on developments in the advanced economies. Among developing regions, East Asia is best positioned to benefit from resumption in global growth, given its relatively open trade regimes, its infrastructure, and its strong and competitive production networks. Even so, the region’s outward oriented economies are unlikely to enjoy the same success in the medium term as they did in the previous decade, in large part because the pressure to increase savings in East Asia’s key export markets is likely to constrain their growth over the medium term. In addition, the risks to the outlook are weighted heavily on the downside. Continued banking problems or even new waves of tension in financial markets could lead to stagnation in global GDP or another year of declining GDP.
The implications for East Asia would be increased pressure on labor markets and the fiscal accounts, and further deterioration in the portfolios of banks.
PDF from World bank
