Discuss on how the East Asian countries overcame the global financial crisis so quickly and achieved such unbelievable economic growth in various ways since then. Also, give the comparisons and contrasts of those policies between the US and the East Asian countries during the crisis………….
The Global Financial crisis of 2008 was attributed to mortgage sector of USA and began in the USA following the bankruptcy and collapse of Lehman Brothers in 2008.It subsequently spread through all the economies of the World. The period was of dire economic and financial upheaval and made economic and financial environment very difficult for the World economy. In initial phase of the crisis the Asian Economy seemed not to be affected by the damaging economic and financial developments which was taking place around them (Dilip, 7). Asian economies remained insulated in the global financial crisis for a period of time and there seemed a possibility that Asia would find easy passage through it. Since Asian economies are out-warding oriented and well connected with the global economy through trade and financial channels, they too found themselves getting affected by the crisis. Following this financial crisis and global recession East Asia experienced a sharp impact on its economy; there was unexpectedly swift and deep reduction of export and industrial production in the fourth quarter of 2008 and first quarter of 2009. East Asia took a vigorous economic rebound to counter the sharp impact of the financial crisis in its economy in the second quarter of 2009. The vigorous economic rebound initiated by East Asia has enabled it to recover most quickly from the crisis than most of the countries and now East Asia has become the strongest and healthiest economy in the world. The goal of this paper is therefore to examine how the East Asia countries overcome the global financial crisis so quickly and achieve and achieve such unbelievable economic growth in various ways since 2008.
ECONOMIC POLICIES SUPPORTING RECOVERY IN EAST ASIA
East Asia implemented a number of economic policies to counter the effects of the 2008 Global Financial Crisis. The quick recovery from the financial crisis by the East Asia countries was as a result of a combination of timely and large fiscal and monetary stimulus notably in China and a powerful process of inventory restocking that began after mid 2009(Athukorola, Kohpaiboont 96). The East Asian economies prepared potent fiscal stimulus package and also attempted monetary easing to combat the recession generated collapse of the real economic activity. The objective was to provide support to the financial systems so that it did not disintegrate and stimulate aggregate demand in the domestic economy. East Asian economies were able to design strong stimulus responses because of their sound fiscal health and credible monetary state. East Asian economies also have the tradition of high saving rates and low household debts, they slashed interest rates in a convincing manner and adopted a large fiscal expansion programs. Some of the economic policies which were implemented by East Asia economies include;
Fiscal policies Fiscal policies have been implemented by the East Asia economies; this is achieved through implementation of fiscal stimulus measures. The fiscal stimulus measures have helped support the domestic demand in most countries in the region. The countries increased spending by more than planned earlier either by announcing additional stimulus packages or accelerating expenditure plans already in use. The fiscal stimulus packages implemented by the East Asia countries were huge and constituted a large proportion of their Gross Domestic Products.
Figure showing Fiscal stimulus implemented by East Asia compared to other economies (Ivalio, Antonio, 20)
According to UNESCAP the size of economic stimulus package implemented by the East Asian countries as a percentage of the 2008 Gross Domestic Product to some selected countries is as follows: China 13%, Indonesia 2.7%, Japan 4.3%, Malaysia 9%, The Philippines 9%, Republic of Korea 8.4%, Singapore 8%, and lastly Thailand 17% (Dilip, 20).China spent a large size of its Gross Domestic Product as Fiscal Stimulus packages as compared the rest of the East Asian countries. Some of the economic stimulus package included capital outlays already in the pipeline. Many of these economies could not make quick disbursements of the pledged stimulus packages. Large capital projects were avoided since they took a long time to be implemented and this could delay the recovery process. Although estimate of fiscal multiplier varies widely, the expansionary fiscal policy added to the aggregate demand in the economy. Some of the expansionary fiscal policy measures that were taken by the East Asian economies included government spending programs. A number of large investments programs were started to strengthen infrastructure and some social safety nets. Again automatic stabilizers in the form of withholding of income and other taxes were also implemented.
China, japans, and Korea both implemented fiscal policies measures to counter the effects of financial crisis in their respective economies. Most of the stimulus packages were geared toward infrastructure development, they were disbursed in the infrastructure projects and this helps and this helps in supporting domestic incomes and demand in the region. Another form of stimulus package implemented by the East Asian Economies was tax cut. China, Japan, and Korea implemented this form of stimulus package to individuals, companies, and different selected products. These resulted in accumulation of income and saving in these economies and increased domestic demand and spending. Tax cut which is a short term fiscal policy measure and the fastest to implement accounted for about one-sixth of the overall stimulus packages in the East Asia region. Korea as compared to China and Japan relied heavily on tax cuts for the bulk of their fiscal stimulus package. In implementing tax cuts as a measure of stimulus package, the East Asia economies emphasized the reductions on personal income taxes and corporate income taxes (Richard, 48). The support for the poor and the vulnerable were also increase considerably within the East Asian economies. The measures taken in the implementation of the above stimulus package by the East Asia economies (China, Japan, and Korea) included targeted and untargeted social transfers, vouchers to low incomes, Vulnerable or rural households, school feeding programs and other schemes and support of housing and construction of low-income housing in the these economies.
Fiscal stimulus packages helped bring some strong positive impacts in the economies of Eat Asia regions. The impacts varied from countries to countries depending on the percentage of the countries Gross Domestic Products spent on the stimulus package, the areas or groups targeted and the method used to disburse and manage the stimulus package. Stimulus that was dominated by the infrastructure and targeted the social spending has the largest impacts to these economies. This was mainly because infrastructure projects cover various sectors of the economy and hence it will create a massive income and demand within the economies as compared to other stimulus packages. On the other hand stimulus that focused on tax cuts and untargeted social transfers and wage increase have been least effective, this can be explained by the fact that the tax cut stimulus only targets a section of the economy. It only benefits the employed leaving a majorly of the population who constitute of the unemployed and the vulnerable group in the society.
China government spent huge amount as a stimulus package focusing on infrastructure projects than the other East Asia economies. It also increased bank lending to help in the activity development in the economy in the first quarter of 2009. In Korea the fiscal stimulus caused activity to rebound strongly, as it was focused on the schemes to generate new jobs, support bank lending, support small and medium enterprises and also accelerate the already established and planned infrastructure spending. The impact of fiscal stimulus package which includes the untargeted social transfers has a low significant impact to the economies of China, Japan, and Korea. China was only using fiscal policy stimulus to advance medium term goals in contrast to Korea, and Japan who were using fiscal policy stimulus package to advance both medium term goals and long term goals. To advance its stimulus package further China invested heavily in energy efficiency and low- carbon alternatives, road and air transport. The government of China spent approximately an equivalent of $ 90 billion on the new rail projects in the 2009 and a similar amount in the year 2010. China also spent an average of $ 31 billion in 2009 and the similar amount in 2010 on energy conservation, pollution reduction, and ecological improvements. Another $ 54 billion was spent by China on technological upgrades in industrial restructuring in energy intensive sectors ( Ivalio, Antonnio, 75). The above fiscal stimulus packages which was used by the East Asia economies contributed strongly to the recovery of their economies quickly from the global financial crisis of 2008. A characteristic feature of the fiscal stimulus packages designed by the East Asian economies was that they comprises of large investments in infrastructure. China for example spent its entire stimulus packages in infrastructure projects or other types of construction activities. Social safety net was given relatively less importance. The Korean stimulus package was a mix tax cuts and public expenditure measures.
Monetary Policies Measures During the global financial crisis of 2008, East Asia regions experienced price pressure in their economies. There was a sharp rise in food prices, interest rates were increasing continuously and inflation was also rising steadily and rapidly. The government and monetary authorities in the East Asia economies embarked on vigorous monetary policy measure in order to maintain the price pressure in their economies (Graham, Ramkishen, 34). The government and monetary authorities in the region maintained monetary accommodation, including low policy rates, reduced reserve requirements and other varying measures. These measures were aimed to support economic activity and also facilitate financial institutions’ access to ample liquidity.
In China it was the loose monetary policy that resulted in a surge in the bank lending that provided local governments and state owned companies with complementary resources needed to carry out the infrastructure- focused stimulus package program. This result in increased bank credit in 2009.The increase in bank credit in China was an equivalent amount of one-third of Gross Domestic Product. This raised the ratio of credit to Gross Domestic Product to 141 percent which was the highest ever realized in the East Asia regions by then. The credit growth rate in China also accelerated the credit growth rates in some other East Asia economies. There was rapid increase in equity and housing prices as a result of credit growth in the region. Sales of real estate also increased strongly in China, Japan, and Korea. Due to high demand of real estate in the region the governments and authorities ease capacity constraints by releasing more land for real estate development. The authorities also took steps not to allow borrowers to defer payments. Central banks also helped in the growth rate of credit in this region by setting target for overall bank credit growth rate and establishing caps on the share of the bank lending for real estate and portfolio investments. They also took step to ban loans for short selling. Other monetary measures used by the East Asia economies to recover from the financial crisis include; higher collateral requirements, higher capital requirements for riskier lenders, and mandatory lower loan- to-value and loan- to- repayment ratios for the mortgage lending. China implemented this for larger mortgages firms only. In aroused policy move, the monetary authorities in East Asia economies reduced interest rates on new investments and purchase of durable goods. Korea followed this policy in the late 2008 and early 2009. Several central banks in the region slashed interest rates on bank borrowings and offered higher interest rates to non resident savers to attract hard currency savings (Richard, 28). The global financial crisis of 2008 directly affected the real economy through multiple challenges in the financial sector of the East Asian economies. The focus of these economies was thereby geared towards rescuing the financial sector by instituting stringent measures on the financial market and institution. Large and speedy injections of liquidity were made in financial institution in the East Asia economies to avoid a complete break down of the financial system. These were implemented by several other countries including the USA. Providing financial liquidity to the financial institution was a highly significant and bold policy move that helped stave off a financial meltdown of disastrous proportions. Central banks also put several special purposed, innovative programs in place to stabilize the financial system. New lending methods were devised by the central banks to provide liquidity support. This helped to avert the collapse of payment system in the East Asian economies and also to avert the widespread failure of the commercial banks and other financial institutions.
Exchange Market policy. The global financial crisis led to weakening of East Asia economies local currencies. China, Japan, and Korea experienced a weak currency in their economies. The weakening of currencies was associated with a weakening US dollar during the global financial crisis. The weakening of US dollar forced the authorities in most Asian countries to intervene heavily in the foreign exchange markets. The measure taken by the East Asia economies was aimed to limit appreciation of their own currencies and make them stronger against US dollar which was by then weakening at a faster rate. The measure was also important since stronger exchange rates were important in extracting more growth rate from domestic demand. Korea reacted and adjusted well by allowing their currency to weaken in 2007 thus limiting the drawdown on reserves. Exchange rate flexibility was critical in managing the foreign exchange inflows while keeping inflation and asset price increases in check. Exchange rate policy was also important in the recovery of East Asia economies as it ensured that the foreign exchange earnings increase.
China, Korea, Japan and other East Asian nations implemented measurers that kept there respective currencies stronger compared to the US dollars. This ensured that their export earnings increase and hence there was increase income in their economies which created domestic demand. On the other hand because of the weakened US dollar in the market and stable currency of the East Asia region local currencies, their imports become relatively cheap and these result into savings in the region. The East Asian central banks also adopted a lax monetary policy stance and reduced interest rates to historically low levels. The global supply chain arrangements were impelling the Asian economy towards a closer currency arrangement. The East Asian currencies have been flying in formation within a narrow band with each other. When the global financial crisis broke out, the East Asian economies had a variety of exchange rate regimes. The Korean currency was on the extreme, floating almost free. The Korean currency depreciated the most by almost 30%. Most of the East Asian economies benefitted from the currency depreciation due to the weak export performance. China for the first time sold it currency, Yuan in 2009 in Hong Kong market. This relaxed its foreign exchange controls which led to the revaluation of Yuan (Richard, 49).The East Asian economies central banks frequently bought the US dollars or hard cash in their market. Their foreign exchange regime kept on climbing. A considerably good level of foreign exchange reserves provided them with financial security against sudden fluctuations in the international capital markets. The East Asian central banks also kept track of the capital inflows which they have suffered earlier on. As majority of the East Asian economies were advancing towards capital account convertibility, a larger foreign exchange reserves provided them with a degree of monetary independence and also exchange rate stability, hence the large exchange reserves served these economies well.
Social policy .Social policy was also implemented by a number of East Asian governments as a mean of economic recovery from the financial crisis. Under social policy several measures were taken the East Asian economies to cushion the impact of the slowdown on the most vulnerable. The policy responses have been helped by smaller than expected negative impact of the crisis on unemployment and labor incomes. The effectiveness the responses of the social policy has been limited by the lack of an adequate structured and financial social safety nets in most countries in East Asia region. The economic crisis affected heavily food and fuel prices in 2008. Fuel is a very sensitive product in any economy. The increase in fuel price will almost affect all sectors of the economy and results in economic retardation of the affected country or countries. Food again is the basis of human life hence increase in it price will result in inflation and some extent contribute to the savings and incomes in the economy. A number of social protection measures were introduced by the East Asian economies to help in the recovery from the global financial crisis of 2008. The governments of China, Japan, and Korea accelerated the conditional cash transfer by increasing their total budgets significantly. Some of the countries in the East Asia region who have already abolished the unconditional transfer reinstated the targeted unconditional transfer. China expanded rural heath insurance scheme and also increased an allocation to earthquake reconstruction in one of its province which was hit by the earthquake. Addressing the fuel and food crisis in the East Asian economies provided a stepping stone to build a more systematic response to the economic downturn.
There were also continued partnerships with donors and Non governmental Organizations on cash and food for work programs that were particularly well suited to countries with lower capacity. Other social measures implemented by the East Asian economies during the global economic crisis depended on a number of factors thin a given economy. Some of the factors considered here are the fiscal space and institutional capacity of the country. Targeted and untargeted cash transfers were combined with in kind transfer in some of the countries in East Asia. China extended benefits under its existing social safety nets. Investment infrastructure supported under the fiscal stimulus packages also had a substantial positive labor impact. In China the stimulus economic package which focused on infrastructure become familiar in the economy as a means of economic recovery. Other East Asian economies also adopted community based small scale infrastructure projects that were designed to create temporary employment opportunities to its citizen’s thereby increasing income and demand. There was also the adoption for training subsidies in various work programs in these economies. The government of these economies provided employers with monetary incentives to retain or hire employees and also to provide training to both the new and existing employees. This was done through devoting significant stimulus funds by the governments to subsidize the capacity building programs. More coherent approach to social protection was also employed by the East Asian governments. These include; selective social insurance scheme, where some countries provided additional benefits to members of various social security institutions. In China a significant effort was made to increase pension benefits, expand rural pension shames, and broaden rural healthcare insurance. China also increased the threshold for minimum living allowance and provided a one time support for 74 million poor.
THE ECONOMIC GROWTH The East Asian economies have recovered sharply and quickly from the global financial crisis by implementing the fiscal and monetary stimulus package among other policy measures. The fiscal and policy measures were implemented by almost all the countries in the region included China, Japan and Korea.
Other policy measures were used differently depending on the given economic environment and set up of a given country. The regional growth rate was estimated to be 1.3 percent by 2009 (Dilip, 27). East Asia received a larger share of foreign direct investments inflows. This was due to a combination of investors expectations of a stronger growth in the region than the rest of the world. It was also attributed to the potential for currency appreciation and the growing liquidity and sophistication of the regions financial market. Despite of the limited availability of capital in the Easer Asian economies, a surge in capital flows created a spate challenge. Most of the East Asian economies followed sound macroeconomic policies and had fairly a long tradition of fiscal conservatism. They entered the crisis with a great deal of fiscal space. The fiscal stimulus packages designed by the East Asian economies were larger in magnitude than the average for the G 20 economies. In 2009, the average size of the fiscal stimulus packages was 2.75% of the Gross Domestic Product in Asia, compared to the average of 2% for the G 20 economies. In terms of size, China, Japan, and Korea launched the largest stimulus packages (Asia Pacific Business Review). China announced a massive business stimulus package in 2008 and also launched aggressive monetary easing in 2009. China committed US $ 586 billion to a stimulus program in the beginning of 2008(Graham, Ramikishen, 81). This was used in fiscal spending on public infrastructure development. These bold and timely policy measures helped pulled the East Asian economies out of the recession so quickly and unexpectedly. The East Asian economies came up with strong and timely response to cope with the financial crisis; again the governments and central banks in the East Asian economies were aggressive in providing response. They prepared fiscal stimulus packages and attempted monetary easing to combat the recession generated collapse of the real economic activity. The macroeconomic fundamentals of the East Asian economy were essentially in the healthy shape and the financial sector weaknesses that had existed earlier had been addressed to a considerable extent hence the fiscal and monetary expansion measures initiated by the East Asian economies had a significant and realistic chance to succeed in the recovery of the economy from global financial crisis of 2008.
COMPARISONS OF POLICIES BETWEEN EAST ASIA AND USA.USA was the epicenter of the Global Financial Crisis of 2008. The USA suffered the most from the Global Financial Crisis as compared to other countries. Several institutions collapsed in the USA including those in the banking sector. USA implemented a number of policies to counter the effects of the financial crisis in its economy. The policies implemented by different economies produced differing impact on economic growth of the regions. Asia experienced a rapid growth by implementing fiscal and monetary policy measure than any other economy in the world. East Asia economies (China, Japan, and Korea) led the Asian economies in implementation of the policies and also in economic growth. The percentage growth in gross domestic product of Asia economy between 2010 and 2012 was the highest as compared to other economies of the world such as USA, Europe, Middle East, and Africa.
Graph showing GDP growth rate by region. (ESCAP Publications, 21)
In comparison to the East Asian economies the policies implementer by the USA governments did not help to revert the situation as quick as did the policy measures implemented by the East Asian economies. The USA in their effort to avert the already growing economic crisis in its country announced a huge economic stimulus to its economy. Most of the economic stimulus packages were focused to specific selected corporations in the USA. For example there was an economic stimulus package of US $ 3.4 billion was awarded to Smart Grid Developments (Richard, 89). On the contrary most of the East Asian economies spent almost their entire fiscal economic stimulus package on infrastructure developments. This could as well help explain why the East Asian economies recovered quickly from the recession than the USA economy.
The response time taken by the East Asian economy was also different significantly by those taken by the USA in the process of turning around the Global Financial crisis. The East Asian economies were very swift in reaction to the financial crisis than the USA. They put in place the fiscal and monetary policy measure before the economy was affected much by the economic crisis. The USA on the other hand did no respond to the crisis swiftly and on time. They only released the stimulus package after the financial crisis had affected its economy adversely and also after the collapse of some the multinational corporations.
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