Economic Growth in East Asia since the 2008 Global Financial Crisis

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Economic Growth in East Asia since the 2008 Global Financial 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 to be 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)
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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, Japan, 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 ...