Economic and Social Survey of Asia and the Pacific 2009

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Sales No. E.09.II.F.11
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United Nations 2009

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ECONOMIC AND SOCIAL SURVEY

OF ASIA AND THE PA

OF ASIA AND THE PACIFIC 2009

CIFIC 2009

Addressing Triple Threats to Development

iii

FOREWORD

We are living through a period of tremendous turmoil and uncertainty. The current
global economic downturn is not the only crisis. Volatility in food and fuel prices has
raised levels of poverty, hunger and malnutrition in many countries. The overarching
menace of climate change, meanwhile, threatens to undermine all our work for
development.

These crises are interrelated. All have profound social and political implications. Each needs solutions that take
the others into account. The Economic and Social Survey of Asia and the Pacific 2009 analyses how these
multiple threats have affected the region, and considers ways in which the region can address them. The
Survey’s central thrust is that the convergence of the crises and the fundamental changes they have brought to
the macroeconomic landscape present a unique opportunity for the region to make growth more fair and
inclusive. Furthermore, by implementing reforms in unison, the region can make a major contribution to reshaping
the global economic architecture.

We face unprecedented threats to development. Our immediate task is to help the poor and vulnerable get
through these hard times, the devastating effects of which are still unfolding. Over the long term, we must find a
more equitable and sustainable path for all the world’s people. The recommendations in this publication are
meant to inspire policy-makers to be bold and collaborative. In that spirit, I commend this Survey to a wide global
audience.

BAN Ki-moon
Secretary-General of the United Nations

March 2009

PREFACE

are in a stronger position to help not only themselves but also others to smooth the impact of the crises and
strengthen regional solidarity. The converging crises could be turned into an opportunity to jump-start a regional
reorientation towards a more inclusive and sustainable development path.

Asia and the Pacific as a crisis-prone region…

During the first part of the year, crude oil prices soared to historical record levels and food commodity prices
increased to the highest levels in over 20 years, causing alarm across the developing countries of the Asia-Pacific
region because of the disproportionate impact of these increases on the poor. The impact was particularly severe
in this region, where the price of main staple food, rice, increased by a staggering 150% in only four months. As
the second half of the year unfolded and commodity prices started to retreat from their peaks, financial turbulence
that had remained largely confined to the United States subprime market took a dramatic turn for the worse,
turning into a full-fledged global financial crisis and setting in motion the most severe economic downturn of the
world economy in post-war history. By early September, it was clear that, for the second time in a decade, the
region would be hit by a financial crisis and that the crisis would be particularly damaging in view of the region’s
heavy reliance on exports to industrial countries for growth. A total of 24 million people are in danger of losing
their jobs, with women and youth – who make up a large share of the manufacturing workforce – disproportion-
ately affected, and this is aggravated by an increase in the number of undernourished to 583 million in 2007 (from
542 million in 2003-2005). A worsening of the state of poverty and hunger in the region is now impossible to
avoid.

In 2008, yet a third global crisis loomed on the horizon – a stealthier but potentially more virulent one than the first
two: climate change calamities. Natural disasters, often associated with climate change stresses and lower
tolerance to increased heat in lower latitudes of this region, struck with intensity in 2008. The number of deaths in
Asia and the Pacific in 2008 reached 232,500 persons, accounting for a staggering 97.5% of such fatalities
worldwide. One of the deadliest storms ever to occur in the North Indian Ocean Basin, Cyclone Nargis, made
landfall in Myanmar’s Ayeyarwady Delta on 2 May 2008 and left a heart-wrenching trail of death and destruction –
84,500 people dead and 53,000 missing. Australia’s “big dry”, the worst drought in more than 100 years, entered
its seventh year with fires – believed to be the worst in its history – causing widespread devastation and hundreds
of deaths in the south-eastern part of the country. Natural disasters tore apart communities at the opposite ends
of the development spectrum, just as the origin of financial crises showed that they no longer fit into easy
developed- versus developing-country classifications.

…yet, its developing countries show remarkable resilience to the financial crisis

Developing countries in the region have shown that they are better prepared for a financial crisis. Over the past
decade, their regulatory reforms in the financial sector, combined with cautious macroeconomic management
policies, have improved current account balances, fiscal deficits and other macroeconomic shortcomings and built
a protective shield of foreign exchange reserves. To a large extent, therefore, the region possesses the resilience
to withstand the worst of the deleveraging process that caused the global financial system to spiral downwards,
leaving no financial institution unaffected.

Export growth in 2008 remained strong until the third quarter, buoyed by weakening currencies and relatively
robust external demand. The developing countries of the region managed to maintain an average growth rate of
5.8%, as compared with – 0.4% in Asia-Pacific developed economies. The region continued on its long-term
development path, which is predicated on an outward-oriented and export-led development paradigm that enabled

In 2008, three global crises converged to threaten development in the Asia-Pacific
region, bringing to the fore particularly testing challenges for policymakers – a Great
Recession in developed countries, food and fuel price volatility and climate change
calamities. The Economic and Social Survey of Asia and the Pacific 2009 analyses these
threats and outlines ways in which economies in the region can move forward in unison
from crisis resilience to crisis resistance. It concludes that some countries in the region

it to attain astounding progress and remarkable transformations over the past two decades. In 2009, the region’s
developing countries are expected to grow at 3.6%, which – compared with growth of – 2.0% in the world’s major
developed countries – further highlights the region’s resilience to the crises. This comparatively high growth,
coupled with the large aggregate size of the region’s economies, could result in the Asia-Pacific region being the
locus of any global growth that may take place in 2009.

Of course, not all countries exhibited this resilience. Some countries have been more exposed than others to
short-term financial flows, and their currencies have suffered from the retreat of those flows from the region in the
last quarter of 2008. Other countries have substantially less fiscal space to implement necessary expansionary
fiscal policies. Nevertheless, major developing countries in the region were in a stronger position, which presents
them with an opportunity to renew partnerships among themselves and with developed countries to bridge equity
divides and contribute to strengthened regional solidarity.

…but major vulnerabilities remain

Resilience notwithstanding, this is no time for complacency. The crisis-prone nature of the region has brought to
the fore vulnerabilities that need to be carefully tracked and for which forward planning and policy action will be
essential.

Paradoxically, some of the region’s vulnerabilities are the very reasons for its success. The fact that the region is
more integrated through finance, trade, investment, technology, transport and knowledge with the rest of the world
than with itself has allowed it to benefit for decades from export-led growth. But these linkages are also channels
through which global instabilities and economic recession are transmitted to the region.

Trade – once the engine of growth in the region – moved from double-digit growth to double-digit declines in
some economies during the fourth quarter of 2008, and fresh evidence indicates that the worst is yet to come. As
the economic outlook continues to darken at the global level, the tried and true recourse that mitigated the
economic crisis in 1998 – boosting exports – has lost its effectiveness. Although intraregional trade has grown
dynamically over the last decade, its cushioning effects are stymied by the fact that it consisted largely of trade in
parts and components in the manufacturing sector that are, in turn, linked to demand for final consumer products
in recession-hit developed countries. Economies with enterprises that are most directly linked through vertically
integrated production networks supplying the United States and European Union markets – such as China, the
Republic of Korea, Singapore, Thailand, and Hong Kong, China – are those experiencing the strongest downward
pressure on economic growth. Another worrisome signal on the trade front is the growing protectionist pressure in
recession-hit countries, where domestic sourcing of inputs is given preferential treatment over imports – often as
conditionalities imposed on bailout packages – could distort market-entry conditions for exports from Asia-Pacific
countries. Furthermore, declining – or at best sluggish – exports will keep exchange rates in the region under
pressure, with a marked possibility of further devaluations both among currencies within the region and

vis- -vis

the currencies of main trading partners outside the region, in an effort to enhance export competitiveness. If
conducted in an uncoordinated manner, devaluation could lead to unnecessary losses in foreign exchange
earnings across the region and increased debt burdens.

An area of immediate concern for the region is the significant share of foreign portfolio capital in external financial
liabilities in some economies of the region. At a time of generalized international risk aversion in which flights to
safety have low-threshold triggers, defending excessive currency depreciation due to the exit of short-term portfolio
capital can reduce the amount of reserves available to cover external short-term debt repayments and current
account deficits. It is clear that access to a greater pool of reserves than is normally adequate is now needed to
reassure investors and it can in turn serve to reduce the extent of net capital outflows.

A further concern is that, when economic growth resumes its long-term trend, it could cause a return of the sharp
increases in commodity prices experienced in recent years. This is highly likely because imbalances between fast-
rising demand and sluggish supply responses have yet to be resolved. The risk of recurring commodity price
rises may be exacerbated by the massive liquidity created for stimulus programmes, which may find its way into
commodity futures markets once again, adding volatility to the expected increasing price trend. Furthermore, the
current low agricultural prices are reducing incentives for farmers to invest for the long-term, perpetuating the
neglect of agriculture and making it more difficult to reverse. Further compounding the risks to future agricultural
production are the changes in temperatures and rain patterns that climate change will bring. For all these reasons,
threats to food security resembling those of recent years loom large and will intensify in the medium to long term.

vis- -vis

vii

A major concern in the region is that the coverage of basic social protection programmes is very low: only 30% of
the elderly receive pensions; and only 20% of the unemployed and underemployed have access to labour market
programmes, such as unemployment benefits, training or public works programmes, including work-for-food
programmes. In addition, only 20% of the population has access to health-care assistance. In fact, Asia and the
Pacific has the highest out-of-pocket health-care expenditures in the world.

While progress was made in the aftermath of the 1997 financial crisis, this issue moved off the radar of
policymakers, as resumed economic growth generated new jobs and business opportunities, lifting millions out of
poverty. At the same time, inequality worsened in all countries.

The vulnerabilities facing the region underline the risk that the convergence of the three crises – a triple threat –
could bring compounding effects that would superimpose new layers of crises. With the list of distressed
institutions and people growing – be it ailing banks, strategic industries, the growing ranks of the unemployed in
urban areas or farmers unprepared for commodity price shocks – it is certain that any complacency on the part of
policymakers will see the increased ranks of the poor put substantial pressure on social cohesiveness. Increased
poverty amid great inequality will be a combustible combination. As the late Indira Gandhi prophetically warned
four decades ago, at the twenty-third session of the General Assembly:

“The chasm between the rich and poor nations, which is already a source of tension and
bitterness in the world, is not decreasing but growing…It is natural that we in the developing
countries should be more aware of the peril than those who live in the affluent countries. The
peril is on our doorstep, but it is not too far from theirs”.

There is thus a significant risk that developed country recession may evolve into a deeper and wider regional
crisis that will bring with it political instability, widespread social unrest, further downward pressures on economic
growth, rising unemployment, and a new cycle of crises, both within and among countries.

…and yet, the triple crisis could be turned into an opportunity to address policy gaps and
reorient the development paradigm

While the Asia-Pacific region emerges with economic performance indicators that are showing resilience, its
increasing vulnerability to crises brings to the fore a number of policy challenges. Impacts of the crises varied
among subregions, as did coping mechanisms, and even though there are a number countries that could take
action alone to overcome the worst of the crisis, the global scope common to all three crises underlines the need
for policy coordination: Cooperation among countries to enhance mutually reinforcing synergies in policy
interventions, evolving long-term planning perspectives, identifying best practices, exchanging ideas about which
policies work best in different contexts – all are clearly needed. Working together, as a region, towards the
common goal of improving the livelihoods of their people in difficult circumstances will also motivate individual
countries to persist in the implementation of new and challenging policy agendas, which would be difficult to do in
isolation.

At a time when the convergence of three crises threatens development in the Asia-Pacific region, there is a need
for comprehensive responses that balance economic, social and environmental considerations, for partial re-
sponses will only provide a temporary respite until a new major crisis hits the region. The Survey proposes a
number of crisis-specific and comprehensive policy actions, which are highlighted below, in which regional
cooperation can be boosted.

Asia-Pacific role in reforming the multilateral system of economic governance

The reform of the global financial architecture is currently under intense debate and should remain at the top of
the international policy agenda for some time to come. Commensurate with its rising contribution to global
economic prosperity, the Asia-Pacific region should have an increasingly influential voice in shaping the future
multilateral system of governance. Rules reducing frictions in trade, albeit imperfect, have been in the making for
70 years. In contrast, financial regulation has remained to a large extent nationalized despite the integrated nature
of financial markets and the increasing frequency and costs of crises. To cite but one example: international
coordination of monetary, financial and fiscal policies could prevent excessive liquidity build-up in international
financial markets, which might otherwise find an outlet in speculation on commodity markets.

viii

A world finance mechanism, either through reform of the current architecture, or through the creation of a new
organization that balances efficient decision-making with global representation, through a variable geometry
configuration of decision-making and consensus building, is certainly needed. The time to act is now, and through
a more effective use of existing regional platforms, Governments and their partners in Asia-Pacific countries can
debate the policy options, sharpen their focus and build political consensus around the multilateral reforms
needed. It is clear that, in the coming years, much more work will be needed towards creating a more stable,
inclusive and sustainable system of economic governance at the multilateral level.

On the trade front, there is a need to ensure that WTO rules and principles, including a conclusion of the Doha
Round of negotiations, are upheld in the service of development. With export opportunities for the region rapidly
declining and protectionist pressures rising as recession-hit economies scramble to support ailing domestic
industries, a strengthening of the multilateral trading system is called for, as this system can offer the most stable,
predictable and transparent environment in which to conduct global and regional trade for development.

Prioritization of regional macroeconomic cooperation

At the regional level, a largely neglected debate concerns the formulation of effective and coordinated macroeco-
nomic policies to move the region from crisis-resilience to crisis-resistance. Coordinated monetary and fiscal
responses have greater credibility and help shore up confidence while enhancing regional and global multiplier
effects. Furthermore, coordinated responses will enable countries to institute measures to “insulate themselves
from regulatory and macroeconomic failures in systemically significant countries”, as recommended by the
Commission of Experts of the President of the United Nations General Assembly on Reforms of the International
Monetary and Financial System in January 2009. Exchange rate coordination would benefit from the establishment
of more coordinated and durable regional arrangements, as would the closely related challenge of managing
vulnerability to reversals in short-term capital flows.

Of equal concern for Asia and the Pacific is the need to establish a regional contingency plan to respond quickly
to the liquidity and capitalization problems of domestic banks. However, this would require the accelerated
establishment of a regional surveillance system that focuses on emerging risks.

The curtailment of trade has been exacerbated by the lack of trade credit. Somewhat anomalously for this trade-
oriented region, it is the only one that does not have a regional institution specifically dedicated to export credit
and export credit guarantees. A regional trade financing facility would enable risk pooling across countries and
scale economies, and would be more credible than isolated national initiatives, thus offering countries with special
needs, in particular, greater access to international finance. There should be an accelerated process of analysis
and dialogue in order to establish such a facility. The announcement by the Government of Japan that a $1 billion
fund would be set up through the Japan Bank for International Cooperation (JBIC) in collaboration inter alia, with
ADB is an important step in the right direction.

Addressing food security and sustainable agriculture

In order to reduce the likelihood that commodity price crises will occur in the future, it is important to promote
energy efficiency and investment in renewable sources of energy. Securing energy supplies and speeding up the
transition to a low-carbon energy system calls for decisive action by governments at the national and local levels
to encourage households and businesses to economize their use of fuel and energy suppliers to invest in
developing and commercializing low-carbon technologies. Appropriate financial incentives and regulatory frame-
works are needed to support both goals.

The state of deprivation of smallholder farmers needs to be addressed in order to improve the food supply
response, reduce poverty and make growth more inclusive. To achieve these objectives in a sustainable manner,
increased public investments, particularly through the fiscal stimulus packages being designed or already under
implementation, are needed. Of key concern is the need to alleviate conditions for small farmers throughout the
supply chain – at the farm level and in production infrastructure, access to markets and processing.

Biofuels have proven to be double edged. Biofuel guidelines and safeguards that minimize adverse impacts on
global food security and the environment will be needed at the global level. A regional preparatory and policy
coordination process would be important to ensure that region-specific challenges are adequately addressed at
the global level.

Building the social foundations for more resilient societies

The rapid economic growth that the region has experienced over the last few decades is creating the means to
make definitive progress in eradicating poverty and hunger, but reaching such goals calls for the implementation
of effective social protection systems. As the current crisis weaves its way through the fabric of society, social
protection should build strong social foundations that will make societies more crisis resilient. Furthermore, by
providing a basic level of income support, protection schemes make individuals feel more secure and less
inclined to increase their savings to protect themselves from possible income losses in times of crisis, thereby
contributing to domestic demand and macroeconomic stability. The provision of social protection thus makes for
good economics. These systems however, should be put in place as part of an overall long term strategy of
building resilient social foundations rather than being ad hoc crisis-driven initiatives. The objective of enhancing
social protection as a means of strengthening the social foundation for a more inclusive society should thus be
included as part of a framework for a new future development paradigm for the region.

Mitigating and adapting to climate change

Although policy attention is focused on fighting the economic crisis and political commitment on climate change
may be fading, there is not necessarily a contradiction between these two policy objectives. The Global Green
New Deal promoted by the Secretary-General is based on the premise that investing in the green economy can
both generate millions of jobs and start addressing the challenges associated with reducing carbon dependency,
protecting ecosystems and preserving water resources. Initiatives such as this require a drastic change in the
“grow first and clean up later” attitude towards climate change, and that must be done through behavioural
change because, if the burdens of climate change mitigation and adaptation are foisted on future generations, the
cost will be prohibitively high. Cooperation among developing countries in the region to develop more practical
and affordable climate-friendly technologies in energy efficiency, renewable energy and carbon capture and
storage is another area with untapped potential.

Evolving appropriate financial incentives and regulatory frameworks on a regional cooperative basis would help to
secure energy supplies and speed up the transition to a low-carbon energy system to encourage (a) households
and businesses to economize their use of fuel and (b) energy suppliers to invest in developing and commercializ-
ing low-carbon technologies. Further development and implementation of the ESCAP framework on renewable and
sustainable energy should be given priority, while the region should, play a more influential role in the multilateral
process of climate change negotiations.

Boosting regional cooperation through an Asia-Pacific framework for inclusive and sustain-
able growth and development

The recommendations highlighted above have complex and, in many ways, novel linkages with each other. The
scale of the economic crisis and related challenges is such that Governments will be required – and many have
already started – to put in place public expenditure programmes on a much larger scale and with a much longer
reach than in the past. However, boosting public expenditure to jump-start battered economies is only part of the
response; it is more important for Governments to use this opportunity to jump-start a reorientation of the
development paradigm towards more inclusive and sustainable economic growth.

Serving as a knowledge-based hub, ESCAP can be a forum for exploring policy options and forging a consensus
on regional cooperation and policy coordination. Building on the work of the secretariat of ESCAP – notably, its
leadership in promoting low-carbon green growth, the 2008 theme study on energy security and sustainable
development in Asia and the Pacific and the Bali Outcome Document and subsequent policy analyses – a
consultative process involving key policy- and decision makers could be started, in partnership with interested
stakeholders, with the goal of devising a framework that will guide future policy planning towards a regional
development paradigm that rebalances economic, social and environmental systems. A new priority needs to be
given to government as a planner of development while also ensuring that comprehensiveness is the key principle
that guides this framework, for partial frameworks can create potential inconsistencies by which the pursuit of one
goal is detrimental to another. The consensus reached at the regional level can then provide a building block for a
truly inclusive multilateral system of economic governance.

ACKNOWLEDGEMENTS

This report was prepared under the substantive direction and guidance of Noeleen Heyzer, Under-Secretary-
General of the United Nations and Executive Secretary of the Economic and Social Commission for Asia and the
Pacific (ESCAP), and under the overall supervision of Shigeru Mochida, Deputy Executive Secretary of ESCAP and
Officer-in-Charge of the Macroeconomic Policy and Development Division. The core team, led by Tiziana
Bonapace, included Amarakoon Bandara, Shuvojit Banerjee, Somchai Congtavinsutti, Eugene Gherman, Aynul
Hasan, Alberto Isgut, Nobuko Kajiura, Muhammad H. Malik and Amy Wong.

Many others provided substantive contributions and gave helpful comments and advice. ESCAP staff who
contributed substantively include: Christopher Kuonqui, Sangmin Nam and Le Huu Ti of the Environment and
Development Division; Shahid Din and Cihat Basocak of the Information and Communications Technology and
Disaster Risk Reduction Division; Beverly Jones and Marco Roncarati of the Social Development Division; Andres
Montes of the Statistics Division; Mia Mikic of the Trade and Investment Division; John Moon and Madan Regmi of
the Transport Division; and Siliga Kofe and Hirohito Toda of the ESCAP Pacific Operations Centre. The statistical
annex was prepared by the Statistics Division, with Eric Hermouet acting as the focal point (tables 10-18), and
Somchai Congtavinsutti (tables 1-9), of the Macroeconomic Policy and Development Division. Kinlay Dorjee, of the
FAO Regional Office for Asia and the Pacific, Bangkok and Phu Huynh, of the International Labour Organization,
Bangkok, also made substantive contributions.

Valuable advice and extensive comments were received from Jorge Carrillo, Jeffrey Crawford, Yann Duval, Matthew
Hengesbaugh, Kyungkoo Kang, Raj Kumar, Aneta Nikolova, Marit Nilses, Syed Nuruzzaman, Simon Olsen, Hiren
Sarkar, David Smith, Srinivas Tata, J.L. Vignuda, Ryuji Yamakawa and Zhendai Yang (ESCAP); Pingfan Hong,
Matthias Kempf, Hung-Yi Li, Ingo Pitterle, and Rob Vos (Department of Economic and Social Affairs, United
Nations, New York); Suzanne Hinsz and Mahesh Patel (United Nations Children's Fund); Garimella Giridhar (United
Nations Population Fund, Thailand); Pilar Fajarnes (United Nations Conference on Trade and Development); Yilmaz
Aky z (Third World Network); Ramkishen Rajan (George Mason University); Scott Irwin (University of Illinois).

The following consultants provided country reports: Mushtaq Ahmad, Sonam Chuki, Tarun Das, Ron Duncan,
Mohammad Kordbache, Panom Lathouly, Hang Chuon Naron and Prakash Kumar Shrestha.

The report benefitted from an external peer review, which incorporated comments and suggestions from a group
of prominent Asian policymakers, scholars and development practitioners, namely: Myrna Clara B. Asuncion,
Assistant Director, National Planning and Policy Staff, National Economic and Development Authority, Philippines;
Juergen Bischoff, Director, GTZ-ASEM, India; Stephen Y.L. Cheung, Professor (Chair) of Finance, City University of
Hong Kong; Tarun Das, Professor (Public Policy), Institute for Integrated Learning in Management, India; Ashfaque
H. Khan, Special Secretary Finance/Director General (Debt Office), Ministry of Finance, Pakistan; Opart Panya,
Assistant Professor, Faculty of Environment and Resource Studies, Mahidol University, Thailand; Prabowo, Director,
Strategic Asia, Indonesia; Ramkishen S. Rajan, Associate Professor, School of Public Policy, George Mason
University Arlington, United States of America; Marsel Salikhov, Head of Economic Research, Institute of Energy
and Finance, Russian Federation.

Sarah Comer, Tommy Kostka, Aphitchaya Nguanbanchong, Kiatkanid Pongpanich and Amornrut Supornsinchai of
the Macroeconomic Policy and Development Division, ESCAP provided research assistance.

The manuscript was edited by Bruce Ross-Larson and Peter Whitten of Communications Development Incorpo-
rated, Orestes Plasencia and Suzanne Starcevic, Editorial Unit of ESCAP and Peter Stalker. The layout and printing
were provided by TR Enterprise, and Parottawat Dechsupha contributed to the design of the cover page.

Woranut Sompitayanurak, supported by Metinee Hunkosol, Anong Pattanathanes and Sutinee Yeamkitpibul of the
Macroeconomic Policy and Development Division, ESCAP, proofread the manuscript and undertook all administra-
tive processing necessary for the issuance of the publication.

Hak-Fan Lau, Ari Gaitanis, Bentley Jenson, Thawadi Pachariyangkun and Chavalit Boonthanom of the United
Nations Information Service, coordinated the launch and dissemination of the report.

xiii

CONTENTS

Page

Foreword .................................................................................................................................................................

iii

Preface ....................................................................................................................................................................

Acknowledgements ..............................................................................................................................................

Abbreviations .........................................................................................................................................................

xxiv

Sources of quotations .........................................................................................................................................

xxvii

Chapter 1.

The return of the financial crisis: Managing, vulnerabilities and deepening
regional cooperation ....................................................................................................................

Impact of the crisis on Asia-Pacific .........................................................................................

Decline in domestic demand and exports ............................................................................

Negative impact on livelihoods and vulnerable groups .......................................................

Growth outlook for 2009 ............................................................................................................

Growth down across the board .............................................................................................

The backdrop for 2009 forecasts ...........................................................................................

Significant downside risks from protracted recession ..........................................................

Indicators of resilience and potential vulnerabilities ...........................................................

Sources of resilience ...............................................................................................................

Vulnerabilities on the watch list ..............................................................................................

From crisis-resilience to crisis-resistance: Next steps

......................................................

Global and regional cooperation in financial issues are at an infant stage ......................

References ........................................................................................................................................

Chapter 2.

Food and fuel price shocks .......................................................................................................

Evolution of fuel and food prices ............................................................................................

Underlying reasons for the volatility of fuel and food prices ...........................................

Fuel ...........................................................................................................................................

Food ..........................................................................................................................................

Integration of food, fuel and financial markets .....................................................................

Economic and social impacts ...................................................................................................

The policy challenge: Managing long-run fuel and food sustainability risks ...............

Energy .......................................................................................................................................

Food ..........................................................................................................................................

Biofuels .....................................................................................................................................

Social protection ......................................................................................................................

References ........................................................................................................................................

xiv

CONTENTS

(continued)

Page

Chapter 3.

The climate change challenge: Reorienting development towards greener
and sustainable growth ...............................................................................................................

Climate change and related vulnerabilities ............................................................................

Environmental impacts ............................................................................................................

Socio-economic impacts .........................................................................................................

Policy responses to climate change ........................................................................................

First strategy:

Utilizing the window of opportunity created by the financial crisis .....

Second strategy: Promoting a shift in the attitude towards climate change ...................

Third strategy:

Asia and the Pacific playing a critical role in the global climate

change agenda .........................................................................................

References ........................................................................................................................................

Chapter 4.

Subregional variations: Performance and policy responses ...........................................

East and North-East Asia: Impact of global financial crisis begins
to take its to

ll ...............................................................................................................................

Impact: Strong head wind slows economic performance ...................................................

Policy responses: Space for expansionary policies .............................................................

Outlook: Difficult times ahead as export engine falters .......................................................

101

North and Central Asia: Overall a year of mixed results .................................................

102

Impact: Resilient growth with some deceleration .................................................................

102

Policy responses: Solid fiscal positions, but concerns loom ..............................................

110

Outlook: Signs of weakening ..................................................................................................

110

Pacific island developing countries: Global economic slowdown clouds
long-term prospects .....................................................................................................................

112

Impact: Growth modest in most economies ........................................................................

114

Policy responses: Providing macroeconomic stability ..........................................................

119

Outlook: Slowdown with long term threats looming large ...................................................

121

South and South-West Asia: Downward pressures but steadfast resilience ...............

122

Impact: Moderating but robust growth ..................................................................................

125

Policy responses: Budget deficits under pressure ...............................................................

131

Outlook: Moderating growth with downward pressures .......................................................

132

South-East Asia: International financial crisis evolves into deepening
subregional industrial crisis .......................................................................................................

133

Impact: Dramatic drops in GDP and exports .......................................................................

133

Policy responses: As recessionary pressures mount, urgency of further
expansionary policies intensifies .............................................................................................

136

Outlook ......................................................................................................................................

139

CONTENTS

(continued)

Page

Developed economies in the ESCAP region: Heightened contagion and
deepening recession ....................................................................................................................

143

Impact: The return of recession .............................................................................................

143

Policy responses ......................................................................................................................

147

Outlook and key policy priorities ............................................................................................

150

Conclusion .....................................................................................................................................

150

References ........................................................................................................................................

151

Chapter 5.

Converging crises: Redirecting policies to achieve inclusive
and sustainable development ....................................................................................................

155

Commonalities among the crises .............................................................................................

156

Convergence and policy stresses ............................................................................................

157

The financial crisis threatens to converge on itself in a deep, downward spiral ..............

157

Financial excesses and commodity price volatility ...............................................................

157

Financial resources are scarce, and the costs of addressing climate change
challenges are high .................................................................................................................

158

The future of Asia and the Pacific: Investing in inclusive and sustainable
development ...................................................................................................................................

159

Public spending: Size matters ..............................................................................................

159

Quality matters more: The importance of forward planning ..............................................

159

Investing for inclusive growth and human progress ............................................................

160

Investing in environmentally sustainable development and innovation ...............................

161

How? Government as the peoples’ partner ..........................................................................

161

Towards an Asia-Pacific framework for inclusive and sustainable
growth and development ............................................................................................................

164

Resuming economic growth and preserving macroeconomic stability ..............................

165

Strengthening the social foundation of inclusive development ...........................................

166

Promoting sustainable development ......................................................................................

168

Guiding principles ....................................................................................................................

169

Conclusion .....................................................................................................................................

169

References ........................................................................................................................................

170

Statistical annex ....................................................................................................................................................

173

xvi

BOXES

Page

1.1.

In a time of crisis, a rule-based multilateral trading system is more important than ever ................

2.1.

Food commodity prices in the last 100 years ........................................................................................

2.2.

Are speculators to blame? ........................................................................................................................

3.1.

National action plans on climate change ................................................................................................

3.2.

Trade-offs in biofuel production ................................................................................................................

3.3.

Adapting to climate change by the private sector: ESCAP-SIDA joint action ....................................

4.1

Responding to climate change in the Pacific: The Pacific Plan 2005 ................................................

113

4.2.

Inclusive growth to tackle widespread poverty and inequalities in South Asia ...................................

123

4.3.

Policy responses in supporting food security in South-East Asia ........................................................

140

5.1.

Infrastructure investment during economic downturns ...........................................................................

162

xvii

TABLES

Page

1.1.

Rate of change of average exchange rates for January-June 2008 as compared
to July-December 2008 .............................................................................................................................

1.2.

Share of Chinese and Indian imports from the ESCAP region and its subregions (2007) ...............

2.1

Impact of commodity price increases on the trade balance ................................................................

2.2.

Impact of food commodity inflation on domestic food inflation ...........................................................

3.1.

Selected examples of infrastructure damage and losses resulting from climatic events
in Asia, 2006-2008 .....................................................................................................................................

3.2.

Implementation of policy measures for technical fuel efficiency improvement ...................................

4.1.

Rates of economic growth and inflation in East and North-East Asia, 2007-2009 .............................

4.2.

Fiscal stimulus packages in China and the Republic of Korea ............................................................

100

4.3.

Rates of economic growth and inflation in North and Central Asian economies, 2007-2009 ...........

102

4.4.

External accounts for North and Central Asian economies, 2007-2008 ..............................................

108

4.5.

Export and import growth in North and Central Asian economies, 2006-2008 ..................................

109

4.6.

Fiscal stimulus packages in North and Central Asia .............................................................................

111

4.7.

Rates of economic growth and inflation in selected Pacific island economies, 2007-2009 ..............

112

4.8.

Current account balance in selected Pacific island economies, 2005-2008 .......................................

117

4.9.

Fiscal stimulus package in selected Pacific island economies ............................................................

119

4.10.

Rates of economic growth and inflation, South and South-West Asian economies, 2007-2009 .......

122

4.11.

Summary of external accounts for selected South and South-West Asian economies ......................

129

4.12.

Fiscal stimulus package in selected countries in South and South-West Asia ...................................

132

4.13.

Selected fiscal stimulus packages in South-East Asian region ............................................................

142

4.14.

Rates of economic growth and inflation of Australia, Japan and New Zealand, 2007-2009 .............

144

4.15.

Summary of external accounts for ESCAP developed countries ..........................................................

147

4.16.

Fiscal stimulus packages in developed countries in Asia and the Pacific ..........................................

148

xviii

FIGURES

Page

1.1.

Spread of 3-month LIBOR to 3-month United States Treasury bill rate, 1995-2008 ..........................

1.2.

Equity markets for selected developing ESCAP economies, 2006-2008 .............................................

1.3.

Performance of regional emerging markets equities indices, 15 September 2008-
9 January 2009 ..........................................................................................................................................

1.4.

Peak-to-trough equity market fall, decline from peak to trough in 1997/98
and peak to end-December 2008 in 2007/08 ........................................................................................

1.5.

Path of equity market decline from peak to trough in 1997/98 as compared
with equity market decline from peak to end-December 2008 in 2007/08 .........................................

1.6.

Non-performing loan rates in selected developing ESCAP economies, Q2 2008 ..............................

1.7.

Export and import growth of selected ESCAP members and associate members to
and from the world, August-November 2008 ..........................................................................................

1.8.

Export and import growth of selected ESCAP members and associate members
to and from Asia, August-November 2008 ..............................................................................................

1.9.

Export performance of selected export-oriented developing ESCAP economies
by quarter, 2008 .........................................................................................................................................

1.10.

Real GDP growth of selected export-oriented developing ESCAP economies by quarter, 2008 ......

1.11.

Value of export and nominal GDP growth for ESCAP developing economies ....................................

1.12.

Inward direct investment as a share of GDP in selected developing ESCAP economies ................

1.13.

Contributions of domestic demand to GDP growth for selected developing
ESCAP economies .....................................................................................................................................

1.14.

Top 10 remittance-recipient developing economies in Asia and the Pacific, 2008 estimate .............

1.15.

Real GDP growth of selected developing ESCAP and developed economies, 2003-2009 ...............

1.16.

Rates of economic growth of selected developing and developed ESCAP economies,
2007-2009 ...................................................................................................................................................

1.17.

Current account balance as a percentage of GDP in selected developing ESCAP
economies, 1996-2008 ..............................................................................................................................

1.18.

Foreign reserves as a percentage of GDP of selected developing ESCAP economies ....................

1.19.

Short-term external debt as a percentage of GDP in selected developing ESCAP economies .......

1.20.

Stock of foreign portfolio investment as a percentage of total external foreign
liabilities, 2002-2007 ...................................................................................................................................

1.21.

Stock of foreign portfolio investments as a percentage of reserves for selected
emerging Asian countries, 2001 and 2007 .............................................................................................

xix

FIGURES

(continued)

Page

1.22.

Exchange rate movements of selected developing ESCAP economies, 2007-2008 ..........................

1.23.

Change in nominal effective exchange rate from peak to trough in 1997-98 and 2007-08 ..............

1.24.

Foreign reserves in selected developing ESCAP economies, December 2007
to December 2008 .....................................................................................................................................

1.25.

Loan-to-deposit ratio of selected developing Asian economies, November 2008 .............................

1.26.

External public debt as a share of GDP of selected emerging Asian economies, Q2 2008 ............

1.27.

Total trade as a percentage of GDP: ESCAP subregions (developing economies only) .................

1.28.

Vulnerability index of selected Asian export-led growers .......................................................................

1.29.

ESCAP developing countries: export share and export dependence index
differences, 1995-2007 ..............................................................................................................................

1.30.

Commodity structure of Chinese imports from ASEAN economies, India and the
Republic of Korea ......................................................................................................................................

1.31.

Differences between applied and bound tariffs, selected ESCAP members ......................................

1.32.

Export growth of selected Asian economies grouping to China and China to the
United States, 2006-2008 ..........................................................................................................................

1.33.

Moving from crisis-resistance to crisis-resilience ....................................................................................

2.1.

Food price index and Brent crude oil price, 1980-2008 .......................................................................

2.2.

Food price index and Brent crude oil price, adjusted by inflation, 1980-2008 ...................................

2.3.

FAO food price index and its components, 2006-2008 .........................................................................

2.4.

Price indexes of selected cereals, 2007-2008 ........................................................................................

2.5.

Production and consumption of petroleum, 1997-2007 ........................................................................

2.6.

World consumption of petroleum and world GDP growth rates, 1982-2007 ......................................

2.7.

Share of increase in world petroleum consumption: top 10 countries ..............................................

2.8.

World grain stocks in days of consumption, 1978-2008 .......................................................................

2.9.

Trends in world consumption of maize, rice and wheat, 1978-2008 ...................................................

2.10.

Relationship between crude oil price and dollar/euro exchange rate, 2006-2008 ..............................

2.11.

Impact of fuel and food prices on the trade balance, 2004-2007 .......................................................

2.12.

Increases in headline and food inflation rates between 2007 and 2008 .............................................

2.13.

Rates of CPI inflation, by ESCAP subregion, 2007-2009 .......................................................................

FIGURES

(continued)

Page

2.14.

Sustainability: balancing the demand and supply of crude oil and food ..........................................

2.15.

Policies to balance demand for and supply of crude oil ......................................................................

2.16.

Petroleum intensity of GDP, by ESCAP subregion, 1990-2005 ..............................................................

2.17.

Policies to balance demand for and supply of food .............................................................................

2.18.

Break-even prices for maize and crude oil with and without subsidies ..............................................

4.1.

Slackening of economic growth in 2008, selected economies .............................................................

4.2.

Acceleration of inflation rate in 2008, selected economies ...................................................................

4.3.

Mixed exchange rate movements: sharp depreciation of the Korean won and
Mongolian tugrik, other currencies stable ...............................................................................................

4.4.

Deterioration of current account balances in 2008, selected economies ............................................

4.5.

China’s fiscal stimulus package focusing on infrastructure investments .............................................

4.6.

Solid but weakening fiscal positions in 2008, selected countries ........................................................

4.7.

Real GDP and sectoral growth in North and Central Asian economies, 2007-2008 ..........................

103

4.8.

Budget balance as a percentage of GDP in selected North and Central Asian
economies, 2007-2008 ..............................................................................................................................

105

4.9.

Inflation in North and Central Asian economies, 2007-2008 .................................................................

106

4.10.

Exchange rates, against the United States dollar, of selected North and Central Asian
economies, 1996-2008 ..............................................................................................................................

107

4.11.

Real GDP growth in selected Pacific island economies, 2006-2008 ....................................................

114

4.12.

Inflation in selected Pacific island economies, 2006-2008 ....................................................................

116

4.13.

Economic growth rates and sectoral contributions in selected South and
South-West Asian economies, 2007-2008 ...............................................................................................

125

4.14.

Inflation in South and South-West Asian economies, 2007-2008 .........................................................

127

4.15.

Budget deficits as a percentage of GDP in South and South-West Asian
economies in 2007-2008 ...........................................................................................................................

130

4.16.

GDP growth dropped in 2008, but the worse is still to come .............................................................

134

4.17.

Domestic demand growth did not help smooth out the impact of dropping
exports during 2008 ...................................................................................................................................

135

4.18.

Inflation trends reverted in the second half of 2008 ..............................................................................

136

4.19.

2009 inflation rates expected to drop back to levels similar to 2007 ..................................................

137

xxii

Staff analysis in the Survey 2009 is based on data and information available up to the end of January 2009.

The term “ESCAP region” is used in the present issue of the Survey to include Afghanistan; American Samoa; Armenia; Australia;
Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam; Cambodia; China; Cook Islands; Democratic People’s Republic of Korea; Fiji;
French Polynesia; Georgia; Guam; Hong Kong, China; India; Indonesia; Iran (Islamic Republic of); Japan; Kazakhstan; Kiribati;
Kyrgyzstan; Lao People’s Democratic Republic; Macao, China; Malaysia; Maldives; Marshall Islands; Micronesia (Federated
States of); Mongolia; Myanmar; Nauru; Nepal; New Caledonia; New Zealand; Niue; Northern Mariana Islands; Pakistan; Palau;
Papua New Guinea; Philippines; Republic of Korea; Russian Federation; Samoa; Singapore; Solomon Islands; Sri Lanka;
Tajikistan; Thailand; Timor-Leste; Tonga; Turkey; Turkmenistan; Tuvalu; Uzbekistan; Vanuatu; and Viet Nam. The term “developing
ESCAP region” excludes Australia, Japan and New Zealand. Non-regional members of ESCAP are France, the Netherlands, the
United Kingdom of Great Britain and Northern Ireland and the United States of America.

The term “Central Asian countries” in this issue of the Survey refers to Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan,
Tajikistan, Turkmenistan and Uzbekistan.

The term “East and North-East Asia” in this issue of the Survey refers to China; Hong Kong, China; Mongolia; and the Republic
of Korea.

The designations employed and the presentation of the material in this publication do not imply the expression of any opinion
whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area,
or of its authorities, or concerning the delimitation of its frontiers or boundaries.

Mention of firm names and commercial products does not imply the endorsement of the United Nations.

The abbreviated title Survey in footnotes refers to the Economic and Social Survey of Asia and the Pacific for the year indicated.

Many figures used in the Survey are on a fiscal year basis and are assigned to the calendar year which covers the major part
or second half of the fiscal year.

Growth rates are on an annual basis, except where indicated otherwise.

Reference to “tons” indicates metric tons.

Values are in United States dollars unless specified otherwise.

The term “billion” signifies a thousand million. The term “trillion” signifies a million million.

In the tables, two dots (..) indicate that data are not available or are not separately reported, a dash (–) indicates that the
amount is nil or negligible, and a blank indicates that the item is not applicable.

In dates, a hyphen (-) is used to signify the full period involved, including the beginning and end years, and a stroke (/)
indicates a crop year, fiscal year or plan year. The fiscal years, currencies and 2008 exchange rates of the economies in the
ESCAP region are listed in the following table:

Rate of exchange

Country or area in the ESCAP region

Fiscal year

Currency and abbreviation

for $1 as at

December 2008

Afghanistan ..........................................

21 March to 20 March

afghani (Af)

52.12

American Samoa ................................

United States dollar ($)

1.00

Armenia ...............................................

1 January to 31 December

dram

305.10

Australia ...............................................

1 July to 30 June

Australian dollar ($A)

1.44

Azerbaijan ............................................

1 January to 31 December

Azeri manat (AZM)

0.81

Bangladesh ..........................................

1 July to 30 June

taka (Tk)

68.94

Bhutan ..................................................

1 July to 30 June

ngultrum (Nu)

49.25

Brunei Darussalam .............................

1 January to 31 December

Brunei dollar (B$)

1.48

Cambodia ............................................

1 January to 31 December

riel (CR)

4 081.00

China ....................................................

1 January to 31 December

yuan renminbi (Y)

6.84

Cook Islands .......................................

1 April to 31 March

New Zealand dollar ($NZ)

1.72

Democratic People’s Republic

of Korea ...........................................

won (W)

139.00

Fiji .........................................................

1 January to 31 December

Fiji dollar (F$)

1.83

French Polynesia .................................

French Pacific Community franc
(FCFP)

85.73

EXPLANATORY NOTES

xxiii

Rate of exchange

Country or area in the ESCAP region Fiscal year

Currency and abbreviation

for $1 as at

December 2008

Georgia ................................................

1 January to 31 December

lari (L)

1.67

Guam ...................................................

1 October to 30 September

United States dollar ($)

1.00

Hong Kong, China ..............................

1 April to 31 March

Hong Kong dollar (HK$)

7.75

India .....................................................

1 April to 31 March

Indian rupee (Rs)

48.45

Indonesia .............................................

1 April to 31 March

Indonesian rupiah (Rp)

10 950.00

Iran (Islamic Republic of) ...................

21 March to 20 March

Iranian rial (Rls)

10 009.00

Japan ...................................................

1 April to 31 March

yen (Y

90.28

Kazakhstan ..........................................

1 January to 31 December

tenge (T)

120.77

Kiribati ..................................................

1 January to 31 December

Australian dollar ($A)

1.44

Kyrgyzstan ...........................................

1 January to 31 December

som (som)

38.21

Lao People’s Democratic Republic ...

1 October to 30 September

new kip (NK)

8 609.20

Macao, China ......................................

1 July to 30 June

pataca (P)

7.98

Malaysia ...............................................

1 January to 31 December

ringgit (M$)

3.46

Maldives ...............................................

1 January to 31 December

rufiyaa (Rf)

12.80

Marshall Islands ..................................

1 October to 30 September

United States dollar ($)

1.00

Micronesia (Federated States of) ......

1 October to 30 September

United States dollar ($)

1.00

Mongolia ..............................................

1 January to 31 December

tugrik (Tug)

1 267.51

Myanmar ..............................................

1 April to 31 March

kyat (K)

5.74

Nauru ...................................................

1 July to 30 June

Australian dollar ($A)

1.44

Nepal ...................................................

16 July to 15 July

Nepalese rupee (NRs)

79.60

New Caledonia ....................................

French Pacific Community franc
(FCFP)

85.73

New Zealand .......................................

1 April to 31 March

New Zealand dollar ($NZ)

1.72

Niue ......................................................

1 April to 31 March

New Zealand dollar ($NZ)

1.72

Northern Mariana Islands ...................

1 October to 30 September

United States dollar ($)

1.00

Pakistan ...............................................

1 July to 30 June

Pakistan rupee (PRs)

79.11

Palau ....................................................

1 October to 30 September

United States dollar ($)

1.00

Papua New Guinea .............................

1 January to 31 December

kina (K)

2.68

Philippines ...........................................

1 January to 31 December

Philippine peso (P)

47.49

Republic of Korea ...............................

1 January to 31 December

won (W)

1 262.00

Russian Federation .............................

1 January to 31 December

ruble (R)

29.38

Samoa .................................................

1 July to 30 June

tala (WS$)

2.73

Singapore ............................................

1 April to 31 March

Singapore dollar (S$)

1.44

Solomon Islands .................................

1 January to 31 December

Solomon Islands dollar (SI$)

8.01

Sri Lanka .............................................

1 January to 31 December

Sri Lanka rupee (SL Rs)

113.33

Tajikistan ..............................................

1 January to 31 December

somoni

3.45

Thailand ...............................................

1 October to 30 September

baht (B)

34.98

Timor-Leste ..........................................

1 July to 30 June

United States dollar ($)

1.00

Tonga ...................................................

1 July to 30 June

pa’anga (T$)

2.07

Turkey ...................................................

1 January to 31 December

Turkish lira (LT)

1.23

Turkmenistan ........................................

1 January to 31 December

Turkmen manat (M)

14 250.00

Tuvalu ...................................................

1 January to 31 December

Australian dollar ($A)

1.44

Uzbekistan ...........................................

1 January to 31 December

som (som)

1 328.00

Vanuatu ................................................

1 January to 31 December

vatu (VT)

112.62

Viet Nam ..............................................

1 January to 31 December

dong (D)

16 977.00

Sources: United Nations, Monthly Bulletin of Statistics website, http://unstats.un.org/unsd/mbs/Default.aspx, 10 February 2009; CEIC Data Company
Limited; and national sources.

November 2008.

October 2008.

August 2008.

xxvii

(a)

Page 2: an excerpt from a statement entitled “Let us work together to promote economic development”
delivered by President Hu Jintao at the APEC CEO Summit, held in Lima, Peru, on 21 November 2008
(source: http://www.fmprc.gov.cn/eng/wjdt/zyjh/t524324.htm).

(b)

Page 40: an excerpt from the message of Prime Minister Manmohan Singh to the General Assembly of the
United Nations on 26 September 2008 (source: http://www.un.int/india/2008/ind1452.pdf).

(c)

Page 70: an excerpt from a statement delivered by President Lee Myung-bak as he presided over the first
session of the Green Growth Commission of the Republic of Korea, published on 27 February 2009 (source:
http://www.futuregov.net/articles/2009/feb/27/green-growth-commission-launched-korea/).

(d)

Page 92: an excerpt from an exclusive interview with Prime Minister Lee Hsien Loong in the Bangkok Post,
published 27 February 2009 (source: http://www.bangkokpost.com/news/asian/136919/exclusive-interview-with-
singapore-prime-minister-lee-hsien-loong).

(e)

Page 154: an excerpt from the message of Prime Minister Kevin Rudd to the General Assembly of the
United Nations on 26 September 2008 (source: http://www.un.org/ga/63/generaldebate/pdf/australia_en.pdf ).

(f)

Page 172: an excerpt from a keynote speech delivered by President H. Susilo Bambang Yudhoyono at the
APEC CEO Summit, held in Lima, Peru, on 21 November 2008 (source: http://www.presidenri.go.id/
index.php/eng/pidato/2008/11/22/1035.html).

SOURCES OF QUOTATIONS

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

sia-Pacific economies have been hit once again

by a financial crisis. On 15 September 2008, the

American investment bank Lehman Brothers collapsed,
triggering an extraordinary downward spiral in confi-
dence and financial turmoil. It was also the day when
the crisis truly hit Asia-Pacific shores, spreading be-
yond its equity markets and posing the greatest threat
to the region’s development since the Asian financial
crisis of 1997.

Many of the policy failures blamed on the region in
1997 were seen once again in the United States and
Europe, albeit to varying degrees – lax supervision of
financial systems, excessive credit creation and the
build-up of asset bubbles. This time, the Asia-Pacific
region is better prepared for currency and balance-of-
payment crises than it was a decade ago, having
improved current account balances and built up a
protective shield of foreign-exchange reserves. Notwith-
standing this resilience, the improvements have not
been enough to prevent severe domestic impacts.

The crisis has worked its way through the Asia-Pacific
region and has had deep repercussions on financial
systems and real economies. Policymakers are now
faced with the task of identifying vulnerabilities and
finding ways in which the region’s sources of resil-
ience, built up from its experience with the 1997 crisis,
can resist shocks in the future.

CHAPTER 1. THE RETURN OF THE
FINANCIAL CRISIS: MANAGING,
VULNERABILITIES AND DEEPENING
REGIONAL COOPERATION

and relative stability in the current crisis, especially
when compared with previous crises. However, the
region’s integration with the global economy through
finance, trade and investment has revealed potential
vulnerabilities that will need to be tracked closely
during the crisis. No country can address this threat to
development on its own. What is needed are policies
that enhance regional coordination and will enable the
Asia-Pacific region to be crisis-resistant.

Impact of the crisis
on Asia-Pacific

Decline in domestic demand and
exports

Half a year after the eruption of the global financial
crisis, the region is feeling several effects. The finan-
cial sector is under stress, and while the likelihood of
a global financial meltdown has been skirted through
aggressive policies, the decimation of financial wealth
has exerted significant downward pressures on aggre-
gate demand and the growth prospects of the region,
with the attendant social consequences still unfolding.

Equity market declines impact domestic
demand

Equity markets in developing countries around the
world have suffered large declines in value since mid-
September 2008, reflecting a global credit crunch and
a worldwide flight to safety among investors. The
global credit crunch, measured by the price of credit,
has been far greater than at the peak of the 1997
crisis (figure 1.1), with the result that global investors
have been forced to pull their funds out of emerging
markets to fund internal operations. The dramatic in-

The global credit crunch has

been far greater than at the

peak of the 1997 crisis

Despite the downward pressures on equity markets,
corporate profits and aggregate domestic demand, the
financial markets have shown an inherent resilience

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Figure 1.1. Spread of 3-month LIBOR to 3-month United States Treasury bill rate, 1995-2008

350

300

250

200

150

100

Basis point

Jan-1995

Jun-1995

Dec-1995

Jun-1996

Dec-1996

Jun-1997

Dec-1997

Jun-1998

Dec-1998

Jun-1999

Dec-1999

Jun-2000

Dec-2000

Jun-2001

Dec-2001

Jun-2002

Dec-2002

Jun-2003

Dec-2003

Jun-2004

Dec-2004

Jun-2005

Dec-2005

Jun-2006

Dec-2006

Jun-2007

Dec-2007

Jun-2008

Dec-2008

Sources: CEIC Data Company Ltd., and British Banker’s Association.

Based on data for China, Indonesia, Malaysia, the Phil-
ippines, the Republic of Korea and Thailand (Asia Bonds
Online, 2008).

crease in the price of credit in late 2008 stemmed
from the unwillingness of banks to lend, as seen from
the markup of credit prices as compared with the risk-
free interest rate proxied by that of United States
Treasury bills.

This led to sharp declines (figure 1.2) in the region’s
equity markets. In the past, foreign and domestic
investors had, thanks to high global liquidity, acquired
an increasing presence in local equity markets, which
in turn led to a large run-up in prices. Nevertheless,
when compared with emerging markets in other parts
of the world (figure 1.3), the losses in Asia and the
Pacific were less, reflecting lower investor concerns
about the prospects for Asia and the Pacific as a
whole. Bond market declines in Asia, while substantial,
were also lower than those in Eastern Europe and
Latin America, as evidenced by corporate bond
spreads, reflecting varying perceptions of sovereign
risk (World Bank, 2008a).

Furthermore, as of end-December 2008, equity markets
had fallen less than in the 1997 crisis (figure 1.4),
although the current crisis may still not have reached
its nadir and there may be a further fall for equity
markets. A comparison of the movement from peak to
trough in 1997/98 with the present path of equity
market decline reveals a similar trend. Thailand,
Singapore, Indonesia and Taiwan Province of China, all
of which were affected by the 1997 crisis, have experi-
enced faster falls in their markets in the current crisis
than in 1997/98 (figure 1.5). This is due to the sheer

magnitude of the current crisis, but also the higher
exposure of these Asia-Pacific economies to foreign
investors in relation to other economies of the region.

These declines are expected to cause a number of
effects that will dampen domestic demand, especially
declining personal consumption and corporate invest-
ments. Although equity market investments constitute a
small portion of household wealth, and equity financing
makes up a relatively small portion of corporate invest-
ment in Asia and the Pacific as compared with devel-
oped countries, the declines will affect the more ad-
vanced economies of the region, such as the Republic
of Korea, Singapore and Hong Kong, China. In these
economies, about 36% of financing is equity-based, with
the remainder coming from bonds and bank credit.

Declines in property markets to further
dampen domestic demand

Another dampening effect on domestic demand will
come from the downturn in property prices. While
equities were the first asset class to experience large
declines in late 2008, property markets followed suit
and can be expected to continue to fall, both as a
consequence and a cause of the unfolding crisis. As

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Figure 1.4. Peak-to-trough equity market fall, decline from peak to trough in 1997/98 and peak to end-
December 2008 in 2007/08

– 10

– 20

– 30

– 40

– 50

– 60

– 70

– 80

– 90

– 100

Russian F

ederation

Thailand

Malaysia

Philippines

Indonesia

Republic of K

rea

Singapore

akistan

Hong K

ong, China

T
aiwan Province of China

1997/98 crisis

Current crisis

Source: ESCAP calculations based on data from CEIC Data Company Limited.

Notes:

Declines for 1997/98 crisis measure major stock market index falling from the peak to the trough during that period. Declines for recent

crisis measure the corresponding movement from the recent peak to December 2008.

region than in developed countries. Home loans repre-
sented only 12% of GDP in China and 5% in India,
whereas in the United States the ratio is 105% (Reuters,
2008). There is a danger of a significant increase in
non-performing loans held by banks due to the inability
of real estate companies to repay their loans.

Private consumption will also be affected by the fall in
property prices, particularly in more advanced econo-
mies in the region, where property assets account for a
more significant portion of household wealth, such as
in the Republic of Korea, Singapore and Hong Kong,
China. In less advanced economies, the consumption
of the middle-income population, for whom property
asset holdings have grown rapidly in recent years –
notably in China and India – will also be curtailed.

Reduced bank lending: the most signifi-
cant factor curtailing corporate activity
and domestic demand

Restrained bank lending is currently the greatest ob-
stacle to the region’s ability to grow out of the crisis.
The concern here is the effect it is having on corpo-
rate investment because an ailing corporate sector in
a climate of slowing domestic growth could add a
new layer of financial stress to the crisis-hit banking

er cent

The degree of bank lending

to the property sector is a

significant concern

with equity markets, foreign capital had also played an
important role in property markets in some countries
and contributed to large property price rises. At the
time of its bankruptcy, Lehman Brothers had $1 billion
invested in real estate in Thailand and a similar amount
in Hong Kong, China (Financial Times, 2008). House
price rises fuelled by rapidly expanding domestic credit
have been important for India, China and Viet Nam.

The reduction in house prices will have an effect on
real estate investments, which have played a particu-
larly important role in the growth of domestic demand
in a number of countries – most notably in China,
where the property sector accounts for about a quarter
of all investment. The degree of bank lending to the
property sector, both the construction industry and
homeowners, is a significant concern. The impact from
lending to institutional property developers is greater
because home mortgages are less important in the

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.5. Path of equity market decline from peak to trough in 1997/98 as compared with equity
market decline from peak to end-December 2008 in 2007/08

100

Hong Kong, China

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

Months

100

India

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

t+16

Months

100

Indonesia

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

Months

100

Malaysia

Peak

(t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

t+16

t+18

Months

100

Philippines

100

Republic of Korea

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

Months

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

t+16

t+18

Months

100

Singapore

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

t+16

t+18

Months

100

Taiwan Province of China

100

Thailand

Peak (t)

t+2 t+4

t+6

t+8

t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 t+26 t+28 t+30

Months

Peak (t) t+2

t+4

t+6

t+8

t+10

t+12

t+14

t+16

t+18

Months

1997/98 crisis

Recent crisis

Source: ESCAP calculations based on data from CEIC Data Company Limited.

Notes:

Declines for 1997/98 crisis measure major stock market index falling from the peak to the trough during that period. Declines for recent

crisis measure the corresponding movement from the recent peak to December 2008.

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

Index (P

eak=100)

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Small and medium-sized enterprises may

be particularly vulnerable due to their

generally higher risk profile and their

smaller pool of internal funds

tional threshold of 8% across major economies in the
region (figure 1.6). This provides an important buffer
that will reduce the systemic risk of increases in non-
performing loans in the coming months.

sector. As access to funds becomes more difficult, an
increase in non-performing loans will lead to greater
risk aversion, restraints on new lending and possibly
higher costs for new borrowers. Increased borrowing
costs may in turn lead to further pressures for corpo-
rate defaults. The ability to repay corporate loans is
especially a risk in export manufacturing sectors
across the region, as well as real estate sectors.
There is the risk of a vicious cycle, for eventually even
previously healthy companies may face liquidity or
even solvency problems, resulting, in turn, in a nega-
tive effect on the balance sheets of banks and a
curtailment in aggregate demand.

Small and medium-sized enterprises (SMEs) may be
particularly vulnerable because they are less likely to
attract funding due to their generally higher risk profile
and their smaller pool of internal funds to see them
through the credit crunch. The most immediate con-
cern is the rollover of short-term debt positions, and
the most affected SME sectors are export-oriented
enterprises, such as textiles, footwear and toys. The
drying up of trade financing has further exacerbated
the situation of SMEs.

It is also expected that bank lending will be curtailed by
a more difficult climate for financing from abroad and
consequently higher borrowing costs from foreign banks.
Some countries are expected to be hit harder than
others. There may be some reorientation of fund-raising
from foreign to domestic sources, resulting in less credit
being available, with negative impacts on overall corpo-
rate investments and household expenditures.

There has also been a marked reduction in bond
issuance, with spreads on Asian emerging market
bonds more than doubling in late 2008. Those countries
where the corporate sector has used bond issuances to
raise money will be most affected. In India, convertible
bond issuance by corporations, one of the preferred
instruments for raising capital in 2007, stood at $578
million by November 2008, down 91% from $6.6 billion
in 2007 (Economic Times, 21 November 2008).

These difficulties notwithstanding, it is important to
recognize that, overall, banks in the region appear
strong enough to maintain solvency, for the level of
non-performing loans is currently below the interna-

Figure 1.6. Non-performing loan rates in
selected developing ESCAP economies,
Q2 2008

er cent

akistan

China

Malaysia

Philippines

Thailand

India

T
aiwan Province of China

Hong K

ong, China

Source: CEIC Data Company Limited.

Note:

Data for India and Pakistan refer to 2006 and Q4 2007

respectively.

Exports and foreign direct investment,
particularly those linked to export
production, to be hit by global
slowdown

In the latter part of 2008, export performance in the
region exhibited a swift downturn attributable to the
curtailment of external demand, both demand globally
and from within the region (figures 1.7 and 1.8).

Among selected export-oriented economies, quarterly
export growth (year-on-year) for Singapore reversed
from over 20% in the first three quarters of 2008 to a
decline of 14% in the fourth quarter (figure 1.9). The
shrinkage of exports in the Republic of Korea and
Thailand was equally pronounced, falling from an aver-
age of over 20% growth in the first three quarters of
2008 to a decline of nearly 10% in the last quarter of
the year. Taiwan Province of China experienced a
turnaround from double-digit growth of nearly 15% in
the first three quarters of 2008 to a fall of nearly 25% in
the fourth quarter. A sharp deceleration of exports was

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.8. Export and import growth of
selected ESCAP members and associate
members to and from Asia,
August-November 2008

– 5

– 10

– 15

– 20

Per cent (y

-o-y)

Aug-08

Sep-08

Oct-08

Nov-08

Export growth

Import growth

Source: ESCAP, “Regional trade and investment: Trends, issues and
ESCAP responses”, note by the secretariat prepared for the sixty-fifth
session of the Commission, April 2009 (E/ESCAP/65/2).

Note:

Economies for which data available: China, Japan, Malaysia,

New Zealand, Republic of Korea, Singapore, Hong Kong, China and
Macao, China.

Figure 1.7. Export and import growth of
selected ESCAP members and associate
members to and from the world,
August-November 2008

– 5

– 10

– 15

Per cent (y

-o-y)

Aug-08

Sep-08

Oct-08

Nov-08

Source: ESCAP, “Regional trade and investment: Trends, issues and
ESCAP responses”, note by the secretariat prepared for the sixty-fifth
session of the Commission, April 2009 (E/ESCAP/65/2).

Note:

ESCAP economies include: Armenia, Australia, China, Geor-

gia, India, Japan, Kazakhstan, Malaysia, New Zealand, Pakistan,
Philippines, Republic of Korea, Russian Federation, Singapore, Sri
Lanka, Thailand, Turkey, Hong Kong, China and Macao, China.

Export growth

Import growth

Figure 1.9. Export performance of selected export-oriented developing ESCAP economies by quarter,
2008

– 10

– 20

– 30

Per cent (y

-o-y)

Sources: CEIC Data Company Limited and Bank of Thailand (for Thailand).

Note:

Exports performance derived from growth rate in United States dollar.

Taiwan Province

Philippines

Singapore

Republic of

Thailand

Hong Kong,

of China

Korea

China

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Figure 1.10. Real GDP growth of selected export-oriented developing ESCAP economies by quarter,
2008

-2

-4

-6

-8

-10

Per cent (y

-o-y)

Sources: CEIC Data Company Limited; Ministry of Trade and Industry, Singapore Press Release, 21 January 2009 (for Singapore) and Taiwan
Province of China, Directorate-General of Budget, Accounting and Statistics, November 2008 (for Taiwan Province of China).

Taiwan Province

Philippines

Singapore

Republic of

Thailand

Hong Kong,

of China

Korea

China

observed in direct exports from the region to the final
destinations of the United States and the European
Union. Concurrently, exports to China from the econo-
mies in the region also registered sharp declines.

Owing to the sharp deterioration in exports and much
weaker domestic demand, the economic growth of
some of these export-oriented economies also weak-
ened noticeably in the last quarter of 2008. The
highest significant negative growth was registered for
Taiwan Province of China at about 8% in the fourth
quarter of 2008 (figure 1.10). Thailand shrank by 4.3%,
while Singapore, the Republic of Korea and Hong
Kong, China, are estimated to have fallen by 3.7%,
3.4% and 2.5% respectively. The performance of the
Philippines remained largely stable as a result of con-
tinued inflows of remittances to render support for
consumption demand.

Most countries in the Asia-Pacific region have relied on
open trade and investment and export-led growth for
their development. As a result, the region enjoyed
prolonged periods of high export and GDP growth
except for two interruptions: the Asian financial crisis of
1997-1998 and the dot-com crisis of 2001 (figure 1.11).
On both occasions, the growth rates of exports became
negative, and GDP growth decelerated. With export
growth decelerating significantly in 2008 and expected
to continue to do so in 2009, it is not surprising that the
GDP growth rate also decelerated substantially in 2008
and is forecast to continue decelerating in 2009.

It is possible that the current drop in exports will be
associated with less of a decline in GDP growth than
in 1997. The impact of the 2001 dot-com crisis on
GDP growth was substantially less than the crisis of
1997, as the 2001 crisis, like the present one, origi-
nated in industrial countries outside Asia. The dot-com
crisis was shallower and shorter than the current crisis,
but, during that time, other components of aggregate
demand were able to pick up the slack, although
exports dropped by similar amounts.

Foreign direct investment is

expected to slow down markedly

As foreign direct investment (FDI) is long term, it is
often thought to be a more stable source of inflows
during a crisis. It has increased dramatically over the
past decade after the sharp fall following the 1997
crisis, even recently returned to pre-1997 values in
South-East Asia, but is now expected to slow down
markedly. This scaling down is already reflected in
estimates of declining FDI contribution to GDP in 2008
(figure 1.12) The drop is primarily due to the origin of
the current crisis, the developed world – where most of
the region’s FDI comes from – as opposed to the
1997 crisis, which started within the Asia-Pacific region.
Foreign investors are concerned about their ability
to finance direct investment while their profits are

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.11. Value of export and nominal GDP growth for ESCAP developing economies

– 10

– 20

er cent

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

ESCAP developing economies export growth rates

ESCAP developing economies GDP growth rates (WDI)

Sources: ESCAP calculations based on IMF, Direction of Trade Statistics (CD-ROM) (Washington, D.C., September 2008); and World Bank, World
Development Indicators online (accessed October 2008).

Figure 1.12. Inward direct investment as a share of GDP in selected developing ESCAP economies

ercentage of GDP

Hong K

ong, China

Viet Nam

Singapore

India

Russian F

ederation

akistan

Malaysia

Thailand

China

T
aiwan Province of China

Indonesia

Philippines

Republic of K

orea

2006

2007

2008

Sources: UNCTAD, World Investment Report: Transnational Corporations and the Infrastructure Challenge (United Nations publication, Sales No.
E.08.II.D.23); EIU, Country Forecasts (London, 2008); and IMF, World Economic Outlook Databases (Washington, D.C, 2008).

Note:

Inward direct investment for 2008 are estimates.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

declining at home and there is less funding available
from their financial institutions. Furthermore, the wors-
ening perceptions of investors regarding the depth and
length of the economic contraction will cause them to
defer pipeline investment decisions.

Still, the multi-year planning horizon inherent in FDI
decisions is expected eventually to tap into positive
growth prospects and override shorter-term concerns.
There will likely be some reorientation, however, to-
wards FDI that is market- and labour-seeking, in order
to tap into the region’s competitive resources, its
positive long-term growth prospects and buoyant do-
mestic demand. This change will come at the expense
of more traditional forms of intrafirm FDI directed to
export production, notably in China, where such export-
oriented investment accounts for a sizeable part of total
investment. Similarly, intraregional FDI, which became
particularly pronounced between and within East Asian
economies and South-East Asian economies, may also
decline. The decline will be all the more significant for
investments that supported regional production net-
works supplying parts and components for consumer
products destined for developed country markets.

Domestic demand under pressure but
holds the key to stabilizing economic
growth prospects

In some major economies of the region, domestic
demand has played an important role in recent
growth, and it will need to play a supportive role in the
face of declining exports. In the immediate future,
domestic demand will most likely not prove robust, as
has already been seen in the declines in absolute
terms, which have come in tandem with a fall in net
exports (figure 1.13). Nevertheless, domestic demand
contributed a greater share of growth in 2008 for the
many economies that had an even greater decrease in
net exports, but it will face additional pressure from
credit constraints as well as the effects of higher
unemployment, uncertainty and very low wage in-
creases in 2009. It is nevertheless expected that the
lower dependence on banking credit for the household
sector will alleviate some of the pressures of con-
strained availability and increased price of credit on
domestic consumption.

Figure 1.13. Contributions of domestic demand to GDP growth for selected developing ESCAP
economies

– 5

– 10

– 15

– 20

– 25

– 30

er cent

China

India

Viet Nam

Indonesia

akistan

Malaysia

Philippines

Thailand

Hong K

ong, China

Republic of K

orea

Singapore

T
aiwan Province of China

Private consumption

Investment

Pulbic consumption

Net exports

Sources: ESCAP calculations based on data from CEIC Data Company Ltd.; Economist Intelligence Unit, Country Forecast (London, 2008).

Note:

Figures for 2008 are estimates.

2007

2008

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Negative impact on livelihoods
and vulnerable groups

The labour market and the vulnerable to
be under great strain

As the crisis is still unfolding, its impact on people’s
income levels and their welfare is difficult to estimate.
Preliminary estimates indicate in 2009 that unemploy-
ment in Asia-Pacific could increase by between 7 to
23 million workers (ILO, 2009). In 2008, the greatest
employment impact was felt in the export manufactur-
ing sector, including garments, electronics and autos,
which constitutes a large part of many East and
South-East Asian economies. The crisis is also ex-
pected to hit such sectors as construction, tourism,
finance, services and real estate. The countries experi-
encing the greatest impact will be those with slowing
economies and rapid labour force growth, such as
Cambodia, Pakistan and the Philippines (ILO, 2008a).
Wage growth is slowing across the region – the aver-
age wage growth in real terms in 2009 is unlikely to
exceed 1.8% – and an outright wage reduction in
countries with low economic growth seems inevitable
(ILO, 2008b). Wage growth has already been reduced
through agreements between governments and social
partners in some cases, such as in Singapore, or
through a cap on minimum wage increases, as in
Indonesia. Apart from an increase in formal unemploy-
ment, there will be a rise in informal employment.
Notably, it is expected that migrants will return to rural
areas, where they will remain underemployed, while
wage competition in urban areas may cause an in-
creased neglect of labour standards, as well as an
increase in income inequality between top executives
and employees.

youngest and oldest populations and socially excluded
groups. Not only do these groups have fewer re-
sources with which to cushion the impact of shocks,
such as real assets and savings, but they also have
less influence on economic and political decision-
making. The negative impacts last much longer than
the crisis itself: although economic growth resumed
relatively quickly after the 1997 crisis, in some coun-
tries it took up to 10 years to recover lost ground in
the struggle against poverty (ILO, 2008c). During the
high-growth period following the 1997 crisis, relatively
robust employment growth was achieved, but a
number of important distributional inequities emerged
(ILO, 2008d). Employment growth varied considerably
within each subregion, large numbers of women re-
mained excluded from the world of work and labour’s
share of income declined in three quarters of 83
countries surveyed by the International Labour Organi-
zation (ILO, 2008b).

Communities or groups that have been excluded from
productive resources, decent work and social security
are likely to be highly vulnerable to the negative im-
pact of the global financial crisis and to volatility in
food and fuel prices. Such groups include: indigenous
communities; ethnic minorities; persons with disabili-
ties; populations displaced due to conflict, large devel-
opment projects, environmental degradation or disas-
ters; stateless people; and migrants. In particular,
many refugees and internally displaced populations
depend on food assistance for their survival and gen-
erally do not have access to land for farming, employ-
ment or income generation.

During a crisis, low-skilled immigrants, especially the
untrained, are among the first to be laid off because
they are concentrated in vulnerable sectors, such as
construction or tourism, and often hold temporary
jobs. The very poor and the socially excluded as well
as non-citizens are especially at risk of being exploited
due to an inability to earn enough to obtain basic
necessities for themselves and their families and due
to their lack of access to social protection.

In countries where the population dependency ratio is
high (i.e., where a large proportion of the population is
below 15 or above 64 and therefore not normally in the
labour force), many families may find it hard to meet
the basic needs of the members of their households,
particularly children. Most of the countries or territories
in the region where at least 15% of the population is
over 60 years of age are higher-income economies
with social protection schemes in place.

But even

The people most at risk from the crisis

are the poor, women who are labourers

in the manufacturing sector, the

youngest and oldest populations

and socially excluded groups

Mere unemployment figures tend to mask the full
extent of the problem. Hundreds of millions more will
bear a disproportionate cost of the crisis. As the 1997
crisis showed, when people are affected by sudden
shocks, the ones most at risk are the poor, women
who are labourers in the manufacturing sector, the

Australia, Georgia, Japan, New Zealand, Russian Fed-
eration, Singapore and Hong Kong, China, as of 2007.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

there, however, families may require greater financial
assistance and care in response to rising costs.
Families, and especially women, may experience the
additional pressure of job insecurity on top of unpaid
work, straining the capacities of households to cope.

Another major challenge during a crisis is youth unem-
ployment, which is expected to increase from its
already high levels in some countries – in 2007, for
example, 25.1% in Indonesia, 25.0% in Sri Lanka and
14.9% in the Philippines (ILO, 2008a). Youth unemploy-
ment also shows gender variations. Indonesia showed
a dramatic increase of 17 percentage points in the
unemployment rate of young women between 1996
and 2006 (from 17.0% to 33.9%). Employment pros-
pects for young Indonesian men, however, were only
slightly better than those of young women: the male
youth unemployment rate in 2006 was 27.1% (ILO,
2007; ILO, 2008d). In the Pacific, where economic
growth has not kept pace with high rates of popula-
tion growth, large youth populations combined with
school dropouts make youth employment a major
concern for this subregion.

The financial crisis could exacerbate the child labour
situation in the Asia-Pacific region, for children may
have to go to work to supplement household income.
As of 2004, by ILO estimates, 122 million children
were economically active in the region. Children are
also at risk of being withdrawn from school or not
enrolled. Where families have to pay school fees for
their children, economic hardship often leaves them
with no option but to keep their children out of school.
When families have to cut back on the quantity and
quality of food, poorer nutrition in children can have
permanent effects on intellectual capacity and cause
chronic poor health, which, along with lower educa-
tional completion rates, could undermine human
capital development and set back economic and
social development for decades.

Women to be affected in specific ways

It is expected that men and women will be affected
somewhat differently by the current financial crisis. In
the Asia-Pacific region, especially with the growth of
exports, many women have entered the labour market,
but many of them work in export processing zones,
where they may not have labour rights, or in industries
which sometimes offer very low wages, poor working
conditions and no job security. Many women also
work in the informal sector, which is precarious and
offers no social protection. Although in many cases
women have taken up paid work because male
household members lost their jobs, women and girls

may be seen as a burden on the family because their
work may not be valued as highly as that of male
household members.

In difficult times, families often rely on women to care
for the sick, older persons and those who cannot fend
for themselves, making it difficult for women to earn
an income outside the home. Culturally, women and
girls are often expected to contribute financially to the
family regardless of how that money is earned. When
there are few opportunities for wage work, girls and
women may end up being trafficked through the
promise of a job or being lured or forced into prostitu-
tion and other forms of extreme exploitation. Men may
migrate out of rural areas, leaving women as house-
hold heads and often among the most poor. In
general, households in which only women earn an
income and those with many dependents are the
poorest.

There are also important subregional variations. In
South Asia, the proportions of both male and female
workers in vulnerable employment, either unpaid con-
tributing family workers or own-account workers, are
the highest in the world. Even though the proportion
of total female workers in vulnerable employment de-
creased slightly more than that of men (3.9 percent-
age points for women and 2.4 percentage points for
men), women continue to carry a higher risk of finding
themselves in a vulnerable employment situation: more
than 8 out of 10 working women, compared with more
than 7 out of 10 working men, are vulnerable. In
South-East Asia and the Pacific, although the overall
unemployment rates are comparatively low and have
stabilized in recent years, there is a worrisome trend
of rising unemployment rates for women, which the
financial crisis could further exacerbate. In 2007, un-
employment rates were 6.9% for women, compared
with 5.6% for men (ILO, 2008e). Ten years earlier, the
rate for women was 4.2%, only 0.3 percentage points
higher than the rate for men.

Lack of social protection exacerbates
impact of crisis

Most developing countries of the region do not
provide adequate social protection for their citizens –
leaving millions to resort to limited, often harmful,
coping mechanisms, such as reducing meals, eating
less nutritious foods, taking children out of school,
selling livestock and other assets or borrowing money
to feed their families. In the case of sudden spikes in
the price of food, the poor have to spend an even
larger proportion of their income on food and will
probably buy less food or food that is less nutritious.
Chapters 2 and 5 examine this issue in more detail.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Remittances expected to slow but will
have stabilizing effect

After several years of strong growth, remittance flows
to developing countries have begun to slow markedly,
leading to heightened concerns about the impact of
the financial crisis. Empirical data on the impact are
not yet available, but anecdotal evidence suggests
that the slowdown will deepen further, and for 2009
growth is expected to be negative, falling to – 0.9%
(World Bank, 2008b).

Many countries of the region have experienced a surge
in labour migration in recent years, with a concomitant
increase in remittances. In 2006 alone, over one million
migrant workers left the Philippines. Annual labour
migration from Bangladesh, mainly to the countries of
the Gulf Cooperation Council (GCC) and Malaysia,
surged from 252,000 in 2005 to over 800,000 in 2007
(World Bank, 2008b). In 2007, the remittances sent by
migrants to countries in the ESCAP region exceeded
$121 billion, up from $110 billion in 2006 and more
than twice the level reached in 2000. In 2008, 5
countries in the region – Bangladesh, China, India,
Pakistan and the Philippines – were listed among the
global top 10 economies receiving remittances (figure
1.14). Remittances make up an important share of GDP
for a number of other economies, particularly smaller
ones, such as Kyrgyzstan and Nepal and some of the
Pacific island countries (World Bank, 2008b). With re-
gard to source countries, remittance flows from the

GCC countries to East and South Asia have grown
particularly fast (World Bank, 2008b).

Despite the global economic slowdown, the contribu-
tion of remittances to the external position of develop-
ing countries is expected to increase relatively in 2009-
2010 because other private flows and official aid are
expected to decrease much more than remittances.
Furthermore, while the intake of additional migrants
may slow, the stock of migrants from these countries
remains large.

On the negative side, as unemployment increases in
developed countries, governments are likely to cut
back on the intake of new migrant workers, or per-
haps even require migrants to return upon completion
of their contracts, especially in the information tech-
nology and tourism sectors. In the GCC countries, a
slowdown following the decline in oil prices has led to
a slowdown in the construction and tourism-related
industries, resulting in lower demand for migrant work-
ers and the likelihood of cutbacks on migrant workers’
wages or their benefits.

Other sectors exhibit a more positive outlook. In devel-
oped countries, there may be increased reliance on
outsourcing as they struggle to reduce their costs,
which could benefit some countries and industries in
Asia and the Pacific. Similarly, demand in developed
countries for caregivers and medical service profes-
sionals is expected to remain stable, particularly in
countries with rapidly ageing populations. The work
done by unskilled migrant workers may also be less
sensitive to downturns since they often fill jobs that
are considered undesirable in the local market but are
nevertheless necessary.

Overall, remittance flows are generally more stable
than other capital flows, and they also tend to be
countercyclical, i.e., increasing during economic down-
turns or after a natural disaster in the migrants’ home
countries. Furthermore, remittances depend not only
on flows of migrants but also on the stock of migrants
abroad. Even if the flow of migrants declines due to
the financial crisis, remittances may not be affected
substantially, as the stock of migrants remains large.

Remittances have traditionally been an important
source of external funding in the Pacific islands in view
of the small size of the economies. While remittances
will be under pressure, they are expected to show
resilience to economic changes. In 2000-2001, despite
a slowing of economic growth in Australia, New Zea-
land and the United States, remittances to the Pacific
islands increased. In 2005 and 2006, remittances again
remained strong. In addition, there is some hope that
seasonal worker schemes between Pacific island coun-
tries and Australia and New Zealand will provide a new
source of remittances (ADB, 2008, p. 19).

Figure 1.14. Top 10 remittance-recipient
developing economies in Asia and the
Pacific, 2008 estimate

Billions of US dollars

India

China

Philippines

Bangladesh

akistan

Indonesia

Viet Nam

Russian F

ederation

Sri Lanka

Nepal

Source: World Bank, Outlook for Remittance Flows 2008-2010.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Growth down across the board

The outlook for Asia-Pacific economies has darkened
since the last quarter of 2008, as the economic set-
back deepens and there is more financial turbulence
than was anticipated. A credit crunch, along with
financial deleveraging, has choked off economic ac-
tivities. The export sector is expected to be hardest
hit by the shrinkage of import demand, so economic
prospects in the region hinge more on domestic
demand, but investment and consumer confidence
has been shaken by more entrenched economic diffi-
culties, poor expectations of corporate profits, a
slowdown in remittances and mounting concerns
about job security and household income. Neverthe-
less, fiscal stimulus programmes should be able to
render some support, particularly if domestic demand
in Asia’s largest emerging economies – China, India
and Indonesia – can remain buoyant. Further intra-
regional trade flows may be triggered, adding some
shock-absorbing effects to the region’s economy.

The backdrop for 2009 forecasts

It is expected that monetary policies around the
world will remain loose for most of 2009. The down-
ward adjustment of food and energy prices will be
conducive to a looser monetary environment. Specifi-
cally, the United States Federal Reserve Bank target
rate is expected to remain at a very low level in
2009. In 2008, the Federal Reserve cut its target rate
seven times. As of 31 January 2009, 400 basis
points had been slashed, from 4.25% at the begin-
ning of 2008 to 0.25%. At the current level, further
cuts would not be very effective, and the Federal
Reserve may opt for direct injections of liquidity into
the financial system. A gradual tightening may only
occur towards the end of 2009, when the United
States economy is expected to be on a path of
stable recovery. Similarly, the European Central Bank
is expected to hold the main refinancing rate at the
currently low level of 2.0% for most of 2009. A
gradual policy normalization is expected to take
place near the end of 2009, when the global
economy is stabilized. The Bank of Japan lowered its
uncollateralized overnight call rate marginally to 0.3%
in October 2008 and further to 0.1% in December
2008. It is expected that the Bank will only revert to
monetary tightening towards the end of 2009.

As for the key exchange rates, the United States dollar
has shown significant volatility, including a strengthen-
ing against the euro, but overall downward pressures
on the dollar will remain as the unwinding of the
country’s fiscal and trade deficits becomes inevitable.
The dollar averaged $1.32 against the euro in the fourth
quarter of 2008, and expectations are that it will edge
up to about $1.40 in 2009. The Japanese yen appreci-
ated notably towards the end of 2008 and averaged at

96 in the fourth quarter of 2008. This trend is ex-

pected to continue in the first half of 2009, before the
yen falls back again in the second half of the year.

Oil prices have fallen considerably since their peak
monthly average of about $135 per barrel in mid-2008.
It is expected that prices will average about $45 per
barrel in 2009. Economic contraction is expected in the
United States, the European Union and Japan in 2009.

Against this backdrop, the forecast for developing
economies in the Asia-Pacific region is a slowdown in
growth to 3.6% in 2009 from an estimated 5.8% in 2008
(figure 1.15). For the region as a whole, performance for
the first half of 2008 showed resilience. Exports grew at
24%, thus remaining strong and riding on the back of
weakening currencies and relatively robust external de-
mand, but the full effect of a slowdown in developed

Growth outlook for 2009

Figure 1.15. Real GDP growth of selected
developing ESCAP and developed
economies, 2003-2009

– 2

– 4

er cent

Baseline

Downside

2003

2004

2005

2006

2007

2008

2009

Sources: ESCAP calculations based on national sources; IMF, Interna-
tional Financial Statistics (CD-ROM) (Washington, D.C., November
2008); ADB, Key Indicators for Asia and the Pacific 2008 (Manila,
2008); website of the Interstate Statistical Committee of the Common-
wealth of Independent States, www.cisstat.com, 22 October 2008
and 3 February 2009; and ESCAP estimates. Figures for developed
economies are taken from IMF, World Economic Outlook Update
(Washington, D.C., January 2009).

Note:

GDP growth to 2008 and 2009 are estimates and forecasts

respectively.

Developing ESCAP economies

Developed economies

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

country markets on exports will surface in 2009. Econo-
mies that are highly dependent on exports, such as
those of East and North-East Asia and South-East Asia,
will inevitably be more vulnerable (figure 1.16). The
extent of deceleration will depend on the extent to
which domestic demand, stimulated by expansionary
fiscal policy, can offset the setback in exports.

Still, it is important not to lose sight of the fact that
aggregate growth in Asia and the Pacific will remain
higher than in other global regions. While difficulties in
the region will be important at the domestic level due
to the enormous social consequences of even moder-
ate decreases in growth rates, the region is relatively
strong compared with the rest of the world (figure
1.15). Comparatively high growth coupled with the
large aggregate size of the region’s economy will
make Asia and the Pacific the locus of global growth
in 2009. The region is forecast to account about 115%
of global GDP growth in 2009.

Significant downside risks from
protracted recession

The possibility of a deeper economic setback in the
United States and consequently in the European Union
and Japan cannot be ruled out, given the highly
fluid financial conditions and the uncertain impact of
expansionary monetary policy and fiscal rescue pro-
grammes. Failure to jump-start the economy and trig-
ger economic growth is the biggest downside risk for
the regional forecast.

A major baseline assumption is that the United States
economy will contract by 1.0% in 2009, following esti-
mated growth of 1.3% in 2008. If a more pronounced
setback in the United States occurs, growth in the
economy would fall by another 2 percentage points,
from – 1% to – 3%. The more severe deceleration in
growth is based mainly on steeper reductions in in-

Calculations based on the share of developing ESCAP
economies in world GDP being about 16% in 2008, an
IMF forecast of global growth of 0.5% in 2009 and an
ESCAP forecast of growth in developing ESCAP econo-
mies of 3.6%.

Figure 1.16. Rates of economic growth of selected developing and developed ESCAP economies,
2007-2009

Developing ESCAP economies

East and North-East Asia

North and Central Asia

Pacific island economies

South and South-West Asia

South-East Asia

Developed ESCAP economies

– 4

– 2

Per cent

Sources: ESCAP calculations based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., November 2008); ADB,
Key Indicators for Asia and the Pacific 2008 (Manila, 2008); website of the Interstate Statistical Committee of the Commonwealth of Independent
States, www.cisstat.com, 22 October 2008 and 3 February 2009; and ESCAP estimates.

Notes:

Rates of real GDP growth for 2008 are estimates, and those for 2009 are forecasts. The term "developing economies" of the region

comprise 38 developing economies (including the Central Asian countries), and the calculations are based on the weighted average of GDP
figures in 2004 United States dollars (at 2000 prices).

2009

2007

2008

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

vestment and consumption, with a significant increase
in bankruptcies and layoffs, job insecurity for those
who are still employed, a further fall in asset prices
and a tighter policy on lending to households. If there
is a deeper United States downturn, economic growth
in Japan and the Euro zone will also fall into more
negative territory.

Under this more severe scenario, the Republic of
Korea, Singapore, Hong Kong, China, and Taiwan
Province of China would most feel the pinch. On top
of slower export growth due to curtailment in global
demand, their deeper integration with the financial

sectors of the developed economies would induce a
more negative impact on their investment and
consumption sectors. China would also face slower
growth in absolute terms, but given the high growth
path and the introduction of a strong fiscal stimulus
plan in late 2008, China is expected to achieve
relatively robust growth even under the downside
scenario. Other economies would inevitably be hit by
a severe downturn in the developed economies. As
commodity prices ease further amidst weaker global
demand, however, inflationary pressure will also ease,
giving many countries policy space for expansionary
policies that can cushion the negative impact.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

For the third time in a decade, economic growth will
be curtailed as the Asia-Pacific region falls victim to
financial crisis and widespread contagion. The shocks
and contagion effects triggered have brought to the
fore certain country-specific vulnerabilities, particularly
in external finance, trade and investment. At the same
time, the region possesses sources of resilience in
2009 that it did not have in 1997. For policymakers,
the challenge lies in moving the region forward from
crisis resilience towards crisis resistance.

Sources of resilience

Post-1997 policy changes: building
resilience through balance and stability

Rising current account deficits constituted one of the
major factors that triggered the 1997 Asian crisis. By
the end of 1996, national deficits ranged from 3.5% of
GDP in Indonesia to 8% in Thailand (ESCAP, 1998).
Since then, most economies of the region, with the
exception of India, Pakistan and Viet Nam, have
significantly improved their current account balances
(figure 1.17), even if current account balances have
declined in some of these countries in recent years.

A crucial aspect of the 1997 crisis was that current
account deficits went hand in hand with United States
dollar-pegged exchange rates, which were rising sig-
nificantly. Eventually, the rise of currency values com-
bined with the drops in current account balances
proved unsustainable. Speculators attacked, starting
with the Thai baht. Despite central bank attempts to
defend their currencies, countries did not possess
adequate foreign exchange reserves to signal that they
could sustain their defence. In contrast, most econo-
mies in the region today, while moving away from
official currency pegs and a commitment to defend
particular exchange rates, still maintain a de facto
regime of adjustable pegs. This time, however, they
have built up very high foreign reserves (figure 1.18),
and they have shown their willingness to use reserves
to defend currency values and maintain stability. Nev-
ertheless, there is significant variation in holdings of

reserves across the region; thus, there are varying
degrees of buffer in the event a currency comes
under pressure.

In another major change in policy, most countries
have reduced their exposure to external short-term
debt, which was a key factor in the 1997 financial
crisis. In 1997, given the inability to roll over such
short-term debt due to risk aversion and unwillingness
to lend on the part of banks, countries had no choice
but to buy foreign currency to finance repayments,
which exerted further pressure on currencies. This time
around, the level of external short-term debt is
healthier in most of the countries affected by the 1997
crisis and is not excessive for other major economies
in the region (figure 1.19), though concerns remain for
some countries.

Vulnerabilities on the watch list

These positive developments notwithstanding, there
are a number of potential vulnerabilities that will
need to be at the top of the watch list and tracked
carefully.

Heightened exposure to short-term
portfolio capital

The spark that has led to immediate macroeconomic
difficulties for some economies of the region has
been, once again, exposure to short-term portfolio
capital. The growing share of foreign portfolio capital
in external financial liabilities has been a significant
feature of many major developing economies across
the region (figure 1.20). At a time of international and
country-specific risk aversion, defending the exit of
short-term portfolio capital to prevent excessive cur-
rency depreciation can reduce the amount of reserves
available to cover external short-term debt repayments
and current account deficits. This is an ongoing con-
cern for many countries.

An analysis of the portfolio investments held by for-
eigners as a percentage of reserves (figure 1.21)
provides a snapshot of the possible vulnerabilities that
currencies would face in the event of an outflow of
short-term portfolio capital. Reserve cover for foreign
portfolio investments is seen to have decreased sub-
stantially across much of the region over this decade,

Indicators of resilience and potential
vulnerabilities

The countries that suffered the worst effects of the 1997
Asian crisis were the Republic of Korea, Thailand,
Indonesia, the Philippines and Malaysia.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Figure 1.17. Current account balance as a percentage of GDP in selected developing ESCAP
economies, 1996 and 2008

– 5

– 10

– 15

– 20

er cent

Viet Nam

akistan

India

Republic of K

rea

Thailand

Indonesia

Philippines

Kazakhstan

T
aiwan Province of China

Russian F

ederation

China

Hong K

ong, China

Malaysia

Singapore

1996

2008

Sources: IMF, International Financial Statistics (CD-ROM) (Washington, D.C., 2008) and World Economic Outlook Database (Washington, D.C.,
October 2008); and national source.

Notes:

Figures for 2008 are estimates. Current account balance for Hong Kong, China refers to 1997

Figure 1.18. Foreign reserves as a percentage of GDP of selected developing ESCAP economies

Singapore

Hong Kong, China

Taiwan Province of China

Malaysia

China

Russian Federation

Thailand

Viet Nam

Republic of Korea

India

Philippines

Kazakhstan

Indonesia

Pakistan

100

120

Per cent

Sources: IMF, International Financial Statistics (CD-ROM) (Washington, D.C., 2008) and World Economic Outlook Databases (Washington, D.C.,
October 2008).

Note:

Figures refer to foreign reserves, excluding gold.

1996

2007

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.19. Short-term external debt as a
percentage of GDP in selected developing
ESCAP economies

er cent

Republic of K

rea

Kazakhstan

Thailand

Malaysia

Indonesia

China

Russian F

ederation

Philippines

India

akistan

Sources: ESCAP calculations on the basis of World Bank, Global
Development Finance Database (accessed on 22 December 2008);
and ADB, Key Indicators for Asia and the Pacific 2008 (Manila, 2008).

Note:

Short-term external debt is defined as debt that has an

original maturity of one year or less.

1996

2007

Figure 1.20. Stock of foreign portfolio investment
as a percentage of total external foreign
liabilities, 2002-2007

er cent

2002

2003

2004

2005

2006

2007

China

India

Indonesia

Malaysia

Philippines

Republic of Korea

Russian Federation

Thailand

Source: IMF, International Financial Statistics (CD-ROM) (Washington,
D.C., 2008).

Notes:

Derived from international investment position (IIP) of respec-

tive economies, including the categories of stock of portfolio investment
and financial derivatives investment, excluding direct investments and
other investments.

Figure 1.21. Stock of foreign portfolio
investments as a percentage of reserves
for selected emerging Asian countries,
2001 and 2007

180

160

140

120

100

er cent

Republic of K

rea

Indonesia

Philippines

Singapore

Malaysia

Kazakhstan

Thailand

Russian F

ederation

India

akistan

China

2001

2007

Source: IMF, International Financial Statistics (CD-ROM) (Washington,
D.C., 2008).

Notes:

Derived from international investment position (IIP) of respec-

tive economies, including the categories of stock of portfolio investment
and financial derivatives investment, excluding direct investments and
other investments.

with cover being less than 100% for some countries of
the region. At a time of unprecedented financial insta-
bility, in which flights to safety have low threshold
triggers, or in which declining equity values can trigger
margin calls for highly leveraged investors, reserves
may easily come under strain. Such outflows of for-
eign portfolio capital may be further compounded by a
similar exit of capital by domestic residents, to the
extent that residents are free to make portfolio invest-
ments abroad. It is clear that access to a greater pool
of reserves than normally adequate assumes an even
more important role in reassuring investors, and it can,
in turn, serve to reduce the extent of net capital
outflows.

Excessive currency volatility

Closely linked to the problem of capital-flow vulnerabil-
ity is the fact that countries are now faced with a new
climate of lower currency values as currencies in
some countries tumble (figure 1.22). The fall began in
2007, with portfolio capital exiting regional markets as
the subprime crisis took hold in the United States and
Europe.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

With the exception of India and the Republic of Korea,
the falls in currency value are of a lower magnitude
than the drops seen in the 1997 crisis. Nevertheless,
currencies remain vulnerable (figure 1.23).

Figure 1.22. Exchange rate movements of
selected developing ESCAP economies,
2007-2008

130

120

110

100

Index (January 2007 = 100)

Jan-07

Mar

-07

June-07

Sept

-07

Dec-07

Mar

-08

June-08

Sept

-08

Dec-08

India

Malaysia

Indonesia

Pakistan

Republic of Korea

Russian Federation

Source:

CEIC Data Company Limited.

Figure 1.23. Change in nominal effective
exchange rate from peak to trough in
1997-98 and 2007-08

1997/98 crisis

Recent crisis

– 10

– 20

– 30

– 40

– 50

– 60

– 70

– 80

er cent

Source: ESCAP calculations based on data from Bank of International
Settlements.

Notes:

Declines for 1997-98 crisis measure the nominal effective

exhange rate movement from the peak to trough during that period.
Declines for the recent crisis measure the corresponding movement
from the recent peak to November 2008.

Republic of

orea

Indonesia

India

Philippines

Malaysia

T
aiwan Province

of China

Thailand

Singapore

Figure 1.24 shows an increasing drawdown of foreign
exchange reserves as countries come under increased
pressure to defend currencies. Pakistan has faced the
most pressing difficulty in maintaining its currency
value, requiring IMF support to bolster dwindling re-
serves as the currency fell to an all-time low in Octo-
ber 2008. The Republic of Korea and Singapore each
agreed to a precautionary $30 billion currency swap
facility with the United States Federal Reserve Bank to
support their reserves.

Exchange rates in the region may remain under
pressure for some time because the global recession
will mute the contributions of portfolio inflows, FDI
inflows and export earnings. Furthermore, in a climate
of sluggish exports and intracountry variation in
exchange rate movements, there is a risk of further
competitive devaluations between countries in the re-
gion, resulting in a beggar-thy-neighbour cycle of com-
petitive relations to the detriment of all in the region.

China has recently shifted the central peg downward,
devaluing the yuan for the first time in over a decade.
In December 2008, the greatest depreciation in the
currency took place since the fixed rate to the dollar
was removed in 2005. Economies in the region will be
under pressure to devalue against the dollar in line
with the yuan to maintain the competitiveness of their
exports to the United States. Furthermore, countries
may continue to devalue against the yuan and the yen
(table 1.1) to maintain their competitiveness in export-
ing to China and Japan. Such extraregional and

Figure 1.24. Foreign reserves in selected
developing ESCAP economies, December
2007 to December 2008

140

120

100

Index (December 2007 = 100)

Dec-07

Jan-08

eb-08

Mar

-08

Apr

-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct

-08

Nov-08

Dec-08

India

Indonesia

Republic of Korea

Malaysia

Pakistan

Source: ESCAP calculations on the basis of CEIC Data Company
Limited.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.25. Loan-to-deposit ratio of selected
developing Asian economies, November 2008

Kazakhstan

Russian F

ederation

Republic of K

orea

Thailand

Singapore

Indonesia

Malaysia

India

China

Philippines

Hong K

ong, China

200

180

160

140

120

100

er cent

Sources: ESCAP staff estimation based on data from CEIC Data
Company Limited; ADB Central and West Asia Department Report No.
2 (for Kazakhstan); and statistics by the Central Bank of the Russian
Federation (for Russian Federation).

Notes:

Data for the Philippines and Kazakhstan refer to February

2008 and March 2008 respectively. Data for India and Republic of
Korea refer to September 2008. Data for Indonesia and Thailand refer
to October 2008. Data for India refer to credit-to-deposit ratio of
scheduled commercial banks. Data for Thailand refer to consolidated
loan-to-deposit ratio.

Table 1.1. Rate of change of average exchange rates for January-June 2008 as compared to
July-December 2008

Rates of changes (%)

Currencies

US$

Yen

Euro

Yuan

Rupiah Ringgit

Peso

Won

NT$

Yen

3.3

Euro

– 9.3

– 11.6

Yuan

2.6

– 0.3

13.7

Rupiah

– 9.3

– 11.4

– 0.2

– 11.6

Ringgit

– 7.0

– 9.5

2.8

– 9.4

3.4

Peso

– 10.6

– 13.0

– 1.2

– 12.9

– 0.6

– 3.9

Won

– 17.5

– 19.2

– 9.4

– 19.6

– 9.1

– 11.5

– 7.9

– 3.7

– 6.2

6.5

– 6.1

7.1

3.6

7.6

17.9

NT$

– 3.5

– 6.0

6.8

– 5.9

7.4

3.8

7.9

18.2

0.2

Baht

– 5.9

– 8.5

4.1

– 8.3

4.8

1.2

5.2

15.4

– 2.3

– 2.6

Source: ESCAP calculations based on data from CEIC Data Company Limited.

Note:

( – /+ ) = depreciation/appreciation against currencies in the row.

intraregional devaluations, if conducted in an uncoordi-
nated manner, can lead to unnecessary losses in
national export earnings.

Banking sector vulnerabilities on the
radar

The current crisis has also highlighted concerns about
the banking sector. Although most economies in the
region possess adequate reserve cover for their exter-
nal short-term debt at the national level, banking sec-
tors may run the risk of being overly dependent on
foreign sources for their lending. It is important to
ensure that the banking sector is healthy without the
need of government assistance, for such assistance
can itself create a generalized loss of confidence in
the sector. Non-performing loans (NPLs) are currently
below the international threshold of 8% across major
economies in the region (figure 1.6), creating less
immediate solvency risk and providing a buffer for
possible increases in NPLs in coming months.

There are concerns about liquidity shortages, however.
Banking loans in some countries are notable for sub-
stantially exceeding domestic deposits (figure 1.25),
requiring banks to rely on significant wholesale funding.
To the degree that such wholesale funding comes from
external sources and is comprised of short-term loans,
the global credit crunch may result in banks coming
under stress in funding their activities. Currency mis-
match of such funding exposes banks to exchange rate
risk while maturity mismatch can lead to roll-over and
interest rate risk. In response to such concerns, the
Republic of Korea recently unveiled a $100 billion
package to guarantee short-term foreign bank loans.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

External public sector repayment pres-
sures also under scrutiny

Another potential vulnerability for a few countries in the
region is public external debt and repayment pres-
sures (figure 1.26). While short-term public debt levels
are generally low, high levels of total external public
debt can create long-term pressure on currencies in
these countries.

Figure 1.26. External public debt as a share of
GDP of selected Asian economies, Q2 2008

er cent

akistan

Philippines

Indonesia

Republic of K

orea

India

Thailand

Malaysia

Russian F

ederation

Kazakhstan

Hong K

ong, China

China

Sources: World Bank, Quarterly External Debt Statistics and CEIC Data
Company Limited.

Notes:

Public debt refers to debts of public sector (government and

monetary authority) and publicly guaranteed private debts. For the
Philippines, public debt refers to public sector debt and debts of
central bank and government banks. For China, figures refer to
foreign debts held by the State Council. For Kazakhstan figures
related to GDP are as of Q4 2007.

Set as a 2 percentage point reduction of the baseline
growth rate.

Methodology from DBS Group research (2008, table 4).

Increased trade dependence as a
source of vulnerability

Increasing trade dependence has characterized the
economic growth in developed and developing coun-
tries alike. In the United States, the original locomotive
of growth, GDP doubled (in current dollars) while its
dependence on imports jumped from 12.3% to 16.3%
of GDP between 1995 and today. This translated into
large increases in exports for developing countries in
the Asia-Pacific region, with the share of merchandise
exports in GDP in Asian developing countries increas-
ing by almost 8 percentage points to reach 37.5% in

2007, while their GDP increased almost threefold
(figure 1.27). This increased trade dependence has
now become a heightened source of vulnerability, rais-
ing serious concerns about the extent to which the
financial crisis can be mitigated in this region.

ESCAP forecasts of the impact of the United States
recession

on growth in merchandise exports from

Asian economies indicate, in real terms, declines in
India from an estimated 13.7% in 2008 to – 1.3% in
2009, in Indonesia from 12.0% to – 1.3%, in Thailand
from 4.8% to – 5.3%, and in the Republic of Korea
from 6.5% to – 3.6%. Under this scenario, the trend in
the import demand of the United States declines from
– 2.9% in 2008 to – 4.6% in 2009.

Small export-oriented economies in the region have
already been hit hard. These countries were the most
affected by the dot-com downturn in 2000-2001. Based
on the changes in export growth and GDP growth that
Asian economies underwent at that time, it is possible
to derive an indicator of export sensitivity to recession:
the higher the ratio of drop in the GDP rate per 10-
percentage-point drop in exports, the more vulnerable
an economy is, all other factors being constant.

In the

cases of Malaysia, Singapore and Hong Kong, China,
during the 2000-2001 crisis, the drop of 10 percentage
points in exports was associated with a drop of 3 to
4.5 percentage points in GDP growth. In contrast, for
the large economies of China, India and Indonesia, the
same fall in exports caused their GDP to contract by
less than half a percentage point (figure 1.28). Never-
theless, it is important to bear in mind that, this time,
the likely impact of recession on exports in the region
may differ in some respects as compared with the
2000-2001 downturn, as the current crisis is much
more severe and complex. Furthermore, comparison
with the previous downturn is less direct, as China and
India today are much more integrated into the global
economy than they were in 2001.

These vulnerability indices, when combined with in-
creased intraregional trade flows and the intensification
of the “factory Asia” phenomenon, would suggest that
the economies and companies that are most directly
linked through production networks supplying the
United States and European Union markets could be
the most vulnerable to the recession in those markets –
specifically Malaysia, the Republic of Korea, Singapore,
Thailand, Hong Kong, China, and Taiwan Province of
China. These economies all have very high export

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

0.5

0.4

0.3

0.2

0.1

– 0.1

India

China

Bangladesh

Indonesia

Thailand

Republic of K

orea

Philippines

T
aiwan Province of China

Russian F

ederation

Sri Lanka

Malaysia

Singapore

Hong K

ong, China

Japan

EMU-12

United States

Figure 1.28. Vulnerability index of selected Asian export-led growers

Sources: ESCAP calculations on the basis of DBS Research Group (2008) methodology using World Development Indicator data for GDP growth
rates and data from IMF, Direction of Trade Statistics for export growth rates.

Notes:

The vulnerability index is calculated as a ratio of the percentage point difference in GDP growth between 2000 and 2001 and the

percentage point difference in export growth over 2000-2001. It shows the changes in GDP growth rates associated with a 1-percentage-point
change in export growth rates. The higher the number, the more vulnerable an economy is; for example, a 1-percentage-point decrease in the
exports of Malaysia is associated with the 0.32 percentage point difference in its GDP over the two years, while in China the same change in
exports was related to a 0.01-percentage-point drop in GDP. In the case of India only, the export and GDP changes had different signs (while
exports fell, GDP still grew).

Figure 1.27. Total trade as a percentage of GDP: ESCAP subregions (developing economies only)

East Asia

South-East Asia

Pacific

Central Asia

South Asia

20%

40%

60%

80%

100%

120%

140%

ESCAP average (1992-95): 63%

ESCAP average (2004-07): 88%

Trade dependence (2004-2007 average)

Trade dependence (1992-1995 average)

Source: IMF, Direction of Trade Statistics (CD-ROM) (Washington, D.C., 2008).

Notes:

South-East Asia: Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Philippines, Thailand, Viet Nam.

East Asia: China; Hong Kong, China; Republic of Korea; Macao, China; Mongolia. South Asia: Afghanistan, Bangladesh, India, Maldives, Nepal,
Pakistan, Sri Lanka. Central Asia: Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan. Pacific island
economies: Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga, Vanuatu.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

vis- -vis

developed markets, these exports con-

tribute much of their GDP and the economies have a
high share of indirect exposure, mostly through China,
to developed country markets now in recession.

At the same time, figure 1.29 shows that Asia’s devel-
oping economies as a group have reoriented their
trade away from the United States and Japanese
markets and towards China, India and the European
Union. The share of developing Asia’s exports ab-
sorbed by the United States declined by 6%, while
that of China increased by almost 5% between 1995
and 2007. This raised some expectations about possi-
bilities that the region may be decoupling from the
United States, and that new growth locomotives may
be emerging in the region that will stymie the full brunt
of the crisis. However, sharp contraction of trade, both
global and intraregional, as well as the transmission of
the economic slowdown have led to the conclusion
that Asia remains firmly linked to the other parts of the
global economy.

First, it is important to note that, while this reorientation
has taken place, developing countries still rely greatly
on exports to the United States, the European Union
and Japan to generate economic growth. Expressed as
an export-to-GDP ratio, export dependence on the
United States and European Union markets is either

unchanged or increasing, signaling that a channel for
the transmission of recession is still open (figure 1.29).

Second, Asian exports are increasingly dependent on
the European Union, which has also been significantly
affected by the economic crisis. The European Union
now plays a bigger role than in 1995, in both export
share and export dependence, with the result that
recession in the European Union will magnify the
adverse impacts of a reduction in United States ag-
gregate demand.

Third, although rapid increases in intraregional and
intra-industry trade among Asia’s developing economies
may signify a decoupling potential, it has grown quite
asymmetrically. China, largely through the hub of Hong
Kong, China, has become a dominant importer of
intermediate products, parts and components that are
produced in the Asia-Pacific region. In 2007, both China
and India sourced about 30% of their total merchandise
imports from Asia’s developing economies (table 1.2).
Furthermore, it is estimated that one third of the total
Chinese imports of intermediate goods used for final
Chinese exports, come from the region

(Aky z,

2008a).

Figure 1.30 shows that the commodity structure of
Chinese imports from ASEAN countries, India and the
Republic of Korea (accounting for 24% of total im-

Figure 1.29. ESCAP developing countries: export share and export dependence index differences,
1995-2007

Export share of India

Export dependence on India

Export share of Japan

Export dependence on Japan

Export share of ASEAN

Export dependence on ASEAN

Export share of China

Export dependence on China

Export share of US

Export dependence on US

Export share of EU

Export dependence on EU

1995

2007

0.0

5.0

10.0

15.0

20.0

25.0

Per cent

Source: ESCAP calculations based on IMF, Direction of Trade Statistics data.

Notes:

Export share is defined as exports of ESCAP developing countries destined for a particular market as a percentage of the total exports of

ESCAP developing countries. Export dependence is defined as exports of ESCAP developing countries destined for a particular market as a
percentage of the GDP of ESCAP developing countries.

vis- -vis

(Akyüz,

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Figure 1.30. Commodity structure of Chinese imports from ASEAN economies, India and the Republic
of Korea

100

1995

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

4 Capital goods (except tranport equipment), and parts and accessories thereof

2 Industrial supplies, not elsewhere specified

3 Fuels and lubricants

1 Food and beverages

Source: ESCAP calculations based on COMTRADE data.

Based on Classification by Broad Economic Categories of goods.

Table 1.2. Share of Chinese and Indian imports from the ESCAP region and its subregions (2007)

Developing

Developed

East and

South and

Pacific

Total

ESCAP

North-East

South-East

South-West

North and

island

ESCAP

economies

Asia

Central Asia

economies

China

46.6

29.8

16.9

12.4

11.3

3.2

2.8

0.1

India

35.6

29.4

6.3

15.4

10.8

1.4

1.7

0.1

Source: Calculated based on IMF, Direction of Trade Statistics, 2007.

ports) has changed over the last decade in favour of
capital goods and industrial supplies, which now com-
prise 87% of total imports from these countries. A
significant contraction of Chinese exports to the United
States and the European Union, slower economic
growth in China and the associated contraction of
imports of parts and components from the rest of Asia
has been spreading throughout the regional supply
chain.

Fourth, the potential of intraregional trade among
developing countries is stymied by high tariffs. Figure
1.31 shows that developing countries have plenty of

scope to raise tariffs without running afoul of WTO
rules due to the wide differences between applied and
bound tariffs.

In times of economic difficulties, the spectre of rising
protectionism is more than an abstract risk. Developed
countries may find it opportune to use contingency
protection and other forms of non-tariff barriers during
an economic recession.

Fifth, international trade, by its very nature, requires
financing. The time lag and resultant payment gap
between the time when a good is exported and the

er cent

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Figure 1.31. Differences between applied and bound tariffs, selected ESCAP members

MFN applied

Bound

Pakistan

India

Indonesia

Maldives

Papua New Guinea

Turkey

Thailand

Nepal

Philippines

Malaysia

Cambodia

Mongolia

Republic of Korea

Singapore

China

Australia

New Zealand

Armenia

Kyrgyzstan

Georgia

Japan

Average MFN applied (8.7)

Average bound (22.5)

Simple average tariff rate (per cent)

Source: WTO, Trade profiles 2007.

time it is received by the importer is typically resolved
through the issuance of a letter of credit by banks.
Trade finance supports credits of up to 90% of world
merchandise trade (in 2007 amounting to about $14
trillion) and is considered one of the most secure
forms of financing. The current financial crisis has
dried up financing, and the gap was estimated by the
World Trade Organization in November 2008 to be
approaching $25 billion. In fact, some exporters are
already unable to obtain financing of any type, even if
they are prepared to pay a steep price. As expected,
this imbalance between supply and demand has given
rise to a number of small hedge funds and other
financiers operating at interest rates that may be as
high as 10% above LIBOR. While these credits are still
taken by some exporters desperate not to default on
their contracts, this also means that their profitability
and competitiveness are under threat.

It is clear that this trade financing gap is exacerbating
an already difficult environment of declining demand.
While this is a global problem, there are some condi-
tions unique to the Asia-Pacific region that compound
the difficulties. Somewhat surprisingly for a trade-ori-
ented region, Asia and the Pacific is the only region in
the world that does not have a separate institution
dedicated to export credits and export credit guaran-
tees. Even though international organizations, notably
regional development banks and the International Fi-
nancial Corporation of the World Bank, have set up
trade finance facilitation programmes, (TFFPs) their

success has varied across regions, with Asia and the
Pacific having received far less support than other
regions. Unfortunately, recent experience has demon-
strated that TFFPs have not been able to solve the
problem of tightening trade finance in times of finan-
cial instabilities.

China and the United States announced a finance
facility of $20 billion that will create up to $38 billion in
annual trade finance (United States, 2008). The draw-
back is that the facility is ad hoc and crisis-driven,
making it much more difficult to trigger the desired
effects. Furthermore, the financing is not available to
everyone in the region, particularly enterprises that are
small, or enterprises in vulnerable countries for which
trade is a vital lifeline – players, in other words, that
lack the leverage to access finance in international
markets. A regional mechanism pooling funds and
risks across all countries could go far towards financ-
ing this gap and facilitating intraregional trade across
all countries of the region.

In conclusion, intraregional trade can provide a cush-
ion against the contraction of exports to developed
countries, but it will depend on strengthening aggre-
gate demand through domestic sources of growth and
restructuring the patterns of consumption, investments
and government expenditure in this direction. A re-
gional mechanism would also help to bridge current
financing gaps that have frozen trade flows.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Much will hinge on the ability of the traditionally fast-
growing economies, especially China and India, to
readjust the mix of consumption, investment and ex-
ports. Importantly, it will also depend on an explicit
policy choice directed to fulfil the role of the locomo-
tive of growth in the Asia-Pacific region. Trade data
show that, during first half of 2008, while Chinese
exports to the United States were still growing, exports
of major suppliers of parts and components to China
also grew (figure 1.32). However, since the change in
trend from mid-2008, it is clear that, based on current
policies, there will be no replacement of the United
States engine of growth from within Asia, as the
prospects for the fast-growing economies to provide
demand for exports from other Asian countries is not
evident. That is not to say that there is no potential to
at least fill some of the void caused by the recession
in developed country markets. Most countries of the
ASEAN+3 grouping, as well as India, have announced
fiscal stimulus packages. Concerted action is required
to ensure that such stimuli supports regional growth
by preventing protectionist moves in the areas of
goods and services trade, investment and mobility of
labour. Such coordinated moves might position these
countries as potential locomotives of growth – not in a
decoupled manner but in a complementary role that
supports the faltering locomotives. This regional posi-
tioning, inextricably linked to the global economy, un-
derlines the importance of multilateral liberalization and
the strengthening of disciplines that will keep trading
relations open, equitable and fair. Thus, the conclusion
of the Doha Round is indispensable (box 1.1).

Figure 1.32. Export growth of selected Asian
economies grouping to China and China to the
United States, 2006-2008

– 10

– 20

– 30

– 40

– 50

Asia 8 exports to China

China exports to United States

Source: ESCAP, “Regional trade and investment: Trends, issues and
ESCAP responses”, note by the secretariat prepared for the sixty-fifth
session of the Commission, April 2009 (E/ESCAP/65/2).

Note:

Asia 8 comprises Indonesia, Malaysia, Philippines, Republic of

Korea, Singapore, Thailand, Hong Kong, China and Taiwan Province of
China. Export growth derived from 3-month moving average (US$).

Jan-07

Mar

-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar

-08

May-08

Jul-08

Sep-08

Nov-08

Per cent (y

-o-y)

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Box 1.1. In a time of crisis, a rule-based multilateral trading system is more important
than ever

Given the level of trade dependence and integration in the Asia-Pacific region, one of the essential tasks
ahead is to strengthen the rules of the world trading system to prevent backsliding on trade liberalization
commitments. An open, rule-based, predictable and non-discriminatory trading system is a prerequisite for the
continued prosperity and development of the region. This was recognized by world leaders who agreed to
develop such a system as part of the Millennium Development Goals (MDG 8, Target 8a).

While estimates of the static economic gains from the ongoing round of negotiations at the World Trade
Organization (WTO) are small, the potential losses from increased protectionism are expected to be large.
Indeed, the estimated gains from the Doha Round are expected to be small because the negotiations are
based on bound tariff rates as opposed to applied tariff rates. Because countries have unilaterally realized the
potential benefits of trade liberalization, most currently apply much lower tariffs compared with the maximum
tariffs – the bound tariffs – they could apply under the existing WTO agreements.

The scope to engage in new trade protectionism through tariff increases remains very high, and the current
trade rules do not provide WTO member countries with adequate insurance against this increasing threat to
development.

In the context of a difficult and recessionary global environment, a significant benefit from successfully
concluding the Doha negotiations would be a clear signal that protectionism and the possibility of a trade war,
as happened during the 1930s when the United States raised tariffs by 60%, will not be permitted by the
rules. This would send out confidence-building signals that would enhance investor confidence and in turn
contribute to a speedier recovery of the global economy, on which ESCAP member countries are dependent.

While there may be scope to improve the Doha Round package on the negotiating table, particularly in its
development prospects, an agreement on the package can be expected to lead to some reduction in
agricultural subsidies and tariff walls on industrial and agricultural goods, as well as to some new rules on
trade facilitation and transparency on preferential trade agreements (PTAs). A conclusion of the Round would
not overly affect the policy space of least developed countries as they do not have to provide reciprocity in
liberalization, but it would improve the prospects for the WTO Aid for Trade initiative and reduce the distorting
and discriminatory effects of PTAs. Finally, it would introduce some initial rules on export restrictions in
agriculture products, an issue the recent food crisis has brought to the fore and a crucially important issue for
net food-importing developing countries.

Reprioritization of the Doha Round’s conclusion is a centrepiece of international policy. In these economically
distressed times, there is a need not only for confidence-building measures that will boost economic growth
but also for renewed motivations for multilateral cooperation that will bring coherence on other fundamental
issues, such as financial regulations, food security needs and the mitigation of climate change.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

Global and regional cooperation
in financial issues are at an
infant stage

As attention turns from immediate crisis-fighting meas-
ures to building resistance to future crises, reform of
the global financial architecture is under intense de-
bate. The G20 leaders have imparted a political mo-
mentum that will ensure that this issue remains at the
top of the international agenda for some time to
come.

Even though there are a number of actions that each
country could take independently, it is highly unlikely
that any one country can ride out this crisis on its
own. The attention turns, therefore, to building coordi-
nated actions for a greater common regional prosper-
ity. The crisis response to managing financial vulner-
ability in the region should be focused on regional
policy measures while also maintaining an active role
in the design of the evolving multilateral financial archi-
tecture.

A largely neglected debate concerns the formulation of
effective and coordinated macroeconomic policies at
the regional level to reduce economic vulnerability.
Countries need to strengthen their policy coordination
in the financial, monetary and trade areas. The impor-
tance of such policies was highlighted by the Com-
mission of Experts of the President of the United
Nations General Assembly on Reforms of the Interna-
tional Monetary and Financial System in January 2009.
The Commission recommends that countries “insulate
themselves from regulatory and macroeconomic fail-
ures in systemically significant countries” (United Na-
tions, 2009).

Through its strengthened analytical and normative role,
the ESCAP secretariat will be at the forefront in intensi-
fying the debate and working towards consensus-
building among the members and associate members
of the Commission on needed policy actions. There is
work to be done at both the global and regional levels
(figure 1.33).

Global level

Reform of global financial architecture

A host of proposals have emerged for new models of
finance, but very few decisions have been made. At
this juncture, five principles should guide the future
debate and policy actions at the multilateral and re-
gional levels.

First, because the Asia-Pacific region is highly inte-
grated globally, policy actions to regulate the new
models of international finance must be global, but
multilateral policies will need to evolve within a coop-
erative framework of economic governance that is
multipolar in character. The new multilateral financial
system will have to be designed with the participation
of new national Government stakeholders who reflect
the evolving balance of global economic influence,
including the major countries of the Asia-Pacific region,
such as through the G20.

Second, because by their very nature financial markets
are prone to boom and bust excesses, there is a
need for sound regulations. These regulations should
serve as a means of safeguarding the best of open
economies and societies and avoiding outright eco-
nomic protectionism.

Third, enhanced accountability should form the centre-
piece of reforms at the global level. The financial
innovations of past decades greatly increased the
problem of moral hazard, as the old “buy and hold”
model of bank lending evolved into “originate to dis-
tribute”, in which banks originated loans and then
repackaged and sold them to international investors,
distributing risks throughout sectors and across the
globe. Under this mechanism, banks had less incentive
to monitor their borrowers as well as downstream
investors. Banks switched from relying on soft informa-
tion and long-term relationships with borrowers to
model-based pricing. A mechanism is needed to re-
quire all originators and arrangers to keep a certain
portion of the underlying assets and the structured
products, as an incentive to examine and monitor
more carefully, and then be held accountable for, the

From crisis-resilience to crisis-resistance:
Next steps

See G20 (2008a).

See G20 (2008b).

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

quality of their credits and securitized products. Banks
should also be required to explain the complex struc-
tured products they design to investors in sufficient
detail, including information on underlying assets and
their risk profiles. Rating firms that evaluated new
financial instruments that were illiquid and did not have
clear market values must also be held responsible.
Conflicts of interest played a role as ratings agencies
received fees from the institutions whose products
were being rated. Action will therefore need to be
taken to standardize the valuation and risk-assessment
methodologies used by credit-rating agencies.

Fourth, international standards need to be revised to
bring about greater stability, while at the same time
ensuring that market-driven principles are not overly
diluted. The Basel Framework’s pillar 2 – which requires
banks and their management to explicitly assess their

risk processes and evaluate their own risks, including a
greater role for the central bank – should also be
strengthened. While pillar 2 is an improvement on the
laundry list of generic risks contained in pillar 1, many
developing countries in Asia and the Pacific have yet to
fully incorporate these provisions in their banking sys-
tems. A key constraint in this approach, not limited to
developing countries, is the lack of technical and
managerial expertise required for understanding the
complexity of financial risks. Furthermore, there has
been criticism that pillar 2 does not have adequate
countercyclical standards for capital adequacy. For
example, the availability of data on the leverage ratios
of institutions would allow countercyclical regulations
through leverage limits. In boom times, leverage limits
should be lowered to prevent financial institutions taking
on increasingly risky structures, while during a bust, the
limits should be raised to aid recovery.

Figure 1.33. Moving from crisis-resistance to crisis-resilience

Asia-Pacific

countries

Reform of global

financial architecture

ESCAP

and other

international

organizations

Creation of regional

financial architecture

Multilateral, multipolar

approach to policy

reform

Strengthened

regulations

Enhanced

accountability

Revision of

international standards

Institutional reform

Exchange rate

coordination

Rethinking

capital flows

Regional trade

financing mechanism

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

at hand is to narrow the channels along which the
developed-country recession will be transmitted back
to the region. The following policy actions are pro-
posed:

•

First, do no harm (Schott, 2008). In other words,
both developed and developing countries should
not resort to protectionist policies focused on nar-
rowly defined nationalistic interests that would
harm trading partners. Especially during this
recessionary climate, new efforts are needed to
push towards the conclusion of the negotiations
under the Doha Development Agenda, both as a
confidence booster and as a bulwark against pos-
sible slippage into protectionism. For example, the
Doha Round could reduce gaps between applied
and bound tariffs so there is less discretion in
implementing tariff increases without running afoul
of WTO rules. Similarly excessive use of contin-
gency protection, or the indiscriminate use of
product standards as covert forms of protection-
ism, could be tempered through tighter disciplines
concluded under the Doha Round.

•

Second, “aid for trade” should be promoted
and channeled, particularly into building the
supply-side responses of developing countries so
that developing countries are able to make more
effective use of market access that will arise in the
future. Tackling bottlenecks in transit, transport and
trade facilitation is an important area of work.

Regional level

Exchange rate coordination

The region should consider establishing coordinated
and durable regional currency arrangements. Uncoor-
dinated national management of currencies can lead
to beggar-thy-neighbour competition. The economic
conditions of European countries at the time they
entered into exchange rate cooperation – in 1979
through the European Exchange Rate Mechanism
(ERM) of intracountry currency bands – has been
pointed to as both an example of the way forward
for Asia and the Pacific and as a path far different
from the current state of the region’s integration. The

The region must take its rightful place

at the table to reform global

financial regulation

Fifth, while the principles underlying a policy to tackle
the weaknesses of global financial regulation are fairly
clear, the institutional structure that will devise and
implement new regulations is less so. It is here where
the region must take its rightful place at the table.
Existing international institutions already engaged in
financial regulation suffer from a lack of global mem-
bership; decision-making is done primarily by devel-
oped country representatives. The Financial Stability
Forum, which sits at the centre of the current global
financial regulatory system, does not include China or
India. Of the 13 members of the Basel Committee, 10
are from Europe; Japan is the only Asian member.
The Board of Directors of IMF comprises only a small
group of developed countries. The Bank for Interna-
tional Settlements and the Basel Committee may be
better placed than IMF to play the role of global
regulator, but this would require fundamental reform to
broaden their membership and increase the binding
nature of their decisions. The question is whether such
an increase in representation is even conducive to
decision-making – the member-driven approach of
WTO and its decades-long process of trade negotia-
tions being a case in point.

These questions raise the potential for a world finance
mechanism, either through a reform of the current one
or a newly-created one, that balances efficient deci-
sion-making with global representation, through a vari-
able geometric configuration of decision-making and
consensus building. Rules reducing friction in trade
are negotiated and administered in WTO. Financial
regulation and liquidity support has remained essen-
tially local, despite the fact that financial crises are
occurring with increasing frequency at higher costs. A
world finance mechanism that is member-driven and
modeled on principles of consistent supervision with
comprehensive non-discriminatory coverage of all sys-
temically significant financial institutions is certainly
worth examining.

Making trade work by locking in further
liberalization through the conclusion
of the Doha Round

The Asia-Pacific region is inextricably tied to trade
and investment with the rest of the world and will
therefore rely on the rapid resumption of global
economic growth for its continued prosperity. The task

Strengthened multilateral rules and principles are needed
not only in trade but also to improve the tracking and
regulation of international financial flows. The region
should not miss the opportunity to contribute to new
ideas and solutions that would put forward the interests
of developing countries and remove asymmetries in the
global financial system.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

The calculation is based on foreign exchange reserves
of $1.9 trillion in September 2008, with roughly 70% held
in United States dollars, according to estimates.

structural diversity of the core developing economies
in Asia – the original ASEAN members, China, the
Republic of Korea and, increasingly, India – is not
much greater than that of the European Union in
1979. East Asia enjoys greater macroeconomic
convergence in inflation, interest rates, balance of
payments, public deficits and debt than was the case
in Europe not only in 1979 but also in the 1990s
during the run-up to the common currency of the
European Monetary Union (EMU). Furthermore, the
conditions for currency cooperation in the European
case can be seen to be endogenous, as economies
have become far less diverse over time under ERM

(Aky z,

2008b).

Rethinking capital flows

The challenge of managing vulnerability to reversals in
short-term capital flows is difficult. Most countries in
the region have chosen not to control the flows them-
selves but to amass sufficient reserves to defend
currencies in the event of such outflows.

There is some evidence that short-term financial in-
flows do not provide countries with significant benefits
even in good times, while clearly increasing vulnerabil-
ity in bad times. Some have argued that financial
globalization has not shown evidence of generating
increased investment or higher growth in emerging
markets (Rodrik and Subramaniam, 2008). Others as-
sert that increased openness to capital flows has
generally proven important for countries aiming to up-
grade from lower- to middle-income status (Fischer,
1998; Summers, 2000). These divergent views point to
the need for a renewed discussion at the regional
level on the role of short-term capital flows, for expo-
sure to these flows remains a significant vulnerability
for this region.

In broad terms, the post-1997 solution was not to
manage the flows themselves but to amass sufficient
reserves to defend currencies in the event of such
outflows. The present crisis has highlighted the fact
that, despite a widespread perception that reserve
accumulation has been sufficient in the region, such
reserves may be inadequate for some countries in
view of the huge inflows of short-term capital in recent
years as a by-product of financial globalization.
Furthermore, the build-up of national reserves is not
an ideal solution because of the large cost for Govern-
ments. Currency sterilization during the process of
reserves build-up while experiencing capital inflows
requires the issuance of domestic bonds. Because
foreign exchange reserves have been invested mainly
in low-yield United States Government bonds, coun-
tries face fiscal costs from the interest rate differential
between the two sets of bonds. It has been estimated
that India, which has comparatively high interest rates,
faced a cost in fiscal year 2007 of 2% of GDP (ABN
AMRO India, 2007). Another cost is the loss in the
capital value of foreign reserve holdings if the value of
the dollar were to decline sharply. For example, China
would suffer a capital loss on its reserves of about
$67 billion if there were a 5% depreciation in the
United States dollar.

A combination of two ap-

proaches should be considered in order to address

The region should consider establishing

coordinated and durable regional

currency arrangements

Nevertheless, the European experience serves only as
a guide and cannot be replicated in Asia and the
Pacific. Specifically, the ERM concept of fixing curren-
cies internally but floating externally is problematic.
Asia’s trade continues to be dependent on trade with
countries outside the region, is more vulnerable to
volatility in international capital flows and has no obvi-
ous anchor currency within the region, as Europe did.
Asia therefore requires a system that provides both
internal and external stability through a collectively
managed currency float relative to the currencies of
major developed country trading partners, based on
agreement on a common basket, central rates and
bands, and rules for intervention and changes in cen-
tral rates. Such an approach has the potential to
produce relatively stable intraregional currency values
due to the similarity of trade baskets across the East
Asian subgroup of countries. Countries are already
managing their currencies independently in relation to
their trade-weighted currency baskets. Regional coop-
eration could formally multilateralize these de facto
national systems of exchange rate management. In
undertaking such an approach, the European experi-
ence is worthy of study so that policymakers in this
region can avoid the missteps of European economies
and evolve a system that is best suited to the particu-
lar characteristics of Asia and the Pacific. In this
regard, critical supporting mechanisms for an effective
intraregional exchange rate arrangement include a
common capital account regime, intraregional credit
mechanisms and rules for interest rate and currency
adjustments.

(Akyüz,

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

the challenge of vulnerability to short-term capital
flows: management of the quantum of such flows
through, for example, deposit requirements on capital
inflows and financial transaction taxes, and regional
cooperation to increase the potential availability of
funds in the event of a currency crisis as well as to
reduce the amount of precautionary funds needed by
each country.

The imposition of capital controls is, however, a highly
complex policy option. A problem with introducing ad
hoc countercyclical capital-control measures is that
they can trigger an adverse reaction from financial
markets, leading to sharp falls in stock prices. The
adverse market reaction to the introduction of
countercyclical restrictions could be most dramatic in
countries with large stocks of foreign debt, weak cur-
rent account positions and a high degree of depend-
ence on foreign capital. A possible solution is to have
a permanent system of control in place, with instru-
ments being adjusted according to cyclical conditions

(Aky z,

2008c).

Regional trade financing mechanism

It is important to keep trade flowing for the region and
to understand the exacerbating effects when trade
financing dries up. During a global recession,
intraregional trade takes on additional importance. A
regional trade financing mechanism would facilitate the
provision of export credits and export credit guaran-
tees to companies and banks from Asia-Pacific coun-
tries. At a time when the engine of trade risks a
shutdown, ways of making trade work for the region
must be found by the region itself (see also ESCAP,
1995). A regional trade financing mechanism will not
only keep trade going but, more important, will con-
tribute to export diversification and encourage SMEs
involved in non-traditional production to develop new
products and services with greater financing
flexibilities.

A regional facility has several advantages compared
with public financing institutions at the national level. It
can:

•

Pool risk and spread it across countries

•

Pool capital and spread it across countries

•

Promote co-financing schemes between private
banks and public-sector institutions

•

Encourage intraregional trade and decoupling from
the recessionary markets

•

Utilize economies of scale

•

Increase credibility and better market outreach and
access to better-quality international finance

Creation of regional financial architecture with its
own institutional setup

The institutional arrangements to support this evolving
regional financial and economic architecture will need
attention. Political will and bold decision-making is
important because the region will need to establish
comprehensive and quick-response foreign exchange
support for all economies vulnerable to a crisis.
International programmes, such as the IMF short-term
liquidity facility and the Federal Reserve swap facility
extended to the Republic of Korea and Singapore, are
insufficient and selective. The ASEAN+3 agreement to
accelerate the implementation of the foreign exchange
reserves pool is an important first step in a regional
approach. However, the membership and size of the
pool should be expanded, as should its purpose, so
that the potential use of funds goes beyond balance
of payments support to include liquidity and solvency
problems. Furthermore, in the event of contagion, size
matters, as multi-country requests for assistance
would curtail its functioning and lead to a potentially
devastating loss of confidence in the very reason for
its existence. The importance of expanding arrange-
ments such as the ASEAN+3 reserves facility was
highlighted by the Commission of Experts of the Presi-
dent of the United Nations General Assembly on Re-
forms of the International Monetary and Financial Sys-
tem in January 2009 (United Nations, 2009). In fact,
the ASEAN+3 has recently reached an agreement
to increase the reserve fund from $80 billion to $120
billion, in order to restore confidence, strengthen finan-
cial stability and promote a sustainable economic
growth in the region (ASEAN, 2009).

While support of foreign exchange reserves is an
important short-term protective measure, it neverthe-
less does not address the fundamental causes of
external vulnerability for economies in the region. A
reserves support arrangement does not prevent the
build-up of unsustainable current account balances
and unrealistic exchange rates, currency and maturity
mismatches in the private sector or asset and credit
bubbles. An expanded reserve fund will thus require
regional monitoring and supervision to provide early
warning and determine conditions warranting disburse-
ment of funds. Similarly, exchange rate coordination
will require regional supporting mechanisms, including
a common policy on capital account openness, credit
mechanisms, and rules for interest rate and currency
adjustments. The most efficient manner to combine
these various regional actions related to financial and
monetary cooperation would be through the establish-
ment of an Asian monetary fund.

(Akyüz,

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

The rationale for the establishment of an appropriate
regional institution is not new. It was supported by
ESCAP during the 1997 financial crisis (see ESCAP,
1998, for example) but did not gain traction due to
differences among member economies. A decade
later, the issue should be revisited, as such an institu-
tion, if properly designed, would support and
strengthen the evolving global financial architecture.
The issue should not be imbued with undue political
significance. The logic for a new regional institution
does not stem from the desire to merely enhance the
regional operations of existing global institutions, but
rather from the inherent managerial challenge faced by
any global institution that can provide sufficient re-
gional emphasis only by spreading itself too thin, as
well as the lack of representation of the region in the
decision-making processes of such institutions.

The presence of an existing international institution,
such as IMF, should not be a constraint to the estab-
lishment of a complementary regional institution. The
ability of international and regional institutions to work
in an integrated manner has already been shown to
be effective in the development banking sphere
through the operations of the World Bank at the global
level combined with regional banks, such as the Asian
Development Bank and the Inter-American Develop-
ment Bank. Similarly, existing regional institutions are
also unsuited to the new responsibilities. While
possessing regional representation, the work and
experience of such institutions are in very different
fields, such as development banking, which is far
removed and may even be in conflict with the role
of a regional macroeconomic, financial and monetary
coordinator.

CHAPTER 1. THE RETURN OF THE FINANCIAL CRISIS

ABN AMRO India (2007). “Does sterilization cost affect

monetary instrument choice?”, The Knowledge
Series (New Delhi, 2007).

ADB, (2008). Navigating the Global Storm: A Policy Brief

on the Global Financial Crisis, p. 19 (Manila).

Aky z,

Yilmaz (2008a). “The current global financial

turmoil & Asian developing countries”, ESCAP
Series on Inclusive & Sustainable Development:
2.

(2008b). “Global financial crisis and implications
for Asia”, presentation at ESCAP High-level Re-
gional Policy Dialogue on “The food-fuel crisis
and climate change”, Bali, Indonesia, 9-10
December 2008.

(2008c). “Financial instability and countercyclical
policy”, Background paper for United Nations
World Economic and Social Survey (United
Nations Department of Economic and Social
Affairs).

Asia Bonds Online (2008). http://asianbondsonline.adb.

org/regional/regional.php.

ASEAN (2009) “Joint Media Statement – Action Plan to

Restore Economic and Financial Stability of the
Asian Region”, Report from the Finance Ministers
of the ASEAN+3 to Heads of States/Govern-
ments, http://www.aseansec.org/22158.htm.

DBS Research Group (2008). “Asia: who’s vulner-

able?”, Topical Reports, 15 August 2008, avail-
able at www.dbsvresearch.com/research/DBS
research.nsf(vwAllDocs)A5E5BBA5BCFFAD1E
482574A90006049D/$FILE/asia_2008aug15. pdf.

Economic Times (2008). “Market sees convertible bond

issues decline 91%”, 21 November 2008.

ESCAP (1995). Economic and Social Survey of Asia

and the Pacific 1995 (United Nations publica-
tion, Sales No. E.95.II.F.10).

(1998). Economic and Social Survey of Asia and
the Pacific 1998 (United Nations publication,
Sales No. E.98.II.F.59).

Financial Times (2008). “Lehman’s Asia risk is re-

vealed”, 26 November 2008.

Fischer, Stanley (1998). “Capital account liberalization

and the role of the IMF”, in “Should the IMF
pursue capital-account convertibility?”, Essays in
International Finance, Department of Economics,
vol. 207, pp. 1-10 (Princeton, NJ: Princeton Uni-
versity Press).

G20 (2008a). G-20

Communiqu ,

Meeting of Ministers

and Governors, Sao Paulo, Brazil, 8-9 Novem-
ber 2008.

G20 (2008b). “Declaration of the Summit on Financial

and the World Economy”, The G20 Leaders
Summit on Financial Markets and the World
Economy, 15 November 2008, Washington,
D.C.

ILO (2007). Labour and Social Trends in Asia and the

Pacific 2007 (Bangkok, 2007).

(2008a). November 2008, Room paper on the
likely impact of the financial and economic
crisis and possible responses.

(2008b). Global Wage Report 2008/2009.

(2008c). “Shaping a fair globalization: Perspec-
tives and prospects for a decent work agenda”
(Working Party of the Social Dimension of Glo-
balization, Governing Body document WP/SDG).

(2008d) World of Work 2008 (Geneva).

(2008e). Global Employment Trends for Women
2008.

(2009). Global Employment Trends 2009 (Ge-
neva).

Reuters (2008). “Asia’s banks, economies still vulner-

able to property downturn”, 10 October 2008.

Rodrik, D. and Arvind Subramaniam (2008). “Why did

financial globalization disappoint?”, http://ksg
home.harvard.edu/~drodrik/Why_Did_FG_
Disappoint_March_24_2008.pdf.

References

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Communiqué,

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Schott, Jeffrey J. (2008). “First, Do No Harm”, www.

petersoninstitutte.org/realtime/?p=210.

Summers, Lawrence H. (2000). “International financial

crises: Causes, prevention, and cures”, Ameri-
can Economic Review, vol. 90, No. 2, pp. 1-16.

United Nations (2009). “The Commission of experts of

the President of the United Nations General
Assembly on Reforms of the International Mon-
etary and Financial System: Recommendations
for Immediate Action”, Statement following
first meeting, 4-6 January 2009 http://www.
un.org/ga/president/63/commission/financial_
commission.shtml.

United States (2008). “United States and China an-

nounce $20 billion in finance facilities that
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Department of Treasury, http://www.treas.gov/
press/releases/hp1318.htm.

World Bank (2008a). “Global market conditions and

implications for trade”, presentation at IFC 2nd
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(2008b). Outlook for Remittance Flows 2008-
2010 (Washington, D.C.).

CHAPTER 2. FOOD AND FUEL PRICE SHOCKS

CHAPTER 2. FOOD AND FUEL PRICE
SHOCKS

etween 2002 and 2008, the price of crude oil

soared, reaching an all-time record of $147 per

barrel in July 2008, then fell precipitously as the
international financial crisis deepened and economic
activity slowed across the globe. In the last day of
2008, crude oil was trading at $36 per barrel. Food
commodity prices followed a similar, though more
moderate, trend. Their increase caused alarm around
the world, for it threatened the food security of millions.
It is estimated that higher food prices in Asia and the
Pacific pushed up the number of undernourished peo-
ple in the region from 542 million in 2003-2005 to 583
million in 2007 (FAO, 2008a). The additional food price
increases in the first half of 2008 and the marked
slowdown in economic activity in the second half are
likely to have increased the number of undernourished
even more, making it less likely that the Millennium
Development Goal of halving the 1990 proportion of
undernourished people by 2015 will be attained.

the global economy recovers from the recession. In
the absence of long-run policies to address these
imbalances in fuel and food markets, episodes of
soaring commodity prices can recur, pushing up do-
mestic inflation rates, hurting the poor and putting
pressure on budget deficits.

Second, given the interconnections between energy,
food and financial markets, a comprehensive policy
approach is needed. Since 2000, for instance, crude oil
and food prices have become increasingly linked.
Thus, policies aimed at moderating the demand for
crude oil, such as promoting energy efficiency, are
conducive to improved energy security and food
security, as well as the mitigation of climate change.
Also, an excessive degree of liquidity in international
financial markets led to a growing presence of financial
investors in commodity markets, and excessive specu-
lation played a role in exacerbating commodity price
booms and busts. Thus policies to promote the
stability of international financial markets will also
contribute to the stability of international commodity
markets.

Third, in the absence of social protection programmes,
food price increases leave the poor with limited, often
harmful coping mechanisms – such as reducing the
number of meals, eating less nutritiously, selling live-
stock and other assets, or taking children out of
school. Some of these coping mechanisms may allevi-
ate hunger temporarily, but they may also lead to
malnutrition, harm livelihoods, and put children’s pros-
pects at risk. The coverage of basic social protection
programmes is very low in developing countries of the
Asia-Pacific region. Only 20% of the population has
access to health care assistance; 30% of the elderly
receive pensions; and 20% of the unemployed and
underemployed have access to labour market pro-
grammes such as unemployment benefits, training, or
public works programmes, including food for work
programmes. Addressing these deficiencies is as
important as taking measures to reduce the likelihood
of a future food price crisis.

Higher food prices in Asia and the Pacific
pushed up the number of undernourished

people in the region from 542 million in

2003-2005 to 583 million in 2007

This chapter describes the evolution of crude oil and
food commodity prices, evaluates the reasons for their
sharp increase up to mid-2008, assesses their eco-
nomic and social impacts and proposes policy re-
sponses. Three main conclusions emerge from the
analysis. First, sustainable development requires a
long-run balance between demand and supply in both
the crude oil market and in food commodity markets.
A major cause of soaring prices has been a sluggish
supply response to fast-growing demand. While the
recessionary impact of the global financial crisis has
led to sharp drops in fuel and food prices, pressure
on these prices will resume in the medium run, once

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Food and oil prices exhibited downward trends
throughout the 1980s and 1990s (figure 2.1). Between
1981 and 1999, food prices dropped at an average
rate of 2.3% per year; the price of crude oil dropped
much faster, at an average rate of 5.9% per
year between 1980 and 1998. When prices are
adjusted for inflation, the decreases are steeper
(figure 2.2).

Both downward trends reverted sharply in the 2000s.

The price of crude oil began to rise in 1999, after
reaching a low of $13 per barrel in 1998. Between
1998 and 2007, the price of crude oil increased at an
annual average rate of 21%, reaching $72 per barrel in
2007. It accelerated even more in the first half of
2008, reaching historic daily highs of more than $140

Evolution of fuel and food prices

Figure 2.1. Food price index and Brent crude oil price, 1980-2008

400

350

300

250

200

150

100

IMF food price index (1995=100)

140

120

100

Brent crude oill price (US$/barrel)

Oil (right axis)

Food (left axis)

1980 1982 1984

1986

1988 1990 1992

1994

1996

1998 2000

2002

2004

2006 2008

Figure 2.2. Food price index and Brent crude oil price, adjusted by inflation, 1980-2008

350

300

250

200

150

100

IMF food price index (December 2008=100)

140

120

100

Brent crude oill price

(US$ of December 2008/barrel)

Oil (right axis)

Food (left axis)

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006 2008

Source: ESCAP, based on data from IMF, www.imf.org/external/np/res/commod/externaldata.csv.

Notes:

The food price index in this figure is the IMF commodity food price index (2005 = 100). It includes price indices for cereal, vegetable

oils, meat, seafood, sugar, bananas and oranges.

Source: ESCAP, based on data from IMF, www.imf.org/external/np/res/commod/externaldata.csv.

Note:

Food price index and crude oil prices are deflated by the United States CPI-U, city average, all items, NSA, December 2008=100.

CHAPTER 2. FOOD AND FUEL PRICE SHOCKS

per barrel in July 2008. The price of food has also
increased sharply since 2000, although not as fast as
the price of crude oil. While food prices did not reach
record levels in real terms (after adjusting for inflation),
at their peak in June 2008, they were the highest in
almost 20 years (figure 2.2). The high prices proved
unsustainable. By the end of 2008, the price of Brent
crude oil plummeted to less than $40 per barrel, 70%
below its July peak. The food price index also
dropped, though less dramatically.

In recent years, the rise and fall of the prices of
different food commodities have not been synchro-
nized. During 2006, sugar experienced a spike, but
other food commodities remained fairly constant until
the last quarter of the year (figure 2.3). In 2007, dairy
prices soared, reaching their peak in November. The
same year, cereals and vegetable oils started a vertigi-
nous ascent that peaked in April 2008, pulling up the
overall food price index.

In all, cereal prices increased

92% from April 2007 to their peak in April 2008,
compared with an increase of 29% between April 2006
and April 2007.

Of the three main cereals, rice experienced the steep-
est price increase in the shortest time: 150% from
January to May 2008 (figure 2.4). Wheat experienced
a price increase of 134%, but it was stretched out
over a year, from March 2007 to March 2008, and
maize prices increased 95% between August 2007
and June 2008. Of the three cereals, wheat experi-
enced the sharpest drop from its peak, followed by
maize and rice. As of December 2008, their prices
dropped 55%, 46% and 40%, respectively, from their
peaks.

From a historical perspective, the recent run on food
commodity prices was not unique (see box 2.1). Nev-
ertheless, this episode was among the five largest
price runs in the last 100 years.

In order to avoid cluttering, the picture does not include
vegetable oil prices, which follow a trend very similar to
that of cereal prices. To construct the overall food price
index, the Food and Agriculture Organization of the
United Nations weights each commodity group by its
share in world exports. Given the high weight of cereals,
this commodity group has a high correlation with the
overall food price index (r = 0.97, calculated over the
period January 1992 to September 2008).

Figure 2.3. FAO food price index and its compo-
nents, 2006-2008

350

300

250

200

150

100

AO food price index and its main

components (1998-2000=100)

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2006

2007

2008

Source: ESCAP, based on data from FAO, www.fao.org/worldfood
situation/FoodPricesIndex/en/.

Dairy

Cereals

Food price index

Sugar

Meat

400

350

300

250

200

150

100

Prices of selected cereals

(index 1998-2000=100)

Figure 2.4. Price indexes of selected cereals,
2007-2008

J F M A M J J A S O N D J F M A M J J A S O N D

2007

2008

Wheat

Cereals price

index

Maize

Rice

Source: ESCAP, based on data from FAO, www.fao.org/worldfood
situation/FoodPricesIndex/en/ and www.fao.org/es/esc/prices/Prices
Servlet.jsp? lang=en.

Note:

Prices of individual commodities shown are for U.S. No. 2,

yellow maize, U.S. Gulf (Friday); white rice, Thai 100% B second
grade, f.o.b. Bangkok (Friday); and U.S. No. 2, soft red winter wheat,
U.S. Gulf (Tuesday).

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

Box 2.1. Food commodity prices in the last 100 years

The 110% increase in food commodity prices from 2002 to 2008 was among the five largest price runs in the
last 100 years (see figure below). The largest run occurred between 1968 and 1974, when commodity prices
increased 236% in only seven years. In the next largest run, encompassing the second World War and the
early post-war years, prices increased 229% in nine years. In both the run of 1914-1918 during World War I
and in the rebound of 1932-1937 during the Great Depression, prices increased about 125%.

The largest price drawdown came at the beginning of the Great Depression, between 1929 and 1932, when
prices dropped 58%. The fastest episode of dropping prices occurred in 1921: they plummeted 54% in only
one year.

350

300

250

200

150

100

Index, trough year (year 1) = 100

1914-1920

1932-1937

2002-2008

1968-1974

1939-1947

A. Largest runs

Year

100

Index, peak year (year 1) = 100

1981-1987

B. Largest drawdowns

Year

1937-1939

1920-1926

1929-1932

Sources: ESCAP, based on the Grilli-Yang index of agricultural food commodities in Stephan Pfaffenzeller, Paul Newbold and Anthony
Rayner, “A short note on updating the Grilli and Yang commodity price index”, World Bank Economic Review 21(1) (2007), pp.151-
163, and data from FAO, www.fao.org/worldfoodsituation/FoodPricesIndex/en/.

Food commodity prices over the last 100 years

CHAPTER 2. FOOD AND FUEL PRICE SHOCKS

Fuel and food commodity markets are characterized
by low short-term demand and supply price
elasticities.

Market prices may thus be volatile and

react sharply to news about events affecting present
or future demand or supply.

Fuel

While world demand for petroleum has grown steadily
for the last 10 years, production has often lagged
behind (figure 2.5).

Between 1998 and 2006, world

petroleum consumption increased at an average annual
rate of 1.73%. The growth in consumption was even
faster in the ESCAP region, at 2.81%. But world petro-
leum production grew at an annual average growth rate
of only 1.40%. Given this situation of excess demand
and the low short-term demand and supply price
elasticities that characterized commodity markets, the
speed at which crude oil prices rose was not surprising.

The major reason for the rapid increase in world
petroleum consumption in the 2000s was accelerated
world economic growth. The average annual world
growth rate increased to 4.9% in 2003-2007 from an
annual average of 3.2% in 1990-2002 (IMF, various
issues). There is a positive association between
economic growth and growth in petroleum consump-
tion, as shown in figure 2.6. An increase in world
income of 1% over the period 1982-2007 was associ-
ated with a 0.79% increase in the demand for petro-
leum. This estimate of the income elasticity of crude
oil demand lies between Gately and Huntington’s
(2002) estimates for developed countries (0.55), on
one hand, and the fast-growing developing countries
(1.17) and oil-exporting countries (1.11) on the other
(see also Hamilton, 2008).

Both developing countries and oil-exporting countries
played a significant role in the increase in world petro-
leum demand in recent years. China, India and oil-
exporting countries such as the Islamic Republic of
Iran and the Russian Federation were among the 10
countries that most contributed to the increase in

Underlying reasons for the volatility of fuel
and food prices

This section draws partly on ESCAP (2009).

Petroleum includes crude oil, natural gas, and other
liquids. Over 1998-2006, crude oil represented 87.6% of
total petroleum production.

Figure 2.5. Production and consumption of
petroleum, 1997-2007

125

120

115

110

105

100

Index (1998-2000=100)

1997

1998

1999

2000

2001 2002 2003

2004 2005

2006

2007

ESCAP consumption

World consumption

World production

Sources: ESCAP, based on data from the United States Energy Infor-
mation Administration, www.eia.doe.gov/iea/pet.html and www.eia.doc.
gov/emeu/international/RecentTotalOilSupplyBarrelsperDay.xls.

Preliminary consumption estimate.

– 1

– 2

– 3

World consumption of petroleum, annual

rate of growth (per cent), 1982-2007

Figure 2.6. World consumption of petroleum and
world GDP growth rates, 1982-2007

y = -1.58 + 0.79x

= 0.47

World GDP, annual rate of growth (per cent), 1982-2007

Sources: ESCAP, based on data from the IMF, www.imf.org/external/
pubs/ft/weo/2005/02/data/index.htm and the United States Energy In-
formation Administration, www.eia.doe.gov/emeuinternational/Recent
PetroleumConsumptionBarrelsperDay.xls.

ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2009

world petroleum consumption between 2001 and 2006
(figure 2.7). Seven of the 10 countries shown in the
figure are developing countries from the fast-growing
ESCAP region. Those seven countries contributed
just over 50% of the world’s increase in petroleum
consumption between 2001 and 2006, up from
39% between 1996 and 2001. In contrast, the contri-
bution of the OECD countries fell to 21% between
2001 and 2006, from 34% between 1996 and 2001.

As mentioned above, crude oil production has often
lagged behind consumption in recent years (figure
2.5). As a result, the world’s spare capacity of crude
oil – unused production capacity that can be called
upon in case of disruption – dropped from 5 million
barrels per day in 2002 to 1 million barrels in 2005.
Although it increased to 2.5 million barrels per day in
2007, spare capacity is still tight by historical stand-
ards. A major reason for the sluggish supply response
has been the increased difficulty and costs of extract-
ing oil from new fields. Costs more than doubled
between 2005 and 2008, due mainly to an acute
shortage of inputs such as engineers, scientists and
equipment, while buoyant world economic growth has
driven up the price of critical inputs such as steel and
cement (Yergin, 2008).

Food

The causes of higher food prices are somewhat similar
to those underlying the increase in the price of crude
oil. The stocks of wheat, maize and rice, measured in
consumption days, have dropped to the lowest levels
in 30 years (figure 2.8).

The biggest drop has been for

maize (59%), followed by rice (51%) and wheat (46%).
Although wheat inventories recovered part of the lost
ground thanks to a record harvest in 2008, that year
they were still 31% lower than in 1999.

Declining inventories can be explained by a combina-
tion of fast-growing demand and stalling production.
Unlike crude oil, the rate of consumption growth for
cereals such as maize, rice, and wheat are less
related to the world’s rate of GDP growth. In data for
the period 1981-2006, the correlation coefficient is
slightly negative for rice (– 0.21), close to zero for
wheat (0.03) and positive but small (0.28) for maize.
This phenomenon reflects Engel’s Law, by which the
share of income allocated to food and other basic
necessities decreases as income grows.

Figure 2.7. Share of increase in world petroleum
consumption: top 10 countries

– 5

Share of increase in world petroleum

consumption (per cent)

China

United States

Saudi Arabia

Iran (Islamic

Republic of)

India

Canada

Thailand

Russian

ederation

Indonesia

Singapore

1996-2001

2001-2006

Source: ESCAP, based on data from the United States Energy In-
formation Administration, www.eia.doe.gov/emeu/international/Recent
PetroleumConsumptionBarrelsperDay.xls.

30.4

22.7