The Global Financial Crisis and its impact on the Asia-Pacific region

It is impossible to predict the nature and extent of the damage that the current global economic crisis will inflict or how long the world and the Asia-Pacific economies will suffer from the ensuing low economic growth. The recession will hit the economies of this region hard through falls in commodity prices, declining trade, capital outflows and lower remittances from citizens working overseas. As this region has neither sufficiently robust domestic demand, nor large intra-regional trade to offset the impact of falling exports to the United States and Europe, countries in Asia-Pacific should adopt a two-pronged approach to the crisis. Internally, they should foster closer policy cooperation to make better use of the region's financial resources and relatively large domestic markets in order to speed up economic recovery. In the long term, the expansion of potentially large domestic markets can gradually replace the current export- oriented development strategy of many countries in this region. Globally, this region should work hand-in-hand with other regions, particularly with the relevant authorities in their main export markets in the US and Europe, to promote world economic growth in line with the APEC ethos of open economies, and resist the temptation of protectionism. All of these require closer cooperation on monetary, fiscal and exchange rate policies, both regionally and globally. Otherwise, Asia-Pacific may well experience a "lost decade" like that suffered by Indonesia following the Asian financial crisis in 1997-98, or by Japan in the 1990s. The crisis has been strengthening the position of the U.S. as the global financial superpower. US financial institutions are now consolidating to become giant financial conglomerates. The U.S. Treasury and the Federal Reserve Bank are able to issue billions of dollars in debt at close to zero nominal interest rates -- lower than inflation rates. Negative real interest rates mean that rather than paying an interest rate, the U.S. Government actually gets paid for borrowing money. People around the world are now so averse to risk, and the scramble for both safety and liquidity so strong, that they are hoarding the safer U.S. dollar, U.S. Treasury bills and U.S. long-term government bonds. Massive capital inflow has allowed the U.S. to finance its budget and balance of payment deficits, and provide funds for rebuilding its financial system, stimulating its economy, recycling funds to provide dollar liquidity to foreign central banks through the Federal Reserve Bank's bilateral currency-swap facilities, and for financing its expensive wars in the Middle East.download