2 - Global Crisis and ASEAN: Impact, Outlook and Policy Priorities

Summary

Introduction

The 2008/09 global financial and economic crisis severely affected the Association of Southeast Asian Nations (ASEAN). Although the region was spared much of the initial shock — as it held little of the “toxic” assets that spawned the financial turmoil — it suffered as the real economic effects pummelled the region. External demand, which drives a good portion of the region's substantial raw material and manufacturing exports, tumbled dramatically. Firms scrambled to adapt, and the result was major layoffs and disruption of the region's supply chains and production networks — the hallmark of the ASEAN's rapid growth since the recovery from the 1997/98 Asian financial crisis.

The region responded swiftly with significant monetary and fiscal stimulus supporting domestic demand and paving the way for an early recovery. The reforms following the 1997/98 crisis allowed most ASEAN countries the monetary and fiscal space required to ease liquidity and pump prime economic activity. This combined stimulus allowed ASEAN to weather the global downturn and perform better than expected in 2009. And it bodes well for a V-shaped recovery into 2010, although with significant variance across the region's ten economies.

Coupled with an improving external environment, the swift policy response has added substantial traction to the region's recovery. Over the last few months, recovery in advanced economies has broadened and global financial markets have stabilized. ASEAN's two biggest trading partners, Japan and China, grew strongly in the final quarter of 2009 and the first quarter of 2010. External demand is poised to return as recovery in advanced economies gather pace. The improved outlook for the global economy combined with aggressive policy rate cuts and prompt fiscal stimulus have clearly benefited ASEAN economies.

This chapter explores the impact of the crisis on ASEAN, the region's growth prospects, and policy issues — both short- and long-term — that can make the recovery both sustainable and more inclusive. First, we discuss the external environment facing the region and second, the prospects over the short term. Third, we examine ASEAN's integration imperative — why it is so important for ASEAN to integrate. And finally, we look into the longer-term issues that need to be addressed now: the importance of the ASEAN Economic Community (AEC), bridging development gaps between members, and escaping the middle income trap that has affected many developing middle income countries.