HOW THE CRISIS AFFECTED ADVANCED ASIA

Although individual circumstances differed, the Advanced Asian economies of the Asia-Pacific region were all hit hard by the global financial crisis when it spread to the real sector and caused the volume of world trade to collapse in the latter part of 2008. These economies immediately responded to the sharp deceleration of economic activity by easing monetary and fiscal policies substantially, which acted relatively quickly to help stabilize the economies. In fact, signs of economic recovery were already evident in the region in the first part of 2009, with some economies returning to positive growth in the early months. The biggest policy challenge most economies faced at the end of 2009 was to decide when to reverse the extraordinary stance of monetary and fiscal policies, which cannot be sustainable for a long time, in view of potential inflationary and debt sustainability concerns.

How to manage the exit will not be easy, however, inasmuch as the prospect for the recovery of world trade remains uncertain. Over the short term, there is a danger that pulling the stimulus prematurely may cause the nascent recovery to stall. Over the medium term, there is going to be an inevitable rebalancing of global demand that will have major implications for Advanced Asia. It will take time to restore balance sheets in advanced Western countries, notably the United States, so that the region's net exports to these markets must decline. This means that Advanced Asia, especially those economies that had relied on high-tech exports to the West to propel growth, must find alternative engines of growth if it is to make the economic recovery firm and sustainable.

The initial impact of the U.S. sub-prime crisis was relatively small on the Advanced Asian economies. For the most part, these economies had only limited exposure to sub-prime-related assets and their banking systems were relatively sound and well capitalized. In fact, the biggest challenge facing these economies in the summer of 2008 was high energy and other commodity prices.