Crisis impacts: Initially there was a feeling in the region that the crisis was a problem for the rich countries. The ASEAN countries had put their houses in order after the deep crisis of 1997-98. As the accompanying table for the six major economies shows, the economies were growing strongly immediately prior to the crisis, in the range 5-8per cent, as they have been for most of this decade. Budget deficits were generally modest. Where they were larger, as in Malaysia and Vietnam, they were funded by buoyant domestic savings or large foreign aid flows. Moreover, all but Vietnam – the one country in the regime displaying crisis vulnerability symptoms – were running current account surpluses, resulting in rapidly accumulating foreign exchange reserves, especially in Singapore and Malaysia. There have been no cases of serious financial collapse or bank runs.
By late 2008, two factors began to quickly undermine these comfortable assumptions. The first was the impact of the rapid decline in international trade volumes. Most of the ASEAN countries, especially Singapore and Malaysia, are highly trade-dependent. The impact is particularly severe in Singapore, where growth has declined from a trend rate of 8per cent to a likely 5per cent contraction this year, the most serious in the country’s history. For the region as a whole, growth will contract sharply from over 6per cent in 2007 (the last full non-crisis year) to about zero this year.
The second factor undermining growth in the region has been the flight to safety in capital markets. Perversely, capital has flowed back to the very countries that caused the crisis, owing to their perceived fiscal capacity to protect their financial sectors. In ASEAN all but Singapore are regarded as ‘emerging markets’, and they have suffered as a result.
Most governments in the region have the flexibility to significantly loosen both fiscal and monetary policy. Fiscal stimulus packages of around 2per cent of GDP, and in some cases more, have been the norm. Inflationary concerns have quickly abated, thus relieving the need to continue with the monetary tightening that was pursued for much of 2008. Exchange rates have been allowed to drift down, although in no major economy have they fallen as far as the A$. In the four countries that experienced a major crisis in 1997-98, most especially Indonesia, there is still some hesitation to let their exchange rates weaken further. This factor, plus the quasi freeze in international debt markets, limits their ability to introduce greater stimulus. It also explains the recent flurry of currency and fiscal support packages. However, it is unfortunate that regional architecture remains under-developed. For example, the much-vaunted ‘Chiang Mai Initiative’, developed in the wake of 1997-98 to crisis-proof the region, is still not functional.
While the short-term effects can be contained, there are potentially worrying longer-term effects, as the already substantial distrust towards globalization and global institutions strengthens. Liberal reformers will find it more difficult to continue the much-needed trade, investment and regulatory reform agenda, as is for example already evident in Indonesia.
Whether the crisis leads to regime change remains to be seen. Ironically, the country that experienced regime collapse during the last crisis – Indonesia under Soeharto in May 1998 – now looks one of the most stable, as illustrated by the successful conduct of nation-wide elections recently. By contrast, two that handled the 1998 crisis adroitly – Malaysia and Thailand – now look shaky, albeit for different reasons, neither particularly related to the global crisis.
The role of ASEAN: ASEAN, now approaching its 42nd birthday, is the developing world’s most durable regional association, and it has contributed greatly to regional harmony. But the global crisis has again illustrated that ASEAN is not yet capable of playing a major role in difficult and sensitive areas. That it is not adept at crisis management was illustrated during the region’s last serious economic crisis, in 1997-98, as well as in various major political challenges, such as Timor.
The origins of the problem are two-fold: in one way or another, the leaders of all the major countries are pre-occupied with events at home; and the ASEAN Secretariat has been deliberately constructed to be a ‘light-weight’, unable to act decisively and powerfully on any issue of real substance.
In the current crisis, ASEAN could play a major role: it speaks for 550 million people, five of its members have been among the world’s fastest growing economies at various times since the 1960s, and it had two seats at the London G20 summit earlier this month (Indonesia as a member and the Thai prime minister as an observer representing the grouping). However, we have yet to hear an ASEAN announcement, much less a concrete proposal of any significance, on how the crisis issues might be tackled.
ASEAN Economies on The Slide
| Country | Variables | 2007 | 2008 | 2009 (f) |
| Indonesia | GDP growth | 6.3 | 6.1 | 3.6 |
| budget | -1.2 | -0.1 | – | |
| current account | 2.4 | 0.1 | -0.6 | |
| Malaysia | GDP growth | 6.3 | 4.6 | -0.2 |
| budget | -3.2 | -4.7 | – | |
| current account | 15.6 | 17.9 | 14.0 | |
| Singapore | GDP growth | 7.8 | 1.1 | -5.0 |
| budget | 9.6 | 5.7 | – | |
| current account | 23.5 | 14.8 | 10.0 | |
| Thailand | GDP growth | 4.9 | 2.6 | -2.0 |
| budget | -1.1 | -0.3 | – | |
| current account | 5.7 | -0.1 | 8.0 | |
| Philippines | GDP growth | 7.2 | 4.6 | 2.5 |
| budget | -0.2 | -0.9 | – | |
| current account | 4.9 | 2.5 | 1.0 | |
| Vietnam | GDP growth | 8.5 | 6.2 | 4.5 |
| budget | -5.5 | -4.7 | – | |
| current account | -9.9 | -9.3 | -11.5 |
(f) = forecast; budget is budget balance; current account is current account balance, both as per cent of GDP.
Source: Asian Development Bank, Asian Development Outlook 2009