Crises in Asia: Historical Perspectives and Implications

Hong, Kiseok; Lee, Jong-Wha; Tang, Hsiao Chink Working Paper Crises in Asia: Historical Perspectives and Implications ADB Economics Working Paper Series, No. 152 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Hong, Kiseok; Lee, Jong-Wha; Tang, Hsiao Chink (2009) : Crises in Asia: Historical Perspectives and Implications, ADB Economics Working Paper Series, No. 152, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1809 This Version is available at: https://hdl.handle.net/10419/109344 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo ADB Economics Working Paper Series Crises in Asia: Historical Perspectives and Implications Kiseok Hong, Jong-Wha Lee, and Hsiao Chink Tang No. 152 | April 2009 ADB Economics Working Paper Series No. 152 Crises in Asia: Historical Perspectives and Implications Kiseok Hong, Jong-Wha Lee, and Hsiao Chink Tang April 2009 Kiseok Hong is Professor at Department of Economics, Ewha Womans University, Seoul; Jong-Wha Lee is Head of the Office of Regional Economic Integration and Office-in-Charge of the Economics and Research Department, Asian Development Bank; and Hsiao Chink Tang is Economist at the Office of Regional Economic Integration, Asian Development Bank. The authors are grateful to the participants in ADB-ADBI Joint Workshop on Global Imbalances and Crisis: Chartering Asia’s Recovery held 16 February 2009 in Manila for helpful comments, and to Marthe Hinojales for able research assistance. The views expressed are the authors’ and do not necessarily reflect the views and policies of ADB, its Board of Directors, or the governments ADB members represent. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ©2008 by Asian Development Bank April 2009 ISSN 1655-5252 Publication Stock No.: The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. The ADB Economics Working Paper Series is a forum for stimulating discussion and eliciting feedback on ongoing and recently completed research and policy studies undertaken by the Asian Development Bank (ADB) staff, consultants, or resource persons. The series deals with key economic and development problems, particularly those facing the Asia and Pacific region; as well as conceptual, analytical, or methodological issues relating to project/program economic analysis, and statistical data and measurement. The series aims to enhance the knowledge on Asia’s development and policy challenges; strengthen analytical rigor and quality of ADB’s country partnership strategies, and its subregional and country operations; and improve the quality and availability of statistical data and development indicators for monitoring development effectiveness. The ADB Economics Working Paper Series is a quick-disseminating, informal publication whose titles could subsequently be revised for publication as articles in professional journals or chapters in books. The series is maintained by the Economics and Research Department. Contents Abstract v I. Introduction 1 II. Data and Methodology 2 A. DataA. Data 2 B. Definition of Recession 3 C. Definitions of Financial Downturns 4 III. Stylized Facts of Economic Crises in Asia 5 A. Descriptive Statistics on RecessionsA. Descriptive Statistics on Recessions 5 B. Descriptive Statistics on Credit Contractions and Stock Price Busts 7 C. Synchronization of Recessions, Credit Contractions, and Stock Price Busts 9 D. Recessions Associated with Financial Crises 11 E. Adjustments in Macroeconomic and Financial Variables 13 F. Comparing the Current Recession with Past Recessions 15 IV. The Global Crises and Asia 16 A. The Impact of �S/Global Crises on Asia 1A. The Impact of �S/Global Crises on Asia 16 B. Synchronization of Global Crises and Asian Recessions 21 IV. Concluding Remarks 23 References 24 Abstract The paper analyzes the stylized features of historical crisis episodes for 21 developing Asian economies over 1961–2007. The paper finds that while there is substantial diversity, on average, recessions and financial downturns are more frequent, longer lasting, and more severe in Asia than in the Organisation for Economic Co-operation and Development countries. The paper also finds that the likelihood and severity of a recession tends to increase when it is associated with credit crunches or stock market crashes. Severe financial downturns or recessions in the global economy are often coupled with financial crises or recessions in Asia. In view of the current global crisis and severe financial downturns, Asian economies are expected to experience a severe recession in 2009. B. Descriptive Statistics on Credit Contractions and Stock Price Busts We compute the same statistics for credit contractions and equity price declines for each economy, and report the results in Table 2. As credit contractions and equity price declines are identified from quarterly data, the duration here refers to the number of quarters between a peak and the following trough. As can be expected from the volatile nature of the financial variables, both credit and equity-price cycles exhibit a greater probability of a downturn than the GDP cycle, although the duration, when translated to the annual frequency, is similar to that of GDP recessions. Also, the peak-to-trough amplitude and the cumulative loss are much greater than those from GDP series. Table 2: Descriptive Statistics on Financial Downturns All Credit Contractions Credit Crunches Country Proportion of Time in Credit Contraction (%) Duration (quarter) Amplitude (%) Cumulative Loss (%) Duration (quarter) Amplitude (%) Cumulative Loss (%) Bangladesh 17.05 5.0 5.66 17.36 – – – Brunei Darussalam 62.07 9.0 72.46 340.93 9.0 72.46 340.93 Cambodia 19.64 5.5 18.07 51.68 7.0 22.05 67.94 China, People’s Rep. of 15.56 4.0 8.04 26.86 – – – Hong Kong 40.00 5.33 11.38 40.29 7.0 26.10 100.34 India 16.15 3.5 7.61 17.37 – – – Indonesia 21.29 4.13 36.79 82.20 3.67 77.14 154.82 Kazakhstan – – – – – – – Korea, Rep. of 7.14 2.4 2.34 4.56 Kyrgyz Republic 30.00 4.33 32.14 94.64 4.33 32.14 94.64 Lao PDR 46.15 4.50 29.50 71.67 5.67 43.48 114.10 Malaysia 16.67 3.00 5.38 12.77 Myanmar 35.66 4.44 20.52 68.70 6.0 36.61 131.05 Pakistan 20.83 4.44 10.91 29.84 7.0 55.23 171.79 Papua New Guinea 43.80 9.33 27.79 230.52 12.75 38.18 339.98 Philippines 32.81 5.17 18.78 114.97 11.5 66.94 547.99 Singapore 22.62 3.45 11.78 29.42 2.0 35.51 52.95 Sri Lanka 22.40 3.58 11.52 26.68 4.0 31.20 52.56 Thailand 18.75 8.33 18.19 138.61 18.0 32.37 374.99 Uzbekistan – – – – – – – Viet Nam 7.69 2.0 2.01 3.5 – – – Average 26.12 4.81 18.47 73.82 7.53 43.80 195.70 United States 21.35 6.83 4.02 22.49 – – – G7 17.29 4.50 5.50 21.84 7.83 20.07 88.83 OECD 17.42 4.36 7.31 27.64 7.01 19.27 79.07 continued. Crises in Asia: Historical Perspectives and Implications | 7 We examine severe financial downturns separately, though the same way we did for recessions in Table 1. Credit contractions and stock price declines with the amplitude belonging in the top quartile of the corresponding distributions are regarded as credit crunches and stock price busts, respectively. According to the last three columns in Table 2, credit crunches and stock price busts involve not only greater losses but also longer durations. Similar to Table 1, Table 2 shows that there exist systematic differences between Asian developing countries and OECD countries. Downturns in the financial market are more frequent, longer-lasting, and more severe among Asian countries. This suggests that not only the output market but also the financial market are more volatile in Asian economies than in OECD countries. Table 2: continued. All Stock Price Declines Stock Price Busts Country Proportion of Time in Stock Price Decline (%) Duration (quarter) Amplitude (%) Cumulative Loss (%) Duration (quarter) Amplitude (%) Cumulative Loss (%) Bangladesh 51.25 6.0 66.67 542.44 13.0 191.73 1987.53 Brunei Darussalam – – – – – – – Cambodia – – – – – – – China, People’s Rep. of 42.25 5.4 53.82 208.76 8.0 125.94 468.25 Hong Kong 32.14 4.33 43.38 126.65 4.0 70.16 190.97 India 47.40 7.0 37.60 214.51 17.0 74.56 784.91 Indonesia 40.00 5.0 61.07 227.11 7.0 128.15 461.08 Kazakhstan – – – – – – – Korea, Rep. of 54.17 7.22 51.79 283.09 13.0 106.72 648.31 Kyrgyz Republic – – – – – – – Lao PDR – – – – – – – Malaysia 38.39 4.78 48.14 149.38 7.33 92.22 330.12 Myanmar – Pakistan 49.47 7.0 39.39 230.57 19.0 153.24 1542.45 Papua New Guinea 35.71 2.33 12.89 26.03 – – – Philippines 58.33 10.2 98.80 740.86 12.83 133.24 1088.41 Singapore 55.43 9.2 39.68 213.87 10.0 82.65 279.09 Sri Lanka 62.79 13.2 78.07 824.85 22.0 143.40 1610.69 Thailand 43.18 3.5 23.28 56.27 – – – Uzbekistan – – – – – – – Viet Nam 57.14 4.0 13.76 38.49 – – – Average 47.69 6.37 47.74 277.35 12.11 118.36 853.8 United States 38.54 5.21 24.22 84.27 8.0 65.20 215.17 G7 42.85 5.88 33.55 159.79 9.96 84.79 412.63 OECD 43.02 6.64 38.47 207.66 11.89 89.49 613.44 – refers to nonavailability of data or such event. Note: Credit crunches refer to credit contractions (including all economies) with the amplitude belonging to the top quartile of the distribution. Similarly, stock price busts refer to stock price declines with the amplitude belonging to the top quartile of the distribution. The cutoff values of the amplitude in classifying credit crunches and stock price busts are 21.09 and 67.98, respectively. 8 | ADB Economics Working Paper Series No. 152 C. Synchronization of Recessions, Credit Contractions, and Stock Price Busts Regional/global economic integration can make macroeconomic and financial fluctuations coincide across economies. One simple approach to considering synchronization of events is to examine their bunching in time. In Figure 2, we plot the proportion of economies in recession, credit contraction, and stock price declines during 1960–2007, separately for developing Asia and OECD. A clear pattern that emerges from Figure 2 is that recessions are less synchronized among Asian countries. For OECD, the proportion of countries in recession exceeds 50% in a couple of incidents and equals zero in many years. The high synchronization of recessions among OECD countries has been reported in Claessens et al. (2008) as well. For Asia, on the other hand, the proportion exhibits relatively small time-series variation, except during the 1997/1998 Asian financial crisis. Our results suggest that Asian countries are not as homogenous or interrelated as OECD countries. A similar difference is observed between the two regions for stock price declines. For OECD, the proportion of countries in stock price declines reaches as high as 100% on a few occasions and below 20% on several others. For Asia, the proportion reaches 100% only once during the Asian financial crisis since 1980 and never below 20% during the sample period. The high values of the series for earlier years are not reliable because the stock price data for that period are available only for a few economies. It is not clear whether the two regions can be similarly distinguished in terms of synchronization of credit contractions. The time series variation in the proportion of countries in credit contractions (measured by standard deviation) is greater for Asia, partly due to the positive time trend apparent in the series since the 1990s. Oftentimes a recession is accompanied or preceded by a financial downturn. For example, the Asian crisis in 1997 was triggered by turmoil in the foreign exchange market. The current �S economic downturn was initiated by the subprime mortgage crisis. The synchronization of real downturns and financial downturns is clearly observed in our data set as well. In particular, we find that credit contractions and stock price declines tend to concur with recessions while stock price declines tend to precede credit contractions. As shown in Table 3, the correlation coefficient between recessions and credit contractions in Asia is 0.19 and the correlation between recessions and stock price declines is 0.18. Credit contractions and one-year-lagged stock price declines are also positively correlated, with the correlation coefficient reaching 0.13. These correlations are all significant at the 5% level. In OECD countries, credit contractions tend to concur with GDP recessions while stock prices tend to precede GDP recessions. According to the lower panel of Table 3, the correlation between recessions and credit contractions in OECD is 0.24 and the correlation between recessions and one-year-lagged stock price declines is 0.17. This suggests that stock prices are more forward looking in OECD countries. Stock price declines and credit contractions are weakly correlated with each other, either contemporaneously or with a lag. Crises in Asia: Historical Perspectives and Implications | 9 Figure 2: Proportion of Economies in Recession, Credit Contraction, and Stock Price Decline (percent) 1960 64 68 72 76 80 84 88 92 96 2000 04 08 1960 64 68 72 76 80 84 88 92 96 2000 04 08 1960 64 68 72 76 80 84 88 92 96 2000 04 08 1960 64 68 72 76 80 84 88 92 96 2000 04 08 1960 64 68 72 76 80 84 88 92 96 2000 04 08 1960 64 68 72 76 80 84 88 92 96 2000 04 08 Recession Asia OECD Credit contraction Asia OECD Stock price decline Asia OECD 0.6 0.5 0.4 0.3 0.2 0.1 0 0.6 0.5 0.4 0.3 0.2 0.1 0 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1.2 1.0 0.8 0.6 0.4 0.2 0 1.2 1.0 0.8 0.6 0.4 0.2 0 10 | ADB Economics Working Paper Series No. 152 Table 3: Correlations between Recessions, Credit Contractions, and Stock Price Declines A: Asia Recession Credit Contraction Stock Price Decline Credit Contraction 0.19** Stock Price Decline 0.18** 0.02 Recessiont-1 0.30** 0.21** –0.06 Credit Contraction t-1 0.04 0.29** –0.21** Stock Price Decline t-1 0.13** 0.12** 0.17** B: OECD Recession Credit Contraction Stock Price Decline Credit Contraction 0.24** Stock Price Decline 0.04 0.06* Recessiont-1 0.17** 0.14** 0.02 Credit Contraction t-1 0.19** 0.38** –0.05 Stock Price Decline t-1 0.17** 0.07* 0.22** * and ** refer to 10% and 5% significance level, respectively. Note: Central Asian countries are included. D. Recessions Associated with Financial Crises When an economy is hit by combined recession and financial downturn, one may expect that the impact will intensify. This expectation is largely supported by Table 4, which compares recessions that are in association with financial crises and those that are not. Following Claessens et al. (2008, 13), “if a recession episode starts at the same time or after the beginning of an ongoing credit crunch or asset price bust”, we consider the recession to be associated with a financial crisis. Since sample means of the recession characteristics are sensitive to outlier observations, Central Asian countries are excluded in Table 4. The last two columns of Table 4 indicate that the peak-to-trough drop in GDP and the associated cumulative loss in GDP tend to be greater when the recession is accompanied by a credit crunch or a stock price bust.4 Similar patterns are observed for OECD countries. Table 4: Descriptive Statistics on Combined Recession and Financial Crises A: Asia Proportion of Time Spent (%) Duration (years) Amplitude (%) Cumulative Loss (%) Recession + Credit Crunch 9.32 1.31 7.36 8.65 Recession + No Credit Crunch 7.26 1.37 4.42 5.28 Recession + Stock Price Bust 6.24 1.19 5.00 5.76 Recession + No Stock Price Bust 12.37 1.60 4.01 5.31 B: OECD Proportion of Time Spent (%) Duration (years) Amplitude (%) Cumulative Loss (%) Recession + Credit Crunch 3.65 1.63 3.22 4.79 Recession + No Credit Crunch 8.08 1.26 1.65 2.44 Recession + Stock Price Bust 4.92 1.33 1.48 2.31 Recession + No Stock Price Bust 4.92 1.13 1.28 1.62 Note: Central Asian countries are excluded because sample means are sensitive to outlier observations. 4 When Central Asian countries are included, median values exhibit similar patterns.median values exhibit similar patterns. Crises in Asia: Historical Perspectives and Implications | 11 Financial crises may increase not only the severity of a recession but also the likelihood of a recession. In order to examine this possibility, Table 5 counts the frequencies of recessions and financial downturns and their joint events, and computes various conditional probabilities. Severe credit contractions and severe stock price declines in the table are the same as credit crunches and stock price busts as defined above, respectively. The first row of Panel A of the table, for example, shows that the total number of credit contraction episodes in our sample is 115 and the total number of recession episodes is 32. For consistency with Table 4, the joint event is defined as a recession episode that starts at the same time or after the beginning of an ongoing credit contraction. The conditional probability, computed as the number of the joint events divided by the number of credit contractions, thus indicates there is about 19% chance of a recession for a given credit contraction episode. Similarly, the conditional probability of 39% in the third row refers to the probability of a recession given that the economy currently has a severe credit contraction. From these two rows, it is clear that Table 5: Frequencies of Recessions and Financial Downturns Asia A: Credit Contraction Recession Frequency of Conditional Probability Credit Contraction Recession Joint Event All All 115 32 17 0.15 All Severe 115 8 4 0.03 Severe All 27 32 9 0.39 Severe Severe 27 8 2 0.09 B: Stock Price Decline Recession Frequency of Conditional Probability Stock Price Decline Recession Joint Event All All 98 19 18 0.19 All Severe 98 5 5 0.05 Severe All 23 19 12 0.52 Severe Severe 23 5 4 0.17 OECD C: Credit Contraction Recession Frequency of Conditional Probability Credit Contraction Recession Joint Event All All 132 59 34 0.26 All Severe 132 16 9 0.07 Severe All 33 59 8 0.24 Severe Severe 33 16 2 0.06 D: Stock Price Decline Recession Frequency of Conditional Probability Stock Price Decline Recession Joint Event All All 221 47 34 0.15 All Severe 221 8 4 0.02 Severe All 57 47 23 0.40 Severe Severe 57 8 2 0.04 Note: Severe stock price declines are the same as stock price busts. Severe credit contractions are the same as credit crunches. Central Asian countries are included. The total number of recessions is not the same between Panels A and B and between Panels C and D because the number of observations with both GDP and stock price data is smaller than the number of observations with both GDP and domestic credit data. 12 | ADB Economics Working Paper Series No. 152 the probability of a recession increases when domestic credit decreases more severely. A similar pattern emerges from the second and the fourth rows. The probability of a severe recession increases from 3% to 9% as domestic credit decreases more severely. Panel B of the table repeats the computation for stock price declines. The total number of (severe) recessions in Panel B is smaller than that of Panel A because the number of observations with both GDP and stock price data is smaller than the number of observations with both GDP and domestic credit data. Panel B of Table 5 shows that the probability of a (severe) recession increases when the stock price decreases more severely. The probability of a recession is 19% conditional on stock price decline, and jumps to 52% conditional on a stock market crash. Likewise, the probability of a severe recession is 5% conditional on stock price decline, and 17% conditional on a stock market crash. OECD countries exhibit somewhat different patterns. As Panels C and D of Table 5 show, the conditional probability of a recession in OECD countries, while increasing with the severity of the stock price decline, is almost independent of the severity of the credit contraction. This, combined with Table 4 results, suggests that credit contractions in OECD increase the severity of a recession but not particularly the likelihood of a recession. E. Adjustments in Macroeconomic and Financial Variables Our discussion thus far has focused mainly on movements of GDP during a recession. In this subsection, we examine how various macroeconomic and financial variables change around a recession episode. Figure 3 plots the growth rate of each variable for 3 years each before and after a peak. The peak year is denoted by 0. For variables that are available at quarterly frequencies (such as CPI, domestic credit, and the stock price), we use the year-on-year growth rate of the fourth quarter. In order to avoid influence of outlier values, Central Asian countries are excluded. A prominent pattern in Figure 3 is that all components of GDP tend to move in the same direction around a recession. For each component, the growth rate becomes negative in period 1 and resumes positive in period 2. Also, consistent with common expectation, fixed investment is most volatile, with the amplitude exceeding that of all the other components of GDP. It appears that fixed investment is the first thing to cut when things go bad. The least volatile component is consumption. Previous studies on business cycles of developing economies have often stressed that, unlike in developed countries, consumption is more volatile than GDP in developing economies. Aguiar and Gopinath (2007), for example, find that “smoothness” of consumption is not observed among 13 developing economies including Korea, Malaysia, Philippines, and Thailand. In order to explain the lack of consumption smoothness, they develop a hypothesis on the nature of underlying productivity shocks. According to Figure 3, however, the amplitude of the fall is smaller for consumption than for GDP. This suggests that, at least during GDP recessions, consumption smoothing is present even among Asian economies. Crises in Asia: Historical Perspectives and Implications | 13 -3 -2 -1 0 2 3 1 -3 -2 -1 0 2 3 1 -3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3 Figure 3: Adjustments in Macroeconomic and Financial Variables around a Recession (percent) GDP growth Consumption growth 7 6 5 4 3 2 1 0 -1 -2 -3 -4 8 7 6 5 4 3 2 1 0 -1 -2 -3 Fixed investment growth Export growth 15 10 5 0 -5 -10 20 15 10 5 0 -5 -10 -15 -20 Import growth Current account/GDP 15 10 5 0 -5 -10 10 8 6 4 2 0 -2 -4 -6 Inflation Real credit growth 25 20 15 10 5 0 16 14 12 10 8 6 4 2 0 -2 Mean Median Current recession -3 -2 -1 0 1 2 3 1-3 -2 -1 0 2 3 -3 -2 -1 0 2 3 1 continued. 14 | ADB Economics Working Paper Series No. 152 Also shown in Figure 3 are adjustments in other macroeconomic variables and financial variables. As the figure illustrates, the current account/GDP ratio improves during a recession. On average, economies experience current account deficits prior to a peak and current account surpluses after a peak. This is consistent with the pattern that imports decrease more than exports. In the next graph, we see the inflation rate tends to increase during a recession. The combination of high inflation and low growth suggests that recessions in developing Asia are mainly driven by supply shocks rather than demand shocks. As Claessens et al. (2008) report, OECD countries exhibit the opposite pattern, with the inflation rate decreasing during a recession. The last two graphs in Figure 3 show that recessions are likely to be associated with financial downturns. In particular, the growth rate of real credit falls substantially in period 1 and remains low even 3 years after the peak. This implies that adjustments in real credit are quite persistent. Stock prices seem to be forward-looking (at least on the way down), starting to fall even before the real economy peaks. Also, stock prices recover more quickly than domestic credit. F. Comparing the Current Recession with Past Recessions �sing the patterns in Figure 3, we can make a rough conjecture on how the current recession in Asia will evolve in the coming years. To compare the current recession with past recessions, the most recent changes and forecasts (where available) for Asian economies are plotted under the name “current recession.” The economies considered are Hong Kong, China; Korea; Malaysia; Papua New Guinea; Philippines; Singapore; and Thailand, for which the Economist Intelligence �nit (EI�) forecasts negative GDP growth in 2009 (as of February). For these economies, period 0 refers to 2008. According to Figure 3, recent developments in GDP and its components have been similar to the average during past recessions. This implies that, at the onset of the current recession, -3 -2 -1 0 2 3 1 Share price growth 60 40 20 0 -20 -40 -60 Mean Median Current recession Note: Period 0 refers to a peak. Figure 3: continued. Crises in Asia: Historical Perspectives and Implications | 15 Asian economies were not particularly different from the norm. It is not clear, however, whether the peak-to-trough drop will also be typical. The EI� predicts that, while GDP and consumption will decrease by about the same percentages as before, the fall in fixed investment will be more modest and the fall in exports will be more severe. This prediction seems reasonable because fixed investment growth prior to the peak before this recession was not particularly high anyway, reducing the need for large adjustments in subsequent periods, and because export demand for Asian products will be hurt by the global recession. The current account/GDP ratio is higher than usual because many Asian economies had current account surpluses in recent years. As a consequence of the sharper-than- usual decrease in exports, current accounts are expected to deteriorate rather than improve during the current recession. For the inflation rate and the financial variables, EI� forecasts are not available. Recent developments in these variables suggest that inflation may further pick up while domestic credit growth further decreases during the current recession. The sharper-than-usual adjustment in stock prices hints that the current recession will be a severe one. Above all, the sharper-than-usual fall in exports bodes ill for the many highly trade-dependent Asian economies. IV. The Global Crises and Asia A. The Impact of US/Global Crises on Asia As the ongoing global financial crisis continues to take its toll on the global real economy, two related questions are foremost on the minds of Asia’s policymakers, researchers, and commentators. First, how deep will the global recession bite and for how long will it last, particularly as it relates to the �S economy (which aside from being the world’s largest economy, is the country where the crisis originated). Second, how bad will Asian economies be affected? The early view that the �S would have seen the worst of the downturn heading into the second half of 2009 now looks increasingly optimistic.5 Instead, the prevailing view is one of continued bearishness at least until the last quarter of the year.6 Thus far, the current �S recession has behaved very much like previous episodes of recession cum financial crisis, which undoubtedly is more severe than the case without banking and housing crises (see Reinhart and Rogoff 2008 and 2009; Claessens, Kose, and Terrones 2008; and Lall, Cardarelli, and Elekdag 2008). There are reasons to believe the current downturn will be even more protracted. The build-up in the �S housing price 5 For the earlier prediction see, among others, the �S Federal Reserve Board (2008) and Reddy (2008). 6 See the latest forecasting survey by the Wall Street Journal in Evans and Izzo (2009). 16 | ADB Economics Working Paper Series No. 152 IV. Concluding Remarks Our analysis of historical crisis episodes in Asia shows that while there is substantial diversity, on average recessions and financial downturns are more frequent, longer lasting, and more severe in Asian economies than in OECD countries. We also find that the likelihood and severity of a recession tends to increase when it is associated with financial crises, such as credit crunches and stock market crashes. The probability of an Asian recession is 19% conditional on stock price decline, and jumps to 52% conditional on a stock market crash. Our results also support the strong links between Asian economies and the global economy. Severe financial downturns or recessions in advanced economies are often associated with financial crises or recessions in Asia. Conditional on a stock market crash in the �S, the probability of an Asian credit contraction is 63% and stock price decline is 88%. The probability of an Asian recession is 14% conditional on an OECD/�S recession, and 24% on a severe OECD/�S recession. The financial turmoil that stemmed from the �S subprime mortgage crisis in 2007 has blown up into a global economic crisis. Major industrialized economies have already entered recessions and despite policy measures taken, the probability of a deeper and more prolonged global recession is high. Emerging Asian economies have also been hit hard due to strong links between Asian economies and the global economy through trade and financial channels. A rapid reversal in capital flows due to risk repricing and deleveraging has led to a squeeze of external funding conditions and a collapse of asset prices. Asian export growth is slowing sharply as demand from major economies shrinks. Given the severity of the current global crisis and financial downturns, the risk that many Asian economies will experience a deeper recession is high. The stylized facts of the movements of macroeconomic and financial variables from the historical recession episodes suggest that sharper declines in stock prices and export demand are associated with severe recession. However, considering that the current recession is unprecedented in many aspects, this episode may not entirely follow the stylized pattern previous recessions have taken. In addition, the actual impact of the global crisis on Asian economies depends on the policies adopted in response to the crisis. Policymakers across the region have taken immediate actions to contain the spillover effects of global financial turmoil on domestic financial systems. However, the wide spread of the crisis on to the real sector has called for policy reactions to hold down economic deterioration. Asian countries have adopted a mix of policy tools including monetary, financial, fiscal, exchange rate, and structural. But it remains a question of what types of policies would be more effective in reducing the length and severity of the recession. For example, the current public debate focuses on calling for more active fiscal responses, considering that monetary policy may have Crises in Asia: Historical Perspectives and Implications | 23 less traction when financial conditions worsen. However, it is not clear whether and to what extent countercyclical fiscal policies can help limit the impact of the global crisis. This is where future research on the role of national policies in dealing with financial and macroeconomic crises in Asia will be useful. References Agenor, P., C. J. McDermott and E. S. Prasad. 1999. Macroeconomic Fluctuations in Developing1999. Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts. IMF Working Paper 99/35, International Monetary Fund, Washington, DC. Aguiar, M., and G. Gopinath. 2007. “Emerging Markets Business Cycles: The Cycle is the Trend.” Journal of Political Economy 115:69–102. Barro, R., and J. �rsua. 2008. Macroeconomic Crises Since 1870. NBER Working Paper No. 13940, National Bureau of Economic Research, Massachusetts. Bry, G., and C. Boschan. 1971. Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, National Bureau of Economic Research, Massachusetts. Burns A. F., and W. C. Mitchell. 1946. “Measuring Business Cycles.” National Bureau of Economic Research, Massachusetts. Claessens, S., A. Kose, and M. Terrones. 2008. What Happens During Recessions, Crunches and Busts? IMF Working Paper WP/08/274, International Monetary Fund, Washington, DC. Evans, K., and P. Izzo. 2009. “Outlook for �S More Bearish.” Asian Wall Street Journal. 13–15 February. Harding, D., and A. Pagan. 2002. “Dissecting the Cycle: A Methodological Investigation.” Journal of Monetary Economics 49:365–81. IMF. 2007. “Chapter 4: Decoupling the Train? Spillovers and Cycles in the Global Economy.” In World Economic Outlook. International Monetary Fund, Washington, DC. ———. 2008. Regional Economic Outlook: Asia and Pacific. April. International Monetary Fund, Washington, DC. Kim, S., Lee, J. W., and C. Y. Park. 2009. “Emerging Asia: Decoupling or Recoupling.” Asian Development Bank and Korea �niversity. Mimeo. Lall, S., R. Cardarelli, and S. Elekdag. 2008. “Chapter 4: Financial Stress and Economic Downturns.” In World Economic Outlook, September. International Monetary Fund, Washington, DC. Mendoza, E. G. 1995. “The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations.” International Economic Review 36(1):101–37. Neumeyer, P. A. and F. Perry. 2005. “Business Cycles in Emerging Economies: The Role of Interest Rates.” Journal of Monetary Economics 52(2):345–80. Reddy, S. 2008. “Recession Dating, When in Doubt, Wait for a Crisis.” The Wall Street Journal. 1 December. Reinhart, C., and K. Rogoff. 2008. Is the 2007 �S Sub-Prime Financial Crisis So Different? An International Comparison. NBER Working Paper 13761, National Bureau of Economic Research, Massachusetts. ———. 2009. “The Aftermath of Financial Crises.” American Economic Review. Forthcoming. �S Federal Reserve Board. 2008. Minutes of the Federal Open Market Committee 28–29 October. Washington, DC. Watson, M. W. 1994. “Business Cycle Durations and Postwar Stabilization of the �.S. Economy.” American Economic Review 84(1):24–46. 24 | ADB Economics Working Paper Series No. 152 About the Paper Kiseok Hong, Jong-Wha Lee, and Hsiao Chink Tang find that based on historical crisis episodes in 21 developing Asian economies from 1961 to 2007, recessions and financial downturns are more frequent, longer lasting, and more severe in Asia than in the industralized countries. Also, severe financial downturns or recessions in the global economy are often coupled with financial crises or recessions in Asia. The severity of the current global financial crisis and recession means Asian economies are likely to experience a severe recession in 2009. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/economics ISSN: 1655-5252 Publication Stock No.: Printed in the Philippines