by Abe de Ramos
Originally published in the Far Eastern Economic Review, January 20, 2009
As the extent of the US-led financial crisis unfolds globally, developing Southeast Asian countries are finding themselves in the position of suffering the collateral damage. While not directly hit by the liquidity crunch like their larger and wealthier neighbors, they’re also not immune to the slowdown, being part of the chain that supplies goods to consumers in the West who are now crimping on their spending. Indeed, the crisis highlights how developing economies in the Association of Southeast Asian Nations (ASEAN) are being reduced to a fringe role in the global economic landscape, and how they’re facing the hard truth that they won’t be able to regain the “tiger economy” status they once held without building a stronger domestic base.
On the surface, it seems as though the region will ride out the crisis relatively well. After all, the first economies to go into recession are those whose financial and industrial sectors are directly linked to the fortunes of the West. The liquidity crunch in Wall Street has weakened the financial hubs of Hong Kong and Singapore, while falling consumer confidence is hurting many Japanese companies reliant on exports to the United States and Europe. Projected declines in GDP growth rates for developing ASEAN nations this year also seem to be less severe than in China, the factory of the world, as well as Taiwan, Korea, and India, which generate substantial revenues from exports of goods, services, and technological expertise.
But the region is far from well and good. Being in the middle of the supply chain East Asia has created in the last 20 years—in which a computer is designed in Japan or Taiwan, its components made in Malaysia, Thailand, or Indonesia, then assembled in China—developing ASEAN nations are seeing a mild slowdown now only because of the lag effect. The question is how quickly and how well it can recover when the full impact of the global slump finally hits home.
In the near term, countries like the Philippines and Vietnam have little leeway to boost domestic economic activity in order to offset falling external demand. With the crisis proving deeper than expected, Asian governments may need to provide stimulus packages and pursue easier monetary policies. However, most are already overstretched, with negative fiscal balances unsupported by a narrow tax base, and made worse by fiscal leakage through corruption. Those with the borrowing capacity such as Thailand and Malaysia can raise funds, but for much higher costs given the lack of liquidity and greater perception of risk.