Looking East: The Road to Recovery

I.   Introduction

The current global recession has experts around the world searching for a solution in a place never looked to before.  For the first time, Asian economies are leading the way out of a global economic slump.  While the United States and Europe have pioneered past recoveries from world recessions, recovery seems to have already begun in Asia with China at the forefront.  Massive government stimulus and expansionary fiscal policies have spurred growth in Asia with other strong economic indicators seemingly providing a foundation to a full-fledged recovery.  Despite a drop in exports, Asian economies have offset the decline in this major source of revenue by slashing interest rates, keeping savings levels high, increasing infrastructure demand and harnessing the potential for expansion in domestic consumer demand.  Many Asian nations are net creditors [1], with significant current account surpluses supplied by capital inflows over recent years.  Asia now has a comparatively high ability to lend and borrow, as opposed to most Western nations which are running high trade and fiscal deficits.  [2] However, the long-term sustainability of this potential recovery is questionable due to the huge amount of government-backed investment and generous policy measures that cannot continue indefinitely.  In order for these Asian economies, in particular China, to return to normalized growth, private investment needs to increase as well as domestic consumption.  No longer can the world wait for the Western consumer to jumpstart the global economy.  Increasing Asian domestic consumption is a necessary driver for getting the world out of this current recession.

II.                  The Global Recession

The heart of this current crisis was ultimately an overleveraged United States economy that fueled much of global consumption. [3] From a broad perspective, it may have begun in the early 1980’s with both the budget and trade deficits. [4] Financial magic tricks and easy money ignited consumer spending leading to an inevitable collapse of the bubble. [5] Beginning with the subprime crisis and flowing over to nearly all other asset classes, the United States economy ground to a halt, affecting the entire world.  As the developed Asian economies are mostly export oriented, they were clearly impacted by the steep drop in U.S. and global consumption as well as the decline in asset values. [6] This caused their respective domestic consumption levels to drop as people lost jobs, portfolio holdings, and overall general wealth.  [7]

Despite collapsing Western credit leading to a global recession, Asian economies have been the first to show signs of recovery.  Growth of middle classes in population giants China and India have led to increases in consumer spending as well as vast infrastructure spending, notably China. [8] Low-cost production in countries like Vietnam and Korea has also spurred economic recovery.  [9] Despite drops in Western consumer appetite, countries in Asia continue to export  due to the intra-continental domestic market.  [10] The domestic market is key to fueling this recovery in the long run and the Asian Development Bank says efficient and effective stimulus is what will bolster domestic demand to offset the weak external environment.  [11]


III.                The Current Situation in Asia

Empirical data indicates that Asia is indeed spurring a recovery during these rough times.  Favorable fiscal conditions in China have led to a surge in bank lending in the first half of 2009 while countries all across Asia have slashed interest rates. [12] China has increased growth from 6 percent in the first quarter to 8 percent in the second.  Other Asian areas like Singapore and South Korea are also showing greater output. [13] Unemployment rates in Asia are among the lowest in the world [14] and drops in Western consumer demand have been offset by increases in exports to other Asian countries.  China has become the largest trading partner for developed countries like Korea, stressing the importance of the intra-continental Asian consumer. [15] Because many Asian countries have lower debt to GDP ratios than developed countries, Asian nations are armed with the financial firepower to stimulate growth in the future.  [16] However, much of this growth has been led by government-backed investments leading to questions regarding the sustainability of this growth and problems in current stimulus measures. [17]

Vast amounts of liquidity poured into these Asian economies through drastic drops in policy rates and other financial measures that have expanded lending have created a positive outlook for now, but the question remains as to what will happen in the long term.  Inflationary pressures will emerge and banks will be forced to raise interest rates and be less generous with monetary policy.  [18] Whether these Asian economies can withstand this inevitable period or experience a “double-dip” will determine how quickly the world recovers from this economic slump.   Countries like China that have injected nearly $1,079 billion USD into their economy have caused experts to question the sustainability of current growth. [19] There are worries that private consumption will fail to take the baton as well as concern that the lack of external demand from the Western market will slow these Asian economies that depended on exports in the past.

IV.                Allow the Asian Domestic Consumer to Fuel the Recovery

Unless private investment and domestic consumption are able to pick up the slack, it is clear that the current bright outlook in Asia will dim once government-backed investment decreases.  Since economic indicators currently show that Western markets are not yet able to increase consumer spending, Asian domestic consumption rates must increase to spur a global recovery.  The Asian Development Bank has stated that current GDP growth in emerging East Asia is sourced more from domestic stimulus than an increase in external demand. [20] Although this bodes well for now, one must remember that the government has played a huge part with expansionary policy measures.  While these countries have promised to maintain such measures until the recovery is solidly on its way, [21] one only needs to remember the concerns mentioned above to see why the domestic consumer needs to play a larger role. 

Recent economic indicators show that the Asian consumer is primed to take on this responsibility.  Slowdowns in growth along with lower oil and food prices have helped calm inflation worries across the region, making it possible for authorities to continue their easing of monetary and fiscal policies.  The fact that many Asian nations are net creditors has allowed a decrease in core inflation and interest rates, increasing the level of capacity to lend and borrow. [22] By controlling inflation, these Asian economies will cash in on the long-term potential for expansion of domestic consumer demand. 

The worry that these export-driven countries will “double dip” once government stimulus measures are stopped and plunge once again into recession are another indication that the Asian domestic consumer must pick up the slack in the decrease of global consumption.  However, recent signs are promising.  Although Asian exports to the United States have fallen, those to other countries in Asia like China and Hong Kong have increased.  Korea has reported an increase in exports to China from 16% to 28.4% during 2000 to 2009 while the Philippines have increased their exports to China from 6.1% to 33.8% in the same period. [23] The large stockpile of cash reserves in Asian economies from all their exporting activities, coupled with high savings rates, give the Asian domestic consumer an advantage that must be utilized to increase both domestic and global consumption. 

V.                  Conclusion

There is no clear way out of this current global recession and signs of recovery are often questioned.  There are even indicators of a “double dip” that says things might get worse before they get better.  However, emerging markets in Asia and generous government policies have given the Asian consumer the power to fuel a global recovery.  Asian domestic consumption rates must continue to increase in order for these countries to truly stake their first claim as leaders out of a global recession.  


[1]          Central Intelligence Agency, The World Factbook (2009), https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html.

[2]          Id.

[3]          Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the global crisis of American capitalism 53 (2008).

[4]          Bruce Arnold, Congressional Budget Office, Causes and Consequences of the Trade Deficit:  An Overview (2000), http://www.cbo.gov/doc.cfm?index=1897&type=0.

[5]          Kevin Phillips, Bad Money: Reckless Finance, Failed Politics, and the global crisis of American capitalism 188 (2008).

[6]          E-mail from Charles Lee, Senior Associate, J.P. Morgan Seoul, to John Lee, J.D. Candidate, University of Illinois College of Law (Sept. 10, 2009 11:00:34 CST) (on file with author).

[7]          Asian Development Bank, Asian Economic Monitor 2009 (2009), http://www.aric.adb.org/asia-economic-monitor.

[8]          Id.

[9]          OECD Statistics, Key Short Term Economic Indicators: Production, Sales, and Orders, http://stats.oecd.org/index.aspx (last visited Sep. 20, 2009).

[10]        Asian Development Bank, Asian Economic Monitor 2009 (2009), http://www.aric.adb.org/asia-economic-monitor.

[11]        Asian Development Bank, Asian Economic Monitor 2009 (2009), http://www.aric.adb.org/asia-economic-monitor.

[12]        World Bank, East Asia & Pacific Update (2009), http://www.worldbank.org/eapupdate.

[13]        OECD Statistics, Key Short Term Economic Indicators: Quarterly National Accounts, http://stats.oecd.org/index.aspx (last visited Sep. 20, 2009).

[14]        OECD Statistics, Key Short Term Economic Indicators: Harmonised Unemployment Rates, http://stats.oecd.org/index.aspx (last visited Sep. 20, 2009).

[15]        World Bank, East Asia & Pacific Update (2009), http://www.worldbank.org/eapupdate.

[16]        Id.

[17]        Asian Development Bank, Asian Economic Monitor 2009 (2009), http://www.aric.adb.org/asia-economic-monitor.

[18]        Stephen Roach, Kidding Ourselves About an Asian Recovery, Time, Jun. 8, 2009, http://www.time.com/time/magazine/article/0,9171,1901366,00.html.

[19]        Id.

[20]        Asian Development Bank, Asian Economic Monitor 2009 (2009), http://www.aric.adb.org/asia-economic-monitor.

[21]        Brian Love, Global Recession Ending: OECD, NewsDaily, Sep. 3, 2009, http://www.newsdaily.com/stories/tre5821z4-us-economy-recovery-oecd/.

[22]        Kevin Brown, Asia eyes sustained recovery, Financial Times, Sep. 10, 2009, http://www.ft.com/cms/s/0/2cca3436-9e39-11de-b0aa-00144feabdc0.html.

[23]        OECD Statistics, MEI Original release data and revisions: I, http://stats.oecd.org/index.aspx (last visited Sep. 20, 2009).