The current global financial turmoil and Asian developing countries



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The current global financial turmoil and Asian developing countries
As the US financial crisis impacts on developing countries, Yilmaz Akyuz attempts to gauge in what way and to what extent the crisis will affect the economies in the Asian region.
AFTER about six years of exceptional growth, the world economy has now entered a period of instability and uncertainty due to a global financial turmoil triggered by the subprime crisis in the United States. Current difficulties, however, are not unrelated to forces driving the preceding expansion. From the early years of the decade the world economy went through a period of easy money as interest rates in major industrial countries were brought down to historically low levels and international liquidity expanded rapidly. In the United States ample liquidity and low interest rates, together with regulatory shortcomings, resulted in a rapid growth of speculative lending, sowing the seeds of current problems.

Global liquidity and an increase in the risk appetite, rather than improvements in fundamentals, have also been the main reason for a generalised and sustained surge in capital flows to emerging markets. They have given a boost to growth in the recipient countries, but also generated fragility and imbalances, including unsustainable currency appreciations and current account deficits, and credit, asset and investment bubbles, which now render them vulnerable, in different ways and degrees, to shocks from the subprime crisis.

The crisis is comprehensive and global, encompassing the banking sector, securities and currency markets, and institutional and individual investors in most parts of the world. The bursting of the bubble has left the United States with excessive housing investment which cannot be put into full use without significant declines in prices. The household sector has ended up with debt in excess of equity represented by such investment. An important part of portfolios of banks and their affiliates is not performing. Bond insurers face massive obligations they cannot meet. And many investors across the world have found themselves holding worthless mortgage-based securities and commercial paper.

The evolution of the world economy now depends crucially on the impact of the crisis on growth in the United States and its global spillovers through trade and finance. Whether growth in Asia would be decoupled depends not only on the nature and extent of contagion and shocks from the crisis, but also on the strengths and vulnerabilities of the economies in the region and their policy response. Adverse spillovers from this crisis will certainly surpass those from the crises in emerging markets in the 1990s. However, for the first time in modern history hopes seem to be pinned on developing countries for sustaining stability and growth in the world economy. On the one hand, the sovereign wealth funds (SWFs) from emerging markets are increasingly looked at as stabilising forces in financial markets by providing capital to support troubled banks in the United States and Europe while taking large risks. On the other hand, economic prospects in the world economy seem to hinge on the ability of Asian developing countries to continue surging ahead despite adverse spillovers from the crisis.




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