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The ongoing euro zone debt crisis creates an undesirable scenario for the global economy as well as for the Asia-Pacific region given that the region has close economic linkages. The paper aims to provide quantitative estimates of the potential impact of the euro zone debt crisis on merchandise exports as well as on economic growth and poverty reduction efforts in the region. The results indicate that a one-percentage-point fall of output growth of the euro zone would result in a total export loss of $166 billion. In addition, the protectionist threats could further increase the loss in exports by $27 billion. On social development, the disorderly euro zone debt crisis scenario would prevent 8.19 million people to get out of poverty and another 1.15 million would be pushed back into poverty as per the $1.25-a-day poverty line. The paper illustrates that macroeconomic policy space appears adequate in most economies that tend to be more heavily affected by the euro zone debt crisis. But strong inflationary pressures and less favourable public debt conditions could prevent some economies from implementing swift and forceful macroeconomic policy responses.
Acknowledgements
We wish to thank Shuvojit Banerjee, Aynul Hasan, Alberto Isgut, Daniel Jeongdae Lee, Huhammad Hussain Malik and Oliver Paddison for helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the United Nations or Ministry of Finance, Thailand.
Notes
1. For further details, see ESCAP (2012a).
2. These economies include Portugal, Italy, Ireland, Greece and Spain.
3. The EFSF was created to safeguard financial stability in Europe by providing financial assistance to euro area member states. Currently, EFSF is backed by guarantee commitments from the euro area member states for a total of 780 billion and has a lending capacity of €440 billion. See more details at http://www.efsf.europa.eu/about/index.htm
4. For further discussion, see UNDESA (2012).
5. For further details, see ESCAP (2011a).
6. Recent studies show that, if the euro zone experiences a sharp recession, the region would experience its growth rate falling sharply through the contagion channels, which would be felt mainly through trade. IMF (2012) predicts a fall of four-percentage-points in the growth rate of China in the downside scenario when the euro zone activity declines by about four-percentage-points to the previous forecasts. Similarly, using a Bayesian vector autoregressive model, Erten (2012) finds that a one-percentage-point reduction in the euro zone growth would lead to 0.75-percentage-point reduction in emerging Asian growth rate.
7. World Trade Organization (WTO) Director General, Pascal Lamy, noted that protectionism was increasing through the ‘accumulation of small measures that do not disappear’, and warned that Asia's open and trade-dependent economies were particularly exposed to this trend. See http://www.bangkokpost.com/breakingnews/295930/wto-protectionism-is-growing-risk
8. See UN-ESCAP-ADB-UNDP (2012).
9. The shares of exports to the United States in total exports have declined over the past ten years for all five subregions in Asia-Pacific, while those to the euro zone economies have reduced in all subregions except for North and Central Asia where the share increased from 15% in 1998 to over 20% in 2010.
10. For the use of the AIO Table, see, for instance, Mori and Sasaki (2007), Pula and Peltonen (2009), and IMF (2011).
11. He, Cheung, and Chang (2007) provide the direct and indirect trade exposure to the United States for major Asian economies based on the country-level bilateral trade statistics from the IMF's Direction of Trade Statistics.
12. North and Central Asia refers collectively to Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Russian Federation, Tajikistan, and Turkmenistan. Uzbekistan is excluded duo to lack of data.
13. South and South-West Asia comprises Afghanistan, Bangladesh, Bhutan, India, Islamic Republic of Iran, Maldives, Nepal, Pakistan, Sri Lanka, and Turkey.
14. See ESCAP (2011c) for details.
15. Pacific Islands include Cook Islands, Fiji, Kiribati, Papua New Guinea, Samoa, Solomon Islands, Tonga, and Vanuatu. ‘Advanced’ countries such as Australia and New Zealand are not included in these aggregated totals. The following countries and territories/areas are excluded due to lack of data: American Samoa, French Polynesia, Guam, Marshall Islands, Micronesia (Federated States of), Nauru, New Caledonia, Niue, Northern Mariana Islands, Palau, and Tuvalu.
16. South-East Asia refers collectively to Brunei Darussalam, Cambodia, Indonesia, Malaysia, Philippines, Singapore, Thailand, Timor-Leste, and Viet Nam. Lao People's Democratic Republic and Myanmar are excluded due to lack of data.
17. East and North-East Asia comprises China, Hong Kong, China, Macao, China, Mongolia, and Republic of Korea. 'Advanced' countries (i.e., Japan) are not included in these aggregated totals. Democratic People's Republic of Korea is excluded due to lack of data.
18. A financial turmoil in this paper is defined as a combination of deteriorated credit condition, lowered stock market indices, and high borrowing costs.
19. See Baldwin and Evenett (2009).
20. The current multilateral trade negotiations, Doha Development Agenda (or the Doha Round), under the World Trade Organization was launched in November 2001.
21. WTO-OECD-UNCTAD reports on G-20 Trade and Investment Measures illustrated the share of trade covered by G-20 trade restrictive measures of their total imports for the following periods: (i) 1% in October 2008 to October 2009, (ii) 0.5% in November 2009 to May 2010, (iii) 0.3% in May 2010 to mid-October 2010, (iv) 0.6% in mid-October 2010 to April 2011, and (v) 0.6% in May to mid-October 2011.
22. See ESCAP (2012b).
23. See ESCAP (2011b) and also Basu et al. (2012).
24. The selected 13 economies met at least one of the following criteria: (i) estimated GDP growth over 2012–2013 under the crisis scenario is lower than 80% of that under the baseline scenario (see Figure 5), (ii) export sensitivity measures amounts to at least 0.5% of GDP (see Table 2), and (iii) the number of additional poor over 2012–2013 is at least 0.25% of population (see Figure 6).
25. See www.imf.org/external/pubs/ft/dsa/index.htm for the methodology and country studies. There is no debt sustainability analysis conducted for Taiwan Province of China.
26. The magnitude of the growth impact on debt profile can be significant. In the case of Malaysia, the public debt level could reach 70% of GDP by 2016 relative to the baseline of around 60% of GDP if output growth is 1.5-percentage-points slower than the baseline.
27. This is mainly due to a high degree of dollarization in Cambodia, and the use of an exchange rate as a main monetary policy tool in Singapore.
28. See Ducanes et al. (2006), Tang et al. (2010), and Yadav et al. (2011) for the analysis of fiscal multipliers in selected Asian economies. The results indicate that fiscal multipliers in larger economies like China and India are typically greater than one, and generally below one for smaller, open economies like Malaysia, Thailand, and the Republic of Korea. More broadly, Ilzetzki et al. (2009), Spilimbergo et al. (2009), and Corsetti et al. (2012) suggest some ranges of fiscal multiplier values under different conditions regarding exchange rate regime, degree of trade openness, national income level, and economy size.
29. See Mishra and Montiel (2012) for a recent review of monetary transmission in developing economies. The literature also suggests that monetary transmission is stronger under the flexible exchange rate regime. But at the same time, fiscal multipliers are typically higher in economies with the fixed exchange rate regime. The net impact of exchange rate system on macroeconomic policy transmission remains unclear.
30. Over 2000-2011, Azerbaijan's mean interest rate spread (the base lending rate minus the deposit rate) stood at close to 8%, compared to 1.7–5.4% in the six economies depicted in Figure 11.