Global economic crisis: Impacts and policy options

Abstract

The current global financial crisis began with the housing boom in 2000 with acquisitions fueled by subprime lending. Complex financial instruments, innovation and globalization helped spread the risk as well as its crippling economic effects when the major US financial institutions went bankrupt. There is the notion that Asia is capable of decoupling from the US; but this crisis has largely disproved this as stock markets fell, currencies tumbled and weak G3 demand led to the drop in manufacturing. Studies show that Asia is still dependent on external demands and global economic conditions. China may well provide a strong anchor for the region but it too relies on global conditions to remain afloat. In the Philippines, the effects of the global crisis were manifested in the outflow of foreign investments, a rise in credit defaults, a plunge in consumer spending and slow remittances. Still, the Philippines is doing better compared to other more open economies in the region such as Hong Kong, Singapore, Korea, and Taiwan which have substantial financial markets. As the ADB predicts that growth will decelerate for Asia in 2009, policymakers can respond to this by: first, acting decisively and collectively to avoid a major downturn; second, building infrastructure and social safety nets to protect the poorest of the poor and those who will be affected by the crisis; third, restoring market confidence; fourth, over the long term, devising counter cyclical policy frameworks to mitigate the impacts; and last, enforcing regional cooperation measures. 2009 De La Salle University, Philippines.

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