Asia Beyond the Global Economic Crisis

Asia Beyond the Global Economic Crisis

The Transmission Mechanism of Financial Shocks

Edited by Satoshi Inomata

The characteristic feature of the recent global economic crisis is the speed and extent of the shock transmission. The development of cross-national production networks in recent years has significantly deepened the economic interdependency between countries, and a shock that occurs in one region can be swiftly and extensively transmitted to the rest of the globe. The sudden contraction of world trade and output was a negative outcome of this intertwined global economic system. Based on the method known as international input–output analyses, this book provides a detailed examination of the mechanics of shock transmission by probing the labyrinth of complex supply networks among nations.

Chapter 7: An Input–Output Analysis of Post-crisis Rebalancing in the Asia-Pacific Economy

Peter A. Petri

Subjects: asian studies, asian economics, economics and finance, asian economics, international economics

Extract

1 Peter A. Petri INTRODUCTION 1. Reducing international imbalances and achieving sustainable demand growth in surplus and deficit economies have emerged as key policy priorities in the wake of the 2008–2009 economic crisis. Global current account imbalances shrank in 2009 – due in part to increased US household savings and depressed investment – but are beginning to grow again in the recovery. Rebalancing is the main objective, for example, of the G-20 surveillance process launched in 2009. Rebalancing raises policy challenges among and within countries. First, it requires changes in the composition of demand, with expenditures shifting from net exports to domestic absorption in surplus economies such as China, and from domestic absorption to net exports in deficit economies, including especially the United States. Such parallel shifts would reduce the scale of net international capital flows. Second, rebalancing requires adjustments in supply, with resources shifting from tradable goods sectors to non-tradable goods sectors in surplus economies and vice versa in deficit economies. Large adjustments of this kind could force changes in Asia’s growth strategy from industrialization to, say, fostering services. Relatively little work has been done so far on the implications of these adjustments. The Asian Development Bank (2009) traces the history of imbalances and explores the general case for rebalancing. The Pacific Economic Cooperation Council’s Taskforce on the Global Economic Crisis examines the implications of rebalancing for the Asia-Pacific, and proposes a policy framework for coordinated initiatives (Petri, 2009). Prasad (2009) and a McKinsey Global Institute study (Woetzel et al...

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