Responding to Financial Crisis Financial Crisis to Responding The Asian financial crisis of 1997–98 was devastating for the region, but policymakers at least believed that they gained a great deal of knowledge on how to prevent, mitigate, and resolve crises in the future. Fifteen Responding to years later, the Asian developing countries escaped the worst effects of the global crisis of 2008–10, in part because they had learned the right lessons from their own experience. In this important study, the Asian Development Bank and Peterson Institute for International Economics join forces to illuminate the con- trast between Asia’s performance during the more recent crisis with its performance during its own crisis and the gap between what the United States and European Union leaders recommended to Asia then and Financial Crisis what they have practiced on themselves since then. The overriding lessons emerging from the essays in this volume are that countries need to prepare for crises as if they cannot be prevented, make room for stabili- zation policies and deploy them rapidly when crises hit, and address the need for self-insurance globally if they can, or regionally if they must. LESSONS FROM ASIA THEN, CHANGYONG RHEE is the chief economist of the Asian Development Bank (ADB). He is the chief spokes- person for ADB on economic and development trends and oversees the Economics and Research Depart- THE UNITED STATES ment, which publishes ADB’s flagship knowledge products. He has over 20 years of professional expe- rience as an economist, financial adviser, and academic. He was the secretary general and sherpa of the Presidential Committee for the 2010 G-20 Seoul Summit, as well as vice chairman of the Financial Services AND EUROPE Commission (FSC) and chairman of the Securities and Futures Commission in the Republic of Korea. Prior to his appointment at the FSC, he was a professor of economics at Seoul National University and assistant professor at the University of Rochester. He was also a frequent and active policy advisor to the NOW Government of the Republic of Korea, including in the Office of the President, the Ministry of Finance and Economy, the Bank of Korea, the Korea Securities Depository, and the Korea Development Institute. His key research interests include macroeconomics, financial economics, and the Korean economy. He has published many papers in these fields. He obtained his PhD in economics from Harvard University and his Changyong Rhee & Adam S. Posen, editors BA in economics from Seoul National University. ADAM S. POSEN is the president of the Peterson Institute for International Economics. From 2009 to 2012, he served as an external member of the Bank of England’s rate-setting Monetary Policy Committee (MPC). Previously, he worked in finance in Germany following reunification; wrote the definitive book on Japan’s economic crisis of the 1990s, Restoring Japan’s Economic Growth (1998), and counseled the Koizumi government that subsequently turned Japan around; coauthored with Ben Bernanke a reform program Rhee/Posen for Federal Reserve policy and currently advises the US Congressional Budget Office; and consulted for the UK Cabinet Office on the successful London G-20 summit of 2009, prior to being appointed to the MPC. Among the most cited economists in the press, he is a columnist for the Financial Times and appears frequently on Bloomberg, NPR, and other programs. In April 2012, an article in the Atlantic magazine named him to its international team of “superstar central bankers,” and in December 2012 he was profiled in the New York Times Magazine article “God Save the British Economy.” He received his PhD and BA from Harvard University and is a member of the Council on Foreign Relations, the Trilateral Commission, and the faculty of the World Economic Forum. 6 ADB Avenue 1750 Massachusetts Ave., NW A COPUBLICATION OF THE Mandaluyong City Washington, DC 20036–1903 ASIAN DEVELOPMENT BANK AND 1550 Metro Manila, Tel 202-328-9000 Philippines Fax 202-659-3225 PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS Tel +63 2 632 4444 http://www.piie.com Cover Illustration: iStockphoto Fax +63 2 636 2444 Cover Design by Peggy Archambault Responding to Financial Crisis LESSONS FROM ASIA THEN, THE UNITED STATES AND EUROPE NOW Changyong Rhee & Adam S. Posen, editors A COPUBLICATION OF THE ASIAN DEVELOPMENT BANK AND PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS Washington, DC October 2013 ASIAN DEVELOPMENT BANK 6 ADB Avenue Mandaluyong City 1550 Metro Manila, Philippines Tel +63 2 632 4444 Fax + 63 2 636 2444 www.adb.org PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 1750 Massachusetts Avenue, NW Washington, DC 20036-1903 (202) 328-9000 FAX: (202) 659-3225 www.piie.com Adam S. Posen, President Steven R. Weisman, Editorial and Publications Director Cover Design: Peggy Archambault Printing: Versa Press, Inc. © 2013 Asian Development Bank. All rights reserved. Published 2013. Requests for copyright permission may be directed to: Asian Development Bank Publishing and Dissemination Unit, Department of External Relations 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Fax: +63 2 636 2648 E-mail: [email protected] Printed in the United States of America 15 14 13 5 4 3 2 1 Library of Congress Cataloging-in-Publication Data Responding to fi nancial crisis : lessons from Asia then, the United States and Europe now / Changyong Rhee & Adam S. Posen, eds. pages cm “October 2013.” Includes bibliographical references. ISBN 978-0-88132-674-1 1. Financial crises—Asia. 2. Financial crises—United States. 3. Financial crises—Europe. 4. Asia—Economic conditions—21st century. 5. United States—Economic conditions—21st cen- tury. 6. Europe—Economic conditions—21st century. I. Rhee, Changyong, editor of compilation. II. Posen, Adam Simon, editor of compilation. III. Cline, William R. Sovereign debt and Asia. HB3808.R47 2013 338.5’42—dc23 2013026764 The views expressed in this publication are those of the authors and do not necessarily refl ect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term “country” in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. ADB encourages printing or copying information exclusively for personal and noncommercial use with proper acknowledgment of ADB. Users are restricted from reselling, redistributing, or creating derivative works for commercial purposes without the express, written consent of ADB. Note: In this publication, “$” refers to US dollars. This publication has been subjected to a prepublication peer review intended to ensure analytical quality. The views expressed are those of the authors. This publication is part of the overall program of the Peterson Institute for International Economics, as endorsed by its Board of Directors, but it does not necessarily refl ect the views of individual members of the Board or of the Institute’s staff or management. The Institute is an independent, private, nonprofi t institution for rigorous, intellectually honest study and open discussion of international economic policy. Its work is made possible by fi nancial support from a highly diverse group of philanthropic foundations, private corporations, and interested individuals, as well as by income on its capital fund. For a list of Institute supporters, please see www.piie.com/supporters.cfm. Contents Preface v 1 Introduction 1 Adam S. Posen and Changyong Rhee 2 Banking Crises and “Japanization”: Origins 11 and Implications Masahiro Kawai and Peter Morgan 3 Responses of Central Banks in Advanced 57 Economies to the Global Financial Crisis Joseph E. Gagnon and Marc Hinterschweiger 4 Why Did Asian Countries Fare Better during 103 the Global Financial Crisis than during the Asian Financial Crisis? Donghyun Park, Arief Ramayandi, and Kwanho Shin 5 Policy Advice and Actions during the Asian 141 and Global Financial Crises Simon Johnson and James Kwak 6 Evolution of the Asian and European Financial 179 Crises: Role of the International Monetary Fund Edwin M. Truman III 7 Global and Regional Financial Safety Nets: 213 Lessons from Europe and Asia Changyong Rhee, Lea Sumulong, and Shahin Vallée 8 Regional Responses to Financial Crises: The 249 Americas, East Asia, and Europe Stephan Haggard 9 Sovereign Debt and Asia: International Lessons 277 and Emerging Issues William R. Cline About the Contributors 313 Index 319 IV Preface The world still awaits a sustained and sustainable recovery from the global fi nancial crisis of 2008–10, which battered the world economy and disrupted global fi nancial markets to an unprecedented degree. Private credit seized up in the United States and European Union, and global output shrank for the fi rst time in the postwar era. Thanks to initially decisive monetary and fi scal stimulus programs implemented by both advanced and developing countries, a measure of fi nancial stability returned in 2009, only to disappear again in a new bout of turmoil caused by sovereign debt and banking crises in Europe. Despite the actions to date by the European Central Bank, the International Monetary Fund, and European governments, the European crisis awaits a more fundamental resolution. More broadly, the world is now aware that major fi nancial crises can emerge from even the most advanced economies and more fully appreciates the devas- tation they can wreak. While this pair of successive crises originated in the world’s largest and most fi nancially developed economies, it still affected the rest of the world, including developing Asia, where economic growth suffered especially in those countries dependent on exports. Many of these Asian coun- tries were protected from the worst of the crisis, however, by a combination of improved fundamentals and practices in their own economies and fortuitous circumstance.