The impact of the global financial crisis on

The impact of the global financial crisis on the Asia-Pacific region by Xianming Meng (Sam) Mahinda Siriwardana and Judith Mcneill Institute for Rural Futures University of New England Australia

The impact of the global financial crisis on the Asia-Pacific region Outline of Presentation Background Partial and general equilibriums An illustration of CGE models GTAP model and simulation scenarios Macroeconomic effects Sectoral effects Policy effects Conclusion

The impact of the global financial crisis on the Asia-Pacific region Annual change in real GDP (%) 15 10 5 Year 2007 Year 2009 0 US -5 -10 EU Japan Russia China India WORLD

The impact of the global financial crisis on the Asia-Pacific region Fiscal stimulus: government spending growth rates (%) 25 20 15 Year 2007 Year 2008 Year 2009 10 5 0 Australia China Hong Kong Taiwan Japan Korea India US EU Russia

The impact of the global financial crisis on the Asia-Pacific region Partial and general equilibriums (1) Price Equilibrium QD = Q s Partial equilibrium: demand equals supply in one or more (but not all) markets. S General equilibrium: demand equals supply in all markets P* D Q* Can we achieve general equilibrium by equilibrating market one by one? Quantity of Grapes

The impact of the global financial crisis on the Asia-Pacific region Partial and general equilibriums (2) Links between markets 1. Input-output linkage 2. Labour capital linkage 3. Substitutes (e. g. Rice and Wheat) and complements (e. g. Peanut butter and Bread) So we need to think about the equilibriums of all markets simultaneously.

The impact of the global financial crisis on the Asia-Pacific region An illustration of CGE models (1) A simple economic system

The impact of the global financial crisis on the Asia-Pacific region An illustration of CGE models (2) Activity Level A nested production function Leontief Good 1 Good G up to CES Primary Factors CES Domestic Good 1 Imported Good 1 Domestic Good G Imported Good G Labour Capital CES Labour type 1 up to Labour type N

The impact of the global financial crisis on the Asia-Pacific region An illustration of CGE models (3) Basic Flows Taxes Labour Capital ← ↑ C*S ↓ ↑ O ↓ ↑ 1 ↓ I →← H →← 1 →← Change in Inventories Emissions Exports Government Households Investors Producers Sales by commodity Purchases by Industry Input-Output Table 1 → ← I+H →← 1 → V 1 BAS V 2 B A S V 3 B A S V 4 B A S V 5 B A S V 6 B A S V 7 B A S V 1 T AX V 2 T AX V 5 T AX V 6 T AX V 7 T AX V 1 LAB S = source of commodity (i. e. domestic or imported) C = Number of Commodities I = Number of industries O = Number of Occupation types H = number of households V 1 CAP V 3 T A X V 4 T AX

The impact of the global financial crisis on the Asia-Pacific region GTAP model 113 global regions (countries) and 57 sectors and commodities, 1 global bank, 1 international transportation service, and a representative household and government for each region, For the purpose of this study they are aggregated into 36 global regions and 28 sectors and commodities.

The impact of the global financial crisis on the Asia-Pacific region Scenarios Scenario 1: 60% decrease in productivity in all financial sectors and 60% decrease in regional investment. Scenario 2: Scenario 1 plus 40% decrease in household consumption. Scenario 3: Scenario 2 plus 20% increase in government spending. Scenario 4: Scenario 2 plus 20% decrease in production tax rates. Scenario 5: Scenario 3 plus a 20% increase in the import tariff rate.

The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (1) Percentage change in GDP and consumption 20 15 10 5 0 st Re of ia ss ld or W Domestic consumption 5 Real GDP Ru -15 _2 -10 EU ru Pe sia da ile Ch SA U na Ca a di In am N et Vi nd la ai e Th or ap ng Si ay sia an ng Ko ne do al M In a iw Ta re Ko g n pa Ja on H lia ra na i Ch st Au -5

The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (2) Percentage change in imports and exports 60 40 20 0 st Re of ia ss ld or W Real exports 5 real imports Ru -80 _2 -60 EU -40 ru Pe le i Ch ay sia ne an ng Ko SA U da na Ca a di In am N et Vi nd la ai Th ore ap ng sia Si al M do In a iw Ta re Ko g n pa Ja on H ia al tr na i Ch s Au -20

The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (3) Percentage change in profitability (industry-average) 10 5 0 st Re of 5 ia ss Ru _2 EU ru Pe le i Ch ld or W SA U da na Ca a di In am N et Vi nd la ai e Th or ap ng sia Si sia ne ng Ko an ay al M do In a iw Ta re g n pa Ko Ja on -35 H -30 na -25 lia -20 ra -15 i Ch -10 st Au -5

The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (4) Change in Equivalent Variation (US$ million) 0 st Re of 5 sia s Ru _2 EU u r Pe ld or W da ile Ch SA U na Ca am N re nd la a et di In Vi ai po a ng ng sia ay al Th Si M an ne do In iw Ta a re Ko n Ko -1400000 pa -1200000 Ja -1000000 g on -800000 H -600000 lia -400000 a in Ch ra st Au -200000

The impact of the global financial crisis on the Asia-Pacific region Sectoral effects World average output changes (%) under scenario 3 60 50 40 30 20 10 0 gs ce vi n r se lin el w D l tio ea ic bl Pu cr Re rt o sp ia nc na Fi T IC an Tr e n tio -50 ad -40 uc c -30 tr ns i on -20 Tr Co tr ec El e cl ol hi Ve tr Pe ile xt Te t ea il O M ns ai Gr -10

The impact of the global financial crisis on the Asia-Pacific region Policy effects Percentage change in real GDP 0 Australia China Hong Kong Japan Korea Taiwan Singapore India USA -2 -4 -6 -8 -10 -12 GFC baseline 20% production tax cuts 20% increase in government spending 20% increase in import tariff

The impact of the global financial crisis on the Asia-Pacific region Conclusions 1. 2. 3. 4. An event like GFC has a devastating effect on regions worldwide. It hits harder on the countries with high-exposure through trade, investment or financial mechanism. The rate of return on capital will decrease significantly during an event like the GFC, but international trade will increase when countries try to reduce the cost in order to survive the GFC. The sectoral effects show that most industries will experience contraction, especially for dwelling, recreation, trade, and textile. But industries like public services and construction will expand during the GFC due to the government expansionary fiscal policy. Although both increases in government spending and decreases in production tax rates can mitigate the negative effects of the GFC, production tax cuts appear much more effective. A protectionism policy would aggravate the effect of the GFC.

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