Global Economic Crisis and Rebalancing Asia's Growth: Supporting SMEs through the Crisis Jong-Wha Lee Head, Office of Regional Economic Integration and Acting Chief Economist, Economics and Research Department Asian Development Bank 23rd CACCI CONFERENCE June 1, 2009
Outline 1. Impact of the global crisis on Asia 2. Rebalancing growth in Asia 3. How are enterprises being affected? 4. Policy issues • Government responses • ADB’s response
Impact of the global crisis on AsiaWorst recession since WWII… World GDP1 and World Trade Volume2 (y-o-y change, %) 1GDP = gross domestic product. 2Export Volume. 3f = forecast. Sources: Asian Development Outlook 2009, Asian Development Bank; World Economic Outlook Database (Oct 2008), Global Economic Policies and Prospects for the G20 Meeting of the Ministersand Central Bank Governors, International Monetary Fund.
Impact on Asia The more globalized, the harder hit Growth stagnates as export demand plunges; affects industrial production Capital flows become volatile Stock prices plummet Currencies tumble against the US dollar Sovereign bond spreads widen, indicating heightened credit risk
GDP growth to slow further in 2009… Annual GDP Growth Rates (%) Annual GDP Growth Rates (%)
…as export demand plunges Export Growth1 ($ value, y-o-y, %) 1 3-month moving average. 2 Refers to NIEs, ASEAN-4 and Viet Nam; does not include Brunei Darussalam, Cambodia, Lao People's Democratic Republic, and Myanmar, for which monthly data are not available. 3 PRC = People's Republic of China. 4 South Asia includes India, Pakistan, and Sri Lanka. Source: OREI staff calculations based on CEIC data.
2. Rebalancing growth in Asia Asia relies heavily on exports… : 7
…thus the need to rebalance growth Strengthen domestic demand Improve investment climate to attract private capital Promote small- and medium-sized enterprises and service industries Adopt financial development and exchange rate polices that promote better and more efficient resource allocation Enhance regional integration and cooperation 8
3. How are enterprises being affected? • Mainly through the adverse impact on exports • Worst hit are those in industries showing steep declines in exports, and their suppliers
Impact by Industry A= road vehicles B= metal manufactures and general industrial non-electrical machinery and equipment C= electrical machinery and apparatus D= basic chemicals, rubber and plastic products E= telecom, sound recording & reproducing apparatus F= other exporting manufacturing industries A= non-electrical machinery B= wearing apparel including footwear C= electrical machinery D= textiles E= professional and scientific equipment F= other exporting non-oil manufacturing industries
Estimating an Exports Vulnerability Index* for Manufacturing * The index measures the share of workers or firms that may be directly affected by the sharp decline in exports.
Backward linkages and multipliers • Estimates computed based on the direct impact on manufacturing sectors exporting • These require inputs from other sectors— crisis impact thus broader given backward linkages • Example: in India, a US$1 drop in wearing apparel exports implies a 43.6 cent drop in intermediate inputs; and another 26.5 cent drop in demand for services (1st order impact) • Multiplier effect will be larger if iterated dynamic channels and linkages are taken into account
What will happen to SMEs? • Importance of SMEs in employment varies across economies • Clearly seen from manufacturing data
Might seem less affected… • Evidence from World Bank Enterprise Survey data from 15 manufacturing industries • Small enterprises are • Less export oriented • Less likely to use imported inputs • More likely to sell output to other small firms and directly to consumers • All more pronounced for South Asia
…but SMEs are still hit • First, averages mask heterogeneity • Second, policies must encourage SMEs linked to export markets and large enterprises—they are precisely the ones that are “engines of growth,” adopt new and more productive technologies, and generate good jobs
Finally, finance is fast becoming a constraint • Bond spreads are increasing – implying difficulties for SMEs in accessing finance
4. Steps taken to deal with the crisis • Safeguard banking and financial systems • Increase liquidity and ease credit and monetary policy • Boost fiscal spending • Specific support to SMEs • Credit guarantees • On-the-job training • Tax allowances
ADB’s response to the crisis Will increase lending by more than $10 billion in 2009–2010
Thank you Jong-Wha Lee Head, Office of Regional Economic Integration and Acting Chief Economist, Economics Research Department Asian Development Bank www.adb.org