Adjusting to the Financial Crisis: How Emerging Markets and Developed Economies Have Fared

This article provides an overview of how the G3 (USA, the euro area and Japan) and Asian emerging markets (EM Asia) have fared following the outbreak of the financial crisis in 2008. The article shows that EM Asia weathered the crisis much better than the G3 for a number of reasons. First, EM Asia had little direct exposure to the failed financial institutions and it was therefore 'only' hit indirectly through a sharp decline in trade and through a rise in financial market turmoil. Second, leading EM Asian nations adopted government stimulus packages that in many cases were bolder than in the G3, which helped to cushion the sharp decline in exports. Third, as a result of the reforms following the Asian crisis, EM Asia had healthy government finances and significant foreign exchange reserves, which also helped. Because the financial crisis was triggered by the bursting of a housing bubble in the USA, the article also analyses the extent to which the same could happen in China, where house prices again are rising. Finally, the article discusses the new activist monetary policy in Japan that aims to bring an end to deflation