When the global financial crisis erupted in the summer of 2007, its spread was limited initially to the financial sectors of the United States and other advanced economies. After Lehman Brothers collapsed in the third quarter of 2008, the crisis became more widespread. During this time, the gross domestic product of the United States and western European countries fell from pre-crisis growth rates of around 3% to below zero. Yet, many emerging Asian countries were relatively unaffected, with annual GDP exceeding 5%. Most of the region did not feel the effects of the financial crisis until late 2008 and early 2009. Even after that, the impact on the region overall was less severe than on the rest of the world. Most countries bounced back relatively quickly (Tille 2011, Goldstein and Xie 2009).
Countries in emerging Asia were probably less exposed to the financial crisis than countries with more mature economies because these countries had adopted relatively conservative financial practices after the 1997–98 Asian financial crisis (Hale 2011). In addition, stimulus policies in emerging Asia were quite aggressive, which fostered fast recoveries.
Still, even with these elements in place, emerging Asia was not spared from the repercussions of the global crisis. The effects spread to the region through two important external channels. First, the collapse of asset prices in mature financial markets affected financial institutions worldwide, including those in Asia. Second, global trade declined in the second half of 2008 at the fastest rate since World War II. Because many Asian countries rely heavily on exports for economic growth, the decline in export demand had an immediate effect. Once asset prices and trade began to recover worldwide, so did emerging Asia’s economies.
However, a close look at the data suggests that these two channels did not affect all countries in emerging Asia equally. In this Economic Letter, we consider possible reasons for different responses. We find that Asian economies that were less exposed to U.S. financial securities and less reliant on exports of manufactured goods were less affected by the crisis.