The impact of the global financial crisis on the Asia-Pacific region

1. 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

2. 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

3. The impact of the global financial crisis on the Asia-Pacific region Annual change in real GDP (%)

4. The impact of the global financial crisis on the Asia-Pacific region Fiscal stimulus: government spending growth rates (%)

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

6. The impact of the global financial crisis on the Asia-Pacific region Partial and general equilibriums (2) • Links between markets • Input-output linkage • Labour capital linkage • 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.

7. The impact of the global financial crisis on the Asia-Pacific region Return on labour Labour supply Real wage Technique Change GDP + Return on capital Capital stock Rate of Return Tax rates disposable income + Intermediate inputs Exchange rate investment level Taxes & subsidies Consumption ║ Sector Output Foreign demand Investors demand Household demand Government demand Intermediate demand ═ + + + + An illustration of CGE models (1) A simple economic system

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

9. The impact of the global financial crisis on the Asia-Pacific region An illustration of CGE models (3) Input-Output Table

10. 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.

11. 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.

12. The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (1) Percentage change in GDP and consumption

13. The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (2) Percentage change in imports and exports

14. The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (3) Percentage change in profitability (industry-average)

15. The impact of the global financial crisis on the Asia-Pacific region Macroeconomic results (4) Change in Equivalent Variation (US$ million)

16. The impact of the global financial crisis on the Asia-Pacific region Sectoral effects

17. The impact of the global financial crisis on the Asia-Pacific region Policy effects Percentage change in real GDP

18. The impact of the global financial crisis on the Asia-Pacific region Conclusions • 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.

19. Let’s hope for the best, but prepare for the worst.Thank you!