Compared to the Asian financial crisis twelve years ago, the dynamic of macroeconomic adjustment in this crisis also looks similar, although the trigger point this time is more bankled than currency-led. The real surprise, however, was in the timing, the scale, and the intensity of how the problem quickly deteriorated into a major global turbulence. According to the IMF, compared with the previous crises, the cost of the current crisis in terms of financial losses could be as high as 10 percent of US GDP. This implies a very substantial welfare loss. Is this the time of upheaval? My answer is both yes and no. The “No” part refers to the fact that, despite the magnitude of the current crisis, aggressive policy response and the willingness to do more by Governments have successfully contained the fallout to the extent that collapse of the global financial system has been avoided. Financial markets, to an appreciable extent, are stabilizing, risk appetite is returning, and signs of improvement in the real economy are beginning to emerge on a world-wide basis. Although it is still early days, they do point to the beginning of stabilization which is an important first step for economic recovery to take hold. The “Yes” part of my answer comes from what I see as a major challenge in the ideas and policies on how best to manage the global economy going forward in this era of globalized finance.
These changes will help reduce the likelihood of crisis and contain the impact of a systemic failure to the level that can be managed by conventional policies. In parallel with this, on the economic front, adjustment to the financial crisis will continue and, in the process, the global economy will likely move into a world of two halves. The first half is the corecrisis countries whose immediate policy concern will be to rebuild financial fundamentals and resume growth. The second half is the less-affected economies, including emerging markets in Asia, whose policy focus will be to sustain growth and avoid financial instability. This latter point is important because, given abundant liquidity, the shift in the pattern of global growth towards the less-affected economies will spark a new financial cycle driven by a resumption of large capital flows to emerging markets. The challenge for emerging markets, therefore, is to grow safely by managing all the attendant risk associated with the strong capital flows. In this context, it is important that the experience of the last ten years, when the fall in Asian  BIS Review 92/2009  3  demand after the Asian financial crisis was offset by a boom in US residential investment, must not be repeated. Otherwise, the crisis risk will remain high, and globalized finance will be seen only as a threat to long-term economic stability. Managing this risk and growing safely will be the stake of emerging market economies going forward.