The Asian Development Outlook 2009 Update (ADO 2009 Update), released today, says that the 1997-98 Asian Financial Crisis and the current global economic crisis exposed the region to the risks of unbalanced openness. The former crisis underscored the risk from excessive financial openness, the latter, excessive trade openness.

A key lesson learned from the Asian Financial Crisis is the need for strong domestic institutional capacity to manage financial globalization. Developing Asia successfully reformed its financial systems in the wake of the 1997-98 crisis, boosting its resilience to financial shocks and to a large degree shielding it from the adverse effects of the current global financial crisis.

"However, the region’s recovery from the Asian Financial Crisis came at the expense of an over-reliance on external demand from outside the region," said ADB Chief Economist Jong-Wha Lee.

Developing Asia’s desire to protect itself from one type of risk from openness and globalization - financial instability due to volatile capital flows - inadvertently magnified its exposure to another type of risk - unbalanced openness. As a result, the ongoing global turmoil battered the region’s exports, reduced capital inflows, and slashed remittance growth.

The region must therefore address the geographically unbalanced structure of its trade, capital flows, and movement of workers by promoting closer intra-regional economic linkages.

"Recognizing that globalization and openness underpinned global growth and prosperity in the last sixty years, the region must continue to embrace them. However, mechanisms must be put in place to safeguard developing Asian economies against excessive and unbalanced openness," said Dr. Lee.

ADO 2009 Update promotes broadening the scope and structure of the region’s flows of trade, capital, and workers by: (i) strengthening intra-regional trade; (ii) effectively managing financial globalization; and (iii) maximizing the benefits from labor mobility.

Strengthening intra-regional trade (particularly for final goods) entails: boosting domestic economies; removing behind-the-border obstacles to freer trade in goods and services; and promoting regional cooperation to institutionalize concrete and specific efforts toward facilitating intra-regional trade.

Effectively managing financial globalization requires: encouraging a shift toward less volatile longer-term inflows; strengthening domestic financial markets with requisite oversight mechanisms and keeping appropriate levels of foreign exchange reserves; and supporting the establishment of regional capital markets for the efficient use of regional savings.

Maximizing the benefits from labor mobility involves: ensuring that the migration channel is kept open, enhancing the safety and security of formal systems for funds transfers, and providing an environment that encourages households to invest more of the funds that they receive. Regional cooperation to avoid protectionist policies would also enhance the interests of both home and host countries.

“Combined with a stronger domestic economy, broader openness can help regional economies achieve rapid yet stable growth,” says Dr. Lee.

Asian Development Outlook, and Asian Development Outlook Update, are ADB’s flagship economic reports analyzing the economic conditions and prospects in Asia and the Pacific, and are issued in March and September, respectively.