by
Xianming Meng (Sam)
Mahinda Siriwardana
and Judith Mcneill
Institute for Rural Futures
University of New England
Australia
The impact of the global financial crisis on the Asia-Pacific region
Outline of Presentation
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Background
Partial and general equilibriums
An illustration of CGE models
GTAP model and simulation scenarios
Macroeconomic effects
Sectoral effects
Policy effects
Conclusion
The impact of the global financial crisis on the Asia-Pacific region
Annual change in real GDP (%)
15
10
5
Year 2007
Year 2009
0
US
-5
-10
EU
Japan
Russia
China
India
WORLD
The impact of the global financial crisis on the Asia-Pacific region
Fiscal stimulus: government
spending growth rates (%)
25
20
15
Year 2007
Year 2008
Year 2009
10
5
0
Australia
China
Hong Kong
Taiwan
Japan
Korea
India
US
EU
Russia
The impact of the global financial crisis on the Asia-Pacific region
Partial and general equilibriums (1)
Price
Equilibrium
QD = Q s
Partial equilibrium: demand
equals supply in one or more
(but not all) markets.
S
General equilibrium: demand
equals supply in all markets
P*
D
Q*
Can we achieve general
equilibrium by equilibrating
market one by one?
Quantity of Grapes
The impact of the global financial crisis on the Asia-Pacific region
Partial and general equilibriums (2)
Links between markets
1.Input-output linkage
2.Labour capital linkage
3.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.
The impact of the global financial crisis on the Asia-Pacific region
An illustration of CGE models (1)
A simple economic system
Return on
labour
Labour
supply
Real wage
Technique
Change
GDP
+
Return on
capital
Capital
stock
Rate of
Return
Tax
rates
disposable
income
Exchange
rate
investment
level
Taxes &
subsidies
Consumption
Foreign
Investors
demand
+
Intermediate
inputs
║
Sector
Output
═
Intermediate
demand
+
demand
+
+
Government
demand
+
Household
demand
The impact of the global financial crisis on the Asia-Pacific region
An illustration of CGE models (2)
Activity
Level
A nested
production
function
Leontief
Good 1
Good G
up to
CES
Primary
Factors
CES
CES
Domestic
Good 1
Imported
Good 1
Domestic
Good G
Imported
Good G
Labour
Capital
CES
Labour
type 1
up to
Labour
type N
The impact of the global financial crisis on the Asia-Pacific region
An illustration of CGE models (3)
Basic
Flows
Taxes
Labour
Capital
↑
C*S
↓
↑
C*S
↓
↑
O
↓
↑
1
↓
V1BAS
I
Government
Households
→←
H
→←
1
→←
V2B AS V 3 B A S V 4 B A S
Change in
Inventories
→←
Emissions
I
Investors
Producers
←
Exports
Sales by
commodity
Purchases by
Industry
Input-Output Table
1
→← I+H →←
1
V5BAS
V6BAS
→
V7BAS
V 1 TA X V 2 TA X V 3 T A X V 4 T A X V 5 T A X V 6 T A X V 7 T A X
V1LAB
V1CAP
S = source of commodity (i.e. domestic or imported)
C = Number of Commodities
I = Number of industries
O = Number of Occupation types
H = number of households
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.
The impact of the global financial crisis on the Asia-Pacific region
Scenarios
 Scenario 1: 60% decrease in productivity in all
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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.
The impact of the global financial crisis on the Asia-Pacific region
Macroeconomic results (1)
Percentage change in GDP and consumption
20
15
10
5
0
-5
-10
-15
Real GDP
Domestic consumption
The impact of the global financial crisis on the Asia-Pacific region
Macroeconomic results (2)
Percentage change in imports and exports
60
40
20
0
-20
-40
-60
-80
real imports
Real exports
The impact of the global financial crisis on the Asia-Pacific region
Macroeconomic results (3)
Percentage change in profitability (industry-average)
10
5
0
-5
-10
-15
-20
-25
-30
-35
The impact of the global financial crisis on the Asia-Pacific region
Macroeconomic results (4)
Change in Equivalent Variation (US$ million)
0
-200000
-400000
-600000
-800000
-1000000
-1200000
-1400000
The impact of the global financial crisis on the Asia-Pacific region
Sectoral effects
World average output changes (%) under scenario 3
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
The impact of the global financial crisis on the Asia-Pacific region
Policy effects
Percentage change in real GDP
0
Australia
China
Hong Kong
Japan
Korea
Taiwan
Singapore
India
USA
-2
-4
-6
-8
-10
-12
GFC baseline
20% production tax cuts
20% increase in government spending
20% increase in import tariff
The impact of the global financial crisis on the Asia-Pacific region
Conclusions
1.
2.
3.
4.
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.