Why has developing East Asia led the global economic recovery?

Only a few expected in late 2008 that East Asia would lead the world economy out of the crisis. Skeptics pointed to the continued dependence of the region on exports to advanced economies. And skeptics and believers alike were predicting that all countries in the region would rethink their growth models to focus more on domestic demand rather than exports and investment. What a difference a year and a half makes. East Asia has recovered from the economic and financial crisis, with output, exports and employment mostly at pre-crisis levels. Leading the global economy, real GDP in developing East Asia is set to grow 8.7 percent in 2010, up from 7 percent in 2009, according to the World Bank’s East Asia and Pacific Update report launched today (and of which I’m the lead author, full disclosure here). The projected growth rate for 2010 is almost a percentage point higher than our own forecast made six months ago, and is higher than the 8.5 percent expansion recorded in 2008.
Firstly and most importantly, the recovery has been influenced by China. The Chinese authorities swiftly implemented a large monetary and fiscal stimulus starting in the last quarter of 2008 (through 2010) that exceeded the one introduced after the 1997-98 Asian financial crisis. The package helped boost government-led investment by nearly 6 percent of GDP in 2009, accounting for the bulk of the 8.7 percent growth in real GDP. The surge in investment, in turn, led to a sharp increase in imports for domestic use, notably from East Asia. This surge was most pronounced in the first half of 2009, when import demand among the advanced economies was contracting fast. 
Secondly, the other countries in developing East Asia also implemented timely fiscal stimulus packages, coupled with prompt and effective monetary easing. Even the low-income countries, notably Lao PDR and Cambodia, injected a discretionary fiscal stimulus of about 3 percent of GDP each in 2009, helping cushion the impact of the crisis on economic activity.
Thirdly, the countries of developing East Asia entered the crisis in fundamentally solid economic health. Heeding the lessons of the 1997-98 Asian financial crisis, countries had reduced government debt and fiscal deficits, cut external debt and ensured robust balance of payments positions, boosted foreign exchange reserves, and substantially improved financial supervision. The region’s well-capitalized banks helped substantially limit financial contagion and the transmission of forces of the global recession and continued to lend through the crisis, albeit at a slower pace in most countries.  
Fourthly, and this is a factor common for most developing regions, is the rebound in advanced economies. Developed countries joined the rebound in the third quarter of 2009, and their contribution to regional exports began to outpace the contribution from China.  
Last but not least, there is the importance of remittances. Unlike other developing regions and in contrast to most projections from early 2009 that suggested large contractions, remittances to developing East Asia continued growing through the crisis. In the Philippines, for example, remittances grew about 6 percent in dollar terms in 2009, while forecasters earlier in the year worried about a contraction of 10-20 percent. And such better-than-projected performance appears to have been observed in other countries heavily dependent on remittances in the region, including many of the Pacific islands.
(Source: Ivailo Izvorski)

Economic Performance

The U.S. has lost 5.7 million jobs in the past 16 months. The six months between October 2008 and March 2009 saw the U.S. economy contract more rapidly than during any other half-year since 1958. In April the unemployment rate reached a 25-year peak and it is forecast to rise through at least the end of this year. In short, the U.S. economy today is mired in a deep recession.
Even worse, the current recession follows an anemic recovery. The business cycle that ran from 2001 to the end of 2007 saw essentially every economic indicator except corporate profits turn in its weakest performance since World War II. Most damaging to working and middle-class households was that the percentage of the adults employed did not grow at all even during the expansion phase of the cycle (from November 2001 to December 2007) - the first time this has ever happened.
Median household income has never recovered from the recession of 2001. It ended 2007 at a lower level than where it stood in 2000. Given that median household income invariably falls during recessions and recovers only slowly as economic growth returns, it is all but guaranteed that median household income will see no growth at all during the current decade.
Even strong corporate profits, the only area of comparative strength in the last economic cycle, may prove to have been illusory. The share of corporate profits accounted for by the financial sector rose dramatically in the 2000s - from 25% in the business cycle of the 1990s to 37% in the 2000s. We now know that these financial profits were largely the result of investments whose value will be progressively written down. In short, the economic strategy of recent years -- based on deregulation, tax cuts for the most well-off, and concerted efforts to weaken the bargaining power of American workers -- clearly led to dismal economic performance across-the-board.
For the moment it seems clear that economic performance in general and the labor market in particular will get substantially worse before they get better. As the country looks for any sign of encouraging economic news, it's important to not set standards too low. As of May 2009, 16 months into the recession, almost 8 million jobs will be needed just to return the country to pre-recession unemployment rates, and this number of required jobs grows every month that the U.S. economy fails to create the 125,000 jobs needed just to keep pace with population growth.
The 4.7% unemployment rate that prevailed in December 2007 was already too high to spur across-the-board wage increases like those seen in the 1990s. In short, returning to the status quo that prevailed before the start of the current recession is far too modest a goal - this country needs a fundamentally different policy strategy to generate acceptable economic performance in coming years.
In their 2008 report, A Feeble Recovery, Josh Bivens and John Irons examine why most Americans failed to benefit from the most recent recovery. Another EPI report by Josh Bivens, Upside surprise in consumption spending doesn't stem sharp decline in economic growth, discusses the historically weak GDP numbers of late. In addition, EPI every month provides an exhaustive look at the unemployment data, examining not just the total jobs lost, but which sectors of the population are feeling the most pain. The May jobs picture can be found here.
(Source: Economic Policy Institute)