Did fiscal stimulus lift developing Asia out of the global crisis? A preliminary empirical investigation

Abstract

Developing Asia has weathered the global economic crisis well and is experiencing a rapid, robust V-shaped recovery. According to conventional wisdom, the fscal stimulus packages put in place by the region's governments played a key role in the region's superior postcrisis performance. The central objective of this paper is to empirically test this conventional wisdom. To do so, we frst examine the state of the precrisis fscal health in major developing Asian countries, and then explore the size and structure of the fscal stimulus packages that they implemented. Our empirical analysis centers on assessing the impact of fscal stimulus on developing Asia's gross domestic product growth during the crisis. Our main fnding is that the stimulus has had a signifcant positive impact. This suggests that fscal policy has helped the region cushion the adverse impact of the collapse in global trade. The immediate implication for regional policymakers is that proactive use of countercyclical fscal policy can limit the slowdown of economic activity arising from severe external shocks. The broader, more fundamental policy implication is that it is in the region's best self-interest to adhere to its long-standing commitment to fscal discipline so that it has fscal space to cope with tail risks. © 2010 by Asian Development Bank.