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The Great Recession and Developing Countries
Malaysia, after suffering a large negative crisis impact in 2009, has experienced a strong rebound in 2010, owing to supportive policies and the rebound in Asia. The precarious fiscal situation precrisis (and two fiscal stimulus packages), however, will require the government to curtail its expenditures in the medium term. Private consumption is expected to grow more slowly as a result of the household sector’s high leverage. While Malaysia is likely to benefit from strong growth in commodities trade, noncommodity export growth will remain weak as the country works to upgrade its manufacturing capacity and diversify away from labor-intensive industries. Potential GDP growth in the medium term would reach 5.1 percent which is lower than the precrisis potential growth rate of 5.5 percent, and the output gap will be large at –9.4 percent by 2015. Finally, growth projections for China show the largest fall in potential growth—by a full 2 percentage points, from 10 percent during the precrisis period to 8.0–8.5 percent during 2011–15, and even to 7.7 percent by 2015. China’s composition of growth is set to change substantially, with a rebalancing in favor of domestic demand due to slower global demand and slower growth in market share. The contribution of net exports to GDP growth is expected to decline from about 2.6 percentage points to zero because of saturation effects in several sectors and limited demand growth. Consumption demand should remain strong while investment growth slows. While China faces no constraints on external finance, the tighter global financial conditions would imply a higher cost of capital and a lower capital-output ratio. On the supply side, the growth slowdown, relative to the precrisis potential, can be expected to come from various growth sources— mainly a slower rate of capital accumulation and employment growth (– 0.8 percentage point). Although China may face weaker TFP growth, the fundamental competiveness of its manufacturing is strong—even with some currency appreciation and wage increases, competitiveness should be maintained. Major investment in infrastructure during the crisis may relieve binding constraints to growth. Although the reduction in China’s potential growth seems to be significant, much of this “adjustment” is not due only to the recent financial crisis. In particular, the lower employment growth is the result of demographic changes, while part of the very high growth in the