Associate professor of finance Tayyeb Shabbir recently presented a paper titled “Impact on ‘East Asia:’ 1997-98 Asian Crisis vs. 2007-09 Global Financial Crisis” at the annual international conference of the Global Academy of Business and Economic Research (GABER) in New York in October. He also served as chair for the session, “Global Financial Crisis: Impact and Policy Response.” The article has been published in GABER’s Conference Proceedings.
While in New York, Shabbir, an expert on financial crises, was also interviewed by Li Jing, an international reporter and American correspondent for the Xinhua News Agency (XNA), the largest wire and television agency in China. The interview was aired to approximately 200 stations in China and XNA’s international channel.
Shabbir says that his paper about the effects the Asian financial crisis of 1997-98 and the more recent global financial crisis of 2007-09 had on China, and East Asia in general, has garnered great interest. He notes that Asian nations have been able to recover significantly better than the United States from the more recent downturn because they did not suffer from major banking issues.
“The U.S. got into this trouble in the first place because of mortgage backed securities, the lax regulatory environment of 2001 onward to 2006, and securitization, which on the surface, seemed like a great innovation,” says Shabbir. “But it all went awry. There was too much risk-taking and not enough regulatory supervision that led to what is now familiar as the subprime crisis, which later transformed itself into a financial crisis for a much larger sector.”
Shabbir says that the “contagion” of the worldwide economic downturn affected Europe much more so than Asia and the rest of the world.
“The effect on East Asian countries and the non-European world was mainly through trade channels and not financial channels as much,” he says. “When the U.S. went into the so-called ‘Great Recession,’ it pulled back from many of its normal import activities, which meant that many of these countries could not export as much as before. Eventually, that resulted in an economic downturn for them as well, albeit in a less severe manner.”
Shabbir adds that much of the damage done to East Asian economies was secondary to events throughout the rest of the world, especially in regard to the U.S. downturn.
“In December of 2007, when the U.S. recession had officially started and some of the banks were already in trouble, many of the stock markets in Asia were chugging along as if they were not going to be affected by it,” he says. “Some people thought that this would be a case of ‘decoupling,’ as if Asia would keep moving forward and not notice the recession and that only the U.S. and Europe would suffer from it.”
Shabbir described a “great dynamism” in East Asian economies that was due to the last 30 years of ambitious economic reform.
“There was great dynamism in these economies, which could not be stopped for too long by the 2008-09 crisis that proved over time to be more of a hiccup,” he says. “They had an internal momentum that was slowed a bit because after all, the U.S. and Europe are such important parts of the global economy. However, the domestic demand. overcame that fairly quickly.
“For instance, in India in the 1990s, they freed up the market system and decided once and for all that it was going to be in India’s best interest to introduce market-friendly reforms,” Shabbir says. “In the case of China, since the 1980s, it has been increasingly involved in the global capitalist system. They freed up their economy at least, if not the political system, although the political system has gotten considerably relaxed as a result too.”
“So both these countries developed a standard recipe to introduce market-friendly reforms,” he says. “An interesting lesson is that they did not go overboard in terms of reliance on markets without having adequate regulatory oversight, something that the Western world is realizing, especially the U.S., [which is] realizing that a good regulatory framework is actually a friend of capitalism.”
Shabbir notes that the concept of the “New Normal,” which was under a lot of discussion at the international G20 Summit in Seoul, has made economists the world over—particularly in the West—more conscious of the changing economic balance between the Western economies and the Asian ones.
“I think economists in the West, in general, always thought about things in global terms,” he says. “But they perhaps had an unrealistic view of the global configuration of economic potential. It was thought that the West was infallible and that vulnerability would always be lying elsewhere. In some sense—and there is little disagreement on this—that this recent crisis has been a very humbling experience for [those] who represent the Western point of view and interests. When you see a powerful, pro-market country like the U.S. go through such a painful experience, then it gives a ready-made argument for those who want to cast doubt on market economies.”
Shabbir gives an analogy for the Asian recovery and those nations’ subsequent economic growth despite the slow economic recovery elsewhere.
“It doesn’t necessarily mean the U.S. is sinking,” he says. “Say you used to live in a penthouse and I was living in a basement. So now I’m two floors below you. That doesn’t mean that you are poor now but that I’m doing very well, and rising fast.”
Shabbir, who has a long-standing interest in research related to the world-wide impact of financial crises, has recently had two articles accepted for publication. “Economic Impact of the Global Financial Crisis of 2007-2009 on South Asia” will appear in the Winter 2011 issue of the Journal of South Asian and Middle Eastern Studies and “Financial and Economic Impact of the Global Financial Crisis of 2007-2009 on Pakistan” will be featured in a winter issue of the Quarterly Research Bulletin, published under the aegis of the Centre for Public Policy & Governance of the Forman Christian College in Lahore, Pakistan. He is also currently preparing his second book, with the working title of “Financial Innovations and Financial Crises,” which will focus on the role of financial derivatives and other financial innovations in precipitating vulnerabilities that led to the 2007-2009 global financial crisis. This co-edited book highlights the positive as well as negative role of market-based financial innovations and the need for effective regulation to make such innovations a net benefit for the economy and the society at large.
Shabbir has just recently won a peer-reviewed, competitive research award for Spring 2011 sponsored by the CSU Dominguez Hills Research Scholarly and Creative Activities Awards Program (RSCAAP) for his proposal entitled, “Potential Impact of the Financial and Economic Crisis of 2007-2009 on U. S. ‘Structural’ Unemployment.”
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