Two Tales of Adjustment: East Asian Lessons for European Growth

Abstract

Paths into the Asian Crisis of 1997-98 and the recent global financial crisis were similar, but the roads out could not be more different. Common wisdom has it that on impact Asia endured fiscal austerity imposed by the IMF whereas the IMF recommended stimulus in the case of the advanced nations at the epicenter of the crisis in 2008-09. While the IMF did recommend different policies to begin with, the fiscal adjustment in Asia was far more modest than is commonly known and the switch from stimulus to austerity in Europe was quite abrupt. The difference in fiscal stance helps explain the difference in the post-crisis paths of output and employment in the two regions.