East Asia and Pacific: Navigating the perfect storm

Today's global financial crisis is not of East Asia's making. Yet the region, like the rest of the world, will not escape its effects. Fortunately, East Asian countries are better prepared to face today's financial turmoil than they were in the 1990s. But it is important to learn the lessons of what happened in the last decade and avoid the policies that can bring even greater hardships to the poor and vulnerable.

First, some positive facts. So far, the economies of developing countries in East Asia have remained stable during this crisis. This is thanks to robust buffers built since the 1997 financial crisis: strengthened public finances and external balances; improved corporate governance; and stricter bank supervision. A sharp boost in foreign exchange reserves has also helped.

But these buffers are now being tested. The sudden withdrawal of investments by nonresident investors has pushed East Asian economies into difficult terrain. The cost of capital has skyrocketed, threatening development programs in the region.