The global downturn could lead to unrest, more poverty and environmental challenges in Asia, regional leaders were warned on Monday, after they agreed on a $120 billion emergency fund to counter the crisis.
Asia has been hard hit by the collapse in global demand largely because of the region's heavy reliance on exports. Singapore, Hong Kong, Taiwan and Japan are in recession and growth elsewhere is the weakest in years.
Poverty is worsening in many countries. Businesses are struggling. The extremely urgent climate change agenda could be affected, Indonesian President Susilo Bambang Yudhoyono said at the annual meeting of the Asian Development Bank.
If all this goes unchecked, down the road we could see social and political unrest in many countries, he told representatives of the ADB's 67-member countries, including finance ministers and central bank governors.
To counter the downturn, the ADB said it will raise lending by half and Asian governments agreed at the weekend to launch a $120 billion fund countries can tap to avert a balance of payments crisis.
Japanese Finance Minister Kaoru Yosano warned that private capital flows into Asian developing nations could turn negative in 2009 after falling below $100 billion in 2008 from over $300 billion in 2007.
ADB should play a leading role to cushion the impact of such a brutal reversal in capital flows, he told the meeting, adding though that a resurgence in Asia could trigger a global recovery.
Longer term, it was vital for emerging Asian economies to build domestic demand to counter the reliance on export earnings, ADB delegates said.
Many Asian exporters have seen demand for their products halve from a year earlier as the deepest global downturn in decades hammered world trade.
The Chinese government's basic approach is to expand domestic demand, particularly consumer demand, to promote growth, Finance Minister Xie Xuren said.
Karen Mathiasen, the chief U.S. delegate, said the shift to rely more on domestic demand would be profound.
Such a fundamental economic transformation will not be easily or rapidly attainable, but ultimately will be key to underpinning a healthy, global and balanced recovery.
To achieve this goal, ADB Governor Haruhiko Kuroda said Asia needed to channel more savings into investments and consumption.
They need to spend more on health, education and social security to reduce household needs for precautionary savings. They need strategies to transfer more corporate savings to households to encourage greater consumer spending.
The ADB has forecast that the region's economies are likely to grow just 3.4 percent in 2009, the slowest pace since the Asian financial crisis a decade ago. It sees growth recovering to 6.3 percent next year if demand rebounds.
But transforming household savings into consumer spending and investments has been a difficult task for Asian policymakers.
In the 10 Southeast Asian or ASEAN nations -- Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam -- savings exceed investments by at least 10 percent, ratings agency Standard and Poor's says.
The ADB is meeting on the Indonesian resort island of Bali, where finance ministers from China, Japan, South Korea and ASEAN on Sunday set up a $120 billion emergency fund aimed at countering the sort of capital flight seen during the 1997/98 Asian financial crisis.
It is Asia's first independently managed multilateral liquidity facility and will be launched by the end of the year.
Japan, the region's biggest economy, also announced a plan to supply up to 6 trillion yen ($61.54 billion) to support its neighbors in an economic downturn.
Several Asian policy makers have flagged the risk of social unrest if governments fail to deal with the crisis. Chinese officials have warned economic discontent could threaten social stability as the giant economy's growth dropped below double digits for the first time in years.
And during the last crisis a decade ago, Indonesia's long-term president, Suharto, stepped down after street protests. Governments also changed in South Korea and Thailand.
To counter the current crisis, the ADB plans to ramp up lending to its developing members to about $33 billion in 2009 and 2010, almost a 50 percent increase over 2007-2008. Most of the new loans will be for infrastructure.
If approved, the bank will also create a $3 billion fast-disbursing facility to meet urgent needs, Kuroda said.
(Writing by Raju Gopalakrishnan; Editing by Neil Fullick)