The events of 2007–9 highlighted several lessons for the policymakers. This chapter focuses on six broad interrelated themes:

1. Decoupling theory a myth

2. Globalization adds vulnerability but also increases efficiency

3. Strong economic fundamentals give more room to handle the crisis

4. Market discipline is necessary

5. Stimulus packages need to be timely and carefully designed

6. Coordinated policy action helps in faster recovery

Decoupling Theory a Myth

Prior to the crisis, there were a lot of discussions on decoupling of emerging and developing economies from the West. In other words, it was believed that even if the advanced economies went into recession, Asia would be affected very marginally and would largely continue with its growth. However, during the economic crisis in a rapidly globalizing world, the decoupling theory has almost lost its credibility. The reduction in growth has not been limited to the advanced economies. The decline from the actual growth rate for 2007 to the growth rate estimated for 2009 is essentially identical for all four groups of countries: 6.3 percentage points for the world on average, 6.1 percentage points for the advanced economies, 6.6 percentage points for the emerging and developing economies, and 7.6 percentage points for those in the Western Hemisphere.

In the case of Singapore, which is a highly open economy, the transmission of the crisis took place through both trade and financial channels. Even though Singapore had very limited exposure to the toxic assets, the economy suffered the consequences of the recession that gripped the advanced economies of the world.

Globalization Adds Vulnerability but Also Increases Efficiency

Globalization of trade (merchandise and services), finance, and labour (demand for labour and flow of remittances) had tied countries together to a much greater extent than they had been earlier. Any crisis that affects a major country or group of countries in the global economy or financial system will have some adverse effects on all other countries.