A large economic downturn in East Asia threatens to end its nearly 30 year run
of high growth rates. It is hard to understand what these declines will actualy
do to the world market. The crisis has caused Asian currencies to fall 50-60%,
stock markets to decline 40%, banks to close, and property values to drop. The
crisis was brought on by currency devaluations, bad banking practices, high
foreign debt, loose government regulation, and corruption. Due to East Asia's
large impact on the world economy, the panic in Thailand, Indonesia, Korea, and
other Asian countries has prompted other countries to worry about the affect on
their own economies and offer aid to the financially troubled nations. The
countries that are included in the East Asian crisis, known as "Tiger"
economies, are Hong Kong, Indonesia, South Korea, Malaysia, the Philippines,
Singapore, Taiwan and Thailand. For these countries to participate effectively
in the exchange of goods, services, and assets, an international monetary system
is needed to facilitate economic transactions. To be effective in facilitating
movement in goods, services, and assets, a monetary system most importantly
requires an efficient balance of payments adjustment mechanism so that deficits
and surpluses are not prolonged but are eliminated with relative ease in a
reasonably short time period. The Asian crisis of recent falls into this
category of inefficient balance of payments facilitated by depreciation of its
currency. By competitively depreciating its currencies, Asia is exporting its
deflation, its overcapacity and its lack of growth to the West, particularly to
the US. No other group of countries in the world has produced more rapid
economic growth and dramatic reduction in poverty than East Asia. Korea,
Malaysia, and Thailand have virtually eliminated absolute poverty, and Indonesia
is within reach of that goal. Nevertheless, this financial crisis has exposed
weaknesses in Asian economies that must be addressed if the region is to return
to its high growth of recent years. Despite the great cries of anguish we hear
from bankers and corporations, the real victims of the collapse of "globalisation"
in Asia, are the same people who were the victims of the "miracle".
Their low wages, or incomes from farming, are now devalued by 25% - 55%.
Millions of casual construction workers are idle across the region. And now
hundreds of thousands of public sector employees and finance sector workers are
being sacked as the IMF enforces government budget cuts, bank and finance
company closures. The East Asian crisis has affected almost all of the Asian
nations, but the three hardest hit countries are Thailand, Indonesia, and South
Korea. The panic began in Thailand in May of 1997 when speculators, worried
about Thailand's slowing economy, excessive debt, and political instability
devalued the baht as they fled for market-driven currencies like the American
dollar. Indonesia's economy soon fell soon after when the rupiah hit a record
low against the U.S. dollar. Indonesia is plagued by more than $70 billion worth
of bad debts and a corrupt and inefficient government. Thailand and Indonesia
also suffer from being overbuilt during real estate booms that were the result
of huge influxes of cash by optimistic foreign investors. South Korea faltered
under the weight of its huge foreign debt, decreasing exports, and weakening
currency. World Bank support for East Asian governments focuses on carrying out
three principal objectives: 1.to build the foundation for restoring growth and
raising incomes by adopting wide-ranging reforms in the financial sector, in
corporate governance and competition, and in managing external debt. This builds
on the IMF-led rescue efforts in the region; 2.to strengthen social protection
for the poor and other vulnerable groups to help cushion the impact of the
crisis; and 3.to improve the quality and transparency of key government
institutions, including helping governments address problems of corruption and
accountability. The World Bank believes these objectives are inseparable and
essential components of winning and holding public support for difficult
reforms. There must be visible help with the social costs of reform,
particularly protection for the unemployed; the financial and corporate sectors
must be better regulated, more transparent, and adequately capitalized to regain
the confidence of investors, both foreign and domestic. Once confidence is
restored, economic growth can resume, raising incomes for the poor in the
process. The World Bank's Involvement to Date Since July 1997, the Bank has
pledged some $16 billion to the region, almost the equivalent of an entire
year's regular lending, and already disbursed more than $3.5 billion in loans.
In Thailand, the Bank pledged $1.5 billion in support of the $17.2 billion
international effort initiated in Tokyo in August, 1997. The initial emphasis of
the Bank program was on reforming the financial sector. This included
establishing a financial restructuring agency to deal with creditors and
depositors of 56 closed finance companies, setting up an asset management
company to collect as much as possible from the bad portfolio, and reducing
restrictions on foreign equity participation. Also, a mission has been helping
Thailand with a social investment program, with a "two channel"
program; one to protect ongoing social programs, and the other with social fund
features and designed to show action and results. Through this program, the
Government-with Bank assistance-expects to create tens of thousands of new jobs
in rural areas, and to deter school students from dropping out of the education
system to help their families generate income. The Bank is supporting reforms
which will enable the government to better use the budget as an instrument of
policy, including social protection. In Indonesia, the Bank's program has
included a technical assistance loan of $20 million for banking sector
management, and preparation of several operations: a structural adjustment loan
to deal with banking and corporate restructuring, and an agriculture sector
structural adjustment operation. Support for financial sector reforms has
included supporting the authorities in their efforts to deal with nonperforming
portfolios and insolvent banks, auditing state banks to improve efficiency and
capital adequacy, strengthening credit appraisal and risk management, improving
bank supervision, and providing better laws governing bankruptcy, disclosure,
and ownership In Korea, the Bank pledged up to $10 billion as part of a $57
billion package to provide liquidity. Within two days of the crisis, the Bank
fielded a team of experts, and within three weeks designed and presented to its
board a $3 billion economic reconstruction loan that was disbursed the same day.
The loan laid out the framework forpolicy changes in the financial sector,
corporate governance, and competition policy. As part of the adjustment program,
we are working with the government on policies that will incorporate social
protection and support workers temporarily displaced during the crisis. A new
Structural Adjustment Loan of $2 billion was approved by the Bank's Board on
March 27, 1998, to support the implementation of reforms in the financial and
corporate sectors and competition policy. In the Philippines, the Bank is
considering an additional $650 million for structural reforms in the financial
and public management sectors, and lines of credit for farmers, small-scale
enterprises and export-oriented activities adversely impacted by the regional
crisis. This special package would hence more than double our two-year
commitment to the Philippines. In Malaysia, the Bank is engaged in a renewed
policy dialogue aimed at supporting the government's own efforts to address
financial and social issues. Plenty of notice In November 1996, in a paper
delivered at the Peoples Conference Against Imperialist Globalisation in Manila,
Ms Joy de Guzman analysed what was then already called the "economic crisis
in Thailand", arguing that it was the same in the rest of the ASEAN
countries. She reported a steady downturn on the Bangkok Stock Exchange,
economic growth down by 2%, a decline in export growth from 23.6% in 1994-95 to
3.8% in 1995-96, and a run on the baht which required the Thai Central Bank to
spend US$120 million to prop up the currency. She said that the crisis was
triggered by a slow-down in exports, especially computer chips, as US and
European importers shifted their sourcing of chips from South East Asia to
Mexico, Central and South America where they were cheaper. So the trade deficit
grew and funds to service the imports and the foreign debt dried up. "This
financial crisis will probably lead to loss of confidence by investors in
Thailand's economy and a slow down and then a slump would ensue", she
predicted. Key Indicators to Watch Unemployment. Unemployment is already a
problem, concentrated for the moment in urban areas, and affecting both skilled
and unskilled workers in Asia. It is expected that in Thailand an estimated
900,000 workers will have lost their jobs by the end of 1999; in Indonesia, it
is estimated that unemployment may have increased by some 2 million people, with
predictions of substantial further rises in the coming months. In other
countries with rigid rules governing hiring and firing, such as Korea,
unemployment may for the first time become a significant social problem. Effect
of exchange rates on prices. Depreciating currencies have increased the price of
imports and tradable goods, and in same cases, the crisis has hiked the price of
certain publicly-controlled goods and services, leading to considerable public
anxiety. While some people involved in the export sector may actually benefit
from the effects of devaluation, others will suffer from a slowdown in their
national economy. Cuts in public services to the poor. Public expenditures will
be stretched by the costs of resolving the financial sector failures, the
greater interest payments on local currency public debt, and the greater
local-currency value of dollar-denominated external public debt. At the same
time, revenues will fall with the weakening of economic activity. If these
trends result in lower spending for social services, the economic downturn would
have even more severe consequences for the poor. In Thailand, for example,
roughly 10 percent of the population lives precariously just above the
international poverty line, with incomes of between US$1.00 and US$1.50 a day.
Restoring Confidence in the Markets The most important single step to help East
Asia's poor, and safeguard the region's success in reducing poverty, is to
reactivate its economy. However, this cannot be done without restoring
confidence among foreign and domestic investors. To restore that confidence, the
region must address pressing issues such as weak financial sectors, lack of
transparency and poor governance in the corporate sectors, and weaknesses in
external liability management. Under-supervised financial sectors, and
government intervention in allocating capital, allowed poorly governed
corporations to invest borrowed money in highly-inflated or risky assets such as
real estate ventures. A lack of transparency-in the form of unreported mutual
guarantees in group companies, lack of disclosure of companies' and banks' true
net asset positions, and insider relations-masked these poor investments. When
combined with fixed exchange rate policies and implicit guarantees to financial
entities, the effect was to create the incentives that led to resource
misallocation and unsustainable external financing. Domestic weaknesses of this
kind were aggravated by undisciplined foreign lending, which led to too much
money chasing investments with potentially poor rates of return. The buildup of
short-term, unhedged debt left the economies vulnerable to a sudden collapse of
confidence. The resulting capital outflows, and with it depreciating currencies
and falling asset prices, exacerbated the strains on private sector balance
sheets and thus proved self-fulfilling. The vicious circle has become even more
vicious as financial problems have led to restricted credit, undermining the
real sector, and thus further contributing to financial fragility. If the
economic problems translate into rising social and political unrest, the
problems would deepen still further. Re-invigorating growth will require
deep-seated reforms focusing on policies and institutions that affect the
behavior of the private sector. These include policies toward the financial
sector, toward the real sector, and toward external financing. Rebuilding the
financial sector is particularly crucial to restoring investor confidence and
growth. In Thailand, Indonesia, and Korea this has meant closing failed banks
and financial institutions, recouping their good assets, re-capitalizing good
banks, improving disclosure and bank supervision, and removing government
interference in lending decisions and setting interest rates. All of these
reforms are essential for the already high saving rates in the region to be
channeled into productive investment so that economies can resume the strong
growth they had enjoyed prior to the crisis. Raw capitalism So here is a more
complete picture of what has gone wrong for capitalism in Asia: TNC-dominated
industrialisation led to chronic trade deficits, uncontrolled speculation -
often connected to political figures - and foreign funds used for non-export
earning investments or luxury consumption, leading to catastrophic currency and
banking collapses. Despite Western criticism of excessive regulation, the Asian
countries have a free-wheeling capitalism with few restraints. All the Asian
governments kept their currencies pegged to the US$, a notable effort to provide
some stability for foreign investments. This became unsustainable after the Thai
baht had to be floated in July this year. Mainstream commentators such as Max
Walsh reacted to all this by blaming the pegging of the currencies to the US$.
His solution is to float all the currencies and everything will "correct
itself". The implications of the Asian financial crisis are many. A
declining Asian economy will reduce demand for U.S. and other countries'
exports. The devalued currencies of East Asia will make Asian imports seen cheap
and will lead to increased American imports, thus increasing our trade deficit (Lochhead
2). A worldwide banking emergency could result if the embattled Asian economies
failed to pay back their loans to the U.S. and other countries (Duffy 2). If the
Asian economies fall further, in a desire to r aise cash, they might sell the
hundreds of billion dollars of U.S. treasuries they now own, leading to higher
interest rates and an American recession (Lacayo 2). An article in the Economist
reported that the Asian economic turmoil and the layoffs that ma y result, could
instigate increased discontent and possibly give rise to violent strikes, riots,
and greater political instability (1-2). Reven 3 Since the financial tumult
causes instability in the world market, several solutions have been proposed
designed to restore the health of the Asian economy. The International Monetary
Fund is offering $60 billion in aid packages to Thailand, Indonesia, and South
Korea (Lacayo 1). The aid will be used for converting short-term debt to
long-term debt and to keep currencies from falling lower in the world market (Passell
2). Lower currency values make repaying loans to other nations more difficult
(Sanger 1 ). The aid packages are tied to measures that will ensure that the
recipient countries reform their economies. Some of the measures the nations
must follow are increasing taxes to decrease budget deficits, ending corruption,
increasing banking regulation, improving accounting information so investors can
make better decisions, closing insolvent banks, selling off inefficient state
enterprises, and increasing interest rates to slow growth and encourage
stability (Lacayo 3). Hopefully these market reforms will allow East Asia to
improve its economic outlook. Since most of the Asian nations have balanced
budgets, low inflation, cheap labor, pro-business governments, and high savings
rates, the long-term outlook for these coun tries is very good (Marshall 1). The
financial crisis, instead of destroying the Asian tigers, will merely serve as a
much needed lesson in debt management, orderly growth, competent accounting
practices, and efficient government. Throughout the East Asian crisis many
different ideas have been proposed to what the cause or causes were. Attempts to
identify the fundamental causes of a financial crisis always suffer from the
problem of distinguishing insight from hindsight. Many financial journalists
today have said the the crisis was the inevitable counsquence of:
"overvalued exchange rates, large current account deficits, short-term
capital inflows, opaque financial systems, or one of several other supposedly
fatal flaws in East Asian capitalism." It seems fair to say that a year ago
nobody suspected that a calamity like what we have seen was possible, although
all of the characteristics that are now described as the fatal flaws of the East
Asian economies were reasonably widely understood. Considering the size of Asias
contribution to the world economy, a rapid recovery will be greatly Anticipated.