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Adjustment, Recovery and Growth: A Consideration of Five 'Crisis' Countries of East Asia

In this paper, the post-crisis experience of the five economies of Thailand, South Korea, Malaysia, Indonesia and the Philippines is considered. It is found that while output growth has recovered to varying degrees, in all these countries there has been a significant change in the pattern of growth and investment, which has meant that the subsequent growth has had very different implications for employment generation, compared to the previous period.

EAST ASIA: A DECADE AFTERDecember 15, 2007 Economic & Political Weekly52Adjustment, Recovery and Growth: A Consideration of Five‘Crisis’ Countries of East Asia Jayati GhoshIn this paper,the post-crisis experience of the five economies of Thailand,South Korea,Malaysia,Indonesia and the Philippines is considered.It is found that while output growth has recovered to varying degrees,in all these countries there has been a significant change in the pattern of growth and investment,which has meant that the subsequent growth has had very different implications for employment generation,compared to the previous period. The east Asian financial crisis was a sharp shock, which a decade ago rocked financial markets globally for a short time. It was one of the more glaring examples of “contagion effects” in financial markets, spreading rapidly from Thailand to other countries in the region even when the economies con-cerned appeared to have different characteristics. It created huge disruptions in the economies and societies of the region, caus-ing large increases in unemployment, sharp increases in poverty, and in some cases major political changes. It also presaged the other financial crises that have hit various parts of the developing world (Russia, Turkey, Argentina) since then.At the time, during and just after the financial crisis in 1997 and 1998, there was surprise and some amount of consternation in international policymaking circles as well as in the main-stream financial press. The east and south-east Asian economies that were hit by the crisis were, after all, among the best per-formers among developing countries in terms of bothGDP growthand exporting ability. Their governments had embraced globalisation in all its aspects, not only in terms of export orien-tation but very extensive trade liberalisation and, more recently, financial liberalisation. The five countries that were particularly affected by financial crisis – Thailand, South Korea, Indonesia, Malaysia and the Philip-pines – had all been characterised by rapid export growth, espe-cially in “sunrise” manufacturing industries, and were substantial recipients of private foreign capital. In general they were charac-terised by “prudent” macroeconomic policies – three of them were running government budget surpluses and the other two had budget deficits that could be considered as moderate rather than excessive. They were regularly lauded by the Bretton Woods insti-tutions as positive examples for other developing countries to follow, and cited as success stories of global integration. Explanations Outside IntegrationTherefore, when the crisis struck, the attempt was made, espe-cially in mainstream policy discussions, to find causes for the crisis that were outside the pattern of economic integration and liberali-sation that had been so favourably cited [Corsetti et al 1999; Radelet et al 1998; Johnson et al 2000]. “Crony capitalism” and opaque financial systems that distorted the pattern of investment; exchange rate rigidity because of the practice of pegging exchange rates to the appreciating US dollar, that adversely affected export competitiveness; these and other such factors were routinely evoked to explain away the crisis in what were otherwise apparently still model economies. Jayati Ghosh (jayatijnu@gmail.com) is at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.
EAST ASIA: A DECADE AFTER

The more plausible reasons for the crisis were rarely dis cussed or all too quickly swept away in the mainstream discussion. Thus, the more structural problem of fallacy of composition that made the excessive focus on exports as the engine of growth more difficult as competing developing country exporters entered the scene was ignored in favour of blaming fixed exchange rates per se. The more

Chart 1a: Export Growth Rates– Indonesia, Malaysia and South Korea (% per year in US $ terms)

40

South Korea Indonesia

30

Malaysia

20

10

0 1991 1993 1995 1997 1999 2001 2003 -10

-20

Source: World Bank,World Development Indicators online.

proximate impact of external financial liberalisation – in terms of allowing inflows of capital that enabled short-term borrowing for longterm projects, breaking the link between the ability to access foreign exchange and the need to earn it, and causing appreciation of the real exchange rate that shifted incentives within the economy from tradeables to non-tradeables – were also underplayed. Yet of course, these were primary instrumental factors in causing the crisis [as elaborated in Jomo (ed) 1998; Johnson 1998; Ghosh and Chandrasekhar 2001] and the failure to recognise these as potentially destabilising economic strategies was part of the problem in subsequent crises in Turkey, Argentina and elsewhere.

Multiple Interpretations

Similarly, the subsequent economic recovery in the crisis-ridden countries of south-east Asia has also been subject to multiple interpretations. Some have argued that the quick and brutal policy res ponse of fiscal and monetary tightening enabled the economic stabilisation and generation of current account surpluses that followed relatively quickly. But there is no question that the IMFinspired strategy of high interest rates, tight monetary policy and fiscal compression actually made things worse in terms of deepening the crisis into a downward spiral especially over 1998, most notably in Thailand, Indonesia and the Philippines. The subsequent recovery, when it did occur, was essentially led by fiscal execonomies of the region appear to have recovered quite substantially. Indeed, by now in mainstream discussion, the Asian crisis is often discussed not in terms of its negative impacts, but rather presented as an example of how economies can recover relatively quickly from crisis and continue on a favourable growth trajectory. There are even those who argue that the Asian financial crisis was

in general a good thing, since it did not destroy the basic economic growth trajectory of the region and forced the economies in question to intensify liberalising reforms, especially in the financial sector, and thereby reduce “crony capitalism”. In addition, the reduction of monopoly power through the break-up of some of the large South Korean industrial conglomerates (or “chaebols”) and the political collapse of the Suharto dictatorship in Indonesia are cited as some of the positive by-products

2005

of the crisis.

This view is current not only in international financial circles but even among some Indian policymakers. This is of especial concern, since it suggests that policymakers in

India (and other developing countries) may not be sufficiently worried about a potential financial crisis as to take adequate precautionary measures to avoid it. Given the large capital inflows because of financial markets’ fascination with India as a hot destination even with the increasing volatility in this and other markets, the continuing policy moves towards external financial liberalisation and recently increased reliance on exports as a growth engine, there are certainly at least some similarities of current economic conditions in India with the situation of pre-crisis southeast Asian countries.

That is why it is particularly important to evaluate the subsequent performance of those economies that were particularly affected by the 1997 financial crisis. Of course, a decade is in any case a useful time to take stock, especially as it is considered sufficiently long for the basic tendencies in the economy to have emerged. In this paper, the post-crisis experience of the five economies of Thailand, South Korea, Malaysia, Indonesia and the Philippines is considered. It is found that while output growth has recovered to varying degrees, in all these countries there has been a significant change in the pattern of growth and investment, which has meant that the subsequent growth has had very different implications for employment generation compared to the previous period.

pansion – first in Malaysia where the use of expansionary Chart 1b: Export Growth Rates– Philippines, Thailand and World (% per year in US $ terms)
fiscal policy began as early as 1998, and subsequently in 30
South Korea, facilitated by external resources through the Miyazawa Initiative from Japan. Even so, the recovery too 20 Thailand Philippines
has been treated rather differently in some analyses, which World
have argued that the period of the crisis was simply a minor 10
blip in an otherwise healthy and sustainable growth pro
cess driven by reliance on market-based reforms, foreign 0
investment and export orientation. 1991 1993 1995 1997 1999 2001 2003 2005
-10
A Good Thing?
This interpretation has been further fuelled by the fact that -20
10 years after the east Asian financial crisis broke out, the Source: World Bank,World Development Indicators online and IMF, Balance of Payments Statistics online for world.

Economic & Political Weekly december 15, 2007

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