No less than the financial crisis itself, the economic recovery in East Asia is serving up lessons for developing countries. UNCTAD´s examination of the Asian recovery, released today (Trade and Development Report, 2000)(1), reaches four main conclusions:
- The extremes of collapse and recovery have been due to misguided policies, although alternatives were available;
- Structural weaknesses have been aggravated by interest rate hikes, and the recovery remains fragile;
- The social burden of the crisis has been unevenly distributed, and solid growth over the next decade will be needed to eliminate its impact; and
- The region´s long-term growth should not be left to the dictates of global finance, firms and markets.
In its assessment of the impact of the policy response to the crisis, the Report concludes that the main damage during the Asian crisis came from hikes in interest rates rather than currency declines. Nor did the orthodox policy response bring stabilization by restoring confidence, but rather by creating a deep recession, import collapse and an unprecedented accumulation of reserves. Both hindsight and foresight (see also TAD/INF/860 of 28 August 1998) suggest that provision of adequate international liquidity to replenish reserves, together with temporary exchange controls, debt standstill and maturity rollover, should have been the chosen policy instruments from the outset.
Currency stability, once achieved, was not sufficient to bring recovery. That only appeared, the Report finds, when tight fiscal and monetary policies were reversed. The Report also examines Malaysia´s unorthodox experiment with capital controls and concludes that not only was this instrumental to its own recovery but it also had a positive impact on the region by forcing a wider policy rethink.
If the crisis was, in part, precipitated by rapid financial liberalization, the burden of financial restructuring has fallen heavily on the State, which in some areas is playing a bigger role than ever. Intervention has amounted to the effective nationalization of financial systems in the Republic of Korea and Indonesia; only in Thailand, where restructuring has been slow, has a market-based approach been followed. But this, the Report notes, is storing up problems by adding to the public debt, which now ranges from 30% of GDP (Republic of Korea) to over 90% (Indonesia). And vulnerability to external pressures, whether through trade or financial shocks, is perhaps even greater than before the crisis.
UNCTAD´s analysis of the East Asian experience confirms that financial cycles in emerging markets appear to be quite different from traditional business cycles. The current account deficits and budget surpluses common to East Asian economies prior to the crisis have been reversed and the excess of investment over savings greatly reduced. These macroeconomic changes are associated with significant changes in income distribution. Even with output back to pre-crisis levels, income appears to be less equally distributed. And like other financial cycles in the developing world, labour has borne the brunt of the crisis through a combination of real wage cuts and rising unemployment, while poverty has remained considerably above pre-crisis levels.
More inclusive growth pattern urged
The Report concludes that a more inclusive pattern of growth is needed, one which does not run rapidly into external constraints. Given that the financial crisis has shown the dangers of excessive reliance on foreign capital and markets, managing integration will remain high on the agenda of policy makers across the region. Striking a balance will not be easy. The global economy is more competitive than in the past as more and more developing countries make a push into the markets of industrial countries and at a time when the latter are becoming less tolerant of market penetration. Still, productivity gaps with industrial countries are very large, and catch-up will mean that investment must remain a priority. But with domestic savings likely to stay high, dependence on foreign capital to close the income gaps with the leading industrial nations will be that much less.
Regional trade and financial flows have played a key role in both the crisis and the recovery. New initiatives at this level - going beyond information disclosures and prudential regulations to include close supervision and control over private borrowing abroad, and tight control over speculative capital flows - should be considered.
Contrary to the mainstream view, the Report considers that the efforts of a developmental State to ensure strategic rather than closer integration with the global economy will remain an integral part of any renewed Asian miracle. Reducing dependence on foreign resources and markets will also mean giving more weight to domestic sources of economic growth.