Since the writing of UNCTAD`s Trade and Development Report 1998, prospects for the global economy have deteriorated significantly. Events during the summer have edged the world economy closer to the brink of a global recession, forcing governments in the North to reassess their policy stances.
The UNCTAD Secretariat today released a preliminary analysis of the potential contribution to global recovery of an increase in Japanese aid to the Asian economies stricken by the recent financial crisis. The study suggests that the impact of a package similar to that recently proposed by Japanese Finance Minister Kiichi Miyazawa would produce a significant increase in activity levels not only in Asia and Japan, but also in the United States and Europe. On UNCTAD estimates, the global growth impact of such a plan would be greater than that of a domestic fiscal stimulus of an equal magnitude.
The study, based on model simulations, shows a loss in output growth for developing countries as a whole, due to the Asian financial crisis, of 0.3 per cent in 1997, 2.7 per cent this year, 1.0 per cent in 1999 and 1.6 per cent in 2000.
For the economies most directly affected by the crisis, the loss in 1998 is significantly larger. This amounts to 18 per cent for Indonesia, 8.1 per cent for the Republic of Korea, and 13.6 per cent for Thailand. Moreover, it is estimated that the impact of the crisis will remain sizeable until 2000.
A Japanese aid package to Asia of $100 billion could add as much as $380 billion to global output over the three year period, 1998-2000, according to the UNCTAD model. Breaking this figure down, in the South-East Asian countries the package adds more than 17 percentage points to cumulative growth. The impact is particularly strong in Indonesia. For the Republic of Korea, the cumulative impact on growth would exceed 10 percentage points. These figures are considerably higher than would result from a domestic fiscal expansion in Japan of similar magnitude.
The simulations show that the impact on GDP growth in the United States and Europe of a Japanese aid package to Asia would be more than twice as large as the impact of a domestic fiscal stimulus package in Japan. It also suggests that such a plan could lower the burden of global adjustment on the United States payments position, and thus reduce protectionist pressures on the multilateral trading system.
The study notes that although a domestic fiscal stimulus is necessary to promote a cyclical upturn in Japan, it is not sufficient to address the structural constraints on more sustained growth. In light of Japan’s regional and global importance the study therefore recommends policy action on three fronts; a temporary fiscal stimulus, aid to the Asian countries in crisis, and structural reforms. In this context, the UNCTAD study welcomes the recent steps taken in Japan, including the Miyazawa Plan, the stimulus packages and efforts to tackle structural deficiencies in the financial sector.
To date, Japan has pledged the world’s largest economic support packages to the Asian economic difficulties, amounting to US $43 billion. The support measures have taken the form of long-term financing (about US $28 billion), trade insurance (US $20 million), grant aid and technical assistance. Additional bilateral support by Japan in response to the Asian crisis, worth $30 billion, has been announced in early October 1998.
This paper was released today, in the context of intergovernmental discussions on the prevention of financial crises taking place at the current annual meeting of the UNCTAD Trade and Development Board.
