Asian Crisis 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 …