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 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)

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South Korea Indonesia

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Malaysia

20

10

0 1991 1993 1995 1997 1999 2001 2003 -10

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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.