FIRST GLOBAL FORUM ON HUMAN DEVELOPMENT
29-31 July 1999 . United Nations Headquarters . New York
LESSONS FROM THE ASIAN CRISIS
by Takatoshi Kato
Waseda University
Discussions are still ongoing to determine the origin or causal background of the Asian Crisis. Yet it seems to me that there exists a widespread acceptance of the nature of the crisis---namely, it was invited in the process of emerging economy’s increasing integration into the global economic system. I think all three presenters’ views are based on this premise.
The implication, then, is that a crisis of similar nature might potentially be repeated in the years to come unless emerging economies would opt to backslide in restricting their current or capital transactions.
The extent to which the Asian Crisis and ensuing global contagion impacted global economy prompted or forced us to undertake a serious review of the current system. Previous speakers provided us with a set of stimulating insights. This being the case, I would like to limit myself to offer three inter-related points.
First, it is in the long-term interests of emerging economies to stay on course with the structural reform agenda.
Second, it is appropriate and timely for emerging Asian economies to address various social safety net agenda.
Third, last two years’ experience is pointing to the need for Asian countries to explore a regional initiative to better anticipate and manage future crisis.
1. Structural Reform Agenda
Let me start with structural reform agenda. It is by no means a coincidence that the Asian currency crisis took place in the late 90s when external private capitals cumulatively flew into the region at an unprecedented magnitude.
In looking back, the extremely painful experience of Asian economies in the 90s, where Japan is no exception, has forced them to recognize that the socio-economic structure which so successfully supported them in the past needs to be adapted to requirements called for by capital mobility and deregulation.
For emerging Asian economies, there are two sets of structural issues to be addressed--- one requires immediate attention and the other is of a more long-term nature.
Crisis-hit economies were all called upon to act immediately to address pressing problems of disposing non-performing loans and restructuring corporate debts. The Japanese experience in the 90s indicates that the longer it takes to effectively address those problems, the heavier the burden becomes. Genuine efforts have been made by all economies facing problems. But the extent of implementation looks somewhat different among various economies. It could be that speed and decisiveness in dealing with problems make a difference in the subsequent state of economic restoration.
It is also important to recognize that Asian economies are faced with a structural reform agenda of a more long-term nature. Necessary reform is indeed far-reaching. Starting from infrastructure for rigorous regulation of the financial sector, we can enlist such agenda as corporate governance, financial market infrastructure, framework of legal system and social safety net. Here I support Professor Lee’s view that strengthening the domestic financial system should be the most important policy agenda.
In Japan, the boundaries of traditional fiscal and monetary policy measures by now have been largely tried and the contribution to growth from larger scale of inputs will be limited due to aging of its population and exhaustion of the catching-up phase. Thus, it seems to me that the option of growing out of the current problems is not at hand for Japan. In this sense, Japan cannot afford to forego serious adaptation exercise.
But for emerging Asian economies, once economic stability is restored and a solid growth path is in sight, there could be a temptation to compromise various reform agenda. It is a little bit alarming that recently we have come across worrisome reports in this regard.
The experiences of the U.S. in the 80s and the Nordic countries in the early 90s suggest that it took a couple of years for those economies to return to a solid growth foundation. Economic logic seems to suggest that a solid base for growth is not established until a capital base of the financial sector is sufficiently strengthened and debt overhang is effectively restructured. If past precedents are any guide, the normalization process will take at least a couple of years.
All these considerations seem to suggest that it is in the long-term interest of emerging Asian economies to persevere with the ongoing reform agenda. And it should be noted that modern financial markets increasingly evaluate a specific economy’s performance not only in terms of traditional macro variables but also on the basis of robustness of its entire system.
2. Social Safety Net Agenda
Putting a stress on previous consideration underlines the significance of recognizing the other aspect of restructuring, particularly in circumstances of severe recession - that it is a source of acute social pain in the short term time-frame.
As a matter of fact, for most emerging Asian economies, the unemployment rate climbed to an unimaginable level from pre-crisis days. This is a point extensively covered in Professor Lee’s paper.
Also, in terms of standard of living, the latest World Bank survey reported a 24.4% decline in 1998 average standard of living in Indonesia from the previous year, a 13.6% decline in Thailand and also a 21.6% decline in urban Korea.
It is quite appropriate, then, that this year’s G7 Leader’s Statement emphasized, “The poor and most vulnerable must be better protected from the burden of adjustment in times of crisis. The international community must work with governments and national authorities to foster investment in people through education, health and other basic social needs, which are foundations for long-term development.”
Having said so, it looks like grave social tensions have been somewhat mitigated with respect to the immediate situation in crisis-hit Asian economies.
For one thing, safety net expenditures were increased in Korea, Thailand and Indonesia as the fiscal stance became increasingly expansionary. Also, the devaluation cushioned the impact of the crisis on the rural poor and the rural sector may have served as a reservoir to absorb living needs for some of the urban poor.
Be that as it may, it is prudent to anticipate that the social impact of the crisis is still emerging and employment and income growth are likely to be limited for the rest of the year.
As I recall, one area of keen interest of emerging Asia’s finance ministers before the crisis was the need to strengthen national social welfare system. According to the IMF statistics, emerging Asian economies spend, in most cases, less than 10% of central government expenditure on social security and welfare as compared with around one-third of expenditure for the G7 central governments. And Professor Lee’s paper substantiates in concrete terms the assessment of the current state of social safety nets of Korea, Thailand, and Indonesia.
Clearly, it is much easier to streamline a nascent system in time of economic robustness as I can tell from the experience of Japan. But a distinct change in demographic structure and further urbanization are features emerging Asian economies are expected to face in one way or another in the next century.
The sense of bottoming out of the Asian crisis should be conceived, in my view, as a timely occasion to lay groundwork for the social welfare scheme for the future.
3. Regional Framework Agenda
Lastly, a few words about the regional framework agenda. Tangible progress in the foregoing two areas, however desirable in their own standing, does not diminish the value of crisis prevention and better crisis management. Reflections on the experience of the Asian crisis began to bring about improvements in various aspects of the international monetary system, and the most notable example is the outcome of international monetary architecture review. In this connection, I appreciated a fairly detailed account provided in Professor Griffith-Jones’ paper to this Forum.
Those of us living in Asia cannot shed the feeling that the IMF and the World Bank are after all organizations of global membership of more than 180 economies. Also, there is a sense that a degree of interdependence among economies in the Asia-Pacific region is expected to grow further.
Therefore, economies in the Asia-Pacific region have a genuine stake to be concerned, first and foremost, about various developments actually or potentially taking place in the region.
These considerations might point to the need to explore a framework of intensive regional consultation to anticipate and address potential risks involving economies in the region at a much earlier stage. Fortunately, progress of international monetary architecture review will offer a strengthened base for regional consultation to depend upon.
In my view, two elements are crucial for regional consultation to be effectively conducted:
(1) There must be a core of common economic interests that make intensive consultation a compelling exercise.
(2) Consultation is conducted at a political level in as much as certain policy judgements can only be made at a political level.I am sure there can be views that question whether conditions are ripe to meet the above considerations. But I, for one, anticipate that emerging Asian economies’ policy horizon would expand in tandem with the degree of restoration of their economic health.