Jong-Wha Lee and Changyong Rhee^*
January 1999

Table of Contents

Abstract
I. Introduction
II. Origins and Evolution of the Asian Crisis
III. Social Impact of the Asian Crisis and the IMF Program
IV. Policy Implications and Lessons from the Asian Crisis
V. Concluding Remarks
References
 
 
 

Abstract

This paper documents the social impacts of the financial crisis in Asia. We provide a general overview of the causes and the evolution of the crisis and highlight the differences as well as the similarities among the affected Asian countries. In particular, the impacts of the crisis on unemployment, real wage, poverty, and income inequality are analyzed using a cross-country data set, which consists of all the countries that have received financial assistance from the IMF over the period from 1973 to 1994. The stylized pattern of employment growth in previous IMF program countries indicates that employment growth is more sluggish in the recovery process compared with other macroeconomic variables. Hence, unemployment rates can remain high for a long period even after the crisis ends in the Asian countries. We also find that the crisis aggravates poverty for marginal groups of the population over a significant period, even though it does not bear a long-term effect on overall income distribution. Policy implications of our findings in building social safety nets in Asia are also discussed.
 

I. Introduction

It has already been more than a year since the financial crisis which erupted in Thailand developed into the financial collapse in Asia. It has continued to deepen and broaden more than anyone anticipated. Its contagion has now spread to Latin America and Russia, and is currently making the global capitalist system come apart at the seams. This financial collapse in Asia was also followed by an economic and social collapse. Asian countries are now struggling to escape from the miseries of declining income, rising unemployment, and increasing poverty.

While there has been much recent research on the causes and the economic impact of the Asian crisis, its social impacts have been relatively neglected. To fill this discrepancy, this paper assesses the severity of the Asian crisis and its social consequences. For decades, Asian countries enjoyed high growth, low unemployment rates, relatively equal income distribution, and low crime rates. Therefore, compared with other crisis-hit countries, the social impacts of the crisis - such as rising unemployment and income inequality - have been felt more painfully in Asia and has led to disastrous social consequences. To make matters worse, most Asian countries have not yet developed a meaningful social safety net. This paper documents the social impact of the crisis in the most affected Asian countries, notably Indonesia, Korea and Thailand, and tries to draw policy implications.

Section II begins with a general overview of the cause and extent of the Asian crisis and highlights the differences as well as similarities among Asian countries. The key features of the Asian crisis are large inflows and sudden withdrawals of foreign capital. We review the extent of foreign capital inflows and outflows in these Asian countries and then analyze which factors caused the sudden change in foreign investors’ confidence in these economies. The role of financial liberalization and globalization in the eruption of the crisis is closely examined. We also pay special attention to the role of International Monetary Fund (IMF) adjustment programs in handling the Asian crisis. In order to assess the economic and social impacts of the crisis and predict its future development, it is imperative to understand the IMF conditionality attached to its financial support for the Asian countries. Moreover, the IMF adjustment program in Asia is being severely criticized as the "same old belt-tightening adjustment" or "one-size-fits-all approach." The frequent emergency IMF bailouts have also been blamed for contributing to new moral hazards in international lending. To evaluate these criticisms, we review the general characteristics of IMF programs as well as the specific content of programs with Indonesia, Korea, and Thailand.

Section III analyzes the disastrous social impacts of the Asian crisis. We assess the current social impacts of the crisis in Indonesia, Korea and Thailand and then provide a prediction for its long-term development. To make a long-term prediction, the social impacts of the financial crisis are analyzed in a broad historical and international perspective. This paper consults the records of all countries that have experienced a currency crisis and received conditional financial assistance from the IMF during the period of 1973 to 1994. From this cross-country data we draw some stylized facts about the impacts of IMF programs on social variables such as unemployment, real wage, poverty, and inequality. Then we compare these stylized facts with the cases of the three most severely affected countries, namely Indonesia, Korea, and Thailand.

Our cross-country analysis shows some stylized patterns of the social impacts of the crisis. For example, we find that employment growth is more sluggish in the recovery process than other macroeconomic variables. This implies that unemployment rates can remain at a higher level for a long period after the crisis, even if output growth, inflation rates, etc., are restored to their pre-crisis level. We also find that the burden of the crisis is distributed unequally. It is the marginal groups such as the poor, the less experienced, the less-educated, women, and young workers who are most severely affected by the crisis. As a consequence, even though the crisis does not bear a long-term effect on overall income distribution, it definitely aggravates poverty for the victimized core group over a significant period. We think these findings have many important policy implications, especially for building social safety nets in these Asian countries during the crisis. Section IV and the conclusion of the paper discuss and summarize the policy implications of our study.
 

II. Origins and Evolution of the Asian Crisis

Needless to say, the origins and the nature of the Asian crisis are multifaceted and the forms of evolution are significantly different among Asian countries. But they all share one common phenomenon: large-scale inflow of foreign capital and its sudden outflow. In evaluating various hypotheses for the origins of the Asian crisis, it is therefore important to understand what caused the sudden change of foreign investors’ confidence in Asian countries. In section II.1, we first review the pre-crisis macroeconomic conditions of Asian countries to see whether they were so aggravated as to justify the sudden loss of foreign investors’ confidence. In particular, macroeconomic policies such as fiscal, monetary, and exchange rate management before the crisis will be compared with those of Latin American cases in the 1980s. Section II.2 then examines in detail to what extent the globalization of international financial markets contributed to the changes in the amount and the structure of external liabilities of Asian countries. In this regard, we will try to highlight the differences as well as the commonality among Asian countries in the origins and the evolution of the crisis. After the crisis began, the highly infected countries – Thailand, Indonesia and Korea – requested IMF financial support and are currently under IMF adjustment programs. In Section II.3, we discuss the nature of IMF adjustment programs in general and the contents of the IMF policies for Indonesia, Korea, and Thailand, respectively.

II.1 Macroeconomic Conditions and Policies

Table 2.1 shows the macroeconomic performance of selected Asian countries from the mid 1970s until the onset of the crisis. The first three sub-tables are for the worst-affected Asian countries; the other tables are for the less-affected countries. For comparison, the table includes Mexico and Argentina.

Growth, Inflation, Unemployment and Macroeconomic Policies

As can be seen in Table 2.1, Asian countries continued their solid growth performance throughout the 1990s. Except for Japan and Taiwan, their average real GDP growth rates during 1990-95 were higher than or at least comparable to their historical averages. It is noteworthy that even the worst-hit countries – Indonesia, Korea, and Thailand – all experienced average growth rates well above 7% during this period.

The performance was equally impressive in terms of price stability. Except for China and the Philippines, the inflation rates of Asian countries in the 1990s were modest at least by developing-country standards and remained at a one-digit level. Even the inflation rates of China and the Philippines were quite low compared with the hyperinflation Mexico and Argentina experienced before their debt crises in the 1980s. We can also see that China and the Philippines enjoyed virtually full employment prior to the crisis; unemployment rates were less than 3% in these economies.¹ Understandably, the long period of full employment experience is making the current crisis harder to swallow for the workers in this region.
 
 

Thailand
 

Indonesia
 

Korea
 

China
 

Hong Kong
 

	75-82	83-89	90-95	90	91	92	93	94	95	96	97
Growth	9.3	7.2	5.0	3.4	5.1	6.3	6.1	5.4	3.9	4.9	5.3
Inflation	8.6	6.7	9.3	9.7	11.6	9.3	8.5	8.1	8.7	6.0	5.7
UE	-	2.7	2.0	1.3	1.8	2.0	2.0	1.9	3.2	2.8	2.2
CA/GDP	1.9	8.3	4.5	8.9	7.1	5.7	7.4	1.6	-3.9	-1.3	-1.5
Saving	29.7	33.6	33.5	35.8	33.8	33.8	34.6	33.1	30.4	30.6	31.1
Investment	27.8	23.6	28	26.4	26.6	27.4	27.3	29.8	30.5	31.3	32.0
Export	18.0	20.1	15.6	12.3	20.0	21.2	13.2	11.9	14.8	4.0	4.0
Budget	1.5	1.6	1.6	0.7	3.2	2.5	2.3	1.1	-0.3	2.2	3.8
Money	-	-	-	-	-	8.5	14.5	11.7	10.6	12.5	8.8
RE(US$)	-	-	0.86	1	0.93	0.89	0.83	0.79	0.74	0.72	0.70
RE(Yen)	-	-	0.96	1	0.99	0.94	0.96	1.00	0.89	0.75	0.64

Japan
 

Malaysia
 

Philippines
 

Singapore
 

Taiwan
 

** Latin America

Mexico