Journal Issue
Finance & Development, March 1980

Economic development and adjustment in Asia, 1974-78: How the Asian developing countries successfully managed to adjust to the economic disruptions of the mid-1970s

International Monetary Fund. External Relations Dept.
Published Date:
March 1980
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Kunio Saito

Asian developing countries as a group successfully adjusted their economies to the worldwide inflation and recession of 1974-75. They achieved rapid economic growth, relatively low rates of inflation, and stronger positions in their balance of payments (BOP) in the following three years, 1976-78 (see Table 1). The performance of Asian developing countries in this period compares well with that of other groups of developing countries. Since late 1978, however, the Asian countries have been faced with a number of economic problems and a period of economic adjustment.

Table 1Selected Asian developing countries: changes in output and prices(Average annual rates in per cent)
Real GDP or GNPConsumer prices
China, Rep. of11.51.511.
Korea, Rep. of10.
Sri Lanka3.
Asian developing countries16.
Sources: IMF, IFS and Annual Reports: various issues and staff estimates.… Indicates that the data are not available.

Weighted averages for all Asian developing countries including, in addition to those listed, the three countries in Indochina and the three countries in the South Pacific.

Sources: IMF, IFS and Annual Reports: various issues and staff estimates.… Indicates that the data are not available.

Weighted averages for all Asian developing countries including, in addition to those listed, the three countries in Indochina and the three countries in the South Pacific.

Like most other countries in the world, Asian developing countries enjoyed a strong economic upswing in the early 1970s. Like others, however, they also suffered from the inflation and recession of 1974-75, when real growth slowed and inflation rates more than doubled. External current account deficits rose sharply in all countries except Indonesia, the region’s only net oil exporter at the time, whose deficit declined slightly (see Table 2).

Table 2Selected Asian countries: external current accounts and reserve changes(In millions of U.S. dollars: average annual rates)
Current account balancesChanges in international reserves
China, Rep. of320-8501,030-27017020120
Korea, Rep. of-600-2,040-560-2,30080-50660-230
Sri Lanka-50-180-4020-2011040
Asian developing countries2-3,400-8,300-2,8001,8007005,300
Sources: IMF, IFS, and staff estimates.… Indicates that data are not available.

Actuals for the first six months, not seasonally adjusted.

Total for all Asian developing countries including, in addition to those listed, the three countries in Indochina and the three countries in the South Pacific.

Sources: IMF, IFS, and staff estimates.… Indicates that data are not available.

Actuals for the first six months, not seasonally adjusted.

Total for all Asian developing countries including, in addition to those listed, the three countries in Indochina and the three countries in the South Pacific.

In some cases as early as mid-1973, most Asian countries adopted less expansionary demand-management policies. These policies were introduced in some countries explicitly, but most countries introduced them in a subtle and gradual manner, and consisted largely of slowing the growth of domestic credit. The effect of this on monetary aggregates and the economy as a whole emerged gradually at first, particularly since overall external accounts remained in surplus and had an expansionary monetary impact. In 1974 and 1975, when external accounts turned into deficit, however, the lower domestic credit limits led to a marked slowdown in the growth of monetary aggregates in most of these countries. These less expansionary policies resulted in a more balanced monetary situation and contributed to reversing inflationary trends. From early 1976, the Asian countries resumed their rapid economic growth and development; both domestic credit and total liquidity rose at an increasing rate to accommodate the faster growth during 1976-78.

Against this background, many Asian countries allowed the earlier increases of oil prices to be passed on to related domestic prices. A number of Asian developing countries, however, strengthened direct controls on the prices of oil and oil products during late 1973-74. This measure did not seem to be effective in alleviating inflationary expectations—the public increased its consumption on the assumption of eventual decontrol and price increases, thereby undermining efforts made to conserve energy and reduce oil imports. The measures were modified relatively shortly thereafter, and the earlier increases of oil prices were passed on to the prices of related domestic products.

“Asian developing countries” in this article refers to the following groups of countries:

(1) two east Asian countries (the Republic of China and the Republic of Korea) and the five ASEAN countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand);

(2) India and its neighboring countries (Bangladesh, Burma, Nepal, and Sri Lanka); and

(3) countries in Indochina (Democratic Kampuchea, the Lao People’s Democratic Republic, and Viet Nam) and the South Pacific (Fiji, Papua New Guinea, and Western Samoa).

The countries in the first subgroup are “middle income” countries, while most of those in the second and third groups are in the “low income” category.

Exchange rate policies differed from country to country in the years between 1973 and 1978. A number of countries, including Bangladesh, Indonesia, and Sri Lanka, substantially devalued their currencies against the U.S. dollar. The purpose of this depreciation was to strengthen the countries’ external competitiveness, especially of their manufacturing sectors, although it had the short-term effect of adding to domestic inflationary pressures. Some Asian countries, including the Republic of Korea, maintained their U.S. dollar exchange rate virtually unchanged; the depreciation of the dollar between 1976 and 1978, particularly vis-à-vis Japan, improved their competitiveness and helped their exports. But this also generated inflationary pressures, particularly toward the end of this period, through the higher cost of semifinished industrial goods which had to be imported. These effects were less significant in the Republic of China, Malaysia, and Singapore, which appreciated their currencies, although relatively slightly, against the U.S. dollar.

Beginning in early 1976, there was a noticeable recovery in investment in most Asian developing countries. In the countries of east Asia and the Association of South East Asian Nations (ASEAN), the ratios of investment to gross national product (GNP) rose to an average of about 30 per cent during 1976-78, with ratios approaching 40 per cent in some cases. Investment was considerably smaller relative to GNP in other Asian developing countries, but the investment-GNP ratio also rose in many of them. The strong investment activity—a unique phenomenon in the world of 1976-78, when investment generally remained stagnant—may be attributed to a number of factors. There was the early reversal of inflationary trends mentioned above. Also in the east Asian, and in some of the ASEAN, countries, a sharp increase in exports of manufactures stimulated greater investment, which, in turn, expanded industrial output and exports.

The supply policies implemented during this period in a number of the Asian developing countries also promoted investment. Sri Lanka and, to a lesser extent, Bangladesh, substantially reduced consumer subsidies and adjusted prices upward to levels that reflected more closely the costs of production and world market prices. Burma increased its openness to external trade and aid, as well as its flexibility in adapting its planning mechanism to market developments. Import liberalization, implemented by a number of Asian countries, including India, the Republic of Korea, and Sri Lanka, also favorably affected domestic investment and overall economic growth and development.

By far the most important factor leading to the expanded investment in the Asian countries, however, was the increased availability of foreign financing. As in most other developing countries, financing has been the major constraint to higher investment, and hence faster economic growth and development, in the Asian countries. As discussed later, the increased flow of external funds had, of course, a favorable impact on their overall BOP and reserves.

In the east Asian and ASEAN countries, the increased inflows of external funds took the form mainly of direct investment and commercial borrowings, mostly from banks abroad but including bond issues. The investment was largely in manufacturing industries, particularly labor-intensive ones; but it also went partly to industries involved in natural resource development, including oil exploration and refining, especially in Indonesia, Malaysia, and Singapore. Foreign direct investment induced more domestic investment, which itself was financed in part by commercial borrowings abroad.

In other Asian developing countries, the increased capital inflows were predominantly through official borrowings, including those from international aid organizations. These were mostly invested in the improvement of infrastructure, but investments were also made in more directly production-related projects, particularly in agriculture. However, although these and other capital inflows rose during the period under review, they were still small relative to the economic size of these countries.

Balance restored

By early 1976, following the inflation and recession of 1974-75, Asia’s economic situation had improved considerably, and the improvements were sustained during most of the following three years. For this three-year period as a whole, aggregate growth rates of Asian developing countries averaged close to 7 per cent. This rate was not only higher than the 1974-75 rate but also higher than the growth rate before the recession in these countries. The average annual rate of increase in consumer prices, which rose to 24 per cent during 1974-75, declined to about 10 per cent in 1976-78— about the same level as in the early 1970s. The group’s combined external current account deficit declined from about US$8 billion a year in 1974-75 to about US$3 billion in 1976-78, which was even less than its deficit in the early 1970s. Capital inflows for this period stayed at the high levels of 1974-75, resulting in a large increase in international reserves (see Table 2).

There were, of course, differences in the performance of each country within the group. Output growth was most marked in the Republic of China and the Republic of Korea, where rates averaged over 10 per cent a year during 1976-78. Annual average growth ranged between 6 per cent and 9 per cent among the ASEAN countries, and between 3 per cent and 7 per cent in India and its neighboring countries. These rates were higher than in the 1974—75 period and, in many cases, higher than in the early 1970s. On the other hand, growth remained generally low in the smaller countries in the South Pacific, and real rates even declined in the countries of Indochina, where hostilities continued and unfavorable weather hampered reconstruction.

The rapid growth accompanied further industrialization not only in the “newly industrializing countries” of the Republic of China, the Republic of Korea, and Singapore but also in other ASEAN countries as well as in India. It also accompanied significant increases in food output, especially in India and some of its neighboring countries. Although short-term factors played a role, including relatively favorable weather in the Indian subcontinent, this growth in industrialization and food output resulted from underlying large investment over many years and thus represented longer-term trends. Industrialization has been increasing in Asia for many years. The expansion of food output then known as the “green revolution”—had taken place earlier in countries such as the Republic of Korea and the Philippines—before it spread to the Indian subcontinent.

But an unfavorable trend also continued during this period—namely, increasing income differentials between “middle” and “low” income countries. Middle-income countries in east Asia and ASEAN continued to grow at high rates, narrowing the gap between their per capita incomes and those of the industrial countries. The growth of the low-income countries around India, by contrast, although it accelerated somewhat, remained relatively slow. The situation was even worse, as noted above, for the smaller countries in Indochina and the South Pacific.

Inflation rates in all Asian developing countries declined between 1974-75 and 1976-78. The decline was most significant in India, where inflation rates averaged 1-2 per cent during 1976-78. It was also noticeable in India’s neighboring countries, as well as in the Republic of China, Malaysia, and Singapore, where annual inflation rates averaged 5 per cent or less. The price performance of other Asian developing countries was less impressive, but except for the countries of Indochina, none of them experienced inflation in excess of 10 per cent by mid-1978. Even in the countries of Indochina, where a rapid postwar inflation rampaged, rates declined markedly during 1976-78.

The decline of inflation rates, in Asia in the 1976-78 period resulted from a number of factors. These included an increase in food supply, especially in India and its neighboring countries, and relatively small rises in the prices of most internationally traded goods. The most important factor, however, was the effect of the earlier hikes in external prices, which were limited to once-and-for-all increases in the prices of related domestic products, without inducing any significant secondary inflation. The less expansionary demand-management policies earlier adopted by the authorities played a significant role in this.

In the period 1976-78 there was a significant improvement in external current accounts of the Republic of China, the Republic of Korea, and Singapore—the three newly industrializing countries of the region—Malaysia (which became a net oil exporter from 1976), India, and Sri Lanka. Of these countries, the Republic of China, India, and Malaysia recorded sizable current surpluses between 1976 and 1978, while the others—the Republic of Korea, Singapore, and Sri Lanka—significantly reduced their deficits from the 1974-75 levels. Manufactured exports rose sharply in the newly industrializing countries, as well as in some ASEAN countries and India. The higher prices of tea contributed to increased export earnings in India and Sri Lanka. Some of these countries, including India and the Republic of Korea, also benefited from higher service receipts, especially remittances from workers in the Middle East. These favorable factors offset the growth of imports, which accelerated sharply during this period, reflecting the high rates of domestic expansion.

In the remaining countries of the region—Indonesia, the Philippines, and Thailand, as well as in the smaller countries around India and those in Indochina and the South Pacific—current account deficits either remained roughly the same between 1974 and 1978 or, in some cases, rose slightly between the two years. These countries also experienced a relatively rapid rise in the growth of imports, particularly in Indonesia, where the earlier increases of oil prices and export earnings generated an even sharper increase in import demand. Their exports, however, remained generally stagnant during 1976-78. The rise in the trade in manufactures hardly affected these countries, as manufactures accounted for only a small part of their exports; and exports and prices of industrial raw materials remained relatively stagnant, reflecting the sluggish recovery from the recession in the industrial countries. Exports of food, particularly of rice, also stagnated, as output in the traditional importing countries rose during this period.

Capital inflows into Asian developing countries averaged about US$7-8 billion a year during 1976-78, about the same as in 1974-75 and more than double the amount in the early 1970s. Their net use of Fund resources, which rose to almost US$1 billion annually for the group during 1974-75, declined considerably in the later period. The increased capital inflows during 1976-78 were mostly in commercial borrowings and direct investment for the east Asian and ASEAN group of countries and in official funds for the other Asian countries. The continued large capital inflows resulted in a significant increase in international reserves for a number of Asian developing countries, including India, Indonesia, the Republic of Korea, and Malaysia. Even among countries with less strong current account positions, reserves declined little in nominal terms, although there were cases of significant declines relative to the level of imports.

Strains of growth

Some adverse changes in the economies of Asian developing countries surfaced toward the end of the 1976-78 period. The most important of these were those resulting from rapid growth, especially in east Asian countries and in some ASEAN countries. Sectoral bottlenecks, as well as overall pressures on prices and external balances, have become increasingly evident. In some Asian countries, too, the extensive commercial borrowing of the last few years has overloaded debt service payments and, more generally, put pressure on their BOP. These strains have checked further economic expansion, prompting the authorities to adopt less expansionary policies. In 1979, the deterioration in the external economic environment owing to the oil price increases and the economic slowdown in the United States and other industrial countries added further to these problems.

The situation is similar to that which prevailed in the mid-1970s, and the Asian authorities have again taken similar countermeasures; but, as a result of their previous experience, they seem to be acting more promptly and more forcefully. By mid-1979, most Asian developing countries had adopted less expansionary demand-management policies. Few countries have strengthened price control methods and, as a result, the 1979 increases of oil prices have been passed on to related domestic prices in most of these countries. It is inevitable and, in most cases, appropriate that the increases in oil and other foreign prices will be passed on to related domestic prices. But a more widespread secondary inflation could follow, and this has to be avoided. On the external side, the availability of commercial funds appears to be at least as favorable as in the mid-1970s. The cost of such borrowings, however, is now substantially higher, generating greater debt-service problems than previously. There are also a large number of Asian and other developing countries with little access to commercial markets. The expansion of the access of these countries to commercial lending, and, more important, the need for increased external aid remain problem areas.

One significant difference between the present and previous adjustment periods is the deterioration of the export environment for manufactured goods as protectionism increasingly takes hold. As noted earlier, the expansion of exports in manufactures contributed significantly to the favorable economic performance of many Asian developing countries between 1976 and 1978. The industrialization of these countries led not only to import substitution but also to export production. It was a part of the global transfer of industries from industrial to developing countries, based on the latter’s economic advantage in possessing a well-trained labor force working for relatively low wages. Both developing and industrial countries should benefit from this new international division of labor and the associated expansion of international trade, involving not only the export of finished manufactures by developing countries but also the import of semiprocessed industrial inputs from industrial countries. To maintain the momentum of these favorable forces and to achieve successful economic adjustment, especially in Asian and other developing countries, an early reversal of protectionist trends is needed.

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