Asia’s economies endured a tough year in 1998, as growth rates in many previously dynamic economies barely remained positive or became negative, according to the Asian Development Outlook 1999. Inflation rose in Southeast Asia, largely due to steep currency devaluations, and current account balances in Asia’s developing economies improved as a result of reduced imports rather than increased exports. The Asian financial crisis hurt many of Asia’s most dynamic economies and raised questions about the role of openness in promoting sustainable growth, the report continues. Nevertheless, it concludes, the Asian developing economies’ best route for ensuring economic growth and prosperity is through economic openness and liberal economic policies.
Region in 1998
In 1998, the report states, the slowdown in Asian growth that began with the deceleration of exports in 1996 worsened with the currency crisis in 1997. It then turned into a widespread regional contraction, with growth in East and Southeast Asian developing economies being the lowest since World War II, averaging –6.9 percent in Southeast Asia and –1.4 percent in the newly industrializing economies. Nervous investors pulled capital out of supposedly risky emerging markets in Asia in 1998, and capital flows turned negative after reaching $105 billion in 1996.
The economies in the region generally considered more dynamic did the worst in 1998—Indonesia suffered a huge contraction, and Malaysia and Thailand had substantial declines, the report states. Among the newly industrializing economies, China fared the best, sustaining little damage, while Korea suffered a large contraction. Hong Kong SAR and Singapore, whose economies are based on trade and financial services, were also affected by the regional slowdown. Reduced export demand partially explained the contractions in Hong Kong SAR and Korea.
Across Asia, the average rate of consumer price inflation rose to 6.5 percent from 4.6 percent in 1997, according to the report. The sharp depreciation of the rupiah caused double-digit inflation in Indonesia. In the newly industrializing economies, inflation rose primarily because of price increases in Korea caused by the sharp depreciation of the won. Milder devaluations in Malaysia, the Philippines, and Thailand drove up inflation in those countries.
Throughout the region, the report points out, current accounts improved as capital flowed out, with Asia’s aggregate current account moving to a surplus of 3.6 percent of GDP in 1998. The improvement came from import reductions, and overall exports did not increase as expected. In the newly industrializing economies, weak demand from other Asian crisis countries and weak global demand for electronic products were to blame for their poor export performance.
Asia’s vulnerability to capital flow reversals was compounded by weak and poorly regulated banking systems in the region. In the newly industrializing economies, particularly in Korea, bad loans increased, the report explains, because of the impact of high interest rates on weak financial institutions.
Link between openness and growth
Annual economic growth between 1965 and 1990, on average, was 2 percent higher in the Asian developing economies that maintained outward-oriented policies than in those that had inward-looking policies, according to the report. Openness, the report adds, promotes market discipline and stimulates growth through improved access to new technologies and skills and to investable resources in international capital markets.
The outward-oriented development strategies—including encouraging exports, reducing import tariffs, and removing quantitative restrictions—adopted by the newly industrializing economies of Asia allowed them, in one generation, to achieve progress that in many Western economies took several generations, the report states. These countries have also largely erased poverty, low life expectancy, malnutrition, and illiteracy.
The massive capital outflow from these economies during the financial crisis threatens to wipe out much of their progress in recent years, the report notes. However, the financial crisis was not caused by the outward-oriented trade policies these countries pursued, and such policies should remain a central component of development. What the crisis does raise questions about is the desirability of completely free capital movement and full capital account convertibility, the report adds. The crisis did not overwhelm countries such as China or India, which had greater restrictions on capital account convertibility than the countries that were engulfed by the crisis.
This does not suggest that countries with a great deal of convertibility should close their capital accounts when faced with a crisis. Instead, they may wish to consider introducing some friction in financial flows using price-based measures, such as taxes on short-term capital, to avoid distortions to beneficial capital account transactions. Countries must also proceed with banking and financial sector reforms before opening their capital accounts. In the middle of a crisis, the report notes, introducing capital controls—although they may provide some breathing space—likely will not slow down speculative capital flows or fix the weaknesses in the economy that caused the crisis in the first place.
As the new millennium approaches, the report observes that the global economy faces a number of challenges: Asia’s advanced economies are still suffering economic turmoil; the European Union is facing prospects of diminished growth and high unemployment; and the U.S. economy, while it appears unscathed by the crisis, is likely to slow down. Increased protectionism in advanced economies and waning support for trade liberalization and openness will exacerbate the problems facing the world economy. The path to global prosperity and recovery from the crisis, the report concludes, lies in an open global environment.
|Indicator and subregion||1996||1997||1998||1999||2000|
|Gross domestic product growth|
|Newly industrializing economies||6.3||6.0||–1.4||2.3||4.3|
|China and Mongolia||9.6||8.7||7.8||7.0||6.5|
|Central Asian republics||1.1||3.5||0.4||—||—|
|Newly industrializing economies||4.3||3.5||3.8||1.1||2.3|
|China and Mongolia||8.4||2.8||–0.8||2.0||3.0|
|Central Asian republics||42.3||21.6||10.1||—||—|
|Current account balance (relative to GDP)|
|Newly industrializing economies||0.3||1.7||9.2||4.9||2.8|
|China and Mongolia||0.9||3.2||2.5||0.9||0.4|
|Central Asian republics||–6.0||–4.2||–7.2||—||—|
The Asian Development Outlook 1999 is available for $36.00 from the Asian Development Bank, P.O. Box 789, 0980 Manila, Philippines. See www.adb.org for more information.
Ian S. McDonald
Senior Editorial Assistant
The IMF Survey (ISSN 0047-083X) is published in English, French, and Spanish by the IMF 23 times a year, plus an annual Supplement on the IMF and an annual index. Opinions and materials in the IMF Survey do not necessarily reflect official views of the IMF. Any maps used are for the convenience of readers, based on National Geographic’s Atlas of the World, Sixth Edition; the denominations used and the boundaries shown do not imply any judgment by the IMF on the legal status of any territory or any endorsement or acceptance of such boundaries. Material from the IMF Survey may be reprinted, with due credit given. Address editorial correspondence to Current Publications Division, Room IS7-1100, IMF, Washington, DC 20431 U.S.A. Tel.: (202) 623-8585; or e-mail any comments to