SPECIAL NOTE: THE ASIAN ECONOMIC CRISIS

The draft of this working paper was completed just before the economic meltdown brought to an end what had come to be known as the "Asian Economic Miracle" with the currencies of key countries like Thailand, Republic of Korea, Indonesia collapsing and economic growth in these and many other countries coming to a halt or even regressing in some cases. At a stroke, the projections developed in the draft working paper became obsolete and the paper needed major revision, sometimes reversal of assessments. It is dangerous to carry out such revisions while instability remains high, hence delay in revision till April 1998. The Outlook study which was to have used the economic projections in this paper, has had to use other conservative ones. The importance of offering projections in this paper has thus now diminished greatly and emphasis is placed instead on qualitative presentation of the observed dynamics of development.

In this paper frequent reference will be made to the Asian economic "crisis", "turmoil", "dislocation", or "meltdown". Irrespective of the word used, these terms refer to the severe slowdown in performance of key economies of the region observed over a period but most pronounced since around July 1997 when first Thailand, then Republic of Korea and later Indonesia showed massive currency depreciation, loss of creditworthiness and other economic reversals including reported closure of considerable industrial infrastructure. The dislocation occurred in other countries too, notably Malaysia and Philippines; particularly important at the global scale has been the dislocation and stalling/near reversal of the economy of Japan. The story of Asia's economic dislocation is still unfolding and its negative ripples are reported daily within the region and far afield.

What follows is a quick profile of some indicators of dislocation. Analysis of its underlying causes is beyond the scope of this paper.

Selected indicators of the crisis

Not all the countries of the region produce their statistics early enough for the crisis to have been effectively monitored from all viewpoints as it evolved. Limited statistics are nevertheless available, even if sometimes delayed in time, to suggest the extent of dislocation. The table below shows changes in US dollar exchange rate:

Exchange rates for selected currencies 1996 - 1998

Country/territory	National currency per $US1.00
	May 1996	May 1997	July 1997	Sept. 1997	Nov. 1997	Jan 1998	April 1998	% devaluation
								by April 1998	Worst level
Australia	1.26	1.28	1.36	1.39	1.45	1.51	1.53	-18	-18
Japan	107	114	116	120	128	128	131	-18	-18
Republic of Korea	781	891	894	909	1035	17241	1375	-43	-55
Singapore	1.41	1.43	1.45	1.51	1.60	1.75	1.59	-11	-19
China	8.33	8.29	8.29	8.29	8.28	8.28	8.28	0	0
Taiwan Province of China	20.9	27.8	27.9	28.6	33.0	33.5	33.0	-37	-38
Indonesia	2328	2443	2478	2970	3510	11350	7950	-71	-7
Malaysia	2.49	2.50	2.59	3.00	3.49	4.40	3.77	-34	-43
Philippines	26.1	26.4	29.5	33.5	35.2	42.1	38.3	-32	-38
Thailand	25.3	25.2	29.8	35.9	40.0	52.4	39.3	-26	-52
India	34.9	35.8	35.7	36.4	37.5	38.8	39.7	-12	-12

Source: The Economist (various issues - last week of reported months).

The most severe devaluations have occurred in Indonesia, Republic of Korea and Thailand, with Malaysian and Philippines devaluations also quite considerable.

Key elements to note include:

· in many cases value of currencies is beginning to regain lost ground;

· while proportionately the devaluations have been most severe in the countries listed earlier, the absolute total value loss of purchasing power (and increased trade competitiveness) represented by Japan's 18% devaluation is of overwhelming importance at both regional and global levels.

Information about the effects of the slowdown on GDP growth rates is more difficult to obtain. For the same countries covered by Table 0.1, the worst slowdowns appeared to have been as follows:

· Thailand: 1996 growth 6.7% pa; 1997 estimate 0.4% pa;

· Japan: 1996 growth 3.9% pa; 1997 estimate -0.7% pa;

· Republic of Korea: 1996 growth 7.2% pa; 1997 estimate 3.9% pa;

· Indonesia: 1996 growth 8.0% pa; 1997 estimate 6.6% pa.

With regard to industrial production data are behind time also for many countries. The worst dislocations (reported for April 1998 covering the last 3 months at annual equivalent) are:

· Thailand : -16.5%

· Japan : -6.4%

· China : -2.6%

· Malaysia : -2.2%

· Republic of Korea : -1.9%

Philippines industrial production also declined sharply during 1997 and has recently grown sharply. In general, with the exception of Japan, the currency depreciation has not led to comparable loss of production. Dislocation is often said to have been most marked for trade (exports) due to failures of banking systems even to cover letters of credit for such trade.

Summary of causes of the crisis

Theories abound as to the trigger(s) and underlying causes of the crisis. The Thai Baht's collapse seems to have been the spark which set off linked meltdowns elsewhere. In general, among the key origins of the crisis, the following are most frequently mentioned:

· rapid growth in, and poor supervision of, bank lending, partly using external funds for unperforming projects such as real estate. Consequently high levels of bad loans;

· failure of currencies to depreciate in line with erosion of price competitiveness of many economies so reducing exports that were needed to drive economic growth;

· very rapid investment rates leading to upsurge in imports and deficit levels;

· uncontrolled external commercial borrowing, including significant levels of short-term money at rather high interest rates.

How soon the crisis can be reversed

This situation is still very fluid and open to debate, with no consensus emerging except around the fact that Japan's emergence from recession is a precondition for all the other economies to revive. There is also near consensus that if China's currency were to devalue, its boosted competitiveness could severely undermine the one advantage which the severely dislocated former "tiger" economies now enjoy. The feeling that the "tigers" may not regain the double-digit growth of recent years is also widespread but it is expected that they can regain much of their performance - how long this will take is not agreed upon.

1 Worst case for Republic of Korea was mid January at 1749 units.