GROWTH AFTER THE ASIAN CRISIS: WHAT REMAINS OF THE EAST ASIAN MODEL?

This paper focuses on the prospects for sustained development in the four East Asian economies most adversely affected by the crises of 1997/98. These include all three second-tier South-East Asian newly industrializing countries (NICs) – Indonesia, Malaysia and Thailand – as well as the Republic of Korea, the most adversely affected of the first-generation newly industrialized economies (NIEs). The first section critically examines the East Asian model presented by the World Bank’s “East Asian Miracle” (1993). The study emphasizes the variety of East Asian experiences. The three second-tier South-East Asian experiences are shown to be quite distinct from, and inferior to, those of the first-generation NIEs, especially the Republic of Korea and Taiwan Province of China. The circumstances leading to the onset of the East Asian crises of 1997/98 are then reviewed to assess whether and how the East Asian “models” may have contributed to the crises. Macroeconomic indicators in Malaysia and the three most crisis-affected economies – i.e. Indonesia, the Republic of Korea and Thailand – are reviewed to establish that, despite some misdemeanours, the crises cannot be attributed to macroeconomic profligacy. After reviewing the causes of these crises, the role of international financial liberalization and the reversal of capital inflows are emphasized. Nevertheless, the trend towards further financial liberalization continues. Malaysia is shown to have been less exposed as a result of restrictions on foreign borrowings as well as stricter bank regulations, but more vulnerable owing to the greater role of capital markets compared to the other three economies in the region. The role of the IMF and financial market expectations in exacerbating the crises is also considered. The emerging discussion begins by asserting that economic recovery in East Asia since 1999 – especially in Malaysia and the Republic of Korea – has been principally due to successful reflationary measures, both fiscal and monetary. The main institutional reforms currently claimed as urgent to protect the four affected economies from future crises and to return them to their previous high growth paths are critically assessed. It is argued that the emphasis by the IMF and the financial media on corporate governance reforms has been misguided and that such reforms are not really necessary for recovery. Instead of the Anglo-American-inspired reforms currently proposed, reforms should create new conditions for further “catching-up” throughout the region. Although the prospects for reform of the international financial system remain dim, a reform agenda in the interests of the South is outlined. Globalization, including international financial liberalization, has reduced the scope for selective interventions so crucial to the catching-up achieved during the East Asian miracle years. However, the process has been uneven and far from smooth, leaving considerable room for similar initiatives more appropriate to new circumstances. In any case, it is unlikely that globalization will ever succeed in fully transforming all other national economic systems along Anglo-American lines. The emerging hybrid systems have not really advanced late development efforts. There is an urgent need to understand better the full implications of globalization and liberalization in different circumstances so as to identify the remaining scope for national developmental initiatives.

Growth with Equity in East Asia?

Rapid growth and structural change have reduced poverty in East Asian economies. Income inequality has been low in Korea and Taiwan, but has risen in recent years with economic liberalization. In the Southeast Asian economies of Thailand, Malaysia and Indonesia, poverty has declined, while income inequality trends have varied, rising most clearly in Thailand. With its strengthened (private) property rights, market liberalization and sustained rapid growth, China has also experienced increased inequality despite considerable poverty reduction. Hence, the common claim of egalitarian growth in East Asia may have been exaggerated, especially since the 1990s.East Asia, China, Indonesia, Malaysia, Korea, Taiwan, Thailand, inequality, poverty

MALAYSIA´S SEPTEMBER 1998 CONTROLS: BACKGROUND, CONTEXT, IMPACTS, COMPARISONS, IMPLICATIONS, LESSONS

Unlike the other East Asian economies which sought IMF emergency credit facilities after borrowing heavily from abroad, the Malaysian authorities simply never had to go to the Fund as prudential regulations introduced earlier had limited foreign borrowings, especially short-term credit. Instead, its crisis was due to massive portfolio investment inflows into the stock market. With the crisis, currency depreciation and stock market declines formed a vicious cycle, exacerbated by contagion and policy responses as well as official rhetoric undermining market confidence, especially in the latter half of 1997. From December 1997, the adoption of more orthodox pro-cyclical policies made the downturn worse. Before mid-1998, new fiscal measures were adopted to reflate the economy, later augmented by the currency and capital control measures from September. Looking at the crisis in August 1998, when the United States still showed little inclination to do anything to improve the situation, the Malaysian measures made good sense. The September 1998 Malaysian controls were undoubtedly well designed and effective in closing down the offshore ringgit market without discouraging greenfield foreign direct investment. The Malaysian experience shows that imposing emergency capital controls on outflows did not have the disastrous effects its opponents claim it would. But, coming 14 months after the crisis began, they were too late to stem capital flight, which had already taken place, resulting in the 80 per cent collapse of the stock market index. The capital controls were amended in February 1999 and ended in September 1999. They prevented more capital from leaving owing to the uncertainty induced by the economic and political developments of early September 1998. All the crisis economies turned around from late 1998, while Malaysia took longer, recovering from the second quarter of 1999. The recovery was stronger than in Thailand and in Indonesia in 1999 and 2000, although it lagged behind that in the Republic of Korea. The Governments of the Republic of Korea and Malaysia were bolder in their fiscal reflationary efforts, and also worked faster at bank re-capitalization and corporate restructuring. The pre-Y2K demand for electronics helped Malaysia and the Republic of Korea more than the others. Malaysia also benefited from higher petroleum and palm oil prices, while the depth of the 1998 recession in Southeast Asia was partly due to El Nino weather effects on agricultural output, and not just the currency and financial crises.

ECONOMIC DIVERSIFICATION AND PRIMARY COMMODITY PROCESSING IN THE SECOND-TIER SOUTH-EAST ASIAN NEWLY INDUSTRIALIZING COUNTRIES

Instead of simply relying on static comparative advantage considerations, the governments of the three second-tier South-East Asian newly industrializing countries of Indonesia, Malaysia and Thailand have all intervened to diversify their economies. Such diversification has included the promotion of new crops (e.g. oil palm) and natural resource exploitation, i.e. diversification of primary production, as well as the promotion of manufacturing. Besides import-substituting and export-oriented manufacturing, primary commodity processing and resource-based manufacturing more broadly have been very important for the industrialization of these countries. Malaysia´s palm-oil refining, Thailand´s agro-processing and Indonesia´s plywood manufacturing have figured significantly in their development of internationally competitive industrial capabilities.

The Political Economy of Malaysian Federalism: Economic Development, Public Policy and Conflict Containment

conflict, fiscal policy, regional policy, Malaysia

CAPITAL MANAGEMENT TECHNIQUES IN DEVELOPING COUNTRIES: AN ASSESSMENT OF EXPERIENCES FROM THE 1990S AND LESSONS FROM THE FUTURE.

This paper uses the term, capital management techniques, to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows and those that enforce prudential management of domestic financial institutions. The paper shows that regimes of capital management take diverse forms and are multi-faceted. The paper also shows that capital management techniques can be static or dynamic. Static management techniques are those that authorities do not modify in response to changes in circumstances. Capital management techniques can also be dynamic, meaning that they can be activated or adjusted as circumstances warrant. Three types of circumstances trigger implementation of management techniques or lead authorities to strengthen or adjust existing regulations: changes in the economic environment, the identification of vulnerabilities, and the attempt to close loopholes in existing measures. The paper presents seven case studies of the diverse capital management techniques employed in Chile, China, Colombia, India, Malaysia, Singapore and Taiwan Province of China during the 1990s. The cases reveal that policymakers were able to use capital management techniques to achieve critical macroeconomic objectives. These included the prevention of maturity and locational mismatch; attraction of favoured forms of foreign investment; reduction in overall financial fragility, currency risk, and speculative pressures in the economy; insulation from the contagion effects of financial crises; and enhancement of the autonomy of economic and social policy. The paper examines the structural factors that contributed to these achievements, and also weighs the costs associated with these measures against their macroeconomic benefits. The paper concludes by considering the general policy lessons of these seven experiences. The most important of these lessons are as follows. (1) Capital management techniques can enhance overall financial and currency stability, buttress the autonomy of macroeconomic and microeconomic policy, and bias investment toward the long-term. (2) The efficacy of capital management techniques is highest in the presence of strong macroeconomic fundamentals, though management techniques can also improve fundamentals. (3) The nimble, dynamic application of capital management techniques is an important component of policy success. (4) Controls over international capital flows and prudential domestic financial regulation often function as complementary policy tools, and these tools can be useful to policymakers over the long run. (5) State and administrative capacity play important roles in the success of capital management techniques. (6) Evidence suggests that the macroeconomic benefits of capital management techniques probably outweigh their microeconomic costs. (7) Capital management techniques work best when they are coherent and consistent with a national development vision. (8) There is no single type of capital management technique that works best for all developing countries. Indeed our cases, demonstrate a rather large array of effective techniques. There are sound reasons for cautious optimism regarding the ability of policymakers in the developing world to build upon these lessons. In particular, we are heartened by the growing understanding of the problems with capital account convertibility in developing countries; by the increasing recognition of the achievements of capital management techniques by important figures in academia, the IMF and the business community; and by the potential for some developing countries (such as Chile, China, India, Malaysia and Singapore) to play a lead role in discussions of the feasibility and efficacy of various capital management techniques.

Capital Management Techniques In Developing Countries: An Assessment of Experiences From the 1990s and Lessons for the Future

The Ghana Poverty Reduction Strategy (GPRS) is currently Ghana's blueprint for growth, poverty reduction, and human development. It represents the framework the government of Ghana adopted to foster economic growth and fight poverty. A joint ILO/UNDP team was set up to specifically study the employment initiatives, programs, and projects that the government of Ghana is currently pursuing within the context of the GPRS. This report examines the current content of the GPRS with regard to employment; identifies challenges for realizing employment objectives; and develops recommendations for strengthening the employment content of national policies. In doing so, it outlines the elements of an employment framework for poverty-reducing growth in Ghana.