African Development Report

African Development Report

African Development Report

African Development Report


International financial market integration has accentuated the rapid flow of capital across borders while simultaneously magnifying the contagion effect of financial crises. This has had far- reaching implications for financial policies both in domestic economies and internationally. The recent financial crisis, which originated in East and South East Asia (hereafter, Asia) and transformed into a global crisis, is a case in point. At no time since the depths of the LDC debt crisis of the 1980s has the outlook for emerging markets appeared so bleak. The economic and financial crises in Asia appear destined to last through 1999, resulting in weaker growth, lower commodity prices and reduced cross-border capital flows.

This chapter reviews recent trends in global financial markets, in particular the spreading financial turmoil triggered by the Asian crisis. It examines the major causes of financial turmoil and its likely impact on African countries, while also exploring the main lessons and policy implications for African countries.

The Roots of the Crisis

Explaining the crisis which began in Asia is made more difficult by the fact that none of the standard fundamentals, such as GDP growth, fiscal balance and inflation, have an indication of the problems that were to come. The sole early-warning indicator, to which scant attention was paid, was the marked 1996 slowdown in Asian export growth.

Up to the time of the crisis, many Asian countries had posted impressive GDP growth rates over a prolonged period. Asian countries had also followed sound fiscal policies, with low fiscal deficits or even budget surpluses, while inflation was kept at single digit levels. On the eve of the crisis, all the five countries most severely affected by the crisis had budget surpluses ranging between 0.3 per cent of GDP in Philippines to 1.3 per cent in Indonesia. Between 1990 and 1997, Asian inflation averaged about 7 per cent a year. Philippines, which had experienced double-digit inflation of 18.7 per cent in 1991, had by 1997 cut inflation to only 5 per cent. Asian nations also maintained very high rates of savings and investment in the region of 30 per cent of GDP, investing heavily in production, infrastructure and human capital development.

With hindsight however, there were a number of macroeconomic and structural factors that should have given sufficient warning of the impending crisis. These included a worsening current account position, appreciating exchange rates, weaknesses in the financial sector, the changing composition of capital flows and moral hazard problems.

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