Southeast Asia's Economic Crisis
Park, Donghyun, Contemporary Review
Southeast Asia's impressive record of economic performance since the early 1960s has inspired the envy of the rest of the developing world for some time. Due to a combination of sound macroeconomic policies, outward-looking export-oriented growth strategies, high savings and investment rates, rapid human resource development, favourable demographic shifts, flexible labour markets, limited relative price distortions, openness to and absorption of foreign technology, absence of bias against agriculture and other conducive factors, the region has been able to achieve economic growth rates well above the norm for developing countries. The achievement is all the more remarkable because it has taken place on a sustained basis for over three decades.
In particular, Indonesia, Thailand, Malaysia and Singapore have been characterized by an influential 1993 World Bank Report as economic miracles, along with the Northeast Asian economies of Japan, South Korea, Taiwan and Hong Kong. The fast growth of the region accelerated even more during recent years - with per capita real income rising by 8.4 per cent, 6.0 per cent, 5.7 per cent and 6.2 per cent in Indonesia, Thailand, Malaysia and Singapore respectively during the period 1985-1995. There have been signs of a turnaround even in the Philippines, for years the region's main underachiever. It seemed as if nothing could break the momentum of the region as foreign economists vied with each other to heap their eulogies and foreign fund managers competed with one another for investment opportunities in the 'tiger economies'. Until now that is.
Southeast Asian economies are currently in the midst of a most traumatic rude awakening. The numbers sum up the story and they are quite sobering. Between December 31, 1996 and October 22, 1997, the main stock exchange indices of Indonesia, Thailand, Malaysia, Singapore and the Philippines fell by 20.7 per cent, 38.5 per cent, 40.9 per cent, 21.9 per cent and 39.2 per cent respectively in local currency terms while the value of their currencies declined by 37 per cent, 34 per cent, 26 per cent, 10 per cent and 25 per cent against the US dollar respectively. Just as significantly, the slowdown shows no signs of ending anytime soon and the consensus in the financial markets seems to be that the situation is bound to get worse before it gets better. Furthermore, the contagion is spreading toward the region's periphery as well as beyond, as witnessed by Vietnam's devaluation of its currency on October 14 and Hong Kong's stock market plunge on October 23 and the collapse of one of Japan's largest brokers, Yamaichi on November 24.
There are two key questions we seek to briefly analyze in this article. First, what went wrong? That is, how can we explain this sudden negative turn for the worse in a part of the world which was bursting with so much dynamism and optimism as recently as the first half of 1997? Second, what are the prospects for recovery? What are the necessary adjustments the Southeast Asian economies must make in order to pull themselves out of their present morass and what are the chances that they will in fact be able to make those adjustments? These questions are relevant not only for the region's more than 450 million inhabitants but to the world at large insofar as they contain valuable general lessons about avoiding economic policy mistakes and making amends once they have been committed.
The forced devaluation of the Thai baht on July 2 provides the logical point of departure for our discussion because the event served as the catalyst of the current economic malaise hanging over Southeast Asia. The devaluation was forced in the sense that the Thai authorities had little choice in the decision. The baht, which had been pegged to a basket of foreign currencies dominated by the US dollar, came under unrelenting speculative attacks since May and the central bank, having spent billions of dollars of foreign reserves trying to defend the peg, was running out of ammunition. …