FREE ESSAY ON ASIA

ASIA

A large economic downturn in East Asia threatens to end its nearly
30 year run of high growth rates. It is hard to understand what these declines will
actualy do to the world market. The crisis has caused Asian currencies to fall 50-60%,
stock markets to decline 40%, banks to close, and property values to drop. The crisis was
brought on by currency devaluations, bad banking practices, high foreign debt, loose
government regulation, and corruption. Due to East Asia's large impact on the world
economy, the panic in Thailand, Indonesia, Korea, and other Asian countries has prompted
other countries to worry about the affect on their own economies and offer aid to the
financially troubled nations.
The countries that are included in the East Asian crisis, known as Tiger economies, are
Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and
Thailand. For these countries to participate effectively in the exchange of goods,
services, and assets, an international monetary system is needed to facilitate economic
transactions. To be effective in facilitating movement in goods, services, and assets, a
monetary system most importantly requires an efficient balance of payments adjustment
mechanism so that deficits and surpluses are not prolonged but are eliminated with
relative ease in a reasonably short time period. The Asian crisis of recent falls into
this category of inefficient balance of payments facilitated by depreciation of its
currency. By competitively depreciating its currencies, Asia is exporting its deflation,
its overcapacity and its lack of growth to the West, particularly to the US.
No other group of countries in the world has produced more rapid economic growth and
dramatic reduction in poverty than East Asia. Korea, Malaysia, and Thailand
have virtually eliminated absolute poverty, and Indonesia is within reach of that goal.
Nevertheless, this financial crisis has exposed weaknesses in Asian economies that
must be addressed if the region is to return to its high growth of recent years. 
Despite the great cries of anguish we hear from bankers and corporations,
the real victims of the collapse of globalisation in Asia, are the same people who were
the victims of the miracle. Their low wages, or incomes from farming, are now devalued by
25% - 55%. Millions of casual construction workers are idle across the region. And now
hundreds of thousands of public sector employees and finance sector workers are being
sacked as the IMF enforces government budget cuts, bank and finance company closures. 
The East Asian crisis has affected almost all of the Asian nations, but the three hardest
hit countries are Thailand, Indonesia, and South Korea. The panic began in Thailand in
May of 1997 when speculators, worried about Thailand's slowing economy, excessive debt,
and political instability devalued the baht as they fled for market-driven currencies
like the American dollar. Indonesia's economy soon fell soon after when the rupiah hit a
record low against the U.S. dollar. Indonesia is plagued by more than
$70 billion worth of bad debts and a corrupt and inefficient government. Thailand and
Indonesia also suffer from being overbuilt during real estate booms that were the result
of huge influxes of cash by optimistic foreign investors. South Korea faltered under the
weight of its huge foreign debt, decreasing exports, and weakening currency.
World Bank support for East Asian governments focuses on carrying out three principal
objectives: 
1.to build the foundation for restoring growth and raising incomes by adopting
wide-ranging reforms in the financial sector, in corporate governance and competition,
and in managing external debt. This builds on the IMF-led rescue efforts in the region; 
2.to strengthen social protection for the poor and other vulnerable groups to help
cushion the impact of the crisis; and 
3.to improve the quality and transparency of key government institutions, including
helping governments address problems of corruption and accountability. 
The World Bank believes these objectives are inseparable and essential components of
winning and holding public support for difficult reforms. There must be visible
help with the social costs of reform, particularly protection for the unemployed; the
financial and corporate sectors must be better regulated, more transparent, and
adequately capitalized to regain the confidence of investors, both foreign and domestic.
Once confidence is restored, economic growth can resume, raising incomes for
the poor in the process. 
The World Bank's Involvement to Date 
Since July 1997, the Bank has pledged some $16 billion to the region, almost the
equivalent of an entire year's regular lending, and already disbursed more than $3.5
billion in loans. 
In Thailand, the Bank pledged $1.5 billion in support of the $17.2 billion international
effort initiated in Tokyo in August, 1997. The initial emphasis of the Bank program
was on reforming the financial sector. This included establishing a financial
restructuring agency to deal with creditors and depositors of 56 closed finance
companies,
setting up an asset management company to collect as much as possible from the bad
portfolio, and reducing restrictions on foreign equity participation. Also, a mission
has been helping Thailand with a social investment program, with a two channel program;
one to protect ongoing social programs, and the other with social fund
features and designed to show action and results. Through this program, the
Government-with Bank assistance-expects to create tens of thousands of new jobs in
rural areas, and to deter school students from dropping out of the education system to
help their families generate income. The Bank is supporting reforms which will
enable the government to better use the budget as an instrument of policy, including
social protection. 
In Indonesia, the Bank's program has included a technical assistance loan of $20 million
for banking sector management, and preparation of several operations: a structural
adjustment loan to deal with banking and corporate restructuring, and an agriculture
sector structural adjustment operation. Support for financial sector reforms has included
supporting the authorities in their efforts to deal with nonperforming portfolios and
insolvent banks, auditing state banks to improve efficiency and capital adequacy,
strengthening credit appraisal and risk management, improving bank supervision, and
providing better laws governing bankruptcy, disclosure, and ownership
In Korea, the Bank pledged up to $10 billion as part of a $57 billion package to provide
liquidity. Within two days of the crisis, the Bank fielded a team of experts, and within
three weeks designed and presented to its board a $3 billion economic reconstruction loan
that was disbursed the same day. The loan laid out the framework forpolicy changes in the
financial sector, corporate governance, and competition policy. As part of the adjustment
program, we are working with the government on policies that will incorporate social
protection and support workers temporarily displaced during the crisis. A new Structural
Adjustment Loan of $2 billion was approved by the Bank's Board on March 27, 1998, to
support the implementation of reforms in the financial and corporate sectors and
competition policy. 
In the Philippines, the Bank is considering an additional $650 million for structural
reforms in the financial and public management sectors, and lines of credit for
farmers, small-scale enterprises and export-oriented activities adversely impacted by the
regional crisis. This special package would hence more than double our two-year
commitment to the Philippines. 
In Malaysia, the Bank is engaged in a renewed policy dialogue aimed at supporting the
government's own efforts to address financial and social issues. 
Plenty of notice 
In November 1996, in a paper delivered at the Peoples Conference Against
Imperialist Globalisation in Manila, Ms Joy de Guzman analysed what was
then already called the economic crisis in Thailand, arguing that it was
the same in the rest of the ASEAN countries.
She reported a steady downturn on the Bangkok Stock Exchange, economic growth down by 2%,
a decline in export growth from 23.6% in 1994-95 to 3.8% in 1995-96, and a run on the
baht which required the Thai Central Bank to spend US$120 million to prop up the
currency. She said that the crisis was triggered by a slow-down in exports, especially
computer chips, as US and European importers shifted their sourcing of chips from South
East Asia to Mexico, Central and South America where they were cheaper. So the trade
deficit grew and funds to service the imports and the foreign debt dried up. This
financial crisis will probably lead to loss of confidence by investors in Thailand's
economy and a slow down and then a slump would ensue, she predicted. 
Key Indicators to Watch 
Unemployment. Unemployment is already a problem, concentrated for the moment in urban
areas, and affecting both skilled and unskilled workers in Asia. It is expected that in
Thailand an estimated 900,000 workers will have lost their jobs by the end of 1999; in
Indonesia, it is estimated that unemployment may have increased by some 2 million people,
with predictions of substantial further rises in the coming months. In other countries
with rigid rules governing hiring and firing, such as Korea, unemployment may for the
first time become a significant social problem. 
Effect of exchange rates on prices.
Depreciating currencies have increased the price of imports and tradable goods, and in
same cases, the crisis has hiked the price of certain publicly-controlled goods and
services, leading to considerable public anxiety. While some people involved in the
export sector may actually benefit from the effects of devaluation, others will suffer
from a slowdown in their national economy. 
Cuts in public services to the poor. Public expenditures will be stretched by the costs
of resolving the financial sector failures, the greater interest payments on local
currency public debt, and the greater local-currency value of dollar-denominated external
public debt. At the same time, revenues will fall with the weakening of economic
activity. If these trends result in lower spending for social services, the economic
downturn would have even more severe consequences for the poor. In Thailand, for example,
roughly 10 percent of the population lives precariously just above the international
poverty line, with incomes of between US$1.00 and US$1.50 a day. 
Restoring Confidence in the Markets 
The most important single step to help East Asia's poor, and safeguard the region's
success in reducing poverty, is to reactivate its economy. However, this cannot be
done without restoring confidence among foreign and domestic investors. To restore that
confidence, the region must address pressing issues such as weak financial sectors, lack
of transparency and poor governance in the corporate sectors, and weaknesses in external
liability management. 
Under-supervised financial sectors, and government intervention in allocating capital,
allowed poorly governed corporations to invest borrowed money in highly-inflated
or risky assets such as real estate ventures. A lack of transparency-in the form of
unreported mutual guarantees in group companies, lack of disclosure of companies'
and banks' true net asset positions, and insider relations-masked these poor investments.
When combined with fixed exchange rate policies and implicit guarantees to financial
entities, the effect was to create the incentives that led to resource misallocation and
unsustainable external financing. Domestic weaknesses of this kind were aggravated by
undisciplined foreign lending, which led to too much money chasing investments with
potentially poor rates of return. 
The buildup of short-term, unhedged debt left the economies vulnerable to a sudden
collapse of confidence. The resulting capital outflows, and with it depreciating
currencies and falling asset prices, exacerbated the strains on private sector balance
sheets and thus proved self-fulfilling. The vicious circle has become even more
vicious as financial problems have led to restricted credit, undermining the real sector,
and thus further contributing to financial fragility. If the economic problems translate
into rising social and political unrest, the problems would deepen still further. 
Re-invigorating growth will require deep-seated reforms focusing on policies and
institutions that affect the behavior of the private sector. These include policies
toward
the financial sector, toward the real sector, and toward external financing. 
Rebuilding the financial sector is particularly crucial to restoring investor confidence
and growth. In Thailand, Indonesia, and Korea this has meant closing failed banks and
financial institutions, recouping their good assets, re-capitalizing good banks,
improving disclosure and bank supervision, and removing government interference in
lending decisions and setting interest rates. All of these reforms are essential for the
already high saving rates in the region to be channeled into productive investment so
that economies can resume the strong growth they had enjoyed prior to the crisis. 
Raw capitalism 
So here is a more complete picture of what has gone wrong for capitalism in
Asia: TNC-dominated industrialisation led to chronic trade deficits, uncontrolled
speculation - often connected to political figures - and foreign funds used for
non-export earning investments or luxury consumption, leading to catastrophic currency
and banking collapses.
Despite Western criticism of excessive regulation, the Asian countries have a
free-wheeling capitalism with few restraints. All the Asian governments kept their
currencies pegged to the US$, a notable effort to provide some stability for foreign
investments. This became unsustainable after the Thai baht had to be floated in July this
year. Mainstream commentators such as Max Walsh reacted to all this by blaming the
pegging of the currencies to the US$. His solution is to float all the currencies and
everything will
correct itself. 
The implications of the Asian financial crisis are many. A declining Asian economy will
reduce demand for U.S. and other countries' exports. The devalued currencies of East Asia
will make Asian imports seen cheap and will lead to increased American imports, thus
increasing our trade deficit (Lochhead 2). A worldwide banking
emergency could result if the embattled Asian economies failed to pay back their loans to
the U.S. and other countries (Duffy 2). If the Asian economies fall further, in a desire
to r
aise cash, they might sell the hundreds of billion dollars of U.S. treasuries they now
own, leading to higher interest rates and an American recession (Lacayo 2). An article in
the Economist reported that the Asian economic turmoil and the layoffs that ma
y result, could instigate increased discontent and possibly give rise to violent strikes,
riots, and greater political instability (1-2). 
Reven 3
Since the financial tumult causes instability in the world market, several solutions have
been proposed designed to restore the health of the Asian economy. The International
Monetary Fund is offering $60 billion in aid packages to Thailand, Indonesia, and South
Korea (Lacayo 1). The aid will be used for converting short-term
debt to long-term debt and to keep currencies from falling lower in the world market
(Passell 2). Lower currency values make repaying loans to other nations more difficult
(Sanger 1
). The aid packages are tied to measures that will ensure that the recipient countries
reform their economies. Some of the measures the nations must follow are increasing taxes
to decrease budget deficits, ending corruption, increasing banking regulation,
improving accounting information so investors can make better decisions, closing
insolvent banks, selling off inefficient state enterprises, and increasing interest rates
to slow growth and encourage stability (Lacayo
3).
Hopefully these market reforms will allow East Asia to improve its economic outlook.
Since most of the Asian nations have balanced budgets, low inflation, cheap labor,
pro-business governments, and high savings rates, the long-term outlook for these coun
tries is very good (Marshall 1). The financial crisis, instead of destroying the Asian
tigers, will merely serve as a much needed lesson in debt management, orderly growth,
competent accounting practices, and efficient government. 
Throughout the East Asian crisis many different ideas have been proposed to what the
cause or causes were. Attempts to identify the fundamental causes of a financial crisis
always suffer from the problem of distinguishing insight from hindsight. Many financial
journalists today have said the the crisis was the inevitable counsquence of: overvalued
exchange rates, large current account deficits, short-term capital inflows, opaque
financial systems, or one of several other supposedly fatal flaws in East Asian
capitalism. It seems fair to say that a year ago nobody suspected that a calamity like
what we have seen was possible, although all of the characteristics that are now
described as the fatal flaws of the East Asian economies were reasonably widely
understood. Considering the size of Asias contribution to the world economy, a rapid
recovery will be greatly Anticipated.