The East Asia Development Experience Before and After the 1997 Crisis: Lessons for Africa Peter Warr Australian National University

Real GDP for Six East Asian Countries, 1986 to 1996: The Boom

Real GDP for Six East Asian Countries, 1996 to 2002: The Bust

Example: Thailand, Real GDP per person, 1951 to 2002

What Caused the East Asian Boom? - High levels of private sector investment -Domestic private investment -Foreign direct investment - Public sector focus on facilitating private sector investment -Macroeconomic stability o moderate inflation o exchange rate stability o moderate public sector debt - Legal system friendly to business - Receptiveness to direct foreign investment

Example: Thailand Sources of growth and the role of domestic private investment - During the boom period, Total Factor Productivity (TFP) accounted for about 20 per cent of growth. -TFP growth was most significant in agriculture, not manufacturing. -The other 80% of total growth was due to growth of factor inputs, 89% of which was growth of the capital stock. -FDI contributed about 11% of the growth of the total capital stock. Public investment contributed about 12% and the other 77% was due to growth of domestic private investment.

Total Factor Productivity growth

The Boom - The growth of domestic private investment was the key to the boom. - But it was also the key to the crisis. - As the boom continued - Increasing amounts of private investment went into real estate and office space construction - The boom was increasingly financed by massive short term capital inflows from abroad - These inflows were facilitated by the abolition of capital controls, beginning around 1990 Thailand continued its fixed exchange rate

Development of reserve vulnerability As this process of capital inflow continued, the accumulated stock of short term capital inflows, consisting of - -Bank loans from abroad - -Portfolio investment from abroad - -Foreign-owned domestic bank accounts Came to exceed the total volume of Thailand’s international reserves.

Thailand: Stocks of Long and Short Term Capital and Reserves, 1980 – 1997

Thailand: Components of Short-Term Capital Stocks and Reserves,

The crisis: -By 1995 Thailand vulnerable to any shock which raised the expectation of an exchange rate devaluation -That happened, with a slow down of export growth in Once capital outflow began, there was nothing the Central Bank could do to stop it. - In July 1997 Thailand floated the exchange rate and had to accept an IMF ‘bailout’ package. -Under the float, the exchange rate moved from O 25 baht / US$ in July 1997 to O 55 baht / US$ in March 1998 to O 35 baht per US$ in mid In 1998, real GDP fell by 11.8% - Poverty incidence rose from about 12% to about 15%

Lessons from the crisis: o don’t combine a fixed exchange rate with capital mobility o under a fixed exchange rate, monitor the level of reserve vulnerability o restoring private sector confidence after a crisis is not easy

Thailand’s recovery has been weak and led by private consumption

Problem: How to stimulate private investment in a sluggish global environment?

Question: Does growth matter? Thailand: Poverty incidence, 1962 to 1999 (per cent) Source: National Economic and Social Development Board, Bangkok, based on household income data collected in the Socio- economic Survey. From the 1960s to 1997 poverty incidence declined dramatically, but it increased during the crisis…

The experience was similar in Indonesia… Indonesia: Poverty incidence, 1970 to 1999 (per cent) Sources and notes: Central Bureau of Statistics, Jakarta, based on household expenditure data collected in the SUSENAS survey.

… and Malaysia… Malaysia: Poverty incidence, 1970 to 1995 (per cent) Sources and notes: Department of Statistics, Kuala Lumpur, published in Ministry of Finance, Economic Survey, various issues, based on household income data collected in the Annual Household Income and Expenditure Survey.

… and the Philippines, though the pre-crisis rate of poverty reduction was slower The Philippines: Poverty incidence, 1961 to 1997 (per cent) Sources and notes: National Statistical Office, Manila, based on household income data collected in the Family Income and Expenditure Survey.

In each of these countries, reductions in poverty were strongly related to the rate of growth… - periods of high growth were periods of rapid poverty reduction - periods of low growth were periods of increasing poverty Thailand: Thailand: Poverty reduction and GDP growth