Download T M P ,

M a c r o e c o n o mic P e r
I s s u e s a n d P o l ic ie s
A REGIONAL OVERVIEW
f o r ma n c e ,
r e c o v e ry o f o th e rs .
T h e r e h a s b e e n a v ic io u s in te r -
action be tw ee n de ve lo p m e n ts in the fin a n cia l s e c to r
and th o se in the real sector.
T
he
stu b b o rn
pe rsiste n ce
of
the
crisis
that
engulfed several c o u n trie s in the seco nd half of
1997
rem a ins
e co n o m ic
region.
the
la nd scape
The
crisis
of
had
of the
feature
A sian
crisis
dim ension .
m a jo r
a
do m ina nt
of the
depth
un pre ce d e n te d
nu m be r
m ost
and the
has
A ffecting
e c o n o m ie s
Pacific
been
as
the
of an
it
did
sim ultaneously,
im p a ct
d e bilitatin g
of
on
the
pe rfo rm a n ce of the region as a w hole.
a
the
econom ic
An indication
of th e depth of th e crisis is given by the fact that
de veloping
eco n o m ie s
of the
E S C AP
region
as a
group reco rde d a grow th rate of close to zero per
cen t in 1998 as ag a in s t ove r 7 per cen t in 1996 and
alm ost 6 p e r cen t in 1997.
T he dism al perform ance
cut acro ss pra ctically all the sub reg ion s, w ith South
A sia being the only bright exception.
T h e spre ad of the crisis has expresse d itself in
the s h a rp co n tra ction of ou tput in a size ab le num ber
of eco no m ies.
O ut of th e 19 de veloping eco no m ies
of m ainla nd A sia for w h ich
table
II.1,
eco n o m ic
1996
as
m any
grow th
in
as
da ta are pre sen te d
seven
1998
suffered
negative
string en t capital
a d e q u a c y req u ire m e n ts
and
la rg e r
provision for loan lo sses co u p le d w ith tigh t m o n e ta ry
policies,
led
to
sh a rp ly
h ig h e r
in te rest
rates
and
severely c o n s tra in e d a c c e s s to credit.
At th e s a m e
tim e,
a g a in s t
c o n tra c tio n a ry
fis c a l
p o lic y
the
ba ckdro p of falling ou tp u t and e m p lo y m e n t c a u se d
m assive cu rta ilm e n t of d o m e stic d e m an d, w h ich w as
not c o m p e n sa te d fo r by any sig n ifica n t exp o rt e x p a n sion.
T h is
resulted
in the
in a b ility of real s e cto r
en te rp rises to gene ra te in te rnal funds.
T h e de a d ly
com b in a tio n of red uce d a c c e s s to credit, e xc e p tio n ally high in te rest rates and severe lim itation s on the
ability to ge ne ra te in te rna l fu n d s
s e rio u sly affected
the d e b t-se rv ic in g c a p a c ity of the real sector.
rising
in cide nce
m ade
the
of
n o n -p e rfo rm in g
fina ncial
in stitu tion s
loans,
u n w illin g
T he
in
to
turn,
exte nd
new cre d it and s h a rp ly red uce d th e a b ility of th e real
sec to r e n te rp ris e s to utilize existin g ca p a citie s,
to
m en tion
u n d e rta kin g
ne w
in vestm ents.
not
T h e se
de velopm e nts on the do m e stic fro n t w e re ag gra vated
in
by the w e a k n e s s e s in the e co n o m y of Jap a n , w h ich
Several cha n n e ls of
has be com e not m erely a le ad ing so u rce of FDI, but
com p a re d
and on ly one in 1997.
in
T h e fin a n cia l secto r
reforms, w h ich in clud ed clo su re of institutions, m ore
with
none
tra n s m is s io n con trib u te d to the rapid contagion.
The
also an in cre a sin g ly im p o rta n t m a rke t fo r e xp o rt and
strong intraregional lin kag es in term s of trade, FDI
a m ajor s u p p lie r of b a n k cre d it for th e d e v eloping
and tou rism inevitably con trib u te d to the transm ission
eco n o m ie s of the region.
of d e clin in g
ou tp u t
in
one
co u n try
to
the
Ja p a n suffere d a m ajor
others.
reduction in ou tput in 1998 and th u s w as not in a
Even th o se c o u n trie s w h ich w e re not fully integrated
position to b e com e as stro n g an en g in e of reco very
into th e regional m a instrea m w e re not im m u ne to the
for
co n tagion effect.
de spite the fact th a t it pro vid e d co n sid e ra b le fin a n cia l
M any of the m w e re affected by the
ge ne ralized fall in co m m o d ity prices.
in v e s to rs ’ c o n fid e n c e
in
the
e m e rg in g
T he loss of
m arke ts
the
rest
O ne of the se is the close intraregional
above.
T his
im plies
that
as
had
been
hoped,
However, a nu m b e r of p o sitive s ig ns have now
The
in crease d
A nu m b e r of factors explain the p e rsisten ce of
m e n tion ed
region
assistance.
em erged.
adverse im p act on capital flows.
linkag es
th e
in
general as a direct co n s e q u e n c e of the crisis had an
the crisis.
of
re-
c o v e ry in any one c o u n try is co n tin g e n t upon the
sources.
flow
region
of
has
capital,
b e n e fite d
m a in ly
fro m
from
an
official
T h e stock m arkets, as w ell as th e c u rre n -
cies, have reco vere d su b s ta n tia lly from th e ir low est
de pths
and
are
s h o w in g
som e
sig ns
of
stability.
Rates of in flation have tu rn e d out to be m uch m ore
23
Table II.1. Selected economies of the ESCAP region: rates of economic growth and inflation,
1997-2001
(Percentage)
Real GDP
Inflationa
1997
1998b
1999c
2000c
2001c
1997
Developing economies of
the ESCAP regiond
5.8
0.2
3.6
5.0
5.6
South and South-West Asiae
4.6
5.3
5.6
6.6
5.9
6.6
5.6
5.0
3.3
7.0
6.8
5.1
6.0
2.6
- 0.3
6.8
0.6
3.8
1.3
6.4
7.5
2.1
5.4
5.5
4.5
4.5
4.0
5.7
4.2
4.3
- 6.2
- 14.0
Bangladesh
Bhutan
India
Iran (Islamic Republic of)
Nepal
Pakistan
Sri Lanka
Turkey
South-East Asia
Indonesia
Malaysia
Myanmar
Philippines
Singapore
Thailand
Viet Nam
4.7
7.8
4.6
5.2
7.8
- 0 .4
China
Hong Kong, China
Republic of Korea
Taiwan Province of China
Pacific island economies
Fiji
Papua New Guinea
Solomon Islands
Tonga
Vanuatu
Developed economies of the
ESCAP region
Australia
Japan
New Zealand
5.7
10.9
6.9
10.5
7.6
6.1
7.5
2.7
2.5
7.0
2000c
2001c
6.0
5.2
4.7
13.2
11.5
10.4
8.5
7.6
9.0
25.0
7.0
7.0
9.5
53.0
7.0
7.4
7.5
30.0
7.0
6.0
17.3
7.8
11.8
9.6
85.7
7.0
8.0
12.0
20.3
4.0
7.8
10.0
57.6
6.0
6.0
8.5
46.6
7.0
43.7
6.8
7.2
6.0
6.0
6.0
6.0
3.5
6.5
7.2
0.4
2.2
3.6
7.9
27.4
10.3
9.0
2.2
0.0
11.6
80.0
5.2
40.0
9.0
- 0.3
8.2
20.0
8.2
3.0
11.5
15.0
5.5
30.0
6.5
2.4
4.0
10.0
10.0
1.0
2.5
4.8
- 0.5
2.6
1.3
7.8
5.8
0.5
0.9
4.6
7.0
1.5
4.4
5.7
6.0
4.4
3.3
3.2
2.9
3.3
8.8
7.0
0.5
-
6.0
2.0
7.6
3.3
3.9
4.7
5.5
6.0
7.3
3.7
5.0
6.2
2.8
5.7
4.4
0.9
- 0.8
-
7.8
5.0
2.6
7.5
1.9
1.8
4.1
3.1
1.7
2.3
4.3
3.7
2.3
2.9
4.3
3.7
2.8
5.2
5.5
-
1.1
-
6.8
- 3 .7
1.8
-5 .2
-
-
6.0
1999c
3.5
3.0
4.1
2.4
2.5
6.1
8.8
East and North-East Asia
-
8.1
7.3
2.8
4.5
1998b
2.7
-
4.3
4.0
3.6
2.7
29.7
5.1
2.0
5.6
3.6
3.5
35.0
8.5
2.2
6.0
2.4
4.0
0.2
5.6
5.1
4.1
3.8
8.9
5.6
5.5
5.5
- 3.9
4.5
11.0
6.0
3.0
7.0
16.0
3.5
1.0
9.0
3.0
3.0
3.0
7.0
7.0
3.0
3.5
3.4
3.9
8.1
2.1
1.3
5.0
6.0
4.5
4.0
5.0
3.0
3.5
5.4
1.5
5.5
5.0
2.0
2.0
2.0
2.0
-
2.8
6.0
6.0
0.1
-
1.2
- 0.5
2.3
3.7
11.5
4.5
3.0
1.0
- 2.2
- 0.8
1.7
2.0
1.6
0.3
- 0.3
0.9
1.3
2.8
4.5
2.7
2.0
2.4
1.7
2.0
3.3
0.2
1.7
1.1
0.3
0.3
1.5
2.6
2.2
2.6
0.9
3.2
-
0.2
-
1.0
1.6
1.0
3.6
-
- 0.5
0.8
1.5
1.3
1.2
1.1
S o u rc e s : ESCAP secretariat calculations based on IMF, International Financial Statistics, vol. LI, No. 9 (Septem ber
1998); ADB, Key Indicators o f Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998) and Asian
Developm ent O utlook 1998 (Oxford University Press, 1998); United Nations, Project LIN K World Outlook: Countries and
Regions, 30 Novem ber 1998; The Econom ist Intelligence Unit, Country Reports: M yanm ar (Burm a); Iran; and South Korea
and North Korea, fourth quarter 1998; and national sources.
a
b
c
Referring to changes in the consum er price index.
Estimate.
Forecast/target.
B
d a s e d o n d a t a f o r 2 4 d e v e lo p in g e c o n o m i e s r e p r e s e n t in g a b o u t 95 p e r c e n t o f t h e p o p u l a t i o n o f t h e r e g io n ( e x c l u d in g
the Central Asian republics); GDP at m arket prices in United States dollars in 1995 has been used as a weight to
calculate regional and subregional growth rates.
e
24
The estim ates and forecasts for countries relate to fiscal years defined as follows: fiscal year 1998/99 = 1998 for
Bhutan, India and the Islamic Republic of Iran; fiscal year 1997/98 = 1998 for Bangladesh, Nepal and Pakistan.
s u b d u e d than origin ally an ticipated de spite dram atic
the se cou ntrie s ow ing to th e s u b stantia l de pre ciatio n
c u rre n c y
of the ir currencies, strong m o n e y s u p p ly grow th and
de preciation.
S om e
easin g
of
and fiscal policies has taken place.
have te n d e d to decline.
achieved
sig nifica nt
m on etary
Interest rates
A n u m b e r of c ou ntrie s have
current
acco un t
surpluses,
s h o rta g e s of som e b a sic com m o d itie s.
the
effect of th e
regional
e c o n o m ic
In contrast,
crisis
on
the
least developed c ou ntrie s in S outh A sia has been
le ading to in crease d foreign exchange reserves, and
relatively
there
growth in these c o u n trie s w as estim a te d to exce ed 5
are
incipient
signs
of
the
ability
of
som e
limited.
W ith
the
exce ptio n
of
Nepal,
cou ntrie s to re-e nter the in ternational private capital
per cent in 1998.
markets.
cou ntrie s w ere less s u s c e p tib le to th e direct im pact
T he fin a n cia l s e cto rs of the se
of the crisis ow ing to the in co n ve rtib ility of the local
N o tw ithstan din g
several
negative
these
positive
asp ects
or
developm ents,
u n certainties
will
currency,
lim ited
low
foreign
com m e rcial
private
debt.
cap ital
The
inflow s
largest
least
and
de ve-
continu e to cloud th e eco n o m ic pe rfo rm an ce of the
loped country, B anglade sh, w a s hit b y a de vastatin g
region in the im m e dia te future.
flood in m id -1998.
T h e burden of large
volum es of no n-p erform in g loans co n tin u e s to plague
the
fina ncial
se cto r
institutions,
not
m erely
in the
c o u ntrie s directly affected by the crisis, but also in
several
others.
fina ncial
The
secto r
pace
reform s
of
has
im plem e ntatio n
been
As a result, its G D P grow th rate
in fiscal yea r 1999 is exp ected to fall significantly.
con stra in ed
s om e in sta n ce s by stiff political opposition.
T he
A sian
e co n o m ic
to a lesser extent,
P rogress
in corp o ra te
v e ry lim ited.
m ent,
debt restructu ring
high.
has been
T he ph e n o m e n a of rising un e m p lo y -
increasing
consum er
be
busin ess
co n fid e n ce
failures
relentle ssly
and
w e ak
persist.
T he
links
Fiji, w h ich
However, m any of the m
to
direct
w ere Papua N ew G u in e a and S olom o n Islands and,
trading
continue
little
in
Despite
im p rovem e nts in the overall liquidity of the financial
rates
had
im pact on m ost Pacific island cou ntrie s.
system s,
le nding
crisis
of
w ith
A sian
E xcep tion s
all have
substantia l
d e veloping
cou ntries.
w e re in dire ctly affected in
varying de grees be ca u s e of the im p act of th e crisis
on
Australia,
Jap an
and
N ew
Z e alan d,
w h ich
tog ether ab sorb a s ize ab le p ro p o rtio n of exp o rts of
Pacific
island
cou ntrie s.
In
addition,
the
po or
im p rovem e nts in the curre nt acco un t of ba la nce of
eco no m ic p e rfo rm an ce of th e s e c o u n trie s w a s largely
p a y m e n ts
a sso cia te d w ith dro ug ht as a result of th e El Niñ o
have
c om e
of
im ports,
con tra ction
increase in exports.
m ainly
throu gh
rather
than
dram atic
any
T he risk pre m ium
m ajor
for raising
capital in inte rna tiona l m arkets rem a ins high.
M ost
w e a th e r p h en om en on .
co u ntrie s exp e rie n ce d low inflation rates in 1997 and
1998.
H ighe r
inflation
FDI inflow s are directed tow a rds the acq uisition of
G uinea and S olom on
existing
due
assets,
rather
produ ctive capacity.
tha n
the
creation
of
new
It see m s unlikely that an early
solution
will
be found
discord
in
several
for the
social
countries,
and
and
the
A n u m b e r of Pacific island
to
de pre ciatio n
rates
in
Fiji,
Papua
New
Islands in 1998 w e re m ainly
of
th e ir
d o m e s tic
curre ncie s.
M ost c ou ntrie s reco rde d deficits on th e ir m e rc h a n -
political
dise trade b a la nce in rece nt years.
external
had su rp lu se s on the
s e rvice s
S om e of them
acco un t,
esp e c ia lly
e n v iro n m e n t c on tain s m any elem en ts of uncertainty,
from tou rism and rem ittances.
However, th e se w ere
w h ich w ere d is c u s s e d in the p re ced ing chapter.
not sufficient to prevent the m
from
having c u rre n t
acco un t deficits.
A
m ore
m a cro e co n o m ic
d isag greg ated
p e rfo rm an ce
picture
of various
and co u n try groups is pre sen te d below.
of
the
sub reg ion s
S ince the be g in n in g of th e ir transition tow a rds
T h e growth
a m arket econom y, for all the C e ntral A sian cou ntrie s
p e rfo rm a n ce of the A sian least developed cou ntrie s
1998
w as
the
rem a ine d
M ost
of
the se
regional
m ixed
1998.
e co n o m ic
least de velope d
m uch
in
less
crisis,
robust
than
develope d
cou ntrie s
M alaysia,
S in ga pore
a
result
eco no m ic
co u ntrie s
develope d cou ntries.
As
in
in
of
grow th
the
in the
S outh-E ast Asia was
the
South
A sian
least
FDI to S o u th-E ast A sian least
slow ed
and
can c e lle d pro p o se d projects.
as
investors
T h ailan d
delayed
from
or
Inflation in crease d in
first y e a r of overall
e c o n o m ie s
have
o u tput
growth.
c o n tin u e d
the
im p ressive reco very sta rte d tw o or th re e ye a rs ago
after m assive decline.
T h e re co very w as s u p p o rte d
by the relatively strong p e rfo rm a n ce of the indu stria l
and se rvice s sectors.
and
capital
G row ing private c o n su m p tio n
investm en t
p ro vide d
th e
de m a n d
stimulus.
M ore pru d e n t fiscal and m o n e ta ry po licies
and
ap pre ciatio n
the
of
the
na tion al
cu rre n c ie s
25
helped to achieve con sid erable su cce ss in reducing
follow ing
rates of inflation
co n fide nce
in the cou n trie s of C entral Asia.
the ir
n u cle a r
of foreign
red uce d
and
however, w ere eased tow a rds th e end of 1998.
acco u n t
deficits
con tin u e s
to
be
These
the
capital
in flow s
cu rre n t
cou ntrie s.
h e nce
However, fiscal de ficits are still quite large in m any
and
the se
fu rth e r
of the se cou ntrie s.
T h e size of m e rch an dise trade
to
tests
in vestors
san ction s,
a
Asia,
T h e yea r 1998 w as one of th e w o rs t y e a rs in
only the R ussian F ederation exp e rie n ce d a serious
recent history for the S o u th -E a s t A sia n eco no m ies.
eco n o m ic
of
T h e re w as a huge c o lla p s e of G D P in m ost of the se
the
countries, led by In d one sia w h ich suffere d d o u b le -
so u rc e
of
falling
c o n cern .
d o w n tu rn
ou tp u t
R ussian
In
in
and
N orth
and
1998.
The
a cce le ra ted
F ederation
has
1997.
T he
confide nce.
debt
So
far,
c o m b ina tion
in flation
u n d e rm in e d
m a c ro e c o n o m ic stab ility achieved
in
C entral
freeze
the
in
the
fragile
by tha t eco no m y
un de rm ine d
eco no m ic
investor
crisis
in
the
digit decline.
rank
of
P hilippines
v irtu a lly
T h e o th e r co u n trie s w h ich jo in e d the
negative
and
flat
R ussian F ederation has not had a sub stantia l im pact
exception.
on the C entral A sian econom ies.
decelerated,
in
grow th
the
re m a ining
w as
th e
inflation
the
digits.
levels
regional eco n o m ic crisis on th e do m estic financial
began
m arke ts in m ost of the South and S ou th-W est Asian
Inflation
cou ntrie s,
S ingapore.
prevented
spared.
the se
th e ir
the
real
co n tagion
se cto rs
effect
w e re
not
of
com p lete ly
T h e tra nsm ission of the eco no m ic crisis to
cou n trie s
channels.
to o k
place
th rou gh
Low er im p o rt de m an d
a
nu m be r
of
in the cou ntrie s
M alaysia ,
g ro w th
the
rem a ine d
c o u n trie s,
w ith
one
o n ly
bright
spo t
in
the
B arring Indonesia, d e s p ite large c u rre n c y
depreciations,
m arke ts
and
V iet N a m ’s e c o n o m ic e x p an sion , tho ugh
subregion.
W h e re a s the relative in sula tion of th e capital
w e re
T h a ila n d
Price
to
stabilize
was
rates
rem a ine d w ith in sin gle
s k y ro c k e te d
to w a rd s
the
exce p tio n a lly
low
W eak
do m e stic
keeping prices in check.
in
Ind o n e sia
end
in
of
th e
but
year.
M alaysia
dem and
and
he lp e d
in
C u rrent a c c o u n ts of the
ba la nce of pa ym ents reg istere d m a jo r im p rovem e nts.
T h a ila n d
w ere
affected by th e crisis c on tribu te d to the sla cken ing of
able to co n ve rt de ficits into large su rp lu se s.
T he
e xp ort pe rfo rm a n ce of s om e of th e S outh and South-
tu rn a ro u n d w as la rgely d u e to a c o lla p s e in im p orts
W est A sia n cou ntrie s.
from
East
theless,
w h ere
and
declined.
for
R epublic
exce pt
GDP
C apital inflows, e s p ecially FDI
S ou th-E ast A sia
the
con tra cted
Islam ic
in
1998
N everof
b e cau se
Iran,
of
the
In
fact,
rather
Indonesia,
than
an
M alaysia
e x p an sion
and
in
exp orts.
E xpo rts
in crease d in volum e but fell in d o lla r te rm s in m any
cases.
T here w e re sig n ifica n t official ca p ital inflows,
against
private
cap ital
o u tflow s
and
foreign
direct
slu m p in the oil m arket, G D P grow th rates in other
investm ent started to return m ostly for a cq u isitio n of
cou n trie s have been m odera te ly high, ranging from
existing assets.
4.5 p e r c e n t in Turkey to 6 per c e n t in India.
ba nking secto rs continued.
ag ricultu ral
pe rfo rm a n ce
e x p en diture
w ere
factors
and
in crease d
w h ich
B etter
However, cap ital o u tflo w s from the
b u dg etary
c o n tribu te d
to
the
Interest
rates
started
to
com e
dow n
in
the
e n h a n ce m e n t of eco n o m ic p e rfo rm an ce in s om e of
se c o n d
these cou ntrie s.
rem a ine d ow ing to the re luctan ce of b a n ks to extend
e ith e r
lower,
Inflation rates in th e cou ntrie s were
or
in crease d
com p a re d w ith 1997.
ad dition
to
eco n o m ic
cou ntrie s, w a s
slightly,
in
1998
as
A low er price fo r petroleum , in
crisis
in
several
de stina tion
resp on sible for red ucin g the exp ort
e a rn in g s of the Islam ic R epublic of Iran.
However,
half of the
y e a r but th e
liquidity
pro ble m
cred it as a result of th e ir ow n re ca p ita liza tio n ne eds
and
fea rs
of
fu rth e r
accu m u la tio n
of
bad
debts.
F inancial institutions a lre a d y had a h u ge b a cklo g of
no n-p erform in g
loans
as
the
p ro g re ss
on
debt
restructu ring rem ained lim ited.
E xcess c a p a c ity in
the low p e tro le um price has he lp ed in con tain ing the
the
a
im p o rt bill of co u n trie s w h ich are net im p orters of
pa rtly resulting from large in ve stm e n ts m ad e du ring
petroleum .
the boom years.
In general, both th e e xp orts and the
im p orts of th e se co u n trie s
rates in
crisis,
1998.
w h ich
registered
A p a rt from
ne ga tively
the
low er growth
regional eco no m ic
affected
acro ss th e bo ard for m ost S outh
capital
and
inflows
S outh-W est
m an u factu ring
s e c to r
m on etary
and fiscal
p o licies
26
Pakistan
b e g in n in g
but
Interest
rates c a m e dow n a n d fis c a l stim u lu s w a s pro vide d.
Moreover,
and
in the
later on the se po licy sta n c e s w e re softe n e d .
financial and real sectors.
India
pro ble m
G o v e rn m e n ts of th e s e c o u n trie s
develope d
against
s e rio u s
tried to tackle th e e c o n o m ic c risis by a d o p tin g tight
A sian cou ntrie s, th e im position of sa n ctio n s by som e
c o u n trie s
was
m ajor
reform s
w e re
in itiate d
in
the
had
a
about the em e rg e n c e of d e fla tio n a ry p re ssu re s tha n
negative im pact on grow th in East A sia as well.
T he
regional
e co no m ic
crisis
has
In
with inflation.
China, G DP grew at an im p ressive rate of 7.8 per
E xpo rts of all three c o u n trie s received
a significant negative s h o ck from the sh a rp dro p in
cen t in 1998, but the rate w as one percen ta ge point
dem and from A sia n e c o n o m ie s in crisis.
low er tha n in the previous year.
Hong Kong, China
the decline in d e m an d from Jap an , w h ich is one of
and the R epublic of Korea, the w orst affected e co n o -
the m ajor trade p a rtn e rs for both A ustralia and N ew
m ies
Zealand, and the fall in de m a n d from o th e r A sian
in the
East A sian
sub reg ion ,
la rge con tra ction in th e ir output.
exp erie nce d
a
However,
T he m ajor co m p o -
econo m ies w e re p a rtly offset by th e robust e co n o m ic
nents of the ag gre gate de m a n d in the se econom ies,
growth in the U nited S tates and, to a le sse r extent,
with the exce ptio n of go ve rn m e n t budget, show ed a
by growth in Europe.
decline in 1998.
W eak d e m an d from within the East
Available
and S o u th-E ast A sian e c o n o m ie s contribu te d to the
com p re ssio n
m an ag ed
of exports,
although som e eco no m ies
to c o m p e n s a te
for this
pa rtially with
an
increase of the ir exp orts to the United States and
the E uro pe an Union.
T he grow th of do m estic invest-
m ent con tra cted as a result of the credit crun ch in
the d o m estic econom y, corp o ra te
the
rise
of
bankru ptcies.
restructuring and
C o nsiste nt
with
1998 to
the se
2001,
on
with
selected e c o n o m ie s
estim a te d,
p lan ned
and
actual
figu res
are given
for
1997,
in tab le
II.1.
for
It is
im portant to em p h a size the high ly tenta tive nature of
the se forecasts, given the several nega tive e lem en ts
and con sid e ra b le u n ce rta in ty that prevail.
slow er
growth, rising u n ce rta in ty and de m a n d com p ression,
in
da ta
forecast e co no m ic grow th and inflation for the years
inflatio nary
pre ssure s
eco no m ies
receded.
An extrem e case w as C hina w here a
DEVELOPING ECONOMIES
OF THE ESCAP REGION
have
m assive build-up of inven to ry in the face of falling
Least developed countries
d e m an d g e ne rated som e d e fla tio n a ry pre ssures and,
indeed, in 1998, the general level of prices slightly
fell.
E xports from e co no m ies in this sub reg ion fell or
the ir grow th sub s ta n tia lly slow ed down.
upon
d o m estic
recession,
d e clin ed sharply.
im p orts
Growth performance
C o nse que nt
them
B an glade sh achieved a G D P grow th rate of 5.6
W ith a m ore dram atic de cline in
in
all
of
per cen t in fiscal ye a r 1998, slig h tly low er than in
the ir im ports, the ob se rve d surg es in the trade and
the
previous
ye a r
(table
II.2).
However,
secto ra l
current acco u n t b a la nces in m any eco n o m ie s in this
growth rates differed s ig n ifica n tly in the tw o years.
sub reg ion reflected d o m estic re ce ssio n a ry pressures
T he agricultural s e c to r p e rfo rm e d relatively b e tte r in
rather than bu oyant exports.
te m p o ra ry p h e n o m e n o n
T his will p ro ba bly be a
w h ich
will w ith er aw ay as
soon as grow th resum es.
1997 and the in dustrial se cto r did well in 1998.
The
agricultural se cto r reg istere d grow th of 3.1 pe r cen t
in 1998 c o m p a re d w ith 6.4 pe r ce n t in 1997, largely
on acco un t of a sho rtfa ll in th e rice crop b e ca u se of
T h e p e rfo rm an ce of the developed cou ntrie s in
the
region
degrees
in
by
1998
the
was
e co no m ic
in fluenced
crisis
in
to
varying
Asia.
W hile
adverse w e a th e r c o n d itio n s and low er in vestm en t in
agricultural in pu ts at th e plan ting stage.
w heat
produ ction
reache d
the
Australia rem a ine d largely un affected by the adverse
m illion ton s in 1998, w ith a
im pact of the A sian crisis, the re was a substantial
over the previous year.
de celeratio n in New Z ealan d.
In Jap an recession ary
im pulses w h ich pre da te d the crisis w ere reinforced.
overall
C onsequently,
mixed.
year,
growth
pe rfo rm an ce
was
T h e J a p a n e se e co no m y shra nk during the
A ustralian
G DP
grow th
rem ained
largely
un-
zation
and
record
However,
level
of
1.7
17 per ce n t in crease
As a result of trade libera li-
de reg ula tion
of
investm en t
in
recent
years, the industrial s e c to r gre w by 8.1 p e r c e n t in
1998 from 3.8 per c e n t in 1997.
tion
of
g a rm e n ts
and
knitw ear,
A ltho ug h p ro d u c as
well
as
food,
beverages and tobacco, w as high, the le a th e r and
affected, w h ile the N ew Z e a la n d growth rate slow ed
ju te su b sectors did not pe rform well in 1998.
significantly.
lower grow th rate in 1997 w as p a rtly d u e to political
cou ntries,
in
Inflation
the
range
rem ained
of
0.3
low
to
in
1.5
all
three
per
cent,
unrest and s h o rta g e s in p o w e r supply.
T he
T h e se rvice s
de spite the d o w n w ard p re ssure on exch an ge rates
secto r grew at 6.6 p e r cen t in 1998, slightly h igh er
du ring 1998.
than 6.3 p e r cen t in 1997.
In fact, in Japan, the co n cern is more
27
Table II.2. Selected least developed countries of the ESCAP region: growth rates, 1995-1998
(Percentage)
Rates of growth
GDP
Industry
Agriculture
Services
8.4
5.3
3.8
6.9
6.5
6.3
8.1a
6.6
1995
1996
1997
1998
4.4
5.3
5.9
5.6
– 1.0
1995
1996
1997
1998
7.4
6.0
4.0
6.4
4.0
2.5
17.0
8.4
8.9
3.7
3.4
7.7
1995
1996
1997
1998
7.6
6.5
6.5
1.8
4.9
9.8
13.3
7.9
0.6
– 0.4
Lao People’s Democratic
Republic
1995
1996
1997
1998
7.0
6.9
6.7
4.0
3.1
2.8
5.8
13.1
17.3
9.8
10.2
8.5
10.0
Maldives
1995
1996
1997
1998
7.2
6.5
8.3
7.7
13.2
8.7
7.2
6.2
1.3
3.1
0.1
Myanmarc
1995
1996
1997
1998
6.9
6.4
4.6
1.1
4.8
5.0
3.4
2.9
12.7
10.9
6.7
1.0
7.3
6.4
5.1
– 1.0
Nepalb
1995
1996
1997
1998
2.7
5.6
3.8
– 0.3
4.4
4.1
4.0
8.3
3.5
2.1
1.1
0.2
5.6
5.4
3.5
4.2
Bangladesh
Bhutanb
Cambodia
3.7
6.4
3.1
6.6
5.0
2.0
0.0
8.8
6.0
6.0
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); The Economist
Intelligence Unit, Country Report: Myanmar (Burma), fourth quarter 1998; and national sources.
Notes: Data for 1998 are estimates.
power; and construction.
Industry comprises mining and quarrying; manufacturing; electricity, gas and
a Rate of growth of manufacturing only.
b GDP at factor cost.
c GDP at 1985/86 producer’s prices.
T h e re
has
been
gradual
im p rovem e nt
in vestm en t ove r th e ye a rs (figure II.1).
in
Investm ent
in vestm en t in total in ve stm e n t has be en in cre a sin g
gradually.
T h e sha re o f priva te in v e s tm e n t in total
as a p e rce n ta g e o f G D P w as 17.4 per c e n t in fiscal
investm ent, w h ich stoo d at 50.8 p e r ce n t in
y e a r 1997 a g a in s t 17.0 pe r c e n t in 1996 and 16.6
in crease d
pe r cen t in 1995.
saving s as a pe rce n ta g e
1998
a ctual
28
sho w s
figu re
However, th e pro visio na l figu re for
som e
m ay
d e clin e
in
rise
th e
as
in vestm en t
sha re
of
but
the
private
any
to
n o ticea ble
6 2 .4
per
up w a rd
ce n t
in
1997.
1994,
D o m estic
of G D P have not show n
tre n d
and
su b sta n tia lly sh o rt of investm ent.
co n tin u e
to
fall
Figure II.1. Savings and investment as a percentage of GDP in selected least developed
countries of the ESCAP region, 1995-1998
Sources: ADB, Key Indicators o f Developing Asian a nd Pacific Countries 1998 (Oxford University Press, 1998) and
Asian Developm ent O utlook 1998 (Oxford University Press, 1998); and national sources.
Notes:
I indicates gross dom estic investment; S indicates gross dom estic savings.
Data for 1998 are estimates.
A ltho ug h
the
fifth
five-ye ar plan
(1997-2002)
In fiscal y e a r 1997, the first y e a r of B h u ta n ’s
p ro jecte d G D P grow th in fiscal yea r 1999 at 6.3 per
eighth
five -ye a r
cent, th e m on soo n flo o d s w hich s tarted in July 1998
grown
by
6.6
plan,
GDP
per cent,
is
e stim a te d
s lig h tly
under
to
have
th e
p la n ’s
and lasted fo r a b ou t two m onths ca u se d da m ag e of
targ e te d annual grow th of 6.7 pe r cent, but high er
m ore tha n 2 billion dollars in different se cto rs of the
tha n the average of 6 pe r ce n t du ring the seventh
econom y,
industry.
in clud in g
infrastructure,
a g ricultu re
and
T h e g o v e rn m e n t la unched an agricultural
plan.
A griculture,
livestock
c re d it p ro g ra m m e for the pu rcha se of seeds, fe rtilizer
4.0
and
developm e nt of horticulture.
cattle,
and
repaym ents
loans have been susp en ded .
annual
floo d
of
rehab ilita tion
and
m ay
se rvice
lead
agricultural
A llocatio ns from the
de ve lo p m e n t pro gra m m e
c o n stru ctio n
sm all
to
secto r
of
1999 for p o st-
per
cent
ow ing
forestry,
w hich
to
p ro d u ctivity
g a in s
and
In con tra st, m in ing and
m anufacturing in crease d by 11.9 and 14.5 pe r cent
respectively,
w hile
e le ctricity
exp an sion
of the
by 5.4 and 6.0 pe r cent.
but
overall
and
actual
and
com p rised 37.6 pe r cen t of G D P in 1997, rose by
B asochu
and
c o n stru ctio n
rose
C o m p le tio n of th e K urichu
hyd rop ow e r projects,
as well
as the
grow th rate fo r 1999 m ay de clin e by m ore tha n 2
D ungsum cem e nt project, d u ring th e eigh th plan was
pe rce n ta g e points from th e pro jecte d rate.
expected to add fu rth e r ca p a c ity in th e se sectors.
A c c o rd -
ing to one estim ate, G D P grow th m ay be as low as
S ince the private s e c to r is relatively un de rd e v e lo p e d
3.3 per cent.
in Bhutan, public s e c to r in ve stm e n ts in hyd ro p o w e r
29
and
en erg y-in te n sive
e co n o m ic activity.
in du stry
have
dom inated
T h e se rvice s sector, w h ich form ed
a third of GDP, m ea nw h ile grew by 7.7 pe r cent.
In
54 per cen t of G DP and em p loys ove r 75 pe r cen t
of
the
w orkforce,
growth.
co n trib u te d
to
the
high
G DP
Plans to in crease coffee p ro d u ctio n w e re
1998, G D P w as estim a te d to grow at a low er rate of
a n no unce d in 1997 as p a rt of a g e ne ral p o lic y of
aro un d 5.0 per cent, pa rtly due to the p o or pe rfo r-
tryin g to develop cash crops.
m ance of the a g ricultu re sector.
e xp orts have grow n rapidly d u rin g th e 1990s, from
E a rn in g s from coffee
$3.2 m illion a y e a r in 1 9 92 -199 4 to $ 2 1 .3 m illion in
In
in
C am bod ia , real G DP grew by 2.0
1997, a sub stantia l de clin e from the 6.5
recorded in 1996.
per
cen t
of
per cen t
1995,
per cent
exports, and to $ 2 5 m illion in 1996.
A griculture, w h ich acco u n ts for 52
GDP
at
cu rre nt
prices
and
em ploys
w hen
rem ained
by
po rte d
pro du ction.
in cre a se d from
m illion
in
1997,
cultivated
area
as fields tha t had
w e re reclaim ed.
also in crease d from
1994 to
total
1.8 m illion hectares in 1996 to 2.1
he ctares
la nd m ine d
T he
been
T he average rice yield
1.3 ton s per hectare in 1992-
1.8 to n s in 1997.
However, floo ding and
external
ban
on
con tinu e
rice h a rvest
d e spite
a
in 1998.
go vern m ent
relatively
in
s e rvice s
grew
trade,
le gislation.
to
T he
lack
c o n stra in
of
the
financial
reso urce s
d e velopm e nt
of
has
irrigation
sy s te m s and to p e rp e tu a te the d e p e n d e n c e of the
agricultural secto r on annual rains.
w h ich
acc o u n te d
a b ou t 21
Ind ustrial output,
im -
new
kip
its
p ro ce s s e d
exp o rts
are
M a n ufacturing,
nications,
and
w h ich
stro n g ly
as
sec to r
pre pa ration s
ow in g
w ooden
in
1997,
as
Visit
w ith
of
exp e cte d
10
to
Lao
to
lim ited
products.
25
The
pe r c e n t of
w h o le s a le
tra n s p o rt
grow th
is
for
1997
re p rese nts
well
recording
s e rvice s
in
and
and
com m u-
per cent.
be
T he
s tim u la te d
P e o p le ’s
as
D e m o c ra tic
R e pu blic Year 1999 pro cee d, a lth ou gh w e a k tou rist
rem a ine d co n stra in e d by w e ak do m estic dem and, as
A sian d e stina tions and lim ited in fra stru ctu re o u tside
well as the regional eco no m ic crisis.
V ie ntia ne
and
targ e t of
attracting
go ods
of
in the
has
of
arrivals fro m A sia, in c re a s e d c o m p e titio n fro m c h e ap
m an ufacture d
per cen t
co st
GDP,
in ou tput of
fo r
fo r
ga rm e n ts
retail
ten ded
po te n tia l
rising
by th e fall
slo w ly
sector,
GDP,
in tro du ced
e xp o rt
The
ap pro xim ately 20 pe r ce n t of GDP.
in
tim b e r e xp orts
ca u se d
de m an d
1996, ow ing to ineffective im p lem e ntatio n of forestry
un p ro ce sse d
th e ir
w h ich co m p ris e s 7 5 per c e n t of th e in d u stria l sector,
growth
still
tariff-fre e
O th e r im p o rta n t
expected to affect industrial ou tput, w h ich c o m p rise s
is
e xp orts
a llow ed
a g ainst both the ba ht and th e dollar, and w e a ke r
grew
likely to have affected the
alth ou gh
un de rexploited .
inputs,
e n viron m en ta l d a m ag e as a result of heavy logging
Log
g o ve rn m e n t
non-rice crop s in clud e tobacco, m aize, pe a n u ts and
soybeans,
aro un d 75 p e r ce n t of the w orkforce, is dom ina ted
rice
the
T h e increase
such
as textiles
was, therefore, exp ected to be less m arked in 1998
than in recent years.
T h e to u rism
H ighe r
eco n o m ic
before th e electio n
de m an d
and th e o n set of the
The
nu m be r
of
tou rist
regional
arrivals
rea che d 82 ,1 0 5 for the first five m on th s of 1998, a
overall
ce n t
de clin e
com p a re d
th a t
m ay
the
not
be
w ith
u n e m p lo y m e n t
slo w do w n
in the
Lao
investm ent.
the
130,754
pro jects fun ded w ith
arrivals d u rin g the sam e p e riod of 1997.
Overall,
continue.
GDP grow th rate for 1998 is e stim a te d at zero per
cent.
is
resu lting
likely
P eople’s
to
from
low er
the
consum er
D e m ocratic
Republic,
w hile a fall in FDI is exp e cte d to lead to a d e clin e in
37
pe r
su g g e st
to u rists
industry, w hich
pro vide d one third of all capital inflow s in 1996, has
crisis.
P rab an g
1 m illion
reached.
s lu m p e d s in ce m id -1 9 9 7 follow ing political disruptio ns
e co n o m ic
Luang
However,
exte rn al
la rge
aid
c o n stru ctio n
are
e x p e cte d
to
On the o th er hand, if th e a n n o u n c e d rise
in d e po sit interest rates e ve ntua lly leads to a rise in
bank
lending
rates,
d o m e s tic
in v e s tm e n t
m ay
be
fu rth e r affected.
G D P grow th in the Lao P eo ple’s D em ocratic
R epublic is e stim a te d to have slow ed to 4.0 per cent
M aldives
has
seen
rapid
and
su sta in e d
in fiscal y e a r 1998 from 6.7 per cen t in fiscal yea r
e co n o m ic d e velopm e nt ove r a long period.
In the
1997, ow ing to low er foreign in vestm en t inflow s as a
last
annual
result of th e regional eco n o m ic crisis.
rate of 8 per cent.
w e a th e r
co n d itio n s
h a rvest in 1998.
a d verse ly
Besides, poor
affected
the
rice
In 1997, the im p roved pe rfo rm an ce
of the agricultu ral sector, w h ich co n trib u te s around
30
decade,
G DP
grew
at
However,
declining trend in rece nt years.
an
ave rag e
th e re
has b e en
a
In 1997, G D P grew
by 6.2 per cen t and w a s e s tim a te d to g ro w by 6.0
per
ce n t
in
1998.
E con om ic
grow th
has
been
a cc o m p a n ie d by a shift aw ay from p rim a ry activities
pow er
to se c o n d a ry and
te rtia ry activities. In
1997, the
drought.
ag ricultural se cto r
grew by 0.1 p e r ce n t
w hile the
indicate that the state se cto r a c c o u n te d for 4 4 .5 per
sh o rta g e s
resulting
Volum e
da ta
from
on
the
1997 -199 8
indu stria l
produ ction
in d u s try and s e rvic e s secto rs grew by 13.2 and 6.0
cent of total industrial output in 1997.
pe r cen t respectively.
cotton fab rics rose in the first half of the 1998, but
A ltho ug h the con tribu tion of
th e fishe ries secto r to G D P
than
that
of tourism ,
has declin ed to less
it rem a ins
the
im p ortan t so u rc e of em ploym e nt.
of th e c o n stru ctio n se c to r to
sin gle
T he contribution
G DP
has increased
ow ing to a rise in residential constru ction .
3 4 0 ,0 0 0
tou rists
visited
m ost
In 1996,
M aldives and
arrivals,
started to de clin e from M ay 1998.
O u tp u t of
P aper o u tp u t fell
by 7.5 per ce n t on average in the first half of 1998,
but
declined
1998.
at
a
m uch
fa ste r
rate
in
A pril-Jun e
T h e c o n stru c tio n sector, of w h ich 85 pe r cen t
is publicly ow ned, w a s also exp e cte d to co n tra ct in
1998, reflecting g o v e rn m e n t bu d g e t cuts and low er
m ostly from W estern Europe, have grown by 27 per
private s ecto r d e m an d for new office space.
cent.
Tourism co m p rise d
services s e cto r w as exp ected to contra ct by 1 per
1996,
g e ne rated
em ploym e nt,
nearly
70
T he
a
11
third
e co no m ic
per c e n t
of
per cen t
19 pe r ce n t of G DP in
of the
g o vern m ent
of foreign
c o u n try ’s
revenue
cu rre n cy
co n cen tra tion
around
and
earnings.
Male
cen t in 1998 ow ing to d e clin e s in retail trade and in
tou rist arrivals from A sia as a result of th e regional
eco no m ic crisis.
has
resulted in w ide regional dispa rities in incom e, as
well as acc e ss to health
basic infrastructure.
services,
ed uca tion and
In th e fifth national d e velop-
m ent plan, th e go v e rn m e n t estim a te d a per capita
in com e
of
aro un d
3 ,7 00
rufiyaa
in
1995
in
the
atolls, c o m p a re d w ith 11,000 rufiyaa in Male.
T he
average for the atolls is fu rth e rm o re likely to hide
sig nifica nt
variations
betw ee n
atolls
and
T he
islands
w ithin an atoll.
In Nepal, G D P at fa c to r cost is e stim a te d to
have grown by 2.1 pe r cen t in fiscal y e a r 1998, the
lowest rate in 22 years and a de clin e from th e 3.8
p e r cent
registered
in
1997.
Poor G D P
grow th
rates have led to a d o w n w ard revision of th e ninth
plan (19 97 -200 1) grow th ta rg e t from 6.5 to 6.0 per
cent
per
acco un ts
an nu m
on
for
per
40
average.
ce n t
of
A griculture,
GDP
and
w h ich
e m p loys
nearly 80 pe r cen t of popu latio n, grew by o n ly 1.1
per cen t in 1998, c o m p a re d w ith 4.1
G DP grow th in M y a n m a r slow ed in fiscal year
pe r c e n t in
1997, largely as a result of bad w eather.
Principal
1997 to 4.6 pe r cent, from 6.4 per cen t in 1996, and
foodgrains such
w as estim a te d to d e crea se fu rth e r to 1.1 pe r cen t in
barley, w h ich c o m p rise 37 .3 p e r c e n t of the a g ri-
1998.
cultural sector, reg istere d a nega tive grow th of 0.4
G row th slow ed in every secto r except energy,
tra n s p o rt and g o vern m ent ad m inistration.
slow
grow th
w as
pa rtly
im ports
the
and
T h e overall
c o n se q u e n c e
w id e s p re a d
of
restrictions
on
power
sho rta ge s.
T h e ag ricultural sector, w h ich accounts
for m ore tha n half of G D P and em p loys 60 pe r cent
per cent.
as rice, w hea t,
m aize,
m illet and
C ash crops, in clud in g s u g a r cane, jute,
oilseed, to b a cc o and po tatoes, also sh o w e d a sm all
negative
w hich
growth.
c o m p ris e s
G row th
in
live sto ck
produ ction,
ne a rly
a
third
agricultu ral
of
production, m e a n w h ile d e c lin e d from 6.2 pe r ce n t in
of the la bo ur force, w as estim a te d to grow by 2.9
1997 to 3.7 per cen t in 1998.
p e r c e n t in 1998.
T he g o v e rn m e n t target for rice
s ecto r grew by 2.8 per c e n t in 1998, dow n from 3.5
ou tput
18.6
per cen t
in
1998
of
m illion
ton s
m ay
not
be
reached ow ing to the rising cost of key inputs such
s ecto r
as fuel for irrigation pu m ps and fertilizer.
d o w nturn
Also, after
in
1997.
d e clin ed
in th e
to
G row th
T h e n o n-a gricu ltural
in th e
m a n u fa c tu rin g
2.4
pe r
cen t
because
c a rp e t
and
re a d y -m a d e
of
a
g a rm e n t
m onths of drought, h e avy rains in S e p te m b e r 1998
sector.
resulted in floo ding in the central rice-grow ing region.
slowing for th e past four years, co n tra cte d by
O th er key e xp ort crops, such as pulses and beans,
per cent, w h ile the electricity, gas and w a te r s e c to r
w ere also d a m ag ed
co n ce rn
over
shorta ge s.
only
1
pe r
c o m m o d itie s
by floods,
rising
prices
leading to growing
and
possible
food
Industrial ou tput w as exp ected to rise by
cen t
fell
in
in
1998
the
first
as
the
six
output
m onths
of
of
key
1998,
com p a re d w ith the s am e period of 1997, ow ing to
T he c o n stru c tio n
registered
nega tive grow th
s e rvice s s e c to r p e rfo rm ed
1997
sector, w h ich
of 2 .9 pe r cent.
b e tte r in
and grew by 4.2 p e r cent.
m onths
of
has
Visit N e p a l Year
1998,
been
1.7
The
1998 th a n
in
In th e first nine
to u rist
arrivals
rose by 10 per cent, and a rise of 12 per c e n t for
the full yea r w a s expected.
31
exceed the pro jecte d 8.5 p e r cent.
Inflation
of
In B a n glade sh, inflation rose from 2.5 pe r cent
in 1997 to 7.0 p e r ce n t in 1998 ow ing to the sho rtfa ll
in
rice
o u tp u t
(table II.3).
and
h ig h e r
m o n e ta ry
c o n ce rn s
been
ab ou t
inflation,
pu rsuin g a po licy of
P artly b e ca u se
th e
g o v e rn m e n t
gra du al
has
d e va lu a tio n
of
cu rre n cy rather than a n y large o n e -o ff devaluatio n.
exp an sion
In
T h e in flatio n in 1997 w as low as a result
view
of th e ir
clo se
tra d e
and
fin a n cia l
of a g o od rice harvest, w h ich led to low food prices.
relations, price ch a n g e s in B hutan p a rtly o c c u r as a
The
any
la gged
lo n g -te rm in fla tio n a ry pre ssure thro u g h ju d icio u s use
P rices
g o v e rn m e n t
w as
c om m itted
to
of its m o n e ta ry and fiscal policies.
cu rb in g
N evertheless,
resp on se
in
Bhutan,
than th o se in
to
p rice
however,
d e ve lo p m e n ts
in
India.
are sig n ific a n tly
high er
India ow ing to h ig h e r tra n s p o rta tio n
severe da m a g e to p ro d u ctio n ca u se d by the floo d of
co sts and a less co m p e titive m arket.
J u ly -S e p te m b e r
p r i c e in d e x in c r e a s e d b y
7 . 0 p e r c e n t in 1 9 9 7 a n d
sp e n d in g fo r reh ab ilita tion and reco nstructio n a ctivi-
w as
by
ties
1998.
are
1998
exp e cte d
to
and
ca u se
in crease d
inflation
go ve rn m e n t
in
1999
to
estim a te d
to gro w
aro un d
T h e co n s u m e r
8
p e r ce n t
in
Table II.3. Selected least developed countries of the ESCAP region: summary of
macroeconomic indicators, 1995-1998
(Percentage)
Bangladesh
1995
1996
6.6
– 6.3
– 5.1
12.2
5.2
10.8
4.0
9.7
2.5
2.0
–
0.6
– 4.9
1997
1998
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
–
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
–
35.6
9.6
9.0
8.8
59.0
7.0
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
– 7.7
– 7.2
– 5.0
44.3
7.9
40.4
7.1
16.6
Lao People’s Democratic
Republic
Budget balance/GDP
Money supply growth (M2)
Inflation rate0
– 4.2
– 5.7
– 5.7
16.4
19.6
26.7
13.1
64.8
19.5
– 9.3
133.5d
77.1e
Maldives
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
–
8.8
– 3.0
– 1.6
– 5.0
15.6
5.5
26.0
6.3
23.1
7.6
21.9 b
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
– 3.3
– 1.6
40.5
25.2
38.9
16.3
29.7
40.0
Budget balance/GDP
Money supply growth (M2)
Inflation ratec,f
– 4.8
– 5.6
– 5.3
16.1
7.6
14.4
11.9
7.8
Bhutan
Cambodia
Myanmar
Nepal
8.1
8.0
– 5.2
10.1b
7.0
8.0
19.9b
11.0
12.0
4.0
S ources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); IMF, International
Financial Statistics, vol. LI, No. 9, September 1998; and national sources.
Note:
Data for 1998 are estimates.
a Excluding grants.
b January-June.
c Refers to changes in consumer price index.
d January-September.
e January-October.
f National urban consumer price index.
32
W ith
Inflation in C a m b o d ia has rem ained in single
digits in the pa st few years.
in
1997.
However,
It w as 8.0 per cent
the re w as
som e
up surg e
in
a
stable
fo reign
exchange
rate
and
im p orts a cco un ting fo r alm o st tw o th ird s of c o n s u m p tion, retail prices in M aldives are s tro n g ly in flue nced
prices in th e early p a rt of 1998 and inflation for the
by exte rn al price developm e nts.
full
cent.
rose to 7.6 per cen t in 1997 from 6.3 pe r ce n t in
co m m o ditie s
1996, de spite slo w e r grow th in m on ey su p p ly a n d a
year
is
P re-election
such
as
tin n e d
e stim a te d
stockp ilin g
rice,
food
fish
and
at
of
pe r
essential
sauce,
gas
11.0
coo kin g
oil,
led to upw ard
noodles,
pre ssure
T h e in flatio n
rate
reduced budget deficit.
on
H ousing, m edical care and tra n s p o rt costs
In M yanm ar, c o n s u m e r price s rose by 29 .7 per
rose by m ore than 20 per cent, yea r on year, in
cen t in 1997 and w ere e s tim a te d to rise fu rth e r by
Jun e
40 .0
prices.
1998
ow ing
to
disruption
to
pro du ction
as
per cent in 1998.
M o n e tiz a tio n of th e bu d g e t
well as im p o rte d inflation resulting from the w e a k -
deficit and lack of fin a n cia l in vestm en t o p p o rtu n itie s
ness
have resulted in e x ce ssive liq u id ity a n d a high rate
of th e
riel.
In fla tiona ry
pressure
w as
ex-
pected to con tin u e ow ing to the go ve rn m e n t’s w e ak
of inflation.
fiscal
sou rce of large disto rtio n s in relative prices.
po sitio n follow ing the
po stp o n e m e n t of aid.
As a result of m on etiza tion of the budget deficit,
Price co n tro ls on s e le cte d item s are a
O fficial
in flation data, w h ich c a p tu re o n ly p rice in c re a s e s in
m on ey su p p ly (M2) rose by about 20 per cen t in
Yangon, are co n sid e re d to u n d e rsta te actual inflation
the first half of 1998.
significantly.
the
election,
T he riel stre n g th e n e d after
boosted
by
im proved
con fide nce
T h e p o or p e rfo rm a n ce of th e a g ric u l-
tural s e cto r has in crease d th e p rice of b a sic staples.
and the reversal of som e of the pre -ele ction flight
Food prices rose by an a ve rag e of 20 .7 p e r cent,
into dollars.
However, fu rth e r cu rre n cy w e a kn e ss
yea r on year, in the first tw o m o n th s of 1998.
m ight
ow ing
m e rch a n -
price of fuel, clo th in g and h o u s in g also rose s h a rp ly
po litical
du ring the sam e p e riod p a rtly b e c a u s e of th e w e a k
result,
dise
trade
to
deficit
the
and
w o rsening
the
u n certain
en viron m en t.
kyat,
new
restrictio ns
on
im p o rts
and
the
T he
v irtua l
ce ssa tion of bo rd e r trade.
T h e c o s t of p u rch a sin g
ge ne rators
to
m ake
for
R epublic had aim ed to bring dow n its high infla-
sh o rta ge s
may
also
tion
consum ers.
A lth o u g h
the
Lao
P eople’s
D em ocratic
rate of 19.5 pe r cent in 1997, there w as a
The
up
have
w id e s p re a d
been
g o v e rn m e n t
po w e r
passed
on
re im p o s e d
to
petrol
steep in cre a se in inflation in 1998 as a result of
rationing restrictio ns in late F e b ru a ry an d fuel prices
a sig nifica nt de p re cia tio n of the new kip and price
fell by an average of 7.2 p e r ce n t in the first seven
in crease s
in
T hailand.
inflation
food
one
of
D uring
th e
in crease d
and
to
non-food
crease.
its
m ajor
partners,
m onths of 1998 c o m p a re d w ith th e s a m e p e rio d of
of
1997.
first
10
m onths
about
77
per cent.
item s
However,
trading
the
co n tribu te d
rate
of
to
1998,
Both
the
in crease
dow n in th e se c o n d half of 1998.
In Nepal, the inflation rate w as 7.8 pe r ce n t in
in-
slowed
T he new kip
fiscal yea r 1997.
T h e p rice index of foo d item s also
rose by 7.8 per cent.
However, w ith in this category,
con tin u e d to w e ake n a g ainst the do lla r during the
products such as m eat, fish, eggs, so ft drinks, milk
se co n d
and cere als registered p rice in crease s of m ore than
and
third
q u a rte rs
s ig ns of sta b ilizin g
of
1998
in the fou rth
but
show ed
quarter.
S ince
10
per cent.
O th e r p ro d u c ts
th e b a h t h a d ap p re cia te d a g ainst the do lla r du ring
ghee,
the period, the d e clin e in the new kip against the
de crea se in price.
baht,
w h ich
even
m ore
is
used
in
c ro ss-b o rd e r
sig nifica nt.
The
trade,
introduction
was
of
the
veg etab les
ity
increases.
tha t
existing
notes
w e re
to
be
such
as
re g is te re d
e d ib le
a
oil,
m arg ina l
T h e p rice in de x of no n-fo o d ite m s
increased by 7.7 pe r ce n t in 1997.
do m e stic c u rre n cy notes of 2 ,0 00 and 5,0 00 led
fears
fru its
P ro d u cts such
as fabric, shoes, do m e stic a p p lia n ce s, fue ls, e le c tric -
to
fu rth e r
and
and
cig arettes
On
reco rde d
th e
o th e r
re latively
hand,
large
m e d icin e
price
and
taken out of circu latio n and resulted in a fu rth e r
personal care item s, tra n s p o rta tio n a n d c o m m u n ic a -
flig h t from
tion w itn e s s e d sig n ifica n t p rice d e c re a s e s .
ce n t
1996.
in
the
1997
kip.
M2
grew
by 64.8
c o m p a re d
new
with
26 .7
per
In J u n e
1998,
d e po sit
cent
rates w ere
from 19 to 22 pe r cen t to curb liquidity.
per
in
raised
T h e in fla -
tion rate fell to 4.0 pe r ce n t in 1998 ow in g to the
low er grow th
in prices of both foo d
and
non-food
items.
33
Trade perfo rm an ce
A s a result of faste r grow th of e xp o rts th a n of
im ports, the m e rch a n d ise tra d e d e ficit fell in 1998.
In fis c a l y e a r
1998, m e rch a n d ise e x p o rts of
The
usually
large
account,
rem ittances, w h ich a m o u n te d to $ 1 ,4 7 5 m illion or 4.5
a p p ro xim a te ly
55
per
cent
of
exp ort
su rp lu s
co n trib u te d
per ce n t of G DP in 1997.
by
on
was
and m e rch a n d ise im p orts by 3.3 pe r ce n t (table II.4).
c o n trib u te
large
d e fic it
The
m ainly
a
tra d e
m ainly
rea d y-m a d e g a rm e n t s e c to r w as e s tim a te d to
offset by
m e rch a n d ise
B an glade sh w e re e stim a te d to grow by 17.0 per cent
the
se rvices
ove rsea s
w o rk e rs ’
T h e s e w e re e stim a te d to
ea rnings.
In th e pre viou s year, total exp o rt ea rnin gs
grow slightly in 1998.
in crease d
by
w as 1.6 per cen t of G D P in 1997 and w a s estim a te d
g a rm e n ts
s e c to r
14.0
pe r ce n t
co m p ris e d
and
51
the
per
ready-m ade
cent
of
total
T h e c u rre n t a cco u n t deficit
to decline in 1998.
m erch a n d ise exports, follow ed by h o sie ry products,
frozen foods, ju te
pro du cts and
leather.
H yd ro p o w e r and c o m m o d itie s s u ch as timber,
In 1996,
ne arly a third of all e xp orts w e re d e stine d for the
cardam on,
U nited States w hile clo se to two fifths w e nt to EU
m ush roo m s are B h u ta n ’s p rincip al exports, although
cou ntrie s.
m a n ufacture d
The
value
of
m e rch an dise
im p orts
potatoes,
fru its
exp o rts
such
as
cem e nt,
p o lythe ne are be co m in g in c re a s in g ly im p ortan t.
im ports.
value
of
im ports, w h ich
A m o n g non-food im ports, capital go ods had
a sha re of 27 p e r cent.
M ore than
p a rticle
and
ferroalloys,
a cco un ting
total
liquor,
pro du cts,
calcium
per cen t of the
coal,
fruit
in crease d by 4.1 per cen t in 1997, w ith food grains
for 2 .6
carbide,
and
bo a rd s
in clud e c o n s u m e r goods,
and
Total
pe tro le um
pro du cts and alm ost all cap ital goods, c o m p rise 35
half of all
im p orts o rig in a te d from o th e r cou n trie s in Asia, m ost
per cen t of GDP.
notably,
India follow e d
India a cco un te d for ove r 94 per ce n t of e xp o rts and
Japan;
H ong
Kong,
in
ranking
China;
ord er by China;
S ingapore;
and
the
A c c o rd in g to p ro visio n a l figures,
69 pe r cen t of im p orts in 1997.
R epublic of Korea.
pa rtn ers
w ere
B anglade sh,
O th e r m ajor trading
Japan
and
Singapore.
Table II.4. Selected least developed countries of the ESCAP region: merchandise exports
and imports in United States dollars and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
1997
Bangladesha
4 427
Bhutan
Imports (c.i.f.)
Value
Annual rates of change
(Percentage)
1995
(millions of
US dollars)
1996
1997
1998
33.8
1.6
14.0
17.0b
55.6
– 2.9
Annual rates of change
(Percentage)
1997
1995
1996
1997
1998
7 162
39.7
15.4
4.1
3.3b
22.5
13.7
1 040
59.5
– 9.7
– 3.0
648
4.4
17.1
– 6.1
349
20.7
12.7
15.6
3.3c
46.9e
Cambodiac
697
74.6
– 24.7
8.2
Lao People’s Dem. Rep.
317
4.3
3.2
– 1.9
Maldives
73
8.7
18.0
23.7
– 1.8
Myanmar
866
7.4
– 12.6
16.4
29.6e
2 021
52.1
1.5
49.2
Nepala
397
– 13.0
3.0
10.2
11.7
1 640
17.5
10.2
21.7
9.0d
– 8 .0 d
– 12.6
Sources: ESCAP secretariat calculations based on United Nations, Monthly Bulletin o f Statistics, vol. Lll, No. 11,
November 1998; ADB, Key Indicators of Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); and
national sources.
Note:
Data for 1998 are estimates.
a Values based on fiscal year.
b July 1997 - May 1998.
c Import value on f.o.b.
d Nine months only.
e January-June.
34
Under the free trade agreement with India signed in
Thailand, which accounts for approximately 64 per
1972 and amended in 1983, Bhutan has been
granted transit rights for third-country trade through
cent of the imports of the Lao People’s Democratic
Indian territory and is not subject to Indian custom
per cent of its exports.
duties and trade restrictions.
always been in Thailand’s favour, the $97
To diversify trade and
to develop the private sector, Bhutan adopted a new
tariff
schedule
in
1996
which
reduced
duty
imports from countries other than India.
on
With the
Republic, including oil and consum er goods, and 20
Although two-way trade has
million
trade deficit with Thailand for the first four months of
1998
suggests
possibilities
difficulties in 1998.
of
balance-of-paym ent
To boost trade between their
exception of alcoholic beverages, import tariffs on
respective countries, the first meeting of the Thai-Lao
consumer goods now range from 10 to 30 per cent
Joint Trade Commission discussed problems relating
while those on industrial inputs are limited to 10 per
to customs
cent.
and the collection of other fees.
Tariffs are not applied to the import of capital
goods.
In the services sector, the main sources of
discussed
procedures,
the
use
transportation,
of
import tax
The two sides also
local
currencies
in
trade
earning are tourism and interest income from the
transactions to solve the problem of dollar shortages.
country’s
Although
foreign
exchange
reserves.
A
current
the
trade
system
is
free
from
formal
account deficit of $60.6 million was recorded in 1997
restrictions, informal trade barriers such as priority
owing to a rising trade deficit.
lists
and
restrictive
licensing
imports of certain goods.
Cam bodia’s current account deficit widened in
1997 compared
deficit on the
with
1996
because
of the
services account. The
large
merchandise
trade deficit, however, narrowed in 1997 from 1996,
as exports rose by 8.2 per cent and imports fell by
3.0
per
cent.
despite
soft
Non-traditional
garments,
as
substantially
domestic
Exports
world
exports
well
and
performed
prices
as
for timber
such
furniture and
accounted
exports,
as
for
excluding
35
well
in
and
1997
rubber.
textiles
leather,
per
cent
re-exports.
and
rose
of
The
slowdown in FDI inflows and production disruptions
resulting from
political uncertainty were expected to
slow
growth
export
in
merchandise trade deficit.
1998 and
worsen
the
A larger trade deficit, in
Hinboun
hydroelectric
requirements
limit
The 210-megawatt Theun
power plant became
opera-
tional in April 1998, more than doubling the country’s
electricity capacity.
the
Under an agreement signed with
Electricity Generating Authority of Thailand
in
1996, exports and royalties are expected to bring an
additional revenue of $30 million per annum in the
future,
compared
with
the
total
earnings of $30 million in 1996.
electricity
export
Thailand’s demand
for power, however, is expected to fall as a result of
economic contraction in 1998 and this may result in
lower
additional
revenue
for
the
Lao
People’s
Democratic Republic.
Merchandise exports of Maldives grew by
about 24 per cent in 1997.
However, preliminary
combination with a decline in tourism receipts and
estimates show a small decline in 1998.
remittances from migrant workers, was expected to
primarily to Germany, Japan, Sri Lanka, the United
lead to a widened current account deficit in 1998.
Kingdom and the United States consist of garments,
and
Merchandise
Democratic
1997.
exports
of
the
Lao
Exports,
fish
and
fish-related
products.
Domestically
People’s
produced goods as a share of total exports have
Republic fell by about 2 per cent in
declined from 80 to about 60 per cent over the last
However, merchandise exports increased by
10 years, while re-exports of jet fuel and duty-free
9.0 per cent during the first nine months of 1998.
products
Exports of coffee increased sharply, from $20 million
increased by about 16 per cent in 1997 and were
for the whole of 1997 to $40 million in the first nine
estimated to have grown around 3 per cent in 1998.
months of 1998.
Imports decreased by 6.1 per
About 50
have
increased.
per cent
of
all
Merchandise
imports
in
imports
1997 were
cent in 1997 and by 8.0 per cent during the first
consumer goods, followed by petroleum products and
nine months of 1998.
intermediate and capital goods.
Thailand’s exports to the Lao
Growth in tourism-
People’s Democratic Republic in the first four months
related imports was associated with the development
of 1998 rose to $106 million but exports of the latter
of new tourist islands, as well as consumption im-
to the former fell to $9.1
million as a result of
depressed demand in Thailand.
The sharp fall of
new kip against the baht has affected trade with
ports
resulting
from
Most
imports
come
a higher number of tourists.
from
Malaysia,
Thailand and the United Arab Emirates.
Singapore,
Earnings
35
from services are derived primarily from tourism and
Thailand.
associated
reserves dwindled to critically low levels, Myanmar
airport
operations.
Tourism
receipts
In
March
1998,
as
foreign-exchange
comprised nearly 70 per cent of the total export of
imposed restrictions on imports, banning the import
goods and services in 1996.
of all items which did not appear on two lists of
Maldives usually has a
large merchandise trade deficit but a surplus on the
priority goods.
services account.
priority.
As a result, the current account
Imports of essential items were given
Demand for trade-related services, as well
deficit has been relatively low at about $36 million in
as tourism revenue, was expected to weaken, and
1997 and in 1998.
the
services
However,
Owing to weak regional demand and low world
prices for commodities, Myanmar’s exports of goods
the
surplus
was
expected
overall current
account
to
decline.
deficit
was
expected to ease in 1998 because of a contraction
in merchandise imports.
and services were expected to rise only by 2 per
cent
kyat.
Merchandise exports of Nepal grew by 11.7
Although Myanmar’s rice exports rose in the first two
in
1998
despite
a
sharp
fall
in
the
per cent in fiscal year 1998 as compared with 10.2
months of 1998, compared with the same period of
per cent in the previous year.
1997, the
exports went to India in 1998 and the remainder to
total
volume
domestic rice supplies.
was
restricted
to
ensure
Exports of pulses and beans
other countries.
Roughly one third of
There was
a sharp
increase in
accounted for 24 per cent of total exports in 1997,
exports to India (58.8 per cent) compared with other
compared with 15 per cent in 1994, and offset to
countries (-2 .4 per cent) in 1997.
some extent the decline in rice exports.
nine months
Export
controls which were imposed in March 1998 to limit
of fiscal year
During the first
1998, woollen carpets
accounted for 48.4 per cent of exports, followed by
trade in rubber, sugar, groundnut oil, sesame seeds
ready-made garments
and sesame oil, and pulses to government agencies
(6.4 per cent).
have remained in place.
If state purchases continue
pulses increased while those of woollen carpets fell.
to be made at below-market price levels, the output
Merchandise imports decreased by 12.6 per cent in
of these
crops
the future.
and
their
export
may
decline
(41.6 per cent)
and
pulses
Exports of ready-made garments and
in
1998 against an increase of 21.7 per cent in 1997.
Soft world prices for rubber and timber
Again, roughly one third of imports came from India
were expected to affect export earnings from these
in 1998.
products
cent) in imports from India and a sharp decrease
and
reduce
incentives
to
producers.
There was a marginal increase (0.9 per
However, Myanmar’s total exports were expected to
(-17.5 per cent) from other countries.
increase significantly in the coming years as a result
positive growth in exports and negative growth in
of foreign investment in the oil and gas sector.
imports, the merchandise trade deficit decreased in
export
of
gas
from
the
Yadana
The
gasfield,
being
1998.
There
was
a significant
As a result of
decrease
in the
developed by Total of France, Unocal of the United
surplus on the services account, which partly offset
States,
the decrease in the merchandise trade deficit and
the
Petroleum
Authority
of Thailand
and
Myanma Oil & Gas Enterprise was delayed as the
power plant in Thailand,
importer,
which will
be the
has not yet been completed.
the current account deficit thus narrowed somewhat.
main
Although
export of gas is estimated to rise to $200 million a
Capital inflows/outflows
year, initial net gains are expected to be relatively
small
since
earnings
will
be
used
to
pay
for
In Bangladesh, actual disbursement of official
aid in fiscal year 1998 at $1,251 million or 3.7 per
Myanmar’s share of the capital costs of the project.
cent of GDP was lower by 15.5 per cent than the
Imports of goods and services were expected
previous year.
External debt servicing, which was
to fall in 1998 as a result of import restrictions and
equivalent to 13.8 per cent of the country’s merchan-
an
dise exports and
acute
imports
shortage
rose
by
of
49.2
foreign
per
exchange.
cent
in
Total
1997
mainly
because of a rise in capital goods imports related to
the construction of the Yadana gas project.
government
required
conducted
in
currencies,
affecting
36
dollars
all
border
instead
transactions
of
trade
to
The
be
partner-country
with
China
and
1.9 per cent of GDP
declined substantially in 1998.
in
1997,
The total outstand-
ing external debt of the public sector increased by
about $443 million to $15,468 million in 1998.
The
external borrowing of Bangladesh consists mainly of
medium-term
terms.
and
long-term
debt on concessional
FDI, which was directed primarily to the elec-
cent to
$147.3
million
compared
with
the
same
tricity, energy and physical infrastructure sectors, was
period of 1997.
estimated to increase to $225 million in 1998.
of $129 million flowed to the industrial and energy
crisis, key investors from China, Malaysia, Singapore
and Thailand are not considering expansion in their
sector in the first six months of fiscal year 1998.
investment and previously approved projects have
This
was
the
result
of
prior
approvals
FDI
of
large
Following the regional economic
been scaled back.
In 1997, a significant amount of
Foreign portfolio investment, however,
foreign currency deposits, amounting to 10 per cent
declined in 1996 and 1997 as a result of the stock
of total deposits in dollar terms, was withdrawn from
market crash in November 1996.
The outflow of
Cambodia
owing
economy.
Foreign currency deposits in Cambodia
investments.
foreign
portfolio
foreign
exchange
capital
had
little
impact
on
as
the
amount
was
the
to
waning
confidence
in
the
a
accounted for 60.3 per cent of M2 at the end of
relatively small proportion of the total transactions in
the first quarter of 1998, a slight decline from 65.1
the foreign exchange market.
per cent a year earlier.
market
Despite the governm ent’s
policy to strengthen the use of the riel in domestic
Bhutan’s current account deficit has generally
been offset by inflows of concessional loans and
grants.
At the sixth round-table meeting, held in
Geneva in 1997, multilateral financial institutions and
bilateral sources pledged $450 million in support of
Bhutan’s eighth five-year plan (1997-2001).
areas
under
hydropower
the
plan
and
include
industries,
Core
development
infrastructure,
of
social
services, human resources, and agriculture, livestock
and forestry.
Large-scale assistance from India has
led to a significant increase in net foreign aid.
the
ngultrum
has
depreciated
by
100
cent
debt obligations in terms of ngultrum have increased.
The convertible currency debt, disbursed in the form
of long-term loans to the public sector, was $122.9
Although the amount of convertible
currency debt in dollar terms increased only by 7
per cent between 1991 and 1997, it increased by
107 per cent in local currency terms, and this has
been
seriously
budget
outlay.
affecting
The
the
external
government’s
debt
annual
situation
will
furtherm ore change dramatically when the loans for
the Tala, Kirichu and Basochu power projects are
disbursed.
External borrowing for rural electrification
and road construction was also expected to increase
as grants are declining.
The balance-of-payments
surplus, however, has led to a rapid accumulation of
foreign exchange reserves.
As of June 1998, total
progress
has
been
slow.
The
dollarization of the Cambodian economy has raised
costs for investors from countries whose currencies
have
depreciated
reduced
the
against
country’s
short-term
debt
but
the
dollar
comparative
labour-intensive exports.
and
has
advantage
in
External debt, excluding
including
obligations
to
IMF,
amounted to an estimated $2 billion by the end of
1997.
Bilateral debt accounted for 86 per cent of
total debt.
Since
per
against the dollar over the past seven years, external
million in 1997.
transactions,
Foreign aid and concessional financing covers
the
current
account
deficit
Democratic Republic.
of
the
Lao
People’s
Grants rose to $98 million in
1997 from $82 million in the previous year, with
bilateral grants accounting for 80 per cent of total
official
transfers,
whereas
increased to $180 million.
loan
disbursements
Inflow of grants continued
to be strong in 1998; grants increased by 10 per
cent during the first nine months of 1998 compared
with the same period in 1997.
However, disburse-
ment
slower during
of
loans
same period.
was
somewhat
the
Interest payments on official borrow-
ings remain low because of the concessional nature
of most loans.
Between 1988 and March 1998, the
Lao People’s Democratic Republic approved a cumulative total of $6.7 billion in FDI, of which Thailand
accounted for almost 39 per cent at $2.6 billion,
followed by the United States with $1.5 billion and
the Republic of Korea with $500 million.
In 1997,
external reserves at $215.4 million amounted to 24
foreign investment fell to
months
million in the previous year owing to a decline of
of
import
cover,
compared
with
$171.4
million in June 1997.
investment
from
Most aid to Cambodia was suspended in mid1997 in the wake of political problems.
Moreover,
approved FDI in the first half of 1998 fell by 63 per
Asian
in
hydropower.
countries
hit
$104
million from
Investment
hard
by
the
$176
approvals
regional
economic crisis such as Malaysia, the Republic of
Korea and Thailand have fallen sharply, and overall
FDI approvals plummeted in 1997.
Many projects,
37
were
Myanmar before lending was frozen in 1988, to fund
approved before the crisis, are currently on hold. To
work on Yangon’s Mingaladon International Airport.
win back investment, the government has announced
Myanmar’s external debt stock fell to $5.2 billion in
particularly
plans
those
to
allow
from
more
Thailand,
generous
which
tax
breaks
for
1996
from
$5.8
billion
in
1995,
owing
to
the
investors, but these efforts are unlikely to have the
revaluation of the debt, of which around 50 per cent
desired effect as long as regional investors remain
is denominated in yen.
short of funds.
long-term debt accounted for 93 per cent of the total
debt
The
been
balance
in surplus
of
in
payments
of
recent years.
Maldives
has
However,
this
stock.
Public sector medium- and
Short-term
debt
is
small,
in
part
because of Myanmar's limited access to financing.
As of February 1998, only $1,950 million out of the
surplus fell to around $25 million in 1997 and 1998
$6.8
from $44 million in 1996.
disbursed since approval of the Foreign Investment
Although disbursements
billion
in
approved
FDI
projects
has
been
from official sources declined from $31.9 million in
Law in 1988.
1995 to $25.2 million in 1996, loans from private
1997, at about $1 billion, was significantly lower than
creditors increased during 1996.
the $2.8 billion approved in 1996, but disbursements
Loans from ADB
Approved investment in fiscal year
comprised nearly half of total disbursements from
improved in 1997.
multilateral
and
or industrial estates projects were approved in 1997.
constituted
The oil and gas sector attracted the largest share of
the
creditors,
Nordic
while
Development
approximately a fifth.
for
almost
half
those
Fund
from
IDA
each
The Kuwait Fund accounted
of
total
bilateral
disbursements.
No new hotels, tourism projects
FDI in 1997, overtaking the manufacturing sector.
Owing to the regional economic crisis, investors from
Medium-term and long-term public debt to finance
ASEAN countries, however, have made adjustments
development projects, and short-term liabilities of the
to ongoing contracts and delayed new investment in
Maldives
Myanmar.
Monetary
Authority
and
banks comprise external debt.
the
commercial
The ratio of medium-
Private
transfers,
consisting
tances from overseas workers,
of
remit-
were estimated at
term and long-term debt to GDP rose to nearly 60
$430 million in 1997, equivalent to 46 per cent of
per cent in 1996 but short-term external liabilities of
total exports.
the
banking
system
have
declined.
Total
debt
service rose by 8 per cent from $10.7 million in
1995 to $11.6 million in 1997.
Net international
In Nepal, the overall balance of payments was
in surplus in 1998 as a result of larger net capital
reserves, however, steadily increased during 1997 as
inflows than the current account deficit.
a result of continued tight monetary policy and a
decreased to $11.1 million in 1998 compared with
buoyant tourism sector.
$28.4 million in 1997, there was a large increase in
foreign
Myanmar faces balance-of-payments difficulties
as FDI inflows and remittances from migrant workers
decline.
inflows
The limited reserves and lack of capital
necessitate
exchange
While FDI
continued
restrictions.
trade
Although
and
most
foreign
multilateral
and bilateral donors ceased significant lending from
1998, official grants increased in the 1990s as a
result of Japan’s debt relief programme.
In 1996,
aid.
However,
international
donors
have
expressed reservations at the continued high levels
of assistance to Nepal, because of their concern
over
the
poor
economic
performance,
partly attributable to continuing
political
which
is
instability.
Frequent changes of government and of high-level
officials were
seen
as a deterrent to
trade
and
investment.
Myanmar received $116 million in grants, of which
65 per cent was from Japan under the Overseas
Financial sector developments
Economic Cooperation Fund debt relief programme
which autom atically converts Myanmar’s debt service
To
contain
upward
pressure
on
prices
in
obligations into grants.
As of February 1998, about
Bangladesh, the bank rate was raised to 8.0 per
$550
service
to
cent from 7.5 per cent in November 1997 while the
About 80 to 90 per cent of
increase in M2, at 10.2 per cent, was kept below the
million
of
debt
Japan was converted.
used
grants
are
Japan
also
loan,
which
38
to
service
announced
was
in
payments
foreign
1998
originally
a
owed
expenditure.
$20
earmarked
million
for
expansion target of 12.3 per cent for fiscal year
1998.
Although nominal interest rates changed only
marginally
between
1997
and
1998,
real
interest
rates declined substantially because
inflation rate.
of the
rising
The liquidity position of the banks
remained comfortable in 1998.
Bangladesh has also
foreign exchange availability to enable convertibility
in
current
account
administrative
transactions,
sectoral
interest
removed
the
controls
and
rate
undertaken a financial sector reform programme to
allowed the conversion of the Unit Trust of Bhutan
strengthen the central bank’s monitoring and super-
into
visory functions,
National
programme
to
as well as a bank
bring
about
restructuring
improvements
in
the
operations of national and private commercial banks.
the
second
Bank,
comm ercial
bank,
in which ADB
the
and
Bhutan
Citibank sub-
sequently acquired shares of 20 per cent each.
of May 1998,
As
12 com panies were listed with the
A report of the Banking Sector Reform Commission
Royal Securities
has recommended that the government should close
raised
non-profitable branches of nationalized commercial
Bills from the Royal M onetary Authority of Bhutan
banks or merge them with profitable ones.
Financial
Exchange of Bhutan
additional
capital
through
and seven
primary
issues.
and government bonds were introduced through the
institutions are burdened with huge non-performing
facility in December 1993 and
loans.
The central bank of the country, Bangladesh
The
Bank,
is
through the Securities Exchange reflects in large
making
serious
efforts
to
improve
the
issuance
recovery of overdue loans and enforce discipline in
part
the activities of the banking system.
gramme.
has
been
established
in
A task force
Bangladesh
oversee the progress of loan recovery.
Bank
against the classified loans have been issued by
Bangladesh
Bank
classification
and
currently
implemented.
Three exclusive loan courts and two
provisioning
a
phased
system
is
loan
being
exclusive bankruptcy courts have been established in
Dhaka and Chittagong.
The
monthly
of
the
Dhaka
Stock
Exchange has declined since the stock market crash
The total market value of all
listed securities in June 1998 was $1,336 million, or
46.7 per cent lower than in June 1997.
The total
number of listed securities and of shares, mutual
funds,
certificates
and
debentures,
increased since June 1997.
boosted
by the
ongoing
in January
public
com panies
governm ent’s
1996.
shares
divestment
pro-
The
direct
Government
involvement
of
in the
Cambodia
financial
reduced
its
sector through
conversion of three joint-venture banks into locally
incorporated
private
banks
Municipal Bank in 1997.
and
liquidation
of the
Furthermore, in view of the
limited capability of the National Bank of Cambodia
to
supervise
and
regulate
the
banking
sector,
international audit firm s conducted on-site inspection
index
in November 1996.
new
to
Guidelines
for the classification of loans and making provisions
and
the
of
however,
has
The stock market was
announcement in the fiscal year
of eight banks.
Commercial banks were required by
the central bank to submit, on a monthly basis, a list
of
loans
exceeding
classification
$100,000,
criteria.
according
The
central
to
loan
bank
also
increased the minimum capital requirement for new
banks to $15
million, the
reserve
requirement
in
1998 from 5 to 8 per cent and the capital guarantee
deposit from 5 to 10 per cent to ensure liquidity and
solvency of the banking system.
Although the stock
1999 budget that the source of income invested in
of private sector credit increased by 18 per cent in
the purchase of shares in the primary and second-
dollar terms in the first half of 1997, credit activity
ary
markets
discrim inatory
traded
would
be
investigated,
high-income
financial
non-financial
not
tax
institutions
institutions
would
rates
and the
on
publicly
stalled in the second half of the year, leading to 2
per
cent
lower
stock
by
the
end
compared
with
compared with the end of June 1997.
be
and
exchange
ended
law
adopted
in
August
of
the
year
The foreign
1997
permits
residents and non-residents to open and maintain
standardized at 35 per cent.
foreign exchange accounts with any authorized bank.
Limited lending opportunities in Bhutan have
caused a continuing build-up of excess reserves in
financial institutions.
The excess reserves of the
Bank of Bhutan amounted to slightly over 50 per
cent
of
deposits
the
of
deposit
large
base,
public
privatized corporations.
composed
enterprises
mostly
or
of
recently
In 1997, Bhutan liberalized
There
are
no
restrictions
on
foreign
exchange
operations, including buying and selling of foreign
exchange,
settlements
transferring
and
funds,
capital
making
flows
international
undertaken
by
intermediaries authorized by the National Bank of
Cambodia.
Following a m arket-based exchange rate
policy, no foreign exchange auctions were held in
39
the second half of 1997, and the spread between
treasury bills carrying annual interest rates of 4 per
the official and the market rate was kept below 2 per
cent that are automatically rolled over.
cent throughout the year.
in private sector activities, together with real negative
However, the
National
High growth
Bank of Cambodia resumed its currency auctions in
interest rates, has led to stronger demand for private
February 1998.
sector
the
credit.
Central
Five
Bank
state-owned
of
the
banks,
Myanmar,
namely
the
Myanma
Republic,
Economic Bank, the Myanma Foreign Trade Bank,
commercial bank interest rates remained unchanged
the Myanma Investment & Commercial Bank and the
In
the
Lao
People’s
Democratic
throughout 1997, leading to negative real interest
Myanma
rates.
dominate the banking system.
In view of rising inflation and the declining
Agricultural
&
Rural
Development
Bank
The sector remains
exchange rate of the new kip, the Government of the
underdeveloped, although 19 private banks, of which
Lao People’s Democratic Republic resumed sales of
four are joint ventures with the government, have
treasury
started operations since
and
central
bank
bills,
encouraged
in-
1992.
Since commercial
reintroduced
banks are required to set deposit rates no lower
In 1994,
than three percentage points below the central bank
$22.4 million, or 1.6 per cent of GDP, was needed to
re-discount rate and lending rates no higher than six
cover debts
percentage points above the central bank re-discount
creases
in
bank
interest
rates
and
minimum deposit rates in early 1998.
inherited
by
state-owned
banks from the former central bank.
commercial
The necessary
rate, nominal interest rates, which
have
remained
capital was raised through the issue of bonds and
unchanged since mid-1996, are well below inflation.
injected into the banking system with the assistance
Since real interest rates have thus been negative,
of ADB.
high
An independent audit in 1997 indicated that
non-performing
loans
had
virtually
rendered
money
has
increasingly
non-interest-bearing.
The Maldives banking system consists of the
M onetary Authority
and four commercial
banks, three of which are branches of foreign banks,
while the fourth
is the
Bank
of Maldives.
The
Maldives M onetary Authority has the normal powers
and obligations
issuing
of a central
currency,
and
bank,
licensing,
which
include
supervising
regulating commercial bank operations.
securities
held
in
foreign
currencies.
Until
mid-1996, however, foreign exchange accounts were
these banks insolvent.
Maldives
been
currency deposits or in foreign
and
There is no
In March
1998,
the
Central
Bank of Myanmar suspended the licences held by
nine
private
transactions
state-owned
banks
and
to
operate
limited
banks.
such
The
foreign
exchange
operations
proportion
to
of
two
non-
performing loans ranged from 2 to 12 per cent for
private banks as of end February 1998 and was
expected to increase with the slump in the property
sector.
market or stock market in the country.
Since nominal interest in Nepal has remained
Monetary policy is used to support economic growth
relatively stable despite the decline in inflation from
with low inflation.
8.1 per cent in 1996 to 4 per cent in 1998, there
In Maldives, commercial bank
lending and deposit rates have remained relatively
has been an increase in real interest rates.
stable.
of the economic slowdown, the nominal
Total assets and
liabilities of commercial
banks increased from 1,748.4 million rufiyaa at the
end of 1995 to 2,124 million rufiyaa at the end of
1996.
In view
refinance
rate of the central bank was lowered from 11 per
cent in 1997 to 9 per cent in 1998.
At the same
R eflecting the tight credit conditions, reserves
time, maturity restrictions on governm ent securities
have risen rapidly while the share of credit in the
for re-discounting and secondary transactions were
total comm ercial banks assets declined to 41 per
removed and the cash reserve
cent in 1996.
mercial banks was lowered from 12 per cent to an
average of 10 per cent.
In
Myanmar,
total
liquidity
has
expanded
ratio of the com-
These measures improved
the liquidity position of the banks and in fact they
annually at 40 per cent since 1994 owing to the
were having excess liquidity in 1998.
financing of public sector deficits, which reached 7
been
per cent of GDP in 1997.
commercial banks in recent years, increasing from
The Central Bank of
a fast increase
in
non-performing
There has
loans
of
Myanmar carries out treasury functions and finances
11.4 per cent in 1994 to 13.9 per cent in 1995 and
the bulk of the public sector deficit by purchasing
further to 20 per cent in 1996.
40
The issues of large sums of non-performing
Policy issues and responses
loans,
restructuring
of
private
banks
and
the
With an average growth rate of over 3.5 per
performance of nationalized commercial banks are
cent in the past two decades, poverty alleviation
still some of the pressing concerns faced by the
continues to be the major challenge for the least
banking
developed countries.
being made to introduce transparency in financial
To break through the conti-
sector
in
nuing poverty syndrome, the existing pace of GDP
transactions,
growth needs to be accelerated.
developed countries,
among
other things,
measures
This will require,
to
ameliorate
the
these
especially
countries.
in
the
Efforts
South
in terms
Asian
are
least
of supervision
prudential regulation by the central banks.
and
However,
existing state of physical infrastructure, diversify ex-
the pace and effectiveness of implementation require
ports, improve banking systems, and expand social
improvement.
and human capital.
The
Although
foreign
investment,
especially
in
effectiveness
of
m onetary
policy
is
a
cause for concern owing to the problem of currency
recent years, is usually welcomed in these countries,
substitution
needed structural reforms are often delayed because
where foreign currencies are widely used as means
of political problems.
The regional economic crisis
in
some
domestic
currency.
economic
national
monetary
because
of concerns
over the
developed
countries,
of payment because of the lack of confidence in the
might also inadvertently result in slower progress on
reforms
least
This
and
undermines
exchange
the
rate
role
of
policies.
implications of developments in the external sector
Promotion of the use of domestic currency cannot
for both growth and stability.
be accomplished by mere rigid legislation but re-
ASEAN
People’s
membership
status
Democratic
However, the recent
accorded
Republic
to
and
the
Lao
quires the creation of a sound financial environment
is
which fosters confidence in the value of the domestic
Myanmar
expected to open up greater trade opportunities and
currency.
to increase inflows of FDI from other ASEAN mem-
effectively, would enhance such confidence.
Financial sector reform, if implemented
ber countries in the medium term.
The need to create an enabling environment
Pacific island economies
for the private sector has been increasingly recognized by the least developed countries.
To achieve
this goal, policy measures aimed at privatization of
public
reforms
enterprises,
have
deregulation
been
implemented
degrees of effectiveness.
of
state-owned
Bangladesh,
controls
and
with
varying
In particular, privatization
enterprises
has
been
slow.
In
example,
the
government
still
for
over 80
per cent of the
Growth performance
structural
assets
in the
banking, utilities and infrastructure sectors and over
Except for Papua New Guinea and Solomon
Islands, which
trading
have substantial
links
with
Asian developing countries, and to a lesser extent,
Fiji, the Asian economic crisis did not have a direct
impact on Pacific island economies.
However, many
of them were indirectly affected in varying degrees
40 per cent of the country’s manufacturing assets.
because of the impact of the crisis on Australia,
Since the state-owned sector has continued to make
Japan and New Zealand, which together absorb a
considerable
sizeable portion of Pacific island countries’ exports.
losses,
partnership
with
the
private
sector, or leasing as a means to limit the deficit of
In addition, the drought associated with the El Nino
the state-owned enterprises has been considered in
weather phenomenon
some countries.
countries and was largely responsible for their poor
For instance, in Bangladesh an
infrastructure development company has been set up
under
the
concessional
aegis
loan
of
of
the
$225
develop physical infrastructure.
affected
most
Pacific
island
economic performance.
government
with
a
million
IDA
to
As can be seen from table II.5, three out of
Nepal has taken a
nine economies recorded negative growth rates in
from
decision to privatize a power company so that the
1997.
private sector will be able to take the lead in the
are
development of hydro-power.
Samoa
In contrast, three out of six for which data
available
suffered
and Vanuatu
negative
were
least
growth
affected
in
1998.
by
the
41
Table II.5. Selected Pacific island economies: growth rates, 1995-1998
(Percentage)
Rates of growth
GDP
Cook Islands
Fijia
Agriculture
Industry
Services
5.0
2.0
-8 .9
3.6
4.6
- 1 .3
5.2
2.4
1.8
1995
1996
1997
1998
-5 .7
-5 .3
0.5
4.5
1995
1996
1997
1998
2.5
3.4
-3 .3
1.8
-1 2 .5
-1 0 .5
-
2.0
-3 .9
-
6.1
1995
1996
1997
2.8
1.7
2.0
-8 .3
-9 .4
2.9
1995
1996
1997
1998
-4 .7
3.9
-5 .2
1.5
0.7
3.0
- 8.0
Samoa
1995
1996
1997
Solomon Islands
1995
1996
1997
1998
- 2.8
1995
1996
1997
1998
Kiribati
Papua New Guinea
Tonga
Tuvalu
Vanuatu
3.7
3.4
2.6
- 6.0
-9 .5
7.6
-1 2 .3
9.0
-9.1
0.5
4.2
1.5
9.5
5.9
3.4
11.5
4.2
26.6
14.0
-0 .5
2.4
7.6
3.5
0.1
18.7
3.5
-2 .7
-7 .2
39.7
2.6
- 1.1
- 1.2
-0 .5
4.9
-5 .4
-1 .3
13.1
-7.1
2.1
- 0 .9
1.6
2.7
1995
1996
1997
2.0
0.5
0.5
1.0
-6 .5
2.7
2.7
- 9 .2
3.0
2.9
1995
1996
1997
1998
3.2
3.0
2.3
3.7
6.4
6.4
- 9.2
1.4
6.2
2.6
3.9
-
2.5
2.5
1.7
3.5
-1 .5
0.3
13.1
1.6
3.3
2.7
1.8
11.6
- 1.2
4.9
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); and national sources.
Notes: Data for 1998 are estimates.
power; and construction.
a
Industry comprises mining and quarrying; manufacturing; electricity, gas and
Real GDP at factor cost.
drought during 1997 and hence had a better growth
to the effects of the drought.
performance.
Papua
Fiji, Papua New Guinea and Tonga
actually recorded contractions
during the year.
in economic growth
Much of the poor performance in
GDP growth of these countries in 1997 is attributed
42
New
Guinea
and
In 1998, Cook Islands,
Vanuatu
to have positive GDP growth rates.
were
expected
On the other
hand, Fiji, Solomon Islands and Tonga experienced
negative GDP growth in 1998.
The Cook Islands economy grew at 0.5 per
cent in 1997 after recording an average negative
growth of 5.5 per cent in
An
per cent of GDP in 1995 to 7.8 per cent in 1997.
The deficit for 1998 was estimated to be around 0.9
coupled with an improvement in the performance of
per cent of GDP.
tourism
sector,
contributed
recovery during the
year.
to
1996.
However, it
resulted in increased fiscal deficit from as low as 0.6
increase in small-scale economic activities in 1997,
the
1995 and
not have much impact on the economy.
the
economic
The tourism
Kiribati
industry,
which is the largest private sector activity in the
recorded
an estimated
2.0
per cent
GDP growth in 1997 against 1.7 per cent in 1996.
country, performed well in the first half of 1997 but
Fishing and copra, which are the key comm odity
weakened
sectors of the Kiribati economy, contracted in 1997
year.
somewhat
in
the
latter
half
of
the
GDP was estimated to grow at 4 to 5 per
as a result of poor climatic conditions.
Kiribati’s new
this
national development strategy calls for a reduction in
estimate were that there would be more investment
and reform of the public sector, attracting foreign
in hotels and that pearl exports would continue to
investment and restructuring the budget in favour of
increase.
private sector development.
cent
in
1998.
Key assumptions
underlying
The Kiribati trust fund
reached a record level of $ A 51 1 million at the end of
After an average annual growth of 3.4 per cent
May 1998.
More of the resources under the trust
between 1993 and 1996, Fiji’s economy contracted
fund
to
by
estimated to
and less in financing government spending, if the
decline further in 1998 with a negative growth of 3.9
government is to improve the long-term prospects of
per cent.
the economy.
1.8
per cent
coincides
in
1997
and was
Although the timing of Fiji’s recession
with
the
Asian
economic
crisis,
need
invested
in
productive
sectors
the
Papua
exposure of the Fijian economy to Asian developing
economies is minimal.
be
The current recession was
partly due to the severe drought, which began in the
New
Guinea
experienced
dramatic
fluctuations in growth performance in line with shifts
in the output of the minerals sector.
After contract-
second half of 1997 and continued into the second
ing 3 per cent in 1990, GDP growth entered double
half of 1998.
figures before peaking at 16.6 per cent in
The agricultural, forestry and fishing
1993.
sectors of the economy declined by 12.5 per cent in
The economy swiftly turned around and contracted
1997,
by 4.7 per cent in 1995 before expanding by 3.9 per
with
sugar
cane
production,
Fiji’s
most
important cash crop by far, declining 23.5 per cent.
cent in 1996.
Non-agricultural production, excluding sugar manu-
by
facturing,
conditions.
increased
by
1.8
per
cent
in
1997.
5.2
per
The economy then contracted in 1997
cent,
partly
as
a
result
of
drought
Recovery in 1998 was subdued owing to
Manufacturing output, excluding raw sugar produc-
a large slump of 9.5 per cent in the agriculture,
tion, recorded a growth of 2.4 per cent in 1997.
forestry and fisheries sector.
the
other
hand,
the
services
sector
recorded
On
a
Estimated GDP growth
for 1998 is 1.5 per cent.
moderate growth of 1.8 per cent in 1997 with strong
The
growth in tourist-related services being partially offset
by
declines
services.
in
finance,
The
insurance
construction
and
industry,
recorded a small reduction in output.
crisis
however,
forestry sector.
Lower lending
on
biggest
business
Papua
impact
New
of
the
Guinea
Asian
has
been
economic
on
the
Exploitation of Papua New Guinea’s
extensive forestry resources gathered pace in 1993
rates in 1998 gave some impetus to the construction
and 1994 with the boom in log prices.
sector,
output of the forestry sector accounted for 6 per cent
but
on
the
whole
investment
remained
of GDP and exports of logs made up 15 per cent of
subdued.
total exports.
A number of other factors contributed to the
decline
By 1996, the
in
Fiji’s
GDP
growth
in
1997
and
1998.
With almost all log exports going to
Japan and the Republic of Korea, demand for logs
dropped dramatically at the end of 1997 as the crisis
These include a slump in sugar exports, a continuing
took hold.
weakness in investment and a decline in consump-
into
tion largely resulting from the impact of the drought
down.
on factor incomes.
tially in 1998 and the value of exports was estimated
The government increased its
expenditure by 10 per cent during 1997 but this did
1998,
Weakness in demand for logs extended
resulting
in
many
operations
shutting
The output of the logging sector fell substan-
to be just half of that in 1997.
43
The
The output of the minerals sector decreased by
Solomon
Islands
economy
was
also
This dramatic
affected by the Asian economic crisis in 1997 and
outcome was due to the forced closure of the giant
Ok Tedi gold mine in August 1997 and interruptions
1998 because of its exposure to the region through
forestry exports. GDP grew only marginally at 0.1
to
per cent in 1997, following a growth of 3.5 per cent in
more than
20
per cent in
production
at
the
1997.
Porgera
gold
mine.
The
minerals sector accounted for 27 per cent of GDP in
1996.
1996, up from 15 per cent in the early 1990s, but
1998, with GDP growth estimated to have contracted
dropped to 22 per cent of GDP in 1997.
by 2.8 per cent.
production
Falling oil
also contributed to the decline
of the
minerals sector.
The
deregulation
of
Papua
New
Guinea’s
labour market in 1992 provided some impetus to the
slow but steady growth recorded in the manufacturing and construction sectors in recent years. The
commerce,
finance
and
business
services
sector
have also grown steadily. The output of the services
sector grew by 0.5 per cent in 1996 and by 4.2 per
cent in
1997.
An
expansionary budget provided
most of the source of growth in services in 1997.
The tightening of the public sector expenditure was
expected to reduce growth in services in 1998.
cent
in
1994,
Samoa’s
economy
recovered
A reduction in real government
spending
also
outcome.
The timing of the fiscal contraction was
contributed
to
the
poor
growth
unfortunate, but absolutely imperative for the new
government which took office in August 1997.
By the
end of 1997, debt-servicing liabilities were equivalent
to 12.2 per cent of GDP. The budget deficit for 1997
was 6.1 per cent of GDP. The government sought to
restore
confidence
management
1998.
by
and
introduced
planning
a
prudent
balanced
fiscal
budget
for
However, the collapse in tax revenue from log
exports was to result in total revenue falling below
expectations, and a budget deficit of about 2 per cent
of GDP for 1998 was expected.
Commercial agricultural production in Solomon
After recording a negative GDP growth of 7.8
per
The economy entered into a recession in
Islands is dominated by copra, palm oil and cocoa.
strongly in 1995 and 1996, with an average annual
Despite improving prices, copra and cocoa produc-
growth of 7.7 per cent.
tion has steadily declined through the 1990s.
Much of this growth was
This
generated by the private sector, with the agricultural
trend abated in 1997 with the Com modities Export
and
industrial
Marketing
GDP
growth
sectors
fell
to
performing
3.4
per
well.
cent
Although
in
1997,
this
Authority
allowing
improved
access
performance was still the best among the Pacific
hence a recovery in production to the
island countries.
1992.
The Samoan economy depends
for
producers by establishing more buying points and
In another policy
the
processing
levels of
Authority
of
copra
is
largely on agricultural production, which has been
encouraging
generally uneven for most of the 1990s.
add value, and a number of copra-crushing mills
Its depen-
downstream
move,
to
dence on a few commodities was clearly illustrated
have recently been established.
in
operational in 1999 and it is anticipated that raw
1994
when
the
economy
contracted
mainly
because taro, the main staple crop and a major
These will be fully
copra will no longer be exported after that.
export crop, was destroyed by a leaf-blight disease.
The
In 1996, however, fish production increased dramatically
and,
production,
together with
led
to
a
an
notable
expansion
overall
agriculture and fish production.
has grown significantly since
in copra
increase
in
Industrial production
1991
and is based
economy
of
Tonga
was
estimated
to
contract by 0.5 per cent in 1998 owing to the impact
of
the
drought
on
agricultural
production.
The
government’s revised figures show that the drought
has
extended
a
recession
which
began
in
1996
The restarting of
when the economy contracted by 1.1 per cent and
the local oil mill in 1996 injected cash into rural
continued in 1997 with a negative GDP growth of
mainly around coconut products.
households
through
the
purchase
of
coconuts.
Exports of copra, coconut oil and coconut cream
1.2 per cent.
Agriculture is Tonga’s most important
industry employing 70 per cent of the labour force
during the first half of 1997 were nearly 40 per cent
and comprising 31 per cent of GDP.
higher than in the same period in 1996.
Available
of 5.4 per cent in 1996, agricultural output declined
data indicate that Samoa’s economy recorded further
further in 1997 largely as a result of a cyclone
improvement in the first part of 1998, with increased
early in the year.
export earnings,
exports.
another major contraction in 1998.
44
especially from tourism
and fish
After a decline
The worsening drought led to
Tonga’s manu-
facturing sector is small and shrinking, comprising
just 3.2 per cent of GDP in 1997 and employing only
4 per cent of the workforce.
begun
to
emerge
in
the
New ventures have
form
of
downstream
processing of agricultural produce.
It is estimated that 50,000 Tongans live
abroad, mainly in Australia, New Zealand and the
United States. Close ties with relatives in Tonga are
typically maintained.
Private transfers from abroad
and remittances are the most important sources of
These earnings were
foreign exchange earnings.
more than three times greater than from merchandise exports in 1997 and represented 20 per cent of
GDP.
In addition to being unaffected by the fallout of
the Asian economic crisis, Vanuatu’s economy also
escaped any serious effects from the recent drought.
GDP growth in 1997 was 2.3 per cent, following 3.0
per cent GDP growth in 1996 and 3.2 per cent in
1995.
1998,
GDP growth was estimated at 3.7 per cent in
with a small rebound in construction and
higher
output
in
agriculture.
An
expansionary
budget provided the stimulus to growth
in 1998.
Little data on other small Pacific island
countries are available.
However, several of them,
including
the
Northern
Mariana
Islands,
French
Polynesia, Guam, New Caledonia, Palau and Tuvalu
were expected to record GDP growth rates of
between 2 and 5 per cent in 1997 and 1998.
Northern
Mariana
Islands
has benefited from
garment manufacturing and exports, while growth in
Guam was mainly due to the tourism industry.
Growth
in
French
Polynesia
is
being
driven
by
French-funded infrastructure spending, which was
started in order to compensate the islands for the
loss of revenue caused by the French nuclear testing
programme in 1995 and 1996. Palau’s economy has
been booming, with nominal GDP growth averaging
24 per cent annually in 1994-1996, while Tuvalu’s
economy is estimated to have recorded 2.5 per cent
growth in 1996 and 1997.
Inflation
Fiji’s inflation rate increased to an estimated
5.4 per cent in 1998 from 3.4 per cent in 1997,
to
reflecting the twin impact of the 20 per cent devalua-
increase to 3.4 per cent of GDP from 1.9 per cent
tion of the local currency against the United States
dollar at the beginning of 1998 and the impact of the
The
budget
deficit
for
1998
was
expected
in 1997, despite the introduction of the value-added
tax in August 1998.
drought (table II.6). The currency was long overdue
for depreciation, given that the main trading partners
Almost 90 per cent of Vanuatu’s exports are
of Fiji are Australia, Japan, New Zealand, the United
agricultural products, with the remainder comprising
mainly tim ber exports. The agriculture, forestry and
Kingdom and the United States, all industrialized
nations recording low inflation rates in recent years.
fisheries sector has shown steady growth in recent
Growth in the sector in 1997 was 3.3 per
The real effective exchange rate gradually appreciated through the 1990s until 1997, when it was 12
cent and it was estimated to be 2.7 per cent in
per cent higher than in 1990. The devaluation of the
1998. The weaker performance in 1998 was despite
Fiji dollar delivered a one-time hike in the price level
strong
in 1998.
Food prices increased more sharply than
non-food items and largely contributed to the rise in
years.
growth
in
copra
output,
Vanuatu’s
most
important agricultural produce. The growth in copra
output has been facilitated by the establishment of
more
buying
Marketing
points
Board.
by the Vanuatu
Weakness
in
the
Commodities
the inflation rate, reflecting a significant share of
imports in food consumption.
agricultural,
forestry and fisheries sectors in 1998 can be traced
to lower beef production, a substantial decline in
output of cocoa and a fall in export demand for
forestry products.
Vanuatu’s construction sector
Papua New Guinea floated its currency in 1994
and it started to depreciate. After maintaining a low
inflation rate since independence, the depreciation of
boomed in the early 1990s, with output reaching 6.5
the kina saw the country enter into a new era of
inflation. The inflation rate jum ped to 17.3 per cent
per cent of GDP by 1995.
in 1995.
The construction sector
With continued depreciation of the kina
slowed substantially in 1996, offsetting gains made
in copra and tourism, and continued to be weak in
against the Australian dollar, inflation reached 11.6
1997.
that there has been some recovery in 1998, but
1997.
The impact of the drought, the Asian
economic crisis and the slump in prices of oil,
further recovery in 1999 will be constrained by the
copper, gold and logs adversely affected exports in
high interest rate policy.
late 1997, leading to another dose of depreciation of
An increase in building approvals indicates
per cent in 1996 before settling to 3.9 per cent in
45
Table II.6. Selected Pacific island economies: summary of macroeconomic indicators, 1995-1998
(Percentage)
1996
0.6
4.3
2.2
-5 .8
0.9
3.1
-7 .8
-8 .7
3.4
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
-0 .5
13.7
17.3
0.5
30.7
11.6
0.2
- 2.0
7.7
3.9
3.0d
11.0
Budget balance/GDPe
Money supply growth (M2)
Inflation ratec
-2 7 .9
-1 8 .8
4.9
7.5
16.5
10.5
8.4b
5.7f
Budget balance/GDPe
Money supply growth (M2)
Inflation ratec
-8 .5
9.2
9.7
- 6.1
- 6.1
6.7
8.1
-2 .3
-0 .9 g
16.0
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
17.1
1.4
2.8
3.0
9.1
2.1
2.0b
3.5
-2 .3
10.1
0.9
-1 .9
-0 .4
1.3
-3 .4
2.2b
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
Fiji
Papua New Guinea
Samoa
Solomon Islands
Tonga
--
21.8
1.0
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
Vanuatu
1997
1995
15.3
11.8
13.3
2.2
1998
-0 .9
-1 .4 b
5.4
- 1.0
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); IMF, International
Financial Statistics, vol. LI, No. 11, November 1998; and national sources.
Note:
a
b
c
d
e
f
g
Data for 1998 are estimates.
Including National Bank of Fiji funding and asset sales.
January-June.
Refers to changes in the consumer price index.
January-March.
Excluding grants.
Annual average up to April.
January-September.
the kina by 20 per cent against an already weak
increasing money supply which has followed large
Australian dollar. This caused the inflation rate to
jum p again to 11 per cent in 1998.
fiscal
Samoa’s
inflation
rate
has
been
generally
volatile and high, ranging from 7.5 to 18.4 per cent
between 1992 and 1997, with the exceptions of 1993
and 1995 when the rate was below 2 per cent.
The
increase in Samoa’s inflation rate to 10.5 per cent in
1997 from
7.5
per cent in
1996 can
attributed to increases in food prices.
largely be
There was a
large increase in money supply during the year in
the wake of the high budgetary deficit in the two
preceding years.
On an annual average basis, the
inflation rate reached 5.7 per cent at the end of April
1998.
The inflation rate of Solomon Islands through
the 1990s has been high, largely due to a rapidly
46
deficits
Between
1990
and
and
heavy
1997,
government
the
borrowing.
average
inflation was 10.5 per cent per annum.
rate
of
In 1996, the
inflation rate reached 11.8 per cent but it dropped
back to 8.1 per cent in 1997.
The price index for
domestically produced items increased by 12.5 per
cent and for imported items by 5.0 per cent.
The
real exchange rate of the Solomon Islands dollar has
been steadily appreciating in the 1990s, with nominal
depreciations falling short of the high inflation rate.
This was addressed in Decem ber 1997 with a 20
per cent devaluation of the Solomon Islands dollar,
which is managed against a basket of currencies.
Around half of Solomon Islands consumption goods
are imported, so the feed-through of the devaluation
on prices was significant.
The inflation rate for 1998
was estimated at 16 per cent.
Prior to 1993, large fiscal deficits and rapid
expansion in the money supply contributed to
their legal currency, and with imports equivalent to
double-digit inflation rates in Tonga.
Since then, the
prices are heavily influenced by price movements in
government
macroeconomic
the United States.
has
pursued
stable
60 per cent of GDP
in both countries,
domestic
Estimates indicate that the infla-
management, with moderate growth in the money
supply and the government budget turning into
tion rate in the Federated States of Micronesia has
been around 4 per cent in recent years. The rate of
surplus.
inflation in Marshall Islands during 1996 was 6 per
has
As a result, the inflation rate since 1993
been
low.
In
1998,
the
inflation
rate was
cent and fell slightly to 4 per cent in 1997.
estimated to rise to 3.5 per cent from 2.1 per cent in
1997, partly because of a small depreciation of the
local
currency
introduced
1998.
in
1998
in the
after
exchange
more
rate
flexibility was
regime
early
Trade performance
in
Apart from Papua New Guinea, most Pacific
Before 1998, the pa’anga was pegged to a
weighted basket of the Australian, New Zealand and
island
United States currencies.
chandise trade balance from 1993 to 1997.
These countries are the
countries
recorded
main sources of Tonga’s imports and so low inflation
though some of them
rates in these nations have been reflected in Tonga’s
low inflation rates.
services
account,
remittances,
deficits
their
recorded surpluses
especially
these
on
were
from
not
merEven
on the
tourism
sufficient to
and
prevent
them from recording deficits on their current account
Vanuatu’s
inflation
rate
has
declining since the early 1990s.
been
low
and
balance.
The inflation rate
The drought caused Fiji’s merchandise exports
for 1997 was 1.3 per cent, up slightly from 0.9 per
Imported inflation has been
to decline significantly in 1997 to $486 million from
the main influence on Vanuatu’s inflation rate; with
$583 million in 1996. Exports of sugar, the country’s
most important export commodity, fell in volume
cent recorded in 1996.
43 per cent of the country’s imports coming from
Australia, the exchange rate relative to the Australian
dollar and Australia’s inflation rate are particularly
terms.
important
influences.
insulated
remaining
relatively
With
stable
the
exchange
against
the
rate
Australian
The
pounded
weak
the
world
problem.
from
prices
for
However,
weak
prices
sugar
Fiji
is
com -
partially
because
of
the
preferential arrangements that it has with EU, which
dollar, Vanuatu’s low and declining inflation rate very
allows its sugar to be exported at guaranteed prices
much reflects that of Australia.
which
1997
However, late in
and continuing into 1998, the vatu appreciated
significantly
against the Australian
New Zealand dollar.
dollar and the
With inflation in these countries
are
higher than
decline in demand
world
market
in Asian
prices.
markets saw
A
lumber
exports drop in 1997. W eakness in the price of gold
also
resulted
in
a
decline
in the
value
of
gold
being low in 1998 and appreciation of the exchange
exports, although volumes remained stable.
rate,
the devaluation of the Fiji dollar gave added impetus
to manufacturing exports.
However, the worsening
inflation
in
Vanuatu
was
expected
to
turn
negative.
In 1998,
effect of the drought on the sugar industry resulted
Inflation
rates
in
economies have been
other small
Pacific
island
in its exports falling further.
low, mirroring the rates in
were estimated to decrease
their main trading partners.
The inflation rate in
Cook
in
Islands
was negative
1996
and
reflecting the low rates in New Zealand.
prices in Cook Islands covered
nents such as food,
Merchandise exports
by
16.1
per cent in
1998 (table II.7).
1997,
The fall in
all the major compo-
clothing, housing and transport.
The
devaluation
of
the
domestic
currency
curtailed imports and these were estimated to fall
sharply in 1998 owing to a strong fall in volumes
In Kiribati, the Australian dollar is used as legal
caused by the price effect of devaluation and by
tender and its inflation rate was expected to remain
weakness
low.
machinery and equipment are estimated to fall by
Tuvalu also uses the Australian dollar as its
legal currency.
Its inflation rate has been 1 per cent
in
domestic
around 24 per cent in
of
1998 against 2 per cent
growth
low in 1998.
important source of Fiji’s imports, accounting for 45
of Micronesia
and Marshall Islands use the United States dollar as
per
cent
1997.
Imports
in the last two years and was expected to remain
The Federated States
in
demand.
of
all
Australia
imported
remains
commodities
the
in
most
1997,
47
Table II.7. Selected Pacific island economies: merchandise exports and imports in
United States dollars and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
Fiji
Papua New Guinea
Imports (c.i.f.)
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1997
1995
1996
1997
1997
1998
Annual rates of change
(Percentage)
1995
1996
1997
486
8.6
20.8
-16.6
-16.1
947
6.2
10.7
-3 .6
2 145
0.9
-5.2
-14.7
-28.8
1 696
- 4.5
19.9
-
15
125.0
11.1
50.0
97
17.3
5.3
Samoa
33.3a
1998
-16 .8
2.6
-31.0
- 12 . 0a
-3 .0
147
18.4
4.3
-8.4
-33.6
159
10.4
-4 .4
4.7
-15.4
Tonga
11
5.5
-13.9
- 10.8
-31.8
73
11.7
-3 .5
2 .2
-16.0
Vanuatu
35
12.0
7.1
16.7
-7.3
94
9.2
2.1
-3.1
-10.9
Solomon Islands
Sources: ESCAP secretariat calculations based on United Nations, Monthly Bulletin o f Statistics, vol. Lll, No. 11,
November 1998; ADB, Key Indicators o f Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); and
Asian Development Outlook 1998 (Oxford University Press, 1998); and national sources.
Note:
a
Data for 1998 are estimates.
January-March.
followed by
New Zealand
per cent of imports.
which
accounts for 15
Overall, Fiji had a large com-
1997.
The decline was entirely due to a fall in
mineral and forestry exports, whereas agricultural
modity trade deficit in 1997 and it was expected to
exports increased.
increase further in 1998.
exports at 25 per cent increased in
The share of agriculture in total
highest level since 1986.
The tourism industry is Fiji’s biggest source
of foreign exchange earnings.
Gross receipts from
larly
for
coffee,
agricultural
accounted
exports
in
1997 to its
Higher prices, particufor
1997,
the
growth
despite
in
weakening
tourism increased by 8 per cent in 1997 to $320
volumes caused by the drought in the later part of
million or around 18 per cent of GDP.
the year.
The Asian
economic crisis has had some impact on tourist
numbers
in 1998, with tourist arrivals from Asia
The
Asian
economic
crisis
had
a
severe
falling by 31 per cent during the first nine months
adverse
of 1998 compared with the corresponding period of
exports in 1998 since both volumes and prices fell.
1997.
repre-
Most of Papua New Guinea’s exposure to East Asia
sented 18 per cent of Fiji’s total tourist arrivals in
is through its exports of logs to Japan and the
1997.
Republic of Korea.
However,
tourists
from
Asia
only
The decline in tourist numbers from Asia
impact on
Papua New Guinea’s forestry
Mineral exports fell dramatically
has been more than offset by increased numbers
in 1997 owing to lower gold and copper production
from
and the decline in output from the Kutubu oilfield.
the
traditional
United
sources: Australia,
Kingdom
and the
New Zealand,
United States, the
usually
A
further
in
merchandise
exports
was
expected in 1998 owing to the continued effect of
records a large surplus on the services
the drought into early 1998 and weak commodity
account.
The
current
account
was
almost
in
balance in 1997, with only a small surplus of $15
million.
prices, especially of oil.
New Guinea’s value of merchandise
exports declined sharply by about 15 per cent in
These effects would more
than offset the boost to gold exports provided by
the first full year of production of the Lihir gold
mine.
Papua
48
decline
Fiji
result of a concerted advertising campaign.
Gold exports made up about 38 per cent of
all commodity exports and 55 per cent of mineral
exports in 1998.
Papua
New
Guinea’s
imports
declined
an improvement in export performance of coconut
marginally in 1997 and were estimated to decline by
products in future years.
31.0
by 43 per cent in 1997, but declined in 1998.
per cent in
expected to
be
1998.
The trade surplus was
oil production has been relatively stable in recent
The current account
years and foreign exchange earnings from it have
in
had been in surplus in the 1990s and the deficit
fluctuated
little.
In
on
accounted
for 20
per cent
services
and
Palm
1998,
14.4 per cent of GDP
about the same as in 1997.
Cocoa exports increased
investment
was
more
compensated for by the trade surplus.
than
However,
1998,
exports
of
of
merchandise
total
palm
oil
exports, a slight decline from the 1997 figure.
the current account turned into deficit in 1997, and a
reduction in the deficit was expected in 1998.
The merchandise imports of Solomon Islands
increased by 4.7 per cent in 1997, but the weak
Samoa’s current account was in deficit up to
economy
and
the
devaluation
caused
1993, but has been in surplus since, but the surplus
decline by 15.4 per cent in 1998.
declined from $12.3 million in 1996 to $9.1 million in
transport
1997.
merchandise
There was a marginal improvement in the
merchandise trade deficit.
Samoa’s strong export
equipment
comprise
imports.
one
The
third
of
merchandise
to
total
trade
balance moved from surplus in 1996 to deficit in
performance in 1997 reflected a substantial expan-
1997 and deteriorated further in
sion of fish and copra exports, with fish becoming
services has become
the country’s largest export earner.
imports
Machinery and
1998.
Trade in
an important com ponent of
The value of
Solomon Islands’ trade and accounted for 25 per
copra exports almost doubled as a result of volume
cent of all exports of goods and services in 1997.
increase.
With
According to the central bank, the coun-
the
collapse
in
log
exports,
try’s exports increased by 33.3 per cent in the first
increased to 32 per cent in 1998.
three months of 1998 on an annual basis.
most
Fish
important
service
underdeveloped.
ing for 38 per cent of total export revenue, followed
on the services account in
by coconut oil, kava and coconut cream.
component
Tourist
of
arrivals for the first four months of 1998 were 8.7
foreign
per cent higher.
travel services.
Exports of logs have been a major source of
export earnings in Solomon Islands.
log
prices
allowed
the
value
of
services
The
at
but
it
remains
Solomon Islands recorded a deficit
10.9
1997.
imports
travel services,
estimated
proportion
Tourism is the
industry,
continued to be the highest export earner, account-
this
which
is
An
exceeds
current account
per
cent
of
important
purchases
of
exports
of
deficit was
GDP
in
1998
compared with a deficit of 4.1 per cent in 1997.
The boom in
log
exports
increase fivefold between 1991 and 1996.
to
Export
Tonga’s merchandise exports fell in both 1996
and 1997 against an increase in 1995.
The small
earnings from logs dropped by 29 per cent to $65
gain in exports of squash in 1997 was more than
million in 1997 with the full effect of the collapse in
offset by declines in vanilla bean exports.
demand being felt in 1998, with exports estimated to
have shifted away from
be just $21 million.
prices.
Log exports in 1998 accounted
Producers
vanilla because
of weak
Squash accounts for almost 50 per cent of
for around 22 per cent of total merchandise exports,
Tonga’s
down from 58 per cent in 1996. The fishing industry
restricted to just a few months at the end of the
has been the second most important export industry.
year.
Almost
but weak
all
tuna
exports
are
sold
preferential trading arrangements.
in
EU
under
Exports from the
merchandise
prices
and
in 1998, overtaking log exports.
exports slashed in half.
of
copra
and
After a downturn in
coconut
rebounded in 1997, reaching $12.8 million.
harvesting
is
adverse
weather conditions
have combined to reduce earnings since then.
poor
exports
but
Squash exports peaked at $9.5 million in 1993
fishing industry were estimated to reach $30 million
1996,
exports
harvest
in
1998
saw
the
value
of
A
squash
Fish exports are Tonga’s
products
second most important export commodity, making up
These
around 20 per cent of merchandise exports. Tourism
exports were estimated to decline to $11.4 million in
has been a growing industry for Tonga, with most
1998.
visitors coming from Australia, New Zealand and the
In future, there will
be a strong shift in
exports of coconut products away from copra and
United
towards coconut oil owing to the establishment of a
reached
number of copra-crushing mills. This should result in
receipts from all
States.
$13.1
Tonga’s
million
in
receipts
1997,
merchandise
from
tourism
higher than
exports,
total
but fall
in
49
these receipts was expected in 1998.
traditionally
run
very
large
trade
Vanuatu recorded a very large current account
Tonga has
deficits.
The
deficit of $22.9 million in 1997, equivalent to 9.7 per
merchandise trade deficit for 1997 was 28 per cent
cent of GDP.
of GDP.
was $8.7 million, and most of the rem ainder of the
These deficits are extraordinarily large, but
are sustainable because
of the large
from Tongans living abroad.
remittances
The current account
The goods and services trade deficit
deficit is accounted for by the unfavourable balance
on investment income.
Despite net official transfers
deficit for 1997 was about 4.2 per cent of GDP after
of $29.4 million, most of which
recording a surplus in 1996.
balance on transfers was just $2.7 million owing to a
is grant aid, the
large outflow of private transfers.
Vanuatu’s merchandise exports were estimated
to fall from $35 million in 1997 to $32.4 million in
1998.
Export performance in 1997 represented a
marked
improvement on
exports were $30 million.
1996 when
merchandise
Most of this increase was
due to higher copra exports, which comprised 56 per
cent of commodity exports in 1997.
Cocoa and
timber exports also performed well, but beef exports
declined slightly.
Vanuatu's main exposure to Asian
economies is in its beef and timber exports and
declines in these were expected in 1998.
Exports of
copra and cocoa were expected to fall
Against
these
dramatically
eased.
falls,
in
1998
exports
after
of
kava
export
in
1998.
increased
controls
were
Kava has the potential to become Vanuatu’s
second biggest comm odity export.
As a share of
GDP, imports in Vanuatu have remained relatively
constant in recent years at around 37
per cent.
Imports were estimated to fall from $94 million in
1997 to $84 million in 1998 and the trade deficit in
1998 was expected to further reduce compared with
1997.
Tourism is Vanuatu’s most important source of
foreign exchange earnings.
Receipts from tourism
were $47.7 million in 1997, far exceeding the value
of all comm odity exports combined.
Capital inflows/outflows
Australia and
New Zealand are the main sources of visitors to
Vanuatu, providing 70 per cent of all tourists.
The
Gross FDI inflow in Fiji has declined dramatically since 1994, when it peaked at $176 million.
By
1996,
this
had
fallen
to
$107
million
and
it
declined further to $49 million in 1997 and gross
direct investment inflow was expected to drop further
in 1998.
Declining investment inflow is a reflection of
the weak overall investment climate and a continuing
impediment to investment is uncertainty over land
tenure problems.
suffering
The sugar industry, in particular, is
decapitalization
owing
lease renewals becoming due.
to
concerns
over
Fiji has an
open
capital account but there is limited scope for shortterm
investment in the country.
market is small.
The
Fijian stock
Gross capital inflows for portfolio
investments in 1997 were $161 million or around 10
per cent of all credits on the balance of payments.
As is the case with gross capital inflows of all forms,
inflows of portfolio capital have been declining since
1994 and were expected to decline further in 1998.
Fiji’s external debt amounted to $240 million or 14
per cent of GDP in 1997.
Total debt service in 1997
was $26 million or just 2 per cent of the value of
goods and services exported.
Papua New Guinea’s capital account recorded a
surplus of $21 million in 1997.
Most of the volatility
appreciation of the United States dollar led to a fall
in the capital account in recent years has come from
in receipts in 1998 to $44.5 million, but a rise in
private
terms
of
Vanuatu’s
domestic
tourist
currency.
industry
to
The
Asian
capital
flows.
Net
private
capital
inflows
exposure
of
amounted to $92 million in 1997 after a net outflow
economies
is
of $111 million in 1996.
Official capital outflow for
minimal so weaker growth in 1998 was the result of
1997 was $61 million owing to debt repayments, but
the appreciation of the vatu against the Australian
this is set to reverse in 1998.
and
balance of payments in 1997 and early 1998 resulted
New
Zealand
currencies
and
against
the
W eakness in the
currencies of competing tourist destinations in the
in foreign reserves again falling to critically low levels
Pacific
of
of $190 million, around two months of import cover,
a strong currency will certainly affect
but by the middle of 1998 this had recovered to $230
subregion.
maintaining
The
government’s
policy
growth in tourism in future years, particularly given
million.
the large increase in the relative price of travel to
increased by 20 per cent in 1997.
The servicing
Vanuatu compared with competing locations such as
requirement of external
is about $60
Fiji and Bali in Indonesia.
million or 3 per cent of goods and services exports.
50
Papua New Guinea’s external public debt
public
debt
The important development since 1995 in the
capital account of Solomon Islands has been the
growing importance of payment arrears, which for
accounting
purposes
can
be
creases in foreign borrowing.
interpreted
as
in-
In 1997, the Govern-
ment of Solomon Islands accumulated $10 million in
capital account.
The capital account surplus was
expected
to
increase
in
1998
owing
to
a
concessional $20 million loan from ADB, which was
provided
in support of the
programme.
comprehensive
reform
External debt amounted to $42 million
in 1997, comprising concessional loans.
external arrears, equivalent to 2.5 per cent of GDP.
The
account
In contrast, several other small Pacific island
because of the commitment by the government to
resulting
economies have large external debt commitments.
curtail
the
pressure
increase
on
the
in arrears
capital
in
1998
and the
For example, Cook Islands had a high government
weakening in FDI inflows was partly offset by a $25
debt of $63 million in late 1996.
million low interest loan from ADB towards the end
costs for Cook Islands in 1997 were around 19 per
of 1998 to support public sector reforms.
cent of GDP, with foreign aid still being the single
Foreign
Debt servicing
reserves remained weak allowing just two months
largest source of funding.
import cover.
external position reflects the substantial dependence
External debt reached $203 million
In Marshall Islands, the
at the end of 1997, equivalent to 51 per cent of
on Compact funds from the United States.
GDP.
Compact of Free Association signed with the United
Of this, $136 million or 67 per cent was
official debt.
States
provides
for
substantial
The
financial
and
technical assistance from the United States for a
In Tonga, net inflows of FDI and short-term
capital increased in conjunction with the expansion
of domestic credit in 1994 and 1995, but since then
have fallen
again.
Net FDI inflows totalled $2.6
million or 1.4 per cent of GDP in 1996.
This is
estimated to have fallen to $1.5 million in 1997 and
changed little in 1998.
The public sector external
debt is $68 million, or 38 per cent of GDP, and
comprises the bulk of external debt.
Debt servicing
has been around 10 per cent of the value of exports
of goods
and
services.
Since the early
1990s,
Tonga’s capital account surpluses have been small
and generally insufficient to cover the regular current
account
deficits,
resulting
in
balance-of-payments
deficits.
In consequence, international reserves have
15-year period that ends in October 2001.
government
had
borrowed
heavily
As the
against
future
Compact funds, substantial capital outflow occurred
during
the
mid-1990s.
The
external
debt
of
Marshall Islands amounted to $141 million in 19941995, or 134 per cent of GDP, with debt service at
the alarming
exports
level of more than 40 per cent of
of goods
and
services.
The
Federated
States of Micronesia also has high external debt
and its Compact agreement with the United States
also ends in 2001.
At the end of 1995, its out-
standing debt amounted to 55 per cent of GDP and
its servicing was equivalent to 18 per cent of goods
and services exports.
fallen substantially from $38 million at the end of
1993 to $12 million in the middle of 1998, or three
Financial sector developments
months of import cover.
Pacific
There is some concern over Tonga’s depen-
island countries
have a considerable
dence on private remittances and the susceptibility
degree of institutional diversity within their financial
to a collapse in the balance of payments in the
sectors.
event that remittances were to dry up.
important single type of institution, but there is a
tances
raise
as
much
foreign
exports of goods and services.
The remit-
exchange
as
all
Barring any political
wide
Commercial banks remain by far the most
range
of
other
financial
institutions
which
typically include a central bank, a development bank,
upheaval, there is no reason for these receipts to
insurance companies and credit unions or coopera-
taper off in the near future.
tives.
on,
the
linkages
with
However, as time goes
relatives
will
weaken
and
remittances are likely to fall.
own
Some very small countries do not have their
national
therefore
currencies
cannot
use
exchange rate policies.
The main item on Vanuatu’s capital account is
or
central
independent
banks
monetary
and
or
As part of economic reform,
a number of them, in particular, Fiji, Papua New
FDI, which amounted to $28.6 million in 1997, with
Guinea,
the overall surplus of $30.3 million recorded on the
financial sector reforms in recent years.
Samoa
and
Tonga,
have
undertaken
51
In
an
environment
of
ample
liquidity,
weak
Tonga.
Since 1995, private sector credit growth in
credit demand by the private sector and a depressed
Tonga has stabilized, with the decline in earnings
economy, nominal interest rates in Fiji have been
from squash playing an important role.
declining.
competition in the banking sector provided by the
open
The
market
Reserve Bank of Fiji engages in
operations
to
target
interest
rates,
Despite the
entry of the new banks, deposit and lending rates
which is a fundamentally difficult policy given that Fiji
did
has an open capital account and an exchange rate
tightened in 1996, squeezing credit growth.
peg.
government increased the required reserve ratio for
The demand for credit in Fiji remains weak
not
change
much.
Monetary
policy
was
The
despite the fact that lending rates are particularly low
banks from 5 to
relative to other developing countries.
thereby slowing net domestic credit growth to 8 per
The lending
10 per cent in February
1996,
rate was 10.2 per cent in 1997, and had fallen to
cent in 1996, compared with 25 per cent in 1995.
9.2 per cent at the end of November 1998.
The bulk of the impact was on private credit, but this
With
nominal rates falling since the beginning of 1998,
has since resumed growth in the 8 to 10 per cent
and the devaluation of the local currency causing the
range.
inflation rate to rise, real interest rates have fallen
gone for housing and other personal expenditure.
More than half of the outstanding credit has
substantially.
Even though Vanuatu has an offshore financial
Nominal interest rates in Papua New Guinea
centre, its domestic financial sector remains under-
have been high and unstable since 1994, undermin-
developed, with weak capital and money markets.
ing the investment environment.
The country has a high level of domestic savings,
The lending rate
had fallen to 10.5 per cent in 1997 compared with
but returns on investment of these savings have not
13.3 per cent in 1996 but was expected to increase
been satisfactory with weak intermediating
in 1998 as a result of the tight monetary stance to
tions.
support
Vanuatu and the Vanuatu National Provident Fund
the
kina.
economy, which
Given
the
weakness
of
the
is struggling to recover from the
In
appear
particular,
to
have
the
Development
channelled
resources
severe downturn in 1997, there is a risk that this
unproductive and risky projects.
policy may prolong the recession.
to
a climax
in early
institu-
Bank
of
towards
The problem came
1998 with
the
Ombudsman
exposing unsound lending practices of these instituIn Samoa, the central bank deregulated the
financial
system
in
January
1998,
relinquishing
tions.
A task force, set up under the comprehensive
reform
programme
to
reform
the
practices
of
control of interest rates and credit ceilings on the
Vanuatu’s public financial institutions, has estimated
commercial banks.
that
The country has three commer-
cial banks, all privately owned.
One of them, the
National Bank of Samoa, was established in 1995
and is owned by local shareholders.
The immediate
result of the deregulation was an increase in both
the lending
banks.
and deposit rates by the commercial
The competition between the three commer-
cial banks should see the interest rates come down
in the future.
The rapid growth in credit in 1995 and
more
than
50
per cent
institutions, amounting to $25
doubtful.
of
loans
million,
by these
are bad or
The interest rate spread between deposit
and lending rates is high.
Real interest rates on
deposits have been steadily increasing in the 1990s
as declines in inflation rates have not been met with
changes in nominal rates.
The government has kept
nominal interest rates high to provide support for the
exchange rate.
1996 in Samoa was due to the entry of the new
National Bank of Samoa, with close to a third of all
commercial
bank
loans
going
to
trade-related
Policy issues and responses
activities while another 20 per cent was allocated for
the building and construction sectors.
Interest rates in Solomon Islands were pushed
Most
Pacific
declining
living
decades
since
island
standards
their
countries
during
population
experienced
the
last
growth
two
rates
up in
1998 as a result of a tightened monetary
exceeded their GDP growth rates.
policy.
The nominal lending rate was 15.7 per cent
uneven GDP growth rates, which averaged over 3
in 1997.
The rapid credit growth in Tonga in 1994
per cent during the 1990s compared with 2 per cent
and 1995 was due to the entry of two new commer-
in the
cial banks to end the
alarming increase in social
52
monopoly of the Bank of
They recorded
1980s.
As a result, there
has
problems
been
an
in some of
these countries as they struggle to meet the increas-
Eco-tourism development would also go a long way
ing demand for better living standards and for a
in
sufficient number of jobs.
Aggressive marketing would be very useful.
promoting
the
industry
in
these
countries.
Pacific
island countries should consider investing in Internet
At the national level, Pacific island countries
have
implemented
economic
reform
initiatives
facilities to market themselves intensively.
in
In their pursuit for higher economic
recent years to reduce the role of the public sector
and
increase
the
role
of
economic development.
the
private
sector
in
Several have, for example,
Pacific island countries face a daunting challenge in
balancing the need for conservation of resources for
embarked on the downsizing of the public sector,
future
privatizing
current needs.
or
corporatizing
state
enterprises
and
growth,
generations
against
exploitation
to
satisfy
Forestry resources appear to have
reforming their tax structures, including the introduc-
been over-exploited in some countries.
tion
weakness in demand for logs as a result of the
of
value-added
tax
additional revenue.
as
a
means
of
raising
However, experiences with re-
form initiatives have been mixed.
Many of them
Asian
economic
crisis
provides
forestry sector.
has
restructure its logging industry.
difficult to
privatize because potential
opportunity to
initiate policies for the sustainable development of
have made some progress in downsizing the public
sector, including cutting the number of staff, but it
proved
an
The current
ment
of
It is encouraging that the Govern-
Solomon
Islands
has
taken
steps
to
In 1996, a conser-
local buyers were non-existent and foreign investors
vation code of practice was introduced, but enforcing
did not show much interest.
compliance
M inisters’ Meeting,
held
The Forum Economic
in July
1998,
specifically
has
been
a
In
1998,
the
government announced that it would nationalize the
addressed economic reform issues aimed at making
logging
Pacific island economies become competitive.
dominated by Malaysian
The
problem.
industry,
government
has
which
also
until
then
had
been
logging companies.
stated
that
it
will
The
reduce
recommendations of that meeting were endorsed by
the South Pacific Forum at its twenty-ninth session
allowable harvesting towards a sustainable level and
in August 1998.
a number of licences have already been cancelled or
Some of the specific areas to be
addressed by these countries relate to encourag-
suspended.
No new licences are being issued.
ing foreign investment, increasing domestic savings
and
enhancing
the
role
of
small
and
Pacific
medium
island
their efforts
enterprises.
towards
countries
need
closer
economic
to
strengthen
cooperation
among their economies, possibly comm encing with
Pacific island countries continue to rely on the
agricultural
sector for both
subsistence
and cash
income but the development of that sector continues
exploration
of the
arrangement.
potential
Perhaps,
of
the
a
regional
trading
membership
of
the
Melanesian Spearhead Group, which currently com -
Most
prises Fiji, Papua New Guinea, Solomon Islands and
land in the Pacific is communally owned. This is not
Vanuatu, with New Caledonia as an observer, could
conducive to investment in the sector.
gradually be expanded through the admission of new
to be constrained by lack of accessible land.
Even Fiji,
management
members and barriers to cross-boundary flows of
system in place among the Pacific island countries,
goods, services and factors of production progres-
which
probably
has
the
best
land
is grappling with the problem of finding an equitable
sively brought down.
accord on the issue of land leases, many of which
for such economic integration is the lack of reliable
will expire soon.
and
These countries have to address
cheap
means
However, one major constraint
of
transportation,
the land issue if they are to realize the full potential
shipping, to enhance the flow of trade.
of the agricultural sector.
example
signed
bilateral
trade
especially
Fiji, for
agreements
with
Papua New Guinea and Vanuatu, but it is acknowThe
fisheries
and
tourism
sectors
are
also
important to Pacific island economies, with tourism
ledged
that,
unless
there
is
a
reliable
shipping
service, it would not be feasible to realize the objec-
already a major foreign exchange earner for some.
tives of these agreements.
Tourism has a bright future but requires stronger
was established by Pacific island countries a quarter
policy support in a number of areas.
tenance
of
law
and
order,
political
The mainstability
and
infrastructure development rank high on the agenda.
The Pacific Forum Line
of a century ago to perform this function,
but it
continues to face problems and has to depend on
subsidies to operate.
53
Pacific
island
countries
currently
enjoy
preferences in certain markets under special trading
special
up
to
15
per
cent
and
paralysed
the
The government had to freeze and
For example, many of them currently
restructure the domestic debt market, and impose a
aid
90-day moratorium on foreign debt repayments.
arrangements.
enjoy
inflation
banking system.
and
trade
benefits
in the
EU
The
market under the Lome IV Convention, which expires
stock market index fell drastically in 1998, making it
in 2000.
the lowest since the benchmark was first calculated
This agreement has provided beneficiary
countries with development assistance, tax benefits,
in 1995.
guaranteed prices for certain exports and preferential
access to
the
EU
market.
Negotiations
Underlying the crisis in the Russian Federation
on the
maintenance of these privileges are continuing and
were
their outcome could have a significant bearing on
discussed in the Survey 1998, budgetary deficits had
the
become a very serious problem
development
prospects
of
countries
currently
severe
economies
benefiting from the agreement.
problems
of
North
in
public
and
finances.
As
for most of the
Central
Asia.
In
the
Russian Federation, the budget deficit was brought
Of the five least developed countries in the
under some degree of control following the high level
Pacific, Samoa and Vanuatu will have their status
in 1995, but it again shot up in 1998.
reviewed
for
for the redemption of state-issued securities and the
Their graduation out of
payment of interest on them has become a heavy
by
the
United
Development Policy in 2000.
Nations
Committee
the status could have some adverse implications.
burden
This is because, as least developed countries, they
remains low.
on the
state
budget,
while
Expenditure
tax
are in a better position to lay claim to concessional
ment securities
development assistance, duty-free market access for
foreign capital from the country, which
their
steep
exports
conditions.
and
favourable
debt
repayment
In this context, it should be noted that
collection
A lack of confidence in the govern-
decline
resulted
in
the
exchange reserves.
in a
massive
country’s
gold
outflow
of
brought a
and
foreign
Despite its efforts to restore
the inclusion of a vulnerability index as a criterion for
confidence in the financial markets, the government
the designation of the least developed countries has
had to close down the domestic bond market and
become a moot issue.
In fact, Vanuatu was already
restructure the existing debt.
recommended
Committee for Development
its GDP was estimated to fall by 5.0 per cent and
Policy for
by the
Assembly
industrial output by 5.2 per cent in 1998 (table II.8).
passed a resolution postponing it pending a report
The grain harvest in 1998 was 47 per cent below
on
the previous year’s level.
the
graduation,
issue
of
but
the
the
General
As a result of all this,
vulnerability
index
by
the
Committee.
GDP for 1999 has been
projected to contract further by 3 per cent.
The economic crisis in the Russian Federation
did not have a substantial impact on the Central
North and Central Asia
Asian economies.
The countries of Central Asia
have succeeded in building independent monetary
Growth performance
and credit systems and in diversifying their trading
relationships so that the financial problems in the
The regional economic crisis had no significant
Russian Federation were not a major determining
direct impact on the economies of the Central Asian
factor in their economic performance.
However, they
republics, although a few of them were affected by
could
the
the fall in oil prices.
Federation had achieved a healthy growth rate as
However, the Russian Federa-
tion suffered a major economic crisis.
Most of the
achievements of seven years of economic
reform
have
performed
better
if
substantial trading links still existed.
continued to show signs of recovery.
Russian
In 1998, they
Modest real
were seriously undermined by the financial crisis that
GDP growth of 3 per cent was expected in Tajikistan
struck the economy in May 1998 and developed into
and Uzbekistan compared with their 1997 rates of
a full-scale economic crisis three months later.
the
beginning,
the
crisis
stripped
the
At
national
currency of two thirds of its value, pushed monthly
54
1.7 and 5.2 per cent respectively.
The economies of
Azerbaijan and Kyrgyzstan were among the better
performers
in
1997
and
Azerbaijan
continued
its
Table II.8.
North and Central Asia; growth rates, 1995-1998
(Percentage)
Rates o f growth
Armenia
Azerbaijan
Kazakhstan
Kyrgyzstan
Tajikistan
Turkmenistan
Uzbekistan
Russian Federation
GDP
Gross agricultural output
1995
6.9
5.0
1996
1997
5.8
7.0
1.2
3.1
-4 .0
0.9
1998
6.0
1995
1996
- 11.8
-7 .0
-17.2
1.3
5.0
-6 .7
1997
5.8
-4 .0
1998
6.7
Gross industrial output
1.5
3.2a
0.3
1.9b
8.2
-23.8
- 8.2
1996
1997
0.5
4.8
0.3
2.0
- 2.0
4.0
1998
1.0
1995
-5.4
-9.0
1996
1997
7.1
3.0
-17.8
8.8
10.4
10.0
46.8
1998
1.8
1995
-12.4
-28 .0
-13 .6
1996
-16.7
-15.0
-23.9
1997
1.7
4.0
-2 .5
1998
3.0
1995
-7 .7
-1 8 .0
1996
0.1
- 2.0
1997
- 20.0
1998
1.5
1995
-0 .9
-3 .0
0.1
1996
1.7
-7 .0
6.0
1997
5.2
4.0
1998
3.0
6 . 1c
1995
-4.1
- 8.0
- 3 .3
1996
-3 .5
-7 .0
- 4 .0
1997
1998
2.0
-5 .0
1.9
-5 .2
1995
-
0.8
1.1 a
4.6
7 .6 b
-6 .4
17.9
-3 5 .0
-
- 9 .4 C
6.5
5.7b
Sources: ESCAP secretariat calculations based on ECE, Economic Survey of Europe 1998, No. 2 (United Nations
publication, Sales No. E.98.II.E.18); and Intra-State Statistical Committee of the Commonwealth of Independent States,
Statistical Yearbook o f the Commonwealth of Independent States 1998 (Moscow, 1998); EBRD, Transition Report 1998
(London, 1998); and United Nations Department of Economic and Social Affairs, The World Economy at the Beginning of
1999 (E/1999/INF/1).
Note:
Data for 1998 are estimates.
a January-June 1998.
b January-November 1998.
c January-September 1998.
55
strong economic performance in 1998.
by
5.8
per
cent
in
1997,
The
After growing
Azerbaijan’s
economy
services
sector
has
become
a
major
source of growth in many economies of North and
was estimated to grow by 6.7 per cent in 1998.
Central
Kyrgyzstan was estimated to grow by only 1.8 per
economic growth in Armenia and Uzbekistan in 1996
Asia.
It
was
the
main
cent in 1998 compared with 10.4 per cent in 1997.
and 1997.
Armenia
double digits in Armenia in 1998.
improved
its
growth
performance
signifi-
contributor
to
The sector was expected to grow by
cantly in 1998 to 6.0 per cent from 3.1 per cent in
largest
1997.
producing 30.7 per cent of GDP in 1997, and it grew
GDP of Kazakhstan grew by 2.0 per cent in
1997 and further by 1.2 per cent in the first eight
months of 1998.
sector
in
the
It has become the
economy
of
Uzbekistan,
by 12.3 per cent in the first nine months of 1998.
However, it was estimated to grow
by 1.0 per cent for the full year.
Private
consumption
and
capital
investment
have continued to be a strong driving force in the
Agriculture has remained the largest contributor
recovery of the economies of Central Asia.
first half of
1998,
accounted for 26.8 per cent of GDP in Uzbekistan in
economies,
except
1997 and it is becoming the largest sector of the
personal real incomes in the
economy of Turkmenistan
consumption grew in the first half of 1998.
to GDP in the Central Asian economies.
been facing difficulties.
The sector
as the gas sector has
Agricultural output rose by
6.1 per cent in Uzbekistan in the first nine months of
1998.
retail turnover grew
Tajikistan.
In the
in all the
Despite
Russian
falling
Federation,
Personal
savings were down by approximately 32 per cent in
nominal
terms
in
the
first
quarter
of
1998
and
The cotton crop and the grain harvest of
appeared to decrease further in the fail of 1998.
1998 were expected to be better than in 1996-1997.
The volume of retail trade turnover increased by 3.1
Turkmenistan fulfilled its target for the 1998 grain
per cent in the first half of 1998 compared with the
harvest, the first time that the annual target has
same period of 1997.
been met since 1991.
Attaining self-sufficiency in
grain production has been a main objective of both
Turkmenistan and Uzbekistan during the period of
their economic reforms.
The 1998 grain harvest in
Kazakhstan could be one of the worst in the past
few decades.
Owing to
drought and
locusts
in
several regions of the country, the harvest was 3
million tons below the target and about 5 million tons
less than in 1997.
Investment continued to grow strongly in 1998
in most of the economies.
In Uzbekistan, it grew by
12 per cent in the first half of 1998 and accounted
for one third of its GDP.
Some additional measures
were undertaken to attract further foreign investment.
Among them were a reduction in the minimum size
of a foreign investment from $300,000 to $150,000,
better ownership rights for foreign firms and extension of protection of terms of FDI agreements up to
Economic
recovery
in
Tajikistan
been
10 years irrespective of subsequent legal changes.
After falling by 2.5
Investment activity in Azerbaijan was supported by
per cent in 1997, industrial production in Tajikistan
two special government programmes on investment
grew by 7.6 per cent in the first eleven months of
and privatization, with a focus on attraction of more
driven by industrial production.
1998.
has
Industrial output has continued to grow in
investment in non-oil sectors such as telecom m u-
Kazakhstan, rising by 4.0 per cent in 1997 and by
nications, petrochemicals and agricultural processing
only 1.1 per cent in the first half of 1998.
Owing to
industries.
Most
of
the
foreign
investment
in
falling world oil prices, industrial production remained
Armenia was channelled into newly privatized enter-
flat in Azerbaijan, rising by only 0.3 per cent in 1997
prises.
and increasing by just 1.9 per cent during the first
policy towards
eleven months of 1998.
investors can be repatriated without restriction, and
Oil production in Azerbaijan
The
economy
FDI.
has
was 4.5 million tons in the first six months of 1998,
investors enjoy tax benefits.
out of the 10.1 million tons targeted for the year.
ment
The industrial output of Armenia grew by only 0.9
privatization
of
Armenia
and
on
maintained
Profits or assets
increased
a
liberal
of foreign
In 1997, the Governreliance
international
on
tenders
cash
in
the
per cent in 1997 and increased by 3.2 per cent in
privatization process.
the
considerably and reached $188 million in the first
half of 1998.
first
half of
1998,
owing
to
upswing in light industry and textiles.
56
a 40
per cent
As a result,
FDI increased
Inflation
(figure II.2).
substantial
Since
1995,
the economies
of
North
and
Central Asia have pursued anti-inflationary policies
which
resulted
in
arresting
the
However, inflation rates, despite their
reduction, were still
cent
in
Tajikistan
Turkmenistan.
and
high at 85.4
87.0
per
cent
per
in
hyperinflation
recorded in those countries in 1992-1994.
Prudent
Further
reductions
in
inflation
in
many
fiscal and monetary policies and the appreciation of
countries were estimated for 1998.
the national currencies were the two main factors
inflation rates in Tajikistan during the first half of
responsible
for
the
considerable
reducing the rates of inflation.
of
the
deficits.
economies
In
avoided
per cent
Kyrgyzstan
and
in
financing
government
down to 3.6
13.8 per cent in Armenia,
Kazakhstan,
25.5
in
The central banks
1997,inflation rates came
per cent in Azerbaijan,
17.4
success
per
25.5
cent
per cent
in
in
Uzbekistan
Low monthly
1998 suggested that inflation could be around 35
per cent by the end of 1998.
This represented a
considerable achievement in the light of the high
rates seen in 1992-1997.
inflation
The estimated annual
rate in Turkmenistan
1998 was the lowest since
at 25
1991.
per cent
The
in
monthly
average inflation rate shrank to 1.5 per cent in the
Figure II.2. Budget balance as a percentage of GDP and inflation rates in selected North
and Central Asian economies, 1995-1998
Sources: United Nations Department of Economic and Social Affairs, The World Economy at the Beginning of 1999
(E/1999/INF/1); Intra-State Statistical Committee of the Commonwealth of Independent States, Statistical Yearbook of the
Commonwealth of Independent States 1998 (Moscow, 1998); and EBRD, Transition Report 1998 (London, 1998).
Notes: Data for 1998 are estimates.
the inflation figure is a logarithmic scale.
Inflation rates refer to changes in the consumer price index.
The vertical axis of
57
Trade performance
first half of 1998 in Uzbekistan compared with 3.5
per cent in the first six months of 1997.
For the
full 1998 year, inflation was estimated to be about
21 per cent.
Economic crisis in the Russian Federation and
Over the past two years, inflation fell
lower world prices of the main export items of the
dramatically in Kyrgyzstan, from 27 per cent in May
economies of Central Asia resulted in a lowering of
1997
their external trade in 1998.
to
11.9
per cent in
May
1998,
and
was
Uzbekistan experienced
expected to remain around the same level by the
a massive downturn in its foreign trade.
end of 1998.
dise exports fell by 4.4 per cent in 1997 and further
Inflation was being driven mainly by
increasing food prices.
Inflation
rates appear to
M erchan-
by 9.4 per cent to $1.82 billion in the first half of
have stabilized in Armenia and Azerbaijan in 1998,
1998 (table II.9).
with very
4.2 per cent in 1997 and by 31.1 per cent to $1.62
little change
in them
from
last year’s
levels.
Merchandise imports also fell by
billion in the first half of 1998.
The country has
been diverting its exports and imports away from the
tion
The rate of inflation in the Russian Federa-
Commonwealth
was
period
estimated
at
80.0
per
cent
in
1998
of Independent States.
1994-1998,
the
share
of
Over the
exports
to
CIS
countries declined from 62 to 25 per cent and of
because of the massive devaluation of the rouble.
However, the monthly inflation rate jumped from 15
imports
per
exports of Tajikistan during the first 10 months of
cent
in
August
1998
to
38.4
per
cent
in
from
54
to
31
per
cent.
Merchandise
September, the biggest monthly increase in more
1998 fell by 23.1 per cent while merchandise imports
than four years.
increased marginally by less than 1 per cent.
In October 1998, the rate shrank
The
two main export items of the country were cotton
to 4.5 per cent.
Table II.9. North and Central Asia: merchandise exports and imports in United States dollars
and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
1997
Imports (c.i.f.)
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1995
1996
1997
1998
1997
Annual rates of change
(Percentage)
1995
1996
1997
-17.4
Armenia
233
6.9
6.1
892
59.3
Azerbaijan
781
- 12.0
14.7
23.8
-3 4 .4 a
794
-6.3
41.1
6 366
56.7
20.7
7.7
- 12.8a
4 275
-13.7
9.8
Kyrgyzstan
631
11.8
18.7
-1 3 .0 a
646
19.0
Tajikistan
746
55.1
-3.1
-23.1a
750
40.1
Turkmenistan
751
-3 .5
1 228
-13.1
4 388
1.8
48.1
-4 .4
4 523
88 776
20.0
9.8
-1 .9
71 351
Kazakhstan
Uzbekistan
Russian Federation
-19.7
-13.1
-9 .4 b
-13.4
4.2
1998
- 0.6
35.8a
1.0
1.0a
-17 .5
24.5 a
-5 .8
12.3
0.6a
17.0
62.8
-4 .2
20.6
2.2
5.8
-31.1 b
-13 .5
Sources: ESCAP secretariat calculations based on United Nations, Monthly Bulletin o f Statistics, vol. LII, No. 9,
September 1998; The Economist Intelligence Unit, Country Report: Uzbekistan, third quarter 1998; and Intra-State Statistical
Committee of the Commonwealth of Independent States, Statistical Yearbook o f the Commonwealth o f Independent States 1998
(Moscow, 1998).
Note:
a
b
58
Data for 1998 are estimates.
January-October.
January-June.
fibre and aluminium, which accounted for 18 and 38
The
per cent of total exports respectively during the first
contracted
half of 1998.
Owing to falling world oil prices, the
exports of Azerbaijan declined by 34.4 per cent in
1997.
Russian
in
Federation’s
1998
whereas
Merchandise
exports
only 1.9 per cent in 1997.
by 35.8 per cent during the same period.
were estimated to fall by
The
economic
recovery
in
Kazakhstan
was
foreign
trade
sector.
In
1992-1997,
its
average
annual export and import growth rates were 11.3
and
7.5
per
cent
respectively.
The
exports
of
Kazakhstan reached $6.37 billion and imports $4.28
billion in 1997, rising by 7.7 per cent and 1.0 per
cent
respectively.
However,
during
the
first
10
months of 1998, exports fell substantially but imports
grew marginally.
During the same period, exports of
Kyrgyzstan
by
fell
13.0
per
cent
and
imports
foreign
had
were
trade
expanded
in
estimated
to
decrease by 13.4 per cent in 1998 as compared with
the first 10 months of 1998, while imports increased
directly linked to the impressive performance of its
it
Merchandise imports
13.5 per cent in
against a 5.8 per cent increase in 1997.
from
non-CIS
countries
were
higher than those from CIS.
almost
1998
Imports
three
times
The volume of trade of
the Russian Federation with CIS countries shrank by
5.1 per cent in the first eight months of 1998.
The
breaks in rouble trading, a lack of confidence in the
exchange
rate and the jum p
imported
goods
severely
second half of 1998.
in
rouble
affected
prices
imports
in
of
the
In addition, the imposition of a
new 3 per cent import duty was expected to curtail
imports further.
increased by 24.5 per cent.
The economies of Central Asia still rely heavily
Capital inflows/outflows
on primary commodities as the major source of their
exports earnings.
Oil export earnings fell by 8.3 per
The net inflow of FDI into the economies of
cent in Azerbaijan in the first three months of 1998
Central Asia has remained below expectations.
and oil accounted for 43 per cent of total exports in
1997, it was $872 million in Azerbaijan, $1.32 billion
comparison with 52 per cent in 1997.
in
The exports
Kazakhstan,
$121
million
in Turkmenistan
In
and
of Turkmenistan were also dominated by gas, oil
$812 million in Uzbekistan.
and refined oil products, along with cotton fibre.
of the investment was concentrated in the two oil-
1998,
Kazakhstan
was
expected
to
produce
In
27
rich
economies
of
More than 80 per cent
Central
Asia,
Azerbaijan
and
million tons of oil, of which nearly 15 million tons
Kazakhstan.
was to be exported.
The oil industry of Kazakhstan
$4.45 billion in FDI, equivalent to 5.3 per cent of its
provided over 30 per cent of budget revenue in
GDP and well over 50 per cent of the total FDI into
1997.
Central
Cotton sales accounted for 45 per cent of
In
Asia.
1993-1997,
In
Kazakhstan
comparison,
received
Turkmenistan
has
total export earnings of Uzbekistan in the first half
received only $445 million since 1992, or one tenth
of 1998.
of that invested in Kazakhstan.
Owing
to
the
poor
performance
of
exports
relative to imports, the external financial position of
the economies of North and Central Asia weakened
in 1997-1998.
The current account deficit exceeded
29 per cent of GDP in Azerbaijan, 20 per cent of
The average ratio of
FDI to GDP of Turkmenistan was 2.8 per cent per
year in 1992-1997.
FDI in the Armenian economy
was expected to total $250 million in 1998, mainly
through participation in privatization of large state
enterprises.
GDP in Turkmenistan and 19 per cent of GDP in
Armenia in 1997.
a
large
current
Armenia was also expected to run
account
deficit
in
1998
since
it
In
1998,
the
Government
of
Uzbekistan
amended the 1994 Law on Foreign Investment to
already amounted to 20 per cent of GDP in the first
guarantee
half of 1998.
investors for 10 years and reduced the minimum size
Kazakhstan, Tajikistan and Uzbekistan
the
terms
of
agreements
for
foreign
had modest current account deficits at 4.5 per cent
of a foreign investment.
of GDP in Kazakhstan and 5.5 per cent in Tajikistan
Federation on foreign investment approved in 1998
in 1997, and 4.3 per cent of GDP in Uzbekistan in
replaced
the first six months of 1998.
earlier
A new law of the Russian
legislation
of
1991
and
provided
The largest element in
measures to protect foreign investors for a certain
the current account deficits was the merchandise
number of years against legal changes affecting their
trade deficit.
business in the country.
59
Portfolio investment has become a new source
of external funds in only two emerging stock markets
of
the
subregion,
Kazakhstan.
Federation
1997.
and
The
economies
the
Russian
Federation
and
It totalled $2.5 billion in the Russian
$404.2
bulk
was
of
million
in
portfolio
accounted
Kazakhstan
investment
for
by
to
in
the
governments’
33 per cent in August 1998.
for industry,
inflation.
very
low
level
of
Real interest rates in Turkmenistan were
high
in
May
1998,
considering
that
annual
inflation at that time was only 15.1 per cent, while
the refinancing rate was 35 per cent.
High real
interest
effect
rates,
economic
Eurobonds.
The rate was too high
given the comparatively
however,
growth
have
had
in Turkmenistan
little
as the
on
banking
sector plays a limited role in the economy.
All the economies of North and Central Asia
have had access to the financial resources of the
international
financial
institutions.
In
1998,
the
Russian Federation was expected to receive $14.8
Kazakhstan continued its programme of bank
consolidation,
which
was
launched
in
more closures of unsound small banks.
1995,
with
The number
billion in loans from IMF, the World Bank and Japan
of commercial banks was reduced from 130 in 1996
to
to 74 banks at the beginning of 1998.
stabilize
the
economy.
However,
these
loan
Only 60
commitments were not implemented in full owing to
banks were expected to survive by the end of 1998.
the inability of the country to meet the conditions of
All the banks of Kazakhstan have been requested to
the IMF.
Since 1996, Azerbaijan has drawn around
adopt international banking standards such as the 8
$43.4 million of its $79 million three-year programme
per cent capital-adequacy ratio recommended by the
and Kazakhstan drew the entire $417.6 million of its
Bank for International
loan
Kazakhstan,
strict criteria were expected to be enforced by 2001.
Kyrgyzstan and Tajikistan have been implementing
The four state-owned banks of Azerbaijan that form
of
IMF.
Armenia,
Azerbaijan,
reform programmes with the support of IMF.
main
objectives
of the
The
IMF programmes were to
assist the economies of Central Asia in implementing
their
macroeconomic
reform,
restoring
macroeco-
nomic stability, implementing transparent privatization
programmes,
reforming
the
financial
restructuring the banking system.
sector
and
Settlements.
However,
the
a second tier in the country’s banking system have
been undergoing restructuring under a programme of
special
supervision
numerous
small
by
the
private
central
banks
bank.
remained
The
underca-
pitalized and were undergoing a process of consolidation.
In addition, the
programmes were expected to contribute to lessening the adverse impact of reforms on the poor by
protecting budgetary provisions for health, education
and the social safety net.
The financial crisis in the Russian Federation
has squeezed the banking sector.
Of the
commercial banks, 275 banks were expected to be
closed or merged in the first half of 1999.
dation
Financial sector developments
1,500
in the
banking
system from collapse.
sector should
Consoli-
prevent the
In restructuring the banking
sector, the central bank of the Russian Federation
The interest rate has been one of the key
has divided the
banking sector into four groups:
Russian
banks that have sufficient capital and liquidity, those
Federation to correct some of the emerging imba-
with sufficient capital but limited liquidity, those that
instruments
of
monetary
policy
in
the
lances in the macroeconomic aggregates caused by
have neither sufficient capital nor liquidity, and those
the economic crisis.
that are
Since the beginning of 1998,
in a “critical
situation” but still
play an
the benchmark rate of the central bank has been
important role in the
changed nine times.
In Kazakhstan and Uzbekistan,
banks belong in the first and second groups and
nominal interest rates remained unchanged in 1997-
these are expected to become the core of a new
1998.
banking
The deposit rates remained below the rate of
inflation and refinancing rates of the central banks,
while lending
rates generally remained above the
recorded level of inflation.
policies
were
Turkmenistan.
Restrictive interest rate
implemented
in
Armenia
and
The central bank of Armenia reduced
its refinancing rate from 47 per cent in June 1998 to
60
could
be
system.
economy.
Banks
rescued through
from
Around
the
200-300
second
group
government support in
raising capital, attracting new investment and restructuring their operation.
The approach of the central
bank to the third group of banks is to liquidate them
as
soon
as
possible
using
bankruptcy of credit institutions.
a
new
law
on
the
A large number of
banks would belong
in the fourth group.
These
in comparison with 1,231 firms privatized in 1997.
banks would be transferred to a newly created bank
Privatization revenue accounted for 0.5-0.7 per cent
in which the State and the bank’s creditors will hold
of GDPin Kazakhstan in 1997, compared with 3.5
stakes with the assistance of the new agency for
per cent in 1996.
restructuring
tion in the oil and gas industries in 1998 owing to
the lack of strategic partners and the absence of oil-
credit
December 1998.
organization
established
in
The central bank has designed
Kazakhstan suspended privatiza-
and implemented individual restructuring plans for 15
export pipelines.
banks, including large ones unable to operate but
privatization programme that had been suspended in
considered
too
“socially
important” to
be
closed.
1997.
In 1998, Kyrgyzstan restarted the
The government was expected to sell the
About 860 banks of the Russian Federation were
state-owned telecommunications monopoly, as well
considered stable and had sufficient resources to
as some major state business in the mining, metal-
survive without significant assistance from the central
lurgy, electronics and energy sectors.
bank.
In September 1998, the central bank lowered
In 1997, a total of 742 state-sector enterprises
the reserve requirements for banks from 10.0 to 5.0-
worth about $13 million were sold in Tajikistan and
7.6 per cent in order to increase bank liquidity.
another 2,000 were
The ongoing economic crisis in the Russian
expected to
be
privatized
in
1998, including two industrial giants of the economy:
Federation has been strongly felt by the stock mar-
the
ket, where liquidity has been severely constrained as
smelter.
a result of low investor confidence.
major state-owned enterprises in 1998 through the
bond
markets
of
the
Russian
The stock and
Federation
began
showing steep declines in the autumn of 1997.
By
state
electricity
company
Turkmenistan
and
the
aluminium
planned to corporatize
18
closed sale of 10 per cent of the stocks to workers
in firms and 5 per cent to managers.
The privatiza-
August 1998, the benchmark stock index fell to its
tion of medium-size and large enterprises in Armenia
lowest level in more than two years.
has become increasingly complex since the govern-
Yields on long-
term government debt rose to 130-140 per cent from
ment switched the emphasis to cash sales in 1997.
90-110
The
per
cent.
A
state
programme
for
the
1998
programme
of
Azerbaijan
protection of the rights of investors of the Russian
privatization of large enterprises.
Federation introduced in 1998 was aimed at restor-
cent of small state-owned
ing confidence in the country’s stock market through
privatized.
emphasized
So far, 80 per
enterprises
have
been
compensation and insurance schemes for investors
and requiring better financial information disclosure.
The
of
the
Russian
Federation
also continued its privatization programme.
the
Policy issues and responses
Government
number of state-owned
companies
However,
that
were
expected to be privatized in 1998 was reduced from
3,000 to 697.
One of the outcomes of the crisis in
In recent years, the economies of Central Asia
the Russian Federation which threatened to seriously
have made significant progress in restoring positive
damage future economic growth prospects was the
economic growth rates and price stability.
particularly
However,
adverse
impact
on
new
small
firms.
they still have to tackle the problems of large fiscal
About 15 per cent of registered small businesses in
deficits, as well as current account deficits.
Moscow were closed in August-O ctober 1998.
They
need to carry forward their privatization programmes
and
continue
market-oriented
institutional
reforms.
The combination of large fiscal
and
current
Financial sector reforms are a priority issue for these
account deficits has appeared to be one of the main
countries.
constraints
to
macroeconom ic
stability
countries of North and Central Asia.
The
privatization
of
state-owned
enterprises
in
the
A number of
countries have taken measures in the recent past to
has remained the key element of enhancing produc-
deal with the problem of fiscal deficit.
tivity and efficiency of the real sector in the countries
ment of Kazakhstan established a state revenues
of North and Central Asia.
tion
process
However, the privatiza-
has slowed down
in most of those
ministry
to
formulate
fiscal
policy
taxation and customs in the economy.
The Governand
regulate
In an effort
In 1998, the Government of Uzbekistan
to boost budget revenue and preclude tax evasion,
planned to sell off shares in 346 state-owned firms,
the Government of Armenia extended the so-called
economies.
61
South and South-West Asia
system of “fixed payments” to more categories of
small
businesses,
income tax.
thereby
Under the
exempting
them
new legislation,
from
services
Growth performance
sector outlets and small firms have to pay a fixed
amount of money to the State, depending on their
location and size.
increase
The measures were expected to
budget revenue and,
expand
the
tax
base
by
at the same time,
cracking
down
on
tax
evasion among owners of small businesses.
In India, there was a distinct improvement in
the
performance
of both the
industrial sectors
GDP growth
agricultural
in fiscal year
and the
1998 and
rate was estimated
at 6.0
overall
per cent
The
compared with 5.1 per cent in 1997 (table II.10).
Government of Uzbekistan was expected to keep the
Aided by a good summ er monsoon, food grain
production was estimated to have exceeded the
consolidated fiscal deficit below 4 per cent of GDP
in
1998,
financed
mainly
by
the
central
bank’s
credits.
record 199 million tons produced in 1996.
As a
result, output of agriculture grew by 3.0 per cent in
1998 as opposed to a contraction observed in the
The banking sector in most countries of the
region
remained
underdeveloped
and
weak,
limited experience in commercial operations.
with
As a
previous year.
benefit from
The industrial sector continued to
the
governm ent’s sustained
effort to
abolish licensing for both domestic production and
result, these countries have been unable to provide
exports
attractive
investment.
Infrastructure,
especially electricity
generation, picked up significantly in 1998, which
savings
facilities
and
mediation for loanable funds.
meaningful
inter-
Banking regulations
and supervision need to be strengthened and this
requires broad institutional and capacity-building.
and
the
consequent
economic
crisis
has
delayed the
recovery
in
the
long-
anticipated
economic
Russian
Federation.
The urgent challenge is to draw up a
in
private
helped the industrial sector to maintain its tempo
and grow by an estimated 5.5 per cent, the same
rate as in the previous year.
The
increase
ing
sector,
capital
Within the manufactur-
goods
and
consum er
durable
goods took the lead in terms of growth, followed by
intermediate and basic goods.
The services sector
credible economic recovery plan and to restore confi-
remained buoyant thanks to the good performance of
dence in the banking system so as to enable banks
both
to resume intermediation and help in reinvigorating
demand
the economy.
Massive withdrawals by depositors
related activities and financial services.
complicated
growth in the services sector was estimated at a
healthy 8.0 per cent.
have
not
only
banks’ soundness
but
further
Among
upward.
the
also
effort
driven
the
to
restore
interest
initial
rates
stabilization
measures undertaken by the new Government of the
Russian
agriculture
Federation were revitalization of the pay-
ment mechanism paralysed by the crisis and default,
In
for
and
industry,
transportation,
response
to
which
generated
communication,
liberal
trade-
In
economic
1998,
policies,
demand for consumer durables in India has been
very strong in recent years and provided a major
permission for foreign banks to collect deposits and
stimulus to the industrial sector.
The number of
households capable of owning consum er durables
provide credit facilities, adjustments in the clearing
has
systems for the treasury bills and loan payments
population,
frozen
claims
towards buying consumer durables, was projected to
between enterprises and the budget, and controlling
rise from 78 million in 1994 to 177 million by 2000.
in
August
1998,
balancing
mutual
money supply.
been
increasing.
which
The
has shown
Indian
middle-class
a strong
inclination
In 1998, against the background of a slowdown in
capital inflows and a somewhat less friendly external
A
new
tax
code
is
needed
urgently
to
environment following India’s nuclear testing in May
generate higher tax revenue to lower the budget
1998, the central government budget announced in
deficit and to pay wages and pension arrears.
It is
June was expansionary.
Nominal spending was set
essential for the government to restructure its debt.
to rise by 14 per cent.
This included a significant
The
increase of 35 per cent in spending on infrastructure
total
domestic
debt
of
government
is
not
excessive, but its maturity structure, even after the
and
restructuring package, is heavily biased towards the
Direct
short term.
additional levy was imposed on imports.
62
a
14 per cent
tax
rates
rise
were
in
left
defence
expenditure.
unchanged,
while
an
Table II.10. Selected South and South-West Asian economies: growth rates, 1995-1998
(Percentage)
Rates o f growth
GDP
India
Iran (Islamic Republic of)a,b
Pakistana
Sri Lanka
Turkey
Agriculture
Industry
Services
12.5
6.4
5.5
5.5
10.4
3.4
5.2
2.4
5.2
4.7
0.9
1995
1996
1997
1998
7.2
7.5
5.1
6.0
-3 .0
7.9
-1 .5
3.0
1995
1996
1997
1998
3.2
4.7
2.6
-0 .3
2.3
3.6
1.5
3.5
1995
1996
1997
1998
5.2
5.2
1.3
5.4
6.6
5.8
0.1
5.9
4.9
5.4
1995
1996
1997
1998
5.5
3.8
6.4
5.5
3.4
-4.1
3.0
3.5
6.9
6.5
7.9
6.6
6.7
5.5
1995
1996
1997
1998
7.2
7.0
7.5
4.5
2.0
4.4
-2 .3
4.5
8.7
6.9
10.4
4.1
7.8
7.8
8.6
4.6
8.1
8.8
8.0
1.1
- 3 .3
4.8
4.8
2.1
4.8
1.0
6.2
4.8
6.0
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); and national sources.
Notes: Data for 1998 are estimates.
power; and construction.
a
b
Industry comprises mining and quarrying; manufacturing; electricity, gas and
Real GDP at factor cost.
Industry comprises oil; mining and manufacturing; water, gas and power; and construction.
The rates of both investment and savings as a
percentage
of
GDP
in
India
have
been
comparison with its per capita income.
high
in
The average
sector and the shifting of about 300 items from the
restricted
import
list
to
the
free
(“open
general
licence”) list of imports to ease import of inputs for
investment rate per annum reached more than 25
production.
Other proposed measures included the
per cent in the eighth five-year plan period (1992-
introduction
of derivatives trading
1997) and was financed mainly by gross domestic
back, partial utilization of employee provident funds
savings, and marginally through net inflow of capital
for investment in private sector bonds/securities and
(figure II.3).
the
The rates of investment and savings in
1998 were estimated to remain high at 27 and 25
introduction
area
marginally
from
sector.
Measures
to
foreign
level
encourage
participation
in the
in
the
private
previous
investment
year.
in
the
insurance
which
was
hitherto
reserved
for the
public
and
domestic market were
strengthened in the 1998 budget.
competition
buy-
sector by letting the private sector enter into the
per cent respectively, the former having increased
its
of
and share
These measures
In the Islamic Republic of Iran, GDP in fiscal
year 1998 was estimated to decline by 0.3 per cent,
included the removal of coal, lignite and mineral oils
compared
from the list of industries reserved for the public
recorded in the previous year.
with
a
positive
2.6
per
cent
growth
Despite the fact that
63
Figure II.3. Savings and investment as a percentage of GDP in selected South and South-West
Asian economies, 1995-1998
Sources: ADB, Key Indicators of Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); World
Bank, World Development Report (Oxford University Press), various issues; and national sources.
Notes:
the
Data for 1998 are estimates.
agricultural
sector
showed
a
I indicates gross domestic investment; S indicates gross domestic savings.
much
improved
2.4 per cent in 1997 and furthe r to 1.3 per cent in
performance, GDP contracted because of a sizeable
1998.
reduction in the value added in the industrial sector.
declining trend; it contracted by 1.5 per cent in 1997
Investment expenditure
also
maintained
a
The deceleration in the overall industrial sector was
and by 1.8 per cent in 1998.
the result of an estimated 14.9 per cent contraction
ment to GDP declined from 15.3 per cent in 1996 to
(compared with 4.5 per cent contraction in 1997) in
14.6 per cent in 1997.
The ratio of invest-
GDP from the oil sector as a result of a decline in
the international price of oil.
However, GDP from
In Pakistan, the GDP growth rate in fiscal year
mining; manufacturing; water, power and gas; and
1998 at 5.4 per cent showed a significant improve-
construction were estimated to grow moderately at
ment from 1.3 per cent in 1997.
5.8,
the agricultural sector rebounded strongly to 5.9 per
4.4,
contrast,
6.5
the
and
2.5
services
per cent respectively.
sector
in
1998
grew
In
only
marginally.
The growth rate of
cent in 1998 compared with 0.1
per cent in the
previous year. The improved performance was aided
by strong
Consistent with the continuous decline in the
growth
in
the
sugar-cane
increased by 26.7 per cent over 1997.
crop,
which
The higher
GDP growth rate in the past two years, the growth of
achievement of agriculture was partly attributed to
total
the comprehensive package for the developm ent of
consumption
expenditure
of the
private
and
public sector declined from 3.6 per cent in 1996 to
64
agriculture
announced
by the
governm ent
at the
beginning of 1997.
adequate
The package included ensuring
returns
agricultural
to
inputs
and
agricultural credit.
sectors
rates:
7 and 9.3
both
compared with
relief
enhanced
in
recorded
GDP was estimated to rise from 24.4 per cent in
prices
of
1997 to
availability
of
savings rate was estimated to increase from
The manufacturing industries and
energy
1997.
farmers,
impressive
26.5
per cent
in
1998.
The
domestic
16.5
per cent of GDP in 1997 to 17.5 per cent in 1998.
growth
per cent respectively in
The Turkish economy in the recent past (1995-
1998
1.2 per cent and zero growth
in
Manufactured items that showed a particularly
1997) went through
an expansionary phase, with
high GDP growth rates with an accommodating mon-
strong performance included sugar, with growth of
etary policy.
45.7 per cent assisted by a good cane crop, and air-
to accelerate significantly.
conditioners, with growth of 166.2 per cent.
year
In 1998,
GDP from industry increased by 6.2 per cent over
In this process, price increases tended
macroeconomic
However, under a three-
structural
adjustment
and
stabilization programme, in 1998 (the first year of the
The
programme) targets for the budget deficit, borrowing
services sector also grew by 4.8 per cent in 1998,
and monetary aggregates were set at the beginning
more than twice the rate achieved in the previous
of the year.
year.
of 1998.
1997 when it grew by a mere 1.0 per cent.
A
very
strong
growth
in
transport
and
communications (8.8 per cent in 1998 compared with
These were largely met in the first half
Despite the slowdown of industrial sector
growth to 4.1 per cent in 1998 compared with 10.4
0.7 per cent in 1997) contributed to the improved
in the previous year, the GDP growth rate has been
performance of the services sector.
estimated at 4.5 per cent on account of improved
performance in the agricultural sector.
Investment expenditure
positive growth in 1998.
in
Pakistan
recorded
However, as a percentage
The growth
rate of agriculture in 1998 was estimated at 4.5 per
cent owing
to
an
increase
in
the
production
of
of GDP, it showed a marginal fall owing to a very
cereals and vegetables against negative growth in
high
the
nominal
GDP
growth
on
account
of
improved performance of the agricultural sector.
the
The
increase in nominal investment was due more to
previous
year.
However,
decelerated to 4.6
per cent
stock changes, partly the bumper cane crop, than
around half of the rate
fixed investment.
year.
A major part of total investment
in
line
with
the
slowdown in the industrial sector, growth of services
in
1998,
recorded
which
was
inthe previous
was supported by increased savings in 1998.
In Sri Lanka, the estimated growth rate of GDP
Inflation
in 1998 at 5.5 per cent was somewhat lower than
the 6.4 per cent in the previous year.
in
output
increase
cent.
of
tea
and
paddy
Inflation in India sharply fell from 9.4 per cent
An increase
contributed
to
the
of overall agricultural output by 3.5 per
On the other hand, poor import demand from
in 1996 to 6.8 per cent in 1997 (table II.11).
fall,
despite
demand
expansion
The
because
of
a
worsening of the fiscal deficit to 6.1 per cent of GDP
East and South-East Asian countries of a number of
was attributed
industrial
lagged effect of very favourable food crop production
products,
including
ceramic
products,
to supply-side factors, that
is, the
plastics and its products, diamonds and wood pro-
in 1996 and the growing integration of the Indian
ducts, affected the industrial sector, which grew at a
economy
somewhat lower rate of 6.6 per cent than the 7.9 per
essential items to be imported at international prices,
cent in the previous year.
which were
crisis
also
adversely
The regional economic
impacted
on
tourism;
from
stitutes.
with
the global
often
The
economy
that
allowed
lower than their domestic
year 1998
started
with
a
sub-
gradual
January to August 1998, the number of tourists from
increase in the rate of inflation.
East and
per cent
reached 18.6 per cent in October 1998 owing to
compared with the same period in the previous year.
the unprecedented seasonal rise of prices of fruit
South-East Asia fell
by 29.5
Overall, the services sector was estimated to grow
and
by 5.5 per cent in 1998 against 6.7 per cent in
administered
1997.
Gross domestic capital formation in nominal
vegetables
and
prices
petroleum products.
the
of
The monthly rate
upward
sugar,
revision
food
of
grains
the
and
The average rate of inflation for
terms was estimated to have increased substantially.
the whole fiscal year 1998 was estimated at 12 per
As a result, the ratio of domestic investments to
cent.
65
Table II.11. Selected South and South-West Asian economies: summary of macroeconomic
indicators, 1995-1998
(Percentage)
1995
1996
Budget balance/GDP
Money supply growth (M2)
Inflation rateb,c
-5 .9
11.0
8.9
-5 .1
18.7
9.4
Budget balance/GDPd
Money supply growth (M2)
Inflation rateb
- 0.1
30.1
49.4
32.5
23.2
Budget balance/GDP
Money supply growth (M2)
Inflation rateb
-5 .6
17.2
13.0
Sri Lanka
Budget balance/GDP
Money supply growth (M2)
Inflation rateb
Turkey
Budget balance/GDP
Money supply growth (M2)
Inflation rateb
India
Iran (Islamic Republic of)
Pakistan
1997
1998
- 6.1
- 6.0
17.7
13.7a
6.8
12.0
- 0.2
23.7
17.3
- 2.0
-6 .3
13.8
10.8
-6 .3
12.2
11.8
- 5 .4
14.0e
7.8
-8 .3
19.4
7.7
-7 .8
10.5
15.9
-4 .5
13.8
9.6
-6 .3
14.0
10.0
-4 .0
103.6
-8 .4
117.3
80.3
-7 .6
97.5
85.7
-7.1
78.1
57.6f
86.0
20.3
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998); IMF, International Financial Statistics, vol. LI, No. 9, September 1998; The Economist
Intelligence Unit, Country Report: Iran, third quarter 1998; and national sources.
Note:
Data for 1998 are estimates.
a January-June.
b Refers to changes in the consumer price index.
c For industrial workers.
d Excluding grants.
e January-September.
f January-October.
The fiscal deficit for 1998 was budgeted at
brought
about
this
decrease.
Twenty-five
items,
5.6 per cent of GDP, which was slightly lower than
including sugar, wheat, edible oil, milk, cheese, red
the actual deficit in the previous year.
However,
meat, rice and fertilizers, are subject to price control.
owing to a shortfall in revenue because of the roll-
In 1998, however, owing to the decline in oil revenue
back of certain tax and duty measures, the actual
and a sharp
deficit in 1998 was estimated to be 6 per cent of
deficit was estimated to increase to 2 per cent of
GDP.
The increased use of financial instruments
increase
in expenditure, the
budget
GDP, thus increasing the pressure on liquidity and
and open market borrowing lessened the need of
the demand situation.
the government to borrow from the central bank.
the fuel price implemented at the beginning of March
As a result, the money supply growth rate in the
1997 contributed to the cost push
first six months of 1998 was estimated to be lower
than in 1997.
per cent.
In the Islamic Republic of Iran, inflation in 1997
In addition, the doubling of
pressure,
and
inflation in fiscal year 1998 was estimated at 20.3
In
the
Islamic
Republic
of
Iran,
various
was 17.3 per cent, much lower than the 23.2 per
measures were undertaken to strengthen the tax
cent recorded in the previous year.
revenue
A reduction in
collection
system
in
order
to
stabilize
the growth of the money supply, as well as the use
government finance in the wake of fluctuating oil
of an elaborate system of price controls and subsidy,
revenue.
66
Important steps were taken to improve tax
administration.
tax
These
identification
taxpayers
and
included
numbers to
the
issuance
of
However, there were factors which slowed down the
a large
number of
price rise.
partial computerization
of the tax
virtually the same as in the previous year and did
The rate of monetary expansion was
administration, as well as increased recruitment and
not cause any additional demand pressure.
enhanced training of tax auditors.
other
In specific recog-
nition of the shortcomings of the current system of
hand,
despite
depreciation
of
On the
the
nominal
exchange rate by 6 per cent, a decline in the world
consumption and sales taxation under which specific
market price of major imports such as wheat, sugar
excise taxes were
levied on a small number of
and petroleum eased pressure on domestic prices.
commodities, the government was considering the
The inflation rate for 1998 was estimated at 10 per
introduction of a value-added tax.
cent,
Preparation of
the underlying administrative infrastructure is under
which
was
marginally
higher
than
in
the
previous year.
way.
In
In Pakistan, prices in general remained under
persistent pressure in the
1990s and the inflation
rate was in double digits until 1998.
However, there
Turkey,
the
macroeconom ic
adjustment
programme initiated in 1998 has been successful in
bringing down the inflation.
decelerated to
57.6
The increase in CPI
per cent during
the first
10
was a clear deceleration of inflation to 7.8 per cent
months of 1998 from 85.7 per cent in 1997.
in 1998 against 11.8 per cent in 1997.
The prices
was no increase in real wages in the public sector
of almost all of the items constituting the consumer
and the prices under the control of the public sector
price index recorded a fall.
of
a
well-performing
supply
situation,
Against the background
economy,
demand
which
eased
management
the
policies
pursued by the government also contributed to the
reduction in prices.
The government succeeded in
There
increased at a much reduced rate; 45.6 per cent in
January-October 1998 compared with 71.6 per cent
in
the
previous
year,
slowdown of inflation.
helped
by
thus
contributing
to
the
The slowdown was further
lower prices
of imported
commodities.
reducing the fiscal deficit by nearly one percentage
The
point in 1998.
As a result, the government’s borrow-
successful in limiting the budget deficit to a level
ing for budgetary support in 1998 was also reduced
which was slightly less than the level recorded in
from
the
level
in the
previous year.
Against a
adjustment
1997.
The
programme
in
estimated growth
1998
was
also
rate of the
money
borrowing target of 66 billion rupees, the government
supply was much less in 1998 and this also helped
borrowed only 57.4 billion rupees.
in keeping inflation in check.
At an institutional
level, the Economic Coordination Committee of the
The
Cabinet kept a close watch on the price situation
and the
supply of essential commodities,
holding
explicitly
macroeconomic
addressed
adjustment
the
inflation
programme
dynamics
and
meetings
every
necessary
proposed a gradual disinflation from the current high
steps to
ensure an adequate supply of essential
inflation rate to a single digit rate by the year 2000.
commodities.
demand
two
weeks,
This
and
effectively
management
took
complemented
measures
and
the
the
The three-year adjustment programme consisted of a
price
fiscal policy section, a monetary policy section and a
structural policy section.
situation improved significantly.
The fiscal part included
measures for limiting the increase in public sector
A
Sri
salary,
Lanka in 1997 was the reduction of inflation to a
key
macroeconomic
prices
single digit from the relatively high level recorded in
measures.
the previous year.
the
Colombo
achievement
However, in the first half of 1998,
CPI
increased
somewhat faster than in 1997.
and
increased
sharply
some
production shortages.
and
increases
in
implementing
agricultural
certain
domestic asset increases.
Structural policies encom -
Supply factors were
the introduction of a regulatory framework for the
of
per
The prices of
food
crops
weather-induced
In addition, the full direct and
telecommunications
domestic
prices
and
energy
of petroleum
sector,
introducing cost control measures and user fees in
regulations strictly on the banking sector.
were
felt
in
1998.
inter-
national prices, raising the minimum retirement age,
tariff
1997
making
responsive to
indirect effects of the upward revision in electricity
September
reform
On the monetary side, limits were set on
the
in
support
tax
passed a wide variety of new measures, including
12.2
subsidiary
because
restricting
cent,
by
mainly responsible for the price rise.
vegetables
in
health
care
system
and
enforcing
prudential
67
The estimated
import growth rate fell
cent
from
Trade performance
per
in
1998
4.4
per cent
in
to 2.7
1997.
India’s merchandise exports in fiscal year 1997
Lower commodity prices, including that of oil, were
touched $35 billion compared with $33.5 billion in
a major factor contributing to the lowering of the
1996,
representing a low growth of 2.1
(table II.12).
import bill.
per cent
commodity groups was mixed.
Another causal factor was the depre-
ciation of the domestic currency by over 10 per
The export performance during 1997 by
cent in 1998, which made imports relatively more
Commodity groups
with a considerable share of total exports such as
expensive in terms of local currency and reduced
textiles,
their demand,
including
ready-made
garments
(24.2
per
cent), posted a growth of 2 per cent, and gems and
international
jewellery (15.2 per cent) recorded a growth of 7.6
consumers.
per cent.
whereas
th e
(12.3 per cent) registered a steep negative growth of
benefit
of the
not passed
lower
on
to
However, the nominal depreciation did
not help exports.
However, agriculture and allied products
the
price of oil was
Over a longer period, whereas
n om inal d o lla re x c h a n g e
ra t e
d e p re c ia te d
by
about 40 per cent from
1992 to
1998, the real
growth in dollars was recorded at a negative 2.8 per
effective
actually
appreciated
cent over the same period in 1997.
about 3 per cent, owing to relatively high inflation
9.2 per cent.
From April to August 1998, export
However, there
exchange
rate
by
were exceptions to the poor trend; software exports
in India.
grew by 50 per cent year on year in the first quarter
the overall trade deficit was estimated to increase
Owing to the weak export performance,
of fiscal year 1998 and the outlook for engineering
slightly from 4.3 per cent of GDP in 1997 to 5 per
goods,
cent in 1998.
pharm aceutical products and jewellery was
improving.
India’s external sector developments
in 1997 and 1998 were marked by sluggishness of
The weak international demand, including
low
trade and inflows on account of invisibles, leading
commodity prices, negatively affected the dollar value
to an increase in the current account deficit from
of commodity exports.
1.7 per cent of GDP in 1997 to 2.4 per cent in
the
effect
of
regional
economic
crisis
and
For the full fiscal year 1998,
1998.
exports were estimated to contract by 0.5 per cent.
Table II.12. Selected South and South-West Asian economies: merchandise exports and
imports in United States dollars and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
1997
Imports (c.i.f.)
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1995
1996
1997
Indiaa
34 849
20.8
5.6
2.1
Iran (Islamic
Republic of)a,b
1998
-0 .5
Annual rates of change
(Percentage)
1997
1995
1996
1997
1998
51 126
28.0
12.1
4.4
2.7
14 995
1.2
17.3
0.0
18 506
-5 .5
22.0
-1 7 .4
Pakistana
8 320
19.6
7.0
-4 .4
3.7
11 894
21.4
13.6
0.8
-1 4 .9
Sri Lanka
4 666
18.4
7.8
13.9
6.7
5 839
11.3
2.0
7.9
7.0
26 245
19.5
7.3
13.0
4.8
48 585
53.5
22.2
11.4
1.9
Turkeyc
Sources: ESCAP secretariat calculations based on United Nations, Monthly Bulletin o f Statistics, vol. Lll, No. 9,
September 1998; IMF, International Financial Statistics, vol. LI, No. 11, November 1998; and national sources.
Note:
a
b
c
68
Data for 1998 are estimates.
The data are based on the fiscal year.
Imports value on f.o.b.
Excluding shuttle trade for exports.
The merchandise trade surplus in the Islamic
On the export front, Pakistan’s achievement in
Republic of Iran was at a peak level of $7.4 billion in
fiscal year 1998 was modest.
fiscal year 1996.
depreciation of the currency and a number of export
Oil and gas exports comprising
about 80 per cent of total exports over the 1990-
incentives
1996
increased
period,
however, fluctuated
in the
range of
offered
by
only
Despite significant
by
the
government,
3.7
per
cent.
$14.6 billion to $19.3 billion owing to fluctuations in
performance was
the international price of oil.
previous year, when exports contracted.
dise
exports
declined
by
The value of merchan-
expected
to
follow
a
the
better compared with the
A break-
1997
down of total exports by comm odity group reveals
In 1998, exports
that the primary commodities group recorded a rise
17.4 per cent
because of the slump in oil prices.
were
much
exports
However,
similar trend
in
as
the
of 17 per cent while textile manufacturing showed a
demand situation, as well as the price of oil, further
slight decrease
deteriorated, partly because of the regional economic
increase.
crisis.
cent compared with a slight increase (0.8 per cent)
Reducing heavy dependence on oil exports
continued to be a major aim of the government.
To
and
other
manufacturing
a
small
Imports in 1998 fell by a large 14.9 per
recorded
in the
previous
year.
Imports
of food
accomplish this, efforts will have to be undertaken to
registered an increase of 17.2 per cent, while imports
increase production and exports of industrial goods.
of machinery, the petroleum group, metal and chem i-
This requires raising the level of competitiveness of
cal products recorded a substantial decline.
industrial products in the international market, which
commodity prices,
in turn needs a comprehensive set of policies and
contributed to the decline in the import bill.
programmes, the components of which would include
channelizing
investment
in
the
industrial
sector,
designing appropriate fiscal incentives, encouraging
foreign investment and setting up appropriate legal
infrastructure.
import of products which had domestic substitutes
continued.
In fiscal year 1997 the
total import bill
was $14.9 billion and showed virtually no increase
over that of 1996.
Of the total imports, food and
also
A steep fall in imports, combined with a small
increase in exports, caused the trade balance to
improve
showed
in 1998.
The invisibles balance also
improvement,
partly
owing
to
higher
overseas workers’ remittances.
On the import side, controls on limiting the
Lower
including the price of oil,
a positive
impact on
the
These changes had
current
account deficit,
which fell from $3.85 billion in 1997 (6.3 per cent of
GDP) to $2.10 billion (3.2 per cent of GDP) in 1998.
In Sri Lanka, merchandise exports increased by
8.4 per cent in the first seven months of 1998 over
agricultural products accounted for the largest share
the same period in the previous year.
(21 per cent of total imports in 1997) followed by
garment exports increased at a higher rate of 14.3
machinery and equipment (18.8 per cent), iron, steel
per cent during the same period.
and metal products (11.8 per cent) and electrical
export trade is mainly governed by the Multifibre
equipment (9 per cent).
Arrangement quota system, the regional economic
Although imports showed
Textiles and
Since the garment
no growth, lower oil export revenue was responsible
crisis,
for decreasing the trade surplus from $7.4 billion in
currency of many East and South-East Asian coun-
1996 to $3.5 billion in 1997.
tries but a much lower depreciation of the Sri Lankan
which
led
to
large
depreciations
in
the
currency, did not affect the export performance of this
The deficit in the services account has been
sector.
Agricultural exports predominated, with the
between 2 and 3 billion dollars over the last four
export of tea increasing by 17 per cent in dollar
years.
terms.
Services payments rose in 1997 due in part
However,
exports
of
gems
and jewellery
to some increase in public sector project activities.
decreased by 42.3 per cent in the first seven months
The increase was, however, partially offset by the
of 1998 owing to substantial slackening of demand
increase in services receipts associated with higher
resulting from the regional economic crisis.
exports
South-East
of
engineering
services.
Transfer flows,
Asian
countries,
including
which consist mainly of private transfers, have been
counted for 80 per cent of Sri
decreasing in the recent past.
exports, 67 per cent of
Net private transfers,
mainly workers’ remittances, dropped to virtually nil
diamond exports in 1997.
in 1995, but recovered modestly in later periods:
1998, total exports were
$463 million in 1996 and $259 million in 1997.
to
East and
Japan,
ac-
Lanka’s jewellery
gems and 12 per cent of
During
the full year of
estimated to grow by 6.7
per cent, down from 13.9 per cent growth in 1997.
69
Merchandise imports increased by 13 per cent
during the first seven months of 1998.
Reflecting
the increase in domestic investment, imports of in-
cent
respectively.
merchandise
For
imports
the
full
were
year
of
1998,
estimated
to
have
increased by 1.9 per cent compared with double-digit
vestment goods and intermediate goods (excluding
growth
petroleum
imports, despite slower export growth, caused the
and
diamonds)
also
recorded
healthy
in the
previous
year.
The
slowdown
of
Despite such increases, a sharp decline in
merchandise trade deficit, including the shuttle trade,
the prices of sugar, wheat and petroleum helped to
to deteriorate only marginally from $15.4 billion in
contain the overall import outlay.
For the whole year
1997 to $15.9 billion in 1998.
of
were
growth.
1998,
merchandise
imports
estimated
to
increase by 7 per cent compared to 7.9 per cent in
the
previous
year.
The
impact
of the
regional
Capital inflows/outflows
economic crisis was also felt, to some extent, on
imports:
diamond
imports
for
In India, there was a decline in overall net
re-export declined
sharply because of a fall in the demand for diamond
capital
in many countries, especially in the East and South-
estimated $9.8 billion in 1998, despite higher inflows
East Asian countries.
of
However, the deficit on the
trade account, which showed some improvement in
1997, worsened marginally from 8.0 per cent of GDP
to 8.1 per cent in 1998.
Total receipts from services
FDI
1997.
due
A sluggish growth in tourist arrivals, mainly
to
uncertainties
created
by
the
regional
economic crisis and the continuing security concerns
in the country, was one of the major reasons for a
slow growth in receipts from services.
The deficit in
current account in 1998 was estimated at 3.1 per
cent of GDP compared with 2.9 per cent observed in
the previous year.
1998 was affected by the adverse external environDuring the first nine months of 1998, exports
to EU increased by 6.6 per cent, whereas exports to
the Asian
region and the
Russian
result
of
their
economic
and
financial
crises.
Earnings from the shuttle trade also declined from
$2.6 billion
in 1997 to $2.2 billion in
full
of 1998,
year
estimated
to have
merchandise
increased
1998.
exports
by 4.8
per
For the
were
cent
compared with 13.0 per cent in the previous year,
whereas the shuttle trade (around 18 per cent of
total
exports
in
$10.4
billion
commercial
launch
of
bank
in
1997
credit,
five-year
1997)
declined by 14 per cent.
was
estimated
to
have
Growth of imports slowed
to
and
“Resurgent
an
the
India
Bonds” attracting over $4 billion from non-resident
Indians.
The
situation
regarding
capital
flows
was
somewhat affected by India’s nuclear explosions in
the month of May 1998 and subsequent sanctions
imposed
by
countries.
the
United
States
and
other
G-7
Under the sanctions, loans by the United
States and Japanese banks to official agencies were
cut off, and trade finances
and
a m ajor part of
international and multilateral development aid were
postponed.
quarter
The confidence of foreign investors was
of
1998,
Moody’s
In the third
Investors
Service
downgraded the Indian credit rating, which raised the
cost of borrowing for Indian private com panies and
state corporations.
Federation fell
drastically by 50.5 and 26.5 per cent respectively as
a
from
negatively affected by the sanctions.
In Turkey, the growth performance of exports in
ment.
and
successful
were estimated to increase by a modest 6 per cent
in 1998 compared with a 14 per cent growth in
inflows
The
changing
composition
of
the
capital
account in favour of non-debt-creating financial flows
led to impressive improvements in debt indicators.
The debt-to-GDP ratio declined continuously from 41
per cent in 1991 to 28 per cent in 1996 and further
to 26 per cent in 1997 and 1998.
The debt-service
ratio also declined continuously from 35 per cent in
1990 to 21.2 per cent in 1997 and further to 19.5
per cent in 1998.
Foreign currency reserves were at
$30.2 billion, equivalent to 6.6 months of im ports at
the end of March 1998.
down significantly in 1998 in response to deceleration
of
domestic
demand
as
well
reductions in the import price of oil.
as
significant
During the first
In the
Islamic
Republic
of
Iran,
the
capital
account balance shifted from a surplus to a deficit
nine months of 1998, imports of consumption goods
from
grew by 7.7 per cent, while imports of intermediate
service payments.
and investment goods declined by 1.1 and 3.1 per
at $4.8 billion in 1997 was somewhat lower than in
70
1995
onward,
mainly
owing
to
large
debt-
The deficit in the capital account
However, progress was achieved in reducing
against the background of sizeable current account
the outstanding stock of external debt and improving
1996.
deficits and assumed particular significance in fiscal
its maturity structure through the use of long-term
year 1999.
inflows in the form
1998
nancing
of project financing and refi-
arrangements.
The
outstanding
external
The testing of nuclear weapons in May
triggered
sanctions
debt declined from its peak of $23 billion in 1993 to
international financial
$12.1
from
billion
in
1997.
A notable feature in this
phenomenon was the reduction of short-term debt
from its peak of $6.7 billion in 1994 to $3.3 billion in
1997.
Owing
to
the
continued
existence
of
a
by
the
G-7
countries
against Pakistan and postponem ent of assistance by
IMF
was
institutions.
consequently
The
assistance
in
abeyance.
held
However, the sanctions were eased towards the end
of 1998 and IMF lending was resumed in early
1999.
Immediately
after
the
nuclear
blast,
the
number of deterring regulations in the area of FDI,
government froze foreign currency accounts of resi-
only 50 projects totalling $722 million were approved
dent and non-resident Pakistanis, with total deposits
between
of $10.9 billion.
1993 and October 1997; however, actual
investment inflow was a very low $40 million.
An
However, foreign currency account
holders were allowed to withdraw money in domestic
alternative to FDI that is becoming important in the
currency
country is the buy-back arrangement, under which
They were also given the option of converting their
foreign investors, especially in the oil and gas sector,
deposits
receive a portion of output generated by a project.
rates.
In 1998, two such agreements were concluded for
the development of a gas field and an oilfield. This
at
the
into
prevailing
official
dollar bonds
with
exchange
attractive
rate.
interest
In Sri Lanka, net inflow of capital in 1998 was
type of arrangement was also expected to increase
estimated
the efficiency of oil production through technological
improvement,
without
increasing
direct
foreign
ownership.
government borrowing in international capital markets
to
increase
to
$529
amounting to $100 million.
million,
including
The net inflow of FDI
was estimated to increase by 12 per cent to $145
million.
The rate of increase was lower than that
observed in 1997.
Net portfolio investment in 1998
Long-term capital inflows in Pakistan declined
to $1.7 billion in 1998 from $2.1 billion in 1997.
was
Although the overall balance of payments improved
continued to sell their shares in the Colombo Stock
over the
year
owing
to
an
improvement
in the
estimated
Exchange,
to
reflecting
be
negative
the
as
contagion
foreigners
effect
of
the
current account balance, there was significant
drawdown on the country’s foreign currency deposits.
financial turmoil in the major emerging markets of
The foreign exchange reserves were depleted and
$2,029 million at the end of fiscal year 1998, equivalent to 5.3 months of imports.
estimated at $930
million as of end June
1998,
the region.
Gross official reserves were estimated at
compared with $1,143 million recorded at the same
time in the previous year.
Standard
&
Poor’s
In Turkey, the inflow of portfolio investments at
The credit-rating agency
lowered
the
country
credit
rating in October 1998, which increased the cost of
$1.4 billion
in 1997.
commercial borrowing from abroad.
in the first six months
of
1998 was
slightly lower than the $1.2 billion in the same period
Mainly because of the increase in private
sector borrowings, a net inflow of $2.7 billion longFDI declined from $682 million in 1997 to $601
term capital took place in the first six months of
million in 1998 and portfolio investment from $377
1998, compared with a net inflow of $1.6 billion in
million to $167 million.
the same period in 1997.
Total outstanding medium-
On the short-term capital
term and long-term debt (regular debt repayable in
account, a net inflow of $3.5 billion was realized in
foreign exchange) was estimated at $22.8 billion, or
the first six months of 1998 compared with $1.9
35.7 per cent of GDP, in 1998, which was slightly
billion in the same period of 1997.
After registering
less than the 37.5 per cent of GDP in 1997.
a sharp
official
Debt
rise
in April-July
1998,
reserves
earnings
started to decline in the second half of August as a
increased marginally in 1998 to 27.7 per cent from
result of outflows induced by the financial turbulence
27.2 per cent in 1997.
created
servicing
as
a
percentage
of
export
One of the major priorities of
by
the
financial
policy making in the country has been to ensure
Federation.
However,
servicing of foreign debts.
$22.1
in October
Debt servicing of loans
has continued to be a burden on the government
billion
crisis
official
1998,
in
the
reserves
$3.7
Russian
stood
billion
at
higher
than at the end of the previous year.
71
Indian rupee depreciated by 14.5 per cent between
Financial sector developments
August 1997 (the time around which the regional
One of the aims of financial sector policies in
economic crisis started) and October 1998.
the South and South-West Asian countries in 1998
was
the
maintenance
of
a
comfortable
liquidity
position for the commercial sector, while at the same
time containing the growth of overall money supply
by restraining direct government borrowing from the
central bank.
All the countries learned lessons from
the
financial
regional
crisis,
and
the
prudential
regulations of the financial institutions were strengthened significantly.
In the Islamic Republic of Iran, credit ceilings
on the banks continued to be administered by the
central bank; both credit-to-deposit ratio and overall
credit
bank.
and 1998 remained comfortable.
The cash reserve
ratio of the banks was reduced from 10 per cent in
1997 to 8 per cent in 1998, which allowed the banks
to expand commercial credit.
To enhance demand
for credit, a one percentage point reduction in bank
lending rates was made.
Bank credits increased by
16.5 per cent in 1997 owing to a sharp increase in
credit to finance food procurement operations.
Bank
credit was estimated to increase by 17.5 per cent in
1998, with 92 per cent of the increase in credit
are
supervised.
Commercial
bank
Under Islamic banking, these are expected
rates of return; ex-post rates may be higher or lower
than quoted rates depending on the profitability of
the
In India, the overall liquidity position in 1997
ceiling
rates of return are set administratively by the central
projects
financed
by
banks.
average deposit rate and the
The
weighted
rate of charge
(on
loans and advances) were 12.4 and 16.8 per cent
respectively in 1997, lower than the inflation rate,
implying
that
real
lending
side,
the
rates
were
negative
negative.
real
rates
On
on
the
bank
facilities contributed to heightened demand for bank
credits, putting pressure on the effectiveness of the
supervisory instruments of monetary control (such as
overdraft interest rate) at the disposal of the central
bank.
The Islamic Republic of Iran continued to have
attributable to financing large procurement of rice
a dual foreign exchange system.
and wheat.
the rate is around 1,750 Iranian rial to the dollar
Since May 1995,
under the lower rate and 3,000 rial to the dollar
Commercial bank credits traditionally comprised
bank’s advances in the form of loans, cash credits,
overdrafts
and
inland
as
purchased and discounted.
well
as
foreign
bills
However, with deregula-
tion, there has been a noticeable shift in the bank’s
asset portfolio mix, with a substantial increase in
investment in money and capital market instruments
such as commercial paper, shares and debentures
issued by the commercial sector.
Banks also held
government securities in excess of their statutory
obligations to do so.
under the higher rate.
In general, the lower rate is
applied to oil and gas export receipts, imports of
essential goods and services, and public sector debt
services and the
account
higher rate to
transactions,
all other current
including
non-oil
exports,
imports of industrial goods, spare parts, raw materials, and service receipts and invisibles.
However,
attempts are being made to unify the exchange rates
in the broader
regime.
context
of
liberalizing
the
trade
As a result of all this, there
was a reduction in the net non-performing assets of
In Pakistan, the government ensured the avail-
the commercial banks, which was estimated at 8 per
ability of enough liquidity in the economy in 1997 by
cent of net advances in 1998 compared with 8.7 per
taking a number of measures, which were further
cent in 1997 and 9.2 per cent in 1996.
reinforced
Most of the
public sector commercial banks were expected to
in
the
early
part
of
1998.
These
measures included changes in the central bank’s
attain the minimum capital adequacy ratio of 8 per
refinance policy which
cent by the end of 1998.
and the cost of credit.
influenced both the supply
A major reduction in the
liquidity ratio freed the bank’s funds and a large
Deterioration in the current account balance in
1998
and
large
outflows
of
foreign
institutional
expansion of credit in the private sector could then
be financed.
The rediscount rate was lowered by 2
investment put downward pressure on the exchange
percentage points.
rate.
(interest rate) to be charged by the banks from their
The Reserve Bank of India intervened in the
exchange market from time to time.
72
However, the
The maximum
rate of finance
borrowers under the export finance scheme and the
scheme for financing locally manufactured machinery
exchange rates.
was reduced from 11 to 8 per cent.
rate system in the country.
As a result of
these measures, from late 1997, a brisk revival of
private
sector
demand
for
credit
occurred
and
contributed to the recovery of the industry sector in
fiscal year 1998.
This has created a dual exchange
In fiscal year 1998, the
Pakistan rupee/dollar exchange parity was adjusted
downward twice: by 8 per cent in October 1997 and
4.5 per cent in May 1998.
It is noteworthy that credit condi-
tions were eased under a regime where inflation was
In Sri Lanka, the budget deficit as a percent-
controlled by containing the overall growth of the
age of GDP was 6.3 per cent in 1998 compared
money supply (M2) by reducing government borrow-
with 4.5 per cent in 1997.
ing.
deficit increased from the banking system.
market operations were
A number of steps were taken during 1998 to
strengthen
the
prudential
regulation
of
banks,
enhance recovery of defaulted loans and restructure
public sector banks.
Effective from the accounting
year ending December 1997, the existing format of
the balance sheet and profit and loss accounts of
changed
to
standards,
banks
was
ensuring
adequate
conform
operations.
Also, concerning prudential supervision,
the central bank introduced
adequacy,
maximum
to
international
transparency
of
regulations on capital
capital
requirements,
loan
concentration and exposure limits, and accounting
and auditing standards consistent with international
norms.
large
As regards commercial bank restructuring, a
number
retrenched
of
and
redundant
about
300
bank
staff
loss-making
were
branches
were closed during the first half of 1998.
liquidity
development financial institutions, and for privatizing
nationalized banks.
used to
in the
the
The
economy
private sector recorded
and
bank
to
impose
maintaining
portfolios.
the
strict
quality
overall
excessive
Bank credit to
a moderate
regional financial crisis
Open
limit the
upward pressure on the interest rate.
increase.
prompted the central
prudential
of the
regulations
comm ercial
for
banks’
The banks have been keeping provision
for loans and advances which have been in default
for six months or more.
Such provision is now to be
made for loans which are three months in arrears.
However,
owing
to
the
relative
insulation
of
the
capital market, the regional economic crisis did not
do much damage to the foreign exchange market;
the
nominal
exchange
rate
depreciated
by
a
moderate 6 per cent during the first half of 1998.
Efforts
were initiated towards divesting government’s remaining ownership in two commercial banks and two
increase
The financing of the
In Turkey,
the
government tried
in
1998 to
provide liquidity for financial markets which had been
depressed from the fallout of the Russian financial
crisis.
The
government
announced
a
series
of
measures in early September 1998 for this purpose.
Important developments took place in the area
The measures included the abolition of withholding
of foreign exchange controls in the aftermath of the
tax on interbank deposits following their reduction
sanctions
imposed
foreign
from 12 to 6.6 per cent in July 1998, the reduction
exchange
regime
adjusted to boost exports,
of the bank and insurance transaction tax from 5 to
on
was
restrict
non-essential
tances
through
the
the
country.
imports
banking
and
The
increase
system.
remit-
Exporters/
1 per cent and the removal of withholding tax on
domestic
borrowing
(other than interest income from abroad) have been
interest accrued
on bank deposits
allowed to retain 50 per cent of the proceeds for two
duction
breaks
weeks.
securities.
at the open market exchange rate.
The remaining
of
a
tax
reduction
October
included
They can sell these proceeds to the banks
were
from
persons receiving remittances and invisible receipts
1998.
in withholding
on
Also
tax
and the
long-term
on
intro-
government
These measures were expected to lower
interest rates and thus the cost of borrowing.
50 per cent has to be surrendered at the official
exchange rate to the State Bank of Pakistan.
The
Exchange
rate
policy
in
Turkey
has
been
import of essential items such as wheat, pulses,
implemented with a view to maintaining international
edible oil, petroleum group, fertilizer, pesticides and
competitiveness.
There was a large depreciation of
pharmaceutical products has been allowed at the
the domestic currency
in
official exchange rate.
January
1998.
All other imports have had to
and
October
nominal term s
However,
between
the
real
be financed by buying foreign exchange at the rate
effective exchange rate appreciated marginally over
which is the mean of the open market and official
the same period.
73
revolution
Policy issues and responses
technologies,
and
the
sector
remains
highly vulnerable to natural phenomena of both flood
The
countries
belonging
to
the
South
and
South-W est Asia subregion have been pursuing the
dual macroeconomic objectives of high GDP growth
and low inflation.
In this endeavour, a number of
issues have emerged which, in spite of governments’
best efforts have not been resolved satisfactorily and
continue to constrain the achievement of a higher
a
sector.
A number of reasons can be identified
Some of these are lack of investment in and
maintenance
marketing
of
irrigation
logistics
and
infrastructure,
inadequate
insufficient
diversification.
The dominant preoccupation with traditional cereals,
in many instances, constrained growth of high valueadded
level of economic performance.
Despite
and drought.
which are holding back the growth potential of this
non-cereal crops
with
good
export
market
potential.
number of economic
deregulation
and liberalization measures to boost private invest-
Reducing the budget deficit is an issue with
ment and the output of the industrial sector, the
which most of the countries of the South and South-
performance of the sector has not been satisfactory.
West Asian region have been grappling.
One of the major reasons for the slow growth of
ments have been making efforts to increase revenue
Govern-
industry can be identified as the lack of adequate
as well as decrease expenditure, especially current
availability of physical infrastructure, including electric
expenditure.
power
included widening the tax base, simplification of tax
and
transport
(roads,
railway
and
ports).
Revenue-increasing
m easures
have
Such constraints adversely affect the utilization of
regimes and improvements in the efficiency of tax
existing capacity and also deter new investment in
administration.
the sector.
uncommon.
Most countries have been trying hard to
increase investment in power and transport.
example, in the
For
1998 budget, the Government of
However, budget overruns are not
Expenditure
increases
have
been
a
major reason for the failure to contain the deficit,
despite efforts to trim them,
including
reducing a
India increased net spending on the infrastructure
variety of subsidies.
Associated with large deficits
sector by a hefty 34 per cent.
are
for
Some countries have
the
modalities
their
financing.
Non-
been offering incentives to attract foreign investment
inflationary financing of deficits under which a major
in the energy sector, including through guaranteed
part of the deficit is financed by raising resources
rates of return.
from the market and not from the central bank have
In some instances, these efforts
have been undermined by negotiation problems.
On
been used by many countries.
Although such a
the other hand, public sector enterprises involved in
modality might be effective in containing the growth
these
of the money supply and inflation in the short run, it
areas
efficiency
to
required
be
major
able
to
improvements
generate
any
in
investible
increases the level of governm ent’s dom estic debt
and future interest payments, thus contributing to the
surplus.
increase of current expenditure in the medium and
The
most
agricultural
countries,
sector is very
contributing
important
substantially
to
in
GDP.
More importantly, a very large percentage of the
long run.
already
Domestic public debt-servicing liability is
significant
for
some
countries
in
the
subregion.
population depends on this sector for employment
and for supply of food.
The performance of this
sector therefore has important direct implications for
poverty.
Besides, this sector supplies raw materials
to industries; sugar milling, cotton milling and tea
Enhancing the commercial
viability
of public
sector enterprises, many of which continue to incur
heavy losses, is a very important policy issue in the
subregion.
A reversal in this situation could strongly
processing are some of the important industries in a
contribute to the domestic resource mobilization and
number of countries.
Governments have attempted
consequently
to
production,
investment gap.
boost
agricultural
especially
cereal
production, by extending a number of incentives to
farmers.
However,
the
growth
of
agricultural
to
the
reduction
in
the
savings-
Governments’ responses to
this
problem have assumed different modalities: increasing the efficiency of the public sector by exposing it
productivity seems to have slowed down following
to competition,
earlier breakthroughs
example, the Government of Sri Lanka in the 1998
74
after the adoption
of green
outright sale
and
divesture.
For
budget planned the divesture of a 40 per cent share
South-East Asia
of the national airline and the sale of minority shares
of selected plantation companies as a part of its
privatization drive.
The Government of India, in the
Growth performance
same year, proposed measures to introduce com petition
in the
insurance sector.
about major improvements
public
enterprises
attention
of
will
However, bringing
in the
continue
performance
to
governments for quite
engage
of
the
some time to
come.
The South-East Asian subregion was worst hit
by the economic crisis in terms of its impact on
output.
GDP contracted significantly in Indonesia,
Malaysia
and
Thailand,
and
Philippines in 1998 (table II.13).
marginally
in
the
Singapore had
very little growth, Brunei Darussalam and Viet Nam
Table II.13.
Selected South-East Asian economies: growth rates, 1995-1998
(Percentage)
Rates of growth
GDP
Brunei Darussalam
1995
1996
1997
1998
Indonesia
1995
1996
1997
1998
Malaysia
Philippines
Singapore
Thailand
Viet Nam
3.0
3.5
4.0
2.5
2.2
8.2
4.4
3.0
0.6
0.4
8.0
4.7
-1 4 .0
1995
1996
1997
1998
- 6.0
1995
1996
1997
1998
4.8
5.7
5.2
-0 .5
1995
1996
1997
1998
8.7
6.9
7.8
1.3
1995
1996
1997
1998
8.8
1995
1996
1997
1998
Agriculture
Industry
-0 .9
10.4
10.4
5.6
-
16. 0a
Services
6.0
7.6
7.3
5.3
-1 5 .9
9.5
1.1
13.8
8.6
2.2
11.2
7.8
3.0
-7.1
10.8
- 7 .6
7.6
7.7
7.9
0.9
0.8
7.0
6.3
6.1
-1 .7
5.0
6.5
5.5
3.5
9.5
6.5
8.2
7.1
8.5
1.3
5.5
-0 .4
-7 .8
9.5
9.3
8.8
5.8
3.1
2.9
-
6.6
8.0
6.0
-5.8
-9.9
6.6
2.5
3.8
1.2
2.5
10.5
7.0
- 0.1
- 1.1
-1 0 .0 a
- 6 .9
13.9
13.8
13.1
10.7
10.8
9.3
8.3
5.0
5.1
4.4
4.5
2.0
1.3
9.0
4.6
Sources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998); and national sources.
Notes: Data for 1998 are estimates.
power; and construction.
a
Industry comprises mining and quarrying; manufacturing; electricity, gas and
Refers to manufacturing only.
75
recorded considerable deceleration from last year’s
especially in the second
level.
result of higher inflation caused by the depreciation
However, Viet Nam’s economy still managed
half of
1997,
were the
In all the countries
of the rupiah, growing unemployment and consider-
in the subregion, aggregate demand suffered, and
able problems in the intermediation functions of the
on the supply side the performance of the industrial
financial system.
to expand by about 6 per cent.
sector seriously deteriorated.
The
crisis
deepened
in
1998
when
GDP
Brunei Darussalam enjoyed a steady improve-
contracted by about 14 per cent, negative growth for
ment in economic growth, with a rate of 4.0 per
the first time in three decades for Indonesia and the
cent in 1997 compared with 3.5 per cent in 1996
largest
and 3.0 per cent in 1995.
region.
The sectors experiencing the most severe
of the regional financial onslaught by its large oil
decline
in
and
financial services and manufacturing.
gas
reserves,
Shielded from the worst
Brunei
Darussalam
has
fared
contraction
among
output
construction,
commerce,
The agricul-
Macroeconomic instability created an atm osphere of
prices and weak domestic demand despite a fiscal
widespread uncertainty in the business climate.
stimulus in the middle of the year, GDP was esti-
the
mated to expand by 2.5 per cent in 1998.
demonstrations and rioting in May 1998, disrupted
social
to
the
tural
time,
able
in
much better than neighbouring Malaysia and Indone-
same
was
economies
sia, but with oil revenues squeezed by low world
The
sector
were
all
grow
unrest,
marginally.
especially
At
street
government’s 1996-2000 development plan targeted
production
5 per cent annual growth.
exports was another factor responsible for bringing
and distribution.
down GDP.
Indonesia
economic
has
crisis.
been
The
hit the
impact
of
Poor performance
of
The government eventually adopted an
hardest by the
expansionary fiscal policy to contain the contraction
the
was
of GDP; the budget deficit increased from 0.9 per
aggravated by a number of economic as well as
crisis
cent of GDP in 1997 to 6.0 per cent of GDP in
non-economic factors.
1998.
There was a sharp decelera-
tion in GDP growth in 1997 when it fell to 4.7 per
cent, despite strong growth in the first half of the
year, as compared with 8.0 per cent in 1996.
major
sectors
setbacks.
of
the
economy
suffered
In
the
first
half
of
1997,
the
Malaysian
All
economy continued its strong growth momentum of
major
the past five years by expanding at a rate of 8.5 per
During the years immediately preceding
cent.
The effect of the regional economic crisis
this crisis, many of the corporate entities, in both
began to be felt in the second half of the year, when
manufacturing
growth
large
and
volumes
of
financial
services,
short-term
accumulated
debt.
The
rapid
moderated
to
7.1
per cent.
The
growth was caused by sluggishness
slower
in aggregate
depreciation of the currency sharply increased the
demand, because of the fall in private expenditure
cost
(consumption and investment) as a result of severe
of
servicing
growing
political
these
loans.
Moreover,
uncertainties,
there
was
with
a
currency
depreciation,
the
collapse
of
the
equity
reluctance on the part of foreign lenders to roll over
market and a liquidity squeeze in the banking sector.
existing loans or to extend new loans.
The resultant
Activity
in the
in the viability of the financial
sectors
decelerated
loss of confidence
institutions caused a run on bank deposits.
The
inevitable consequence was a severe liquidity crunch
mining,
but
services
the
and
construction
manufacturing
sector
maintained a robust growth performance at 12.5 per
cent.
The agriculture sector also performed better in
which affected the growth of output in both manu-
1997, growing by 3.0 per cent compared with 2.2
facturing and services.
Particularly hard hit was the
per cent in 1996.
construction
which
was 7.8 per cent in 1997.
industry,
registered
negative
growth in the second half of 1997.
Meanwhile, the
prolonged
growth
drought
slowed
down
in
the
As
the
The overall growth rate of GDP
regional
turmoil
deepened,
the
agricultural sector to just 0.6 per cent in 1997 from
Malaysian economy experienced the full impact of
3.0
the crisis and contracted in 1998 for the first time
per
cent
in
1996.
w eakening
consumption
contributed
to
sluggish
76
On
and
lower GDP
consumption
the
growth
and
demand
private
in
private
side,
investment
1997.
The
investment,
since 1985.
In view of the impending recession, the
government
during
the
latter
part
of
the
year
adopted a strategy of fiscal stimulus and relaxation
of monetary policy to revive the domestic economy.
the El Niño effect on agriculture, which recorded one
These measures contained the overall contraction in
of its worst performances, with
1998 to 6.0 per cent.
declining by 7.5 per cent during the first half of
Private consumption declined
agricultural output
steeply as a result of the adverse wealth effect of
1998.
the
negative growth rate of 6.6 per cent.
drop
in
prices
of
assets,
including
stocks,
For the whole year, the sector recorded a
The effect of
increased unemployment, higher interest rates and
the
inflation.
sector, which contracted by 1.7 per cent in 1998.
Private
investment
was
also
strongly
discouraged by tight liquidity and the higher cost of
credit.
from
The increased cost of production resulting
the
goods
higher
in
the
prices
face
of
of
imported
falling
intermediate
demand
was
additional disincentive for private investment.
an
All the
crisis was the
Output
in
most severe
manufacturing
estimated to decline.
and
in the
industrial
construction
was
Services, meanwhile, grew by
3.5 per cent, buoyed by the relatively better performance of transportation and comm unication and the
finance sectors.
The lagged effect of the crisis on
major sectors of the economy were adversely
affected.
The manufacturing sector output, which
production can be partly traced to the slow trans-
contributes about 33 per cent to GDP, was estimated
to shrink significantly in 1998, a sharp contrast to
was still surprisingly hefty during the second half of
the 12.5 per cent growth of 1997.
ment had already declined by 9.2 per cent and it
After growing by
mission of the crisis on demand.
1997.
Investment growth
By the first quarter of 1998, however, invest-
9.5 per cent in 1997, the construction sector suffered
declined further by 14.5 per cent during the following
a huge contraction in 1998.
quarter as the high interest rate regime, uncertainty
was
not
immune
either
The agriculture sector
and
it was
adverse weather conditions as well.
affected
by
over the currency movements and the difficulty of
The recession
getting working capital dampened investor interest in
naturally affected the service sector and its growth
expansion.
was estimated to decelerate to less than 1 per cent
in 1998 from 7.9 per cent in the previous year.
was the relatively strong growth of personal consumption expenditure.
Government assurance that
Offsetting the lower investment growth
the crisis was temporary, in addition to the upward
The Philippines showed a notable measure of
resiliency amidst the regional economic crisis.
The
adjustments in minimum wages implemented in 1997
and 1998, contributed to boosting consum er confi-
decline in the Philippine peso’s value was one of the
dence.
lowest
grow at a relatively healthy rate.
among
economic
moderate.
the
countries
disruption
arising
affected;
from
the
hence,
the
crisis
was
On the external front, exports continued to
For 1998, GDP
was estimated to contract by 0.5 per cent.
The negative effect of the crisis on the
The Singapore economy began to feel the full
real sector was not apparent immediately after the
onset of the crisis in 1997.
For instance, six months
into the crisis, industry was growing in real terms by
6.0 per cent.
Strong growth was recorded in mining
impact
of the
Although
regional
several
economic
tax
crisis
concessions
measures were announced
in
and
1998.
other
in 1998 to help ease
and quarrying, construction, finance and transporta-
business costs and to improve access to working
tion, communication and storage.
capital, the deteriorating regional economic environ-
However, evidence
of a slowdown could already be seen in manufac-
ment affected its growth performance.
turing, the utilities, trade, housing and other private
tic demand and depressed corporate earnings,
sector construction activities.
combination with a large fall in the value of the
For the whole of 1997,
dollar
and
in
stock
W eak dom es-
GDP posted a growth of 5.2 per cent on account of
Singapore
prices,
a more favourable performance during the first half
strong negative influence.
of the year.
manufacturing fell by 8 per cent in 1998.
exerted
in
a
Fixed asset investment in
GDP was
estimated to have grown by just over 1 per cent in
By the first quarter of 1998, it was obvious that
1998 against 7.8 per cent in 1997.
There was an
the crisis would have a much deeper impact than
across-the-board deceleration
initially expected.
major sectors of the economy.
Singapore’s relatively
downtrend and the peso-dollar exchange rate was
better
with
appreciating after January 1998, higher production
was because of its strong economic fundamentals,
While interest rates were on the
performance
compared
in growth
its
of all the
neighbours
costs and expectations of weak demand combined to
including high foreign reserves and negligible foreign
depress production.
debt.
Compounding the problem was
77
Since
pendent
Singapore’s
on
external
heavily
de-
investment continued to expand but at a lower rate,
government
has
mainly in infrastructure development and rural deve-
economy
trade,
the
is
been very conscious of the need to maintain and
strengthen the competitiveness of the economy.
lopment projects.
In
The crisis further intensified in 1998 and GDP
addition to the tax measures envisaged in the 1998
budget, the government announced a package of
registered negative growth of 7.8 per cent.
S$2 billion in June 1998 to stimulate the economy.
sector that managed to grow at a positive rate (2.5
The
per cent) was agriculture.
package
business
included
costs
infrastructure
tax
and
breaks
additional
projects.
In
to
reduce
1998,
In fact, its growth rate
for
improved compared with the previous year because
the
most
spending
November
The only
crop
production
increased
and
livestock
government accepted the recommendations of the
production expanded, especially of frozen chicken.
Committee on Singapore’s Competitiveness to cut
The construction sector contracted by 22 per cent
business costs.
The recommendations included a
and the manufacturing sector by 10 per cent; both
proposal to cut wages by 5 to 8 per cent and
subsectors were adversely affected by the severe
reduce the employer’s contribution to the Central
liquidity crunch and excess capacity.
Provident
sector posted negative growth of about 7 per cent,
Fund
by
10
percentage
points.
The
The services
current employer’s contribution is equivalent to 20
per cent of a w orker’s monthly wages. The cut in
reflecting the
the
average investment index dropped by about 40 per
Central
from
the
Provident
beginning
Fund
of
was to
1999
be
and will
effective
remain
in
place for two years.
Private
recessionary trend
in the
economy.
investment showed a marked decline; the
cent in the first seven
consumption,
months of 1998.
especially
expenditure
Private
on
durable
goods, continued to fall in line with a contraction of
The
current
regional
economic
crisis,
which
both economic activities and purchasing power.
A
started in Thailand in the middle of 1997, caused a
decline in merchandise exports in dollar term s also
contraction of GDP of that country by 0.4 per cent
contributed to lowering GDP
during the same year.
austerity measures did not prove helpful in steering
A large number of busi-
nesses closed down and laid off employees.
Many
financial institutions faced the problems of deteriorat-
in 1998.
The strict
the economy along the path of recovery.
The tight
fiscal policy strategy was slightly eased in March
ing asset quality and liquidity shortage, and a large
1998.
number of finance companies were ordered to close
equivalent to 2.4 per cent of GDP in 1998 against 1
down
per cent of GDP in 1997 and surpluses in several
their
operations.
Foreign
investors
and
creditors thus lost confidence in the economy, resulting in large capital flight from the country.
earlier years.
The
impact of the capital flight was aggravated by a
number of structural
problems,
particularly
As a result, the budget recorded a deficit
in the
Viet Nam virtually escaped the direct adverse
impact of the economic crisis in 1997, when its
financial sector, which were not so obvious when the
economy grew at 8.8 per cent,
in line with the
economy was growing fast.
growth
All
The spread of the crisis
rates
of
earlier
years.
the
sectors
in other countries with which Thailand has strong
maintained their previous high growth rates.
economic
crisis started affecting the economy in 1998, mainly
linkages
has
delayed
recovery.
The
agricultural sector grew by 1.2 per cent in 1997,
through
lower than
and
the
3.8
per cent
in
1996,
owing
to
a sharp
reduction
in foreign
The
investment
loss in competitiveness of exports,
resulting
unfavourable weather conditions which lowered the
from
production of key crops such as maize, cassava and
currency compared with other countries in the re-
sugar cane.
The non-agricultural sector contracted
gion.
by
cent;
face
0.6
per
the
construction,
banking
and
relatively
less depreciation
of the
domestic
Moreover, domestic industry struggled in the
of
capital
shortages
and
slowed
market
finance, and insurance sectors were the worst hit.
demand.
The manufacturing sector grew only marginally, with
cent in 1998.
negative growth of production starting in the second
including agriculture.
half
adversely affected by unfavourable weather condi-
of
domestic
the
year.
On
consumption
the
and
demand
investment
side,
both
declined.
W hile private investment contracted sharply, public
78
GDP was estimated to grow at 5.8 per
Growth fell in all the main sectors,
tions, prompting
security.
The agricultural sector was
concerns
about
domestic
food
Inflation
level in 1998, although considerable increases were
recorded
The worst fear arising from the economic crisis
compared
with the
previous
and the heavy depreciation of domestic currencies
inflation
rate
turned
marginally
was spiralling inflation.
collapse
of
domestic
demand
This turned out to be true
only in the case of Indonesia.
countries,
price
Table II.14.
1995-1998
rises
remained
In all the other
at the
single-digit
year
(table
II.14). The only exception was Singapore, where the
negative.
and
The
soft
world
commodity prices, including oil, were the restraining
factors for inflation in most countries.
Selected South-East Asian economies: summary of macroeconomic indicators,
(Percentage)
1995
1996
Savings/GDP
Investment/GDP
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
30.6
31.9
0.4
27.6
8.6
30.2
32.7
1.2
29.6
6.5
31.0
31.6
-0 .9
23.2
11.6
24.0
25.0
- 6.0
52.7 b
80.0
Malaysia
Savings/GDP
Investment/GDP
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
39.5
43.5
0.9
24.0
3.4
42.6
41.5
0.7
20.9
3.6
44.4
42.8
2.4
21.5
2.7
42.0
34.2 d
-3 .4
3.1e
5.2
Philippines
Savings/GDP
Investment/GDP
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
14.6
22.2
0.5
24.2
15.5
24.8
8.1
15.6
24.2
0.3
23.2
8.4
Savings/GDP
Investment/GDP
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
50.4
33.7
7.6
8.5
1.7
49.3
35.3
6.8
9.8
1.4
50.0
37.4
3.3
10.3
2.0
- 0 .3
Savings/GDP
Investment/GDP
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
37.0
41.6
2.9
17.0
5.8
35.8
41.7
2.3
12.6
5.9
35.9
35.0
- 1.0
16.5
5.6
26.0
-2 .4
13.8 e
8.2
Savings/GDP
Investment/GDP
Budget balance/GDPa
Money supply growth (M2)
Inflation ratec
19.0
27.1
- 4.1
22.6
12.7
17.2
27.9
-3 .2
22.7
4.5
20.1
29.0
-4 .3
24.0
3.6
-3 .5
15.0
8.2
Indonesia
Singapore
Thailand
Viet Nam
1997
0.1
26.1
5.1
1998
20.2
- 1 .9
19.3e
9.0
50.0
32.0
1.7
8.6
S ources: ESCAP secretariat calculations based on ADB, Key Indicators of Developing Asian and Pacific Countries 1998
(Oxford University Press, 1998) and Asian Development Outlook 1998 (Oxford University Press, 1998); IMF, International
Financial Statistics, vol. LI, No. 11, November 1998; and national sources.
Note:
Data for 1998 are estimates.
a Excluding grants.
b January-March.
c Refers to changes in the consumer price index.
d As a percentage of gross national product.
e January-June.
79
The
inflation
rate
in
Indonesia
has
been
relatively low in recent years, helped by the government policy of keeping inflation at the single-digit
level.
The government has been controlling the
prices of a number of main commodities such as
rice, sugar, flour and edible oil.
A prudent fiscal
policy also helped.
With the economic crisis,
however, inflation rose to 11.6 per cent in 1997 and
then shot up to 80.0 per cent in 1998. The main
contributory factor was the sharp depreciation of the
domestic currency.
Money supply also grew rapidly,
partly because of the sizeable liquidity support
provided for cash-strapped banks.
On the fiscal
front, the sharp depreciation of the rupiah resulted in
soaring government expenditure because of the
ballooning outlays on items with foreign exchange
components such as amortization of external debt as
well as subsidies on imported food. Under the IMF
package, subsidies were curtailed on some essential
goods but later restored and increased to ensure the
availability of food and other essentials at affordable
prices throughout the country. The government has
been implementing a special programme to provide
rice at about half of the prevailing market price for
low income families.
IMF eventually agreed to a
sizeable budget deficit, which was estimated at 6.0
per cent of GDP in 1998. The prolonged drought
imports. Price controls were established for 21 basic
food items. The public sector austerity drive and
tighter monetary policy during most of 1998 resulted
in a significant decline in aggregate domestic demand.
The regional crisis did not immediately translate
into higher prices in the Philippines. The inflation rate
for 1997 was about 5 per cent, much lower than in
the previous year.
The sharp acceleration in the
inflation rate, however, started in 1998. W hile nonfood items were largely responsible for the inflation in
1997, higher food prices due to the lower output of
the agricultural sector, which was severely affected by
the drought, triggered the increase in the inflation rate
in 1998.
However, improved weather conditions,
combined with prudent fiscal and monetary policies,
pushed down prices starting in July 1998. For the
whole year, the inflation rate was estimated to reach
9.0 per cent. Unlike past depreciation episodes in
the country, the impact of the sharp depreciation on
prices has so far been moderate for a number of
reasons. First, manufacturers were more concerned
with preserving their market shares than maintaining
profit margins by raising prices.
tion in international crude oil
Second, the reducprices substantially
offset the effects of the peso depreciation. Third, with
minimal increases in oil prices, the transport fare
hikes and the minimum wage adjustments were also
resulted in a decline in the supply of agricultural
products, especially foodstuffs.
The breakdown of
the distribution system exacerbated the problem.
Rice, cooking oil, chicken, dry milk and eggs were
The
among the commodities that contributed significantly
to overall inflation.
The rumours surrounding the
The growth of money supply was steadily on the rise
in 1997 prior to the crisis, reaching a peak in July
lower compared with the past depreciation episodes.
tamed
inflation
was
partly
due
to
the
tight
monetary policy adopted in response to the crisis.
scarcity of commodities sometimes triggered massive
1997, after which it has been on the downtrend.
purchases, supported by large withdrawals from
banks triggered by the deterioration of confidence in
financial sector institutions. The inflationary pressure
weakened during the last quarter of 1998.
June 1998, the growth of broad money was down to
17 from 24 per cent in July 1997. On the fiscal side,
the slowdown in the economy led to lower revenue
collections,
which
government deficit.
In Malaysia, the rate of inflation was only 2.7
per cent in 1997, the lowest since 1990. The food
subgroup registered the highest increase. In 1998,
the inflation rate was estimated to reach 5.2 per cent.
The highest increase again came from the food
subgroup. The severe currency depreciation had a
strong influence on prices, but the estimated inflation
rate in 1998 remained below expectation.
This
By
in
turn
widened
the
national
Current expenditure had to be
maintained at a generally high level in 1998 com pared with 1997 in order not to push the economy
into a recession and to protect social sector expenditure. In 1998, the national government was likely to
incur a deficit equivalent to 1.9 per cent of GDP after
four years of small surplus.
moderate inflation rate was the result of several
actions by the government.
It had introduced
Singapore is a country with a tradition of low
inflation. The rate of inflation averaged 2.2 per cent
over the period 1992-1996. In 1997, the increase in
measures to increase supply and control the price of
basic food items.
The measures included direct
the consumer price index was again limited to 2.0
per cent. Despite the depreciation of the Singapore
subsidies for selected basic items of food, liberaliza-
currency, consumer prices tended to decline. After
increasing by less than 1 per cent during the first
tion of food imports and finding cheaper sources of
80
half of 1998, the consumer price index fell in the
second half of 1998. The fall reflected slackening
economic activity, slower growth in money supply
and competitive pressures in retail business. The
consumer price index for the full year fell by 0.3 per
cent. This was the first annual decline since 1986.
Heavy depreciation of the domestic currency
had a strong influence on the inflation rate in
Thailand, but its impact remained restrained. The
credit squeeze, high unemployment rate, cuts in real
wages and the decline in the values of fixed assets
dampened domestic demand and kept the price rise
in check. The decline in the price of oil on the
world market also helped in containing inflationary
pressures. On the other hand, increases in valueadded tax and the excise tax for many categories of
goods contributed to inflationary pressure.
The
inflation rate which stood at 5.6 per cent in 1997
rose to 8.2 per cent in 1998. Prices of food items
increased by 9.6 per cent and non-food items by 7.3
per cent.
levels.
Food prices rose fast, partly because of
reduced supply caused by bad w eather conditions.
The overall inflation rate was estimated at 8.2 per
cent for 1998. The rate could be higher but for a
number of countervailing factors.
Smuggling from
neighbouring countries whose currencies depreciated
by far more than the dong, such as Thailand,
perhaps rose and helped in containing prices. Tight
credit and a reduction in the budget deficit also
exerted a moderating influence.
Trade performance
The large depreciation of domestic currencies
in the countries of the South-East Asian subregion
was not accompanied by a comm ensurate increase
in export values in dollar terms.
Even where the
volume
increased,
export
earnings
remained
subdued owing to tough price competition in the
international market.
In fact, several countries
recorded negative growth in 1998, but im ports fell
drastically, reflecting weak domestic demand. As a
result, merchandise trade balances improved significantly. All the countries were able to record either
lower current account deficits or large surpluses.
Viet Nam made great progress in bringing
down inflation from very high levels some years ago.
In 1997, the inflation rate, at 3.6 per cent, was
exceptionally low. Faced with the regional economic
crisis, Viet Nam devalued its currency a few times
In Indonesia, merchandise
during 1998 but the extent of overall depreciation
was much more moderate compared with its neighbours.
Nevertheless, it exerted pressure on price
exports in dollars
grew at 7.3 per cent in 1997 compared with 9.7 per
cent in 1996 (table II.15).
Owing to the depreciation
of the rupiah, non-oil/gas exports increased, while a
Table II.15. Selected South-East Asian economies: merchandise exports and imports in
United States dollars and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
Indonesia
Malaysia
Philippines
Singapore
Thailand
Viet Nam
53
78
25
125
57
8
Imports (c.i.f.)
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1997
1995
1996
1997
444
908
088
023
619
850
13.4
25.5
31.6
22.1
24.2
34.4
9.7
6.2
16.7
5.7
7.3
0.8
-
1.2
33.2
22.8
0.0
3.8
22.0
1998
1997
-6 .3
41 693
- 8.2
79 050
16.9
38 581
- 1 7 .9a 132 445
- 6.6
61 353
0.9
11 200
Annual rates of change
(Percentage)
1995
1996
27.0
30.3
25.7
21.3
34.9
40.0
5.7
1.0
20.4
5.5
- 1 .7
36.7
1997
- 2 .9
0.8
14.0
0.8
-1 3 .4
0.5
1998
-3 4 .2
-1 8 .0
-1 7 .5
- 2 3 .4a
-3 3 .0
-3 .0
Sources: ESCAP secretariat calculations based on United Nations, Monthly Bulletin o f Statistics, vol. LI I, No.11,
November 1998; ADB, Key Indicators of Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); and
national sources.
Note:
a
Data for 1998 are estimates.
January-September.
81
fall
in oil
prices
on the
world
market led to
decrease in value of exports of oil/gas.
constraints
a
Some of the
impeding export growth included
lower
demand, interrupted supply of imported materials for
exported commodities with
a high import content,
difficulties in procuring containers and the liquidity
problem
arising
from
high
interest
rates.
cent.
Export items with a better export performance
included iron, steel and metal manufactured goods,
transport equipment,
and
electrical
and
electronic
goods, but exports of logs and sawn tim ber were
estimated to decline sharply owing to stiff com petition from Indonesia.
Total
merchandise imports fell by 2.9 per cent in 1997,
In 1997, imports of investment goods valued in
and this was entirely due to the rapid reduction in
dollars recorded the strongest growth (6.9 per cent),
imports in the second half of the year.
The ex-
mainly due to lumpy imports, which doubled in 1997.
change rate crisis was responsible for most of the
Imports of intermediate goods declined by 4.9 per
decline since the imports became expensive in the
cent.
domestic currency.
stabilized
The situation was aggravated as
a result of the difficulty in opening letters of credit
with
international
banks.
Merchandise
exports
Growth
at
in
imports
of
consum ption
in
1997.
1.3 per cent
goods
Imports
of
intermediate and investment goods constituted about
84 per cent of total imports.
Total imports growth
remained depressed in 1998 and recorded negative
was expected to fall by about 18 per cent in 1998,
growth of 6.3 per cent.
Merchandise imports
decreased by a much higher rate of 34.2 per cent in
contraction of consumer demand.
indicating
a
severe
investment
slowdown
and
1998.
The services account recorded a deficit in both
The current account deficit narrowed in fiscal
1997 and 1998.
The large net outflow originated
year 1997/98 to 1.3 per cent from 3.5 per cent in
from investment income.
the preceding year. The decline came primarily from
merchandise
the larger surplus in the merchandise trade account
higher
despite
the
increase
in
deficit
in
the
services
surplus
deficit
in
The improvement in the
in
the
1997
was
services
offset
account,
current account was in deficit in 1997.
by
the
and
the
For the first
account.
Further improvement in the current account
time since 1990, this deficit was estimated to turn
balance
and,
into a surplus in 1998 because of the very large
in
fact,
a
sizeable
surplus
was
expected in fiscal year 1998/99 owing to a sharp
reduction in imports.
merchandise account surplus.
The number of tourists fell
significantly because of unfavourable news relating to
the
haze occurring
in some
regions,
as well as
street demonstrations and riots.
In the Philippines, merchandise exports rose
by 22.8 per cent in 1997, an acceleration over the
1996 record of 16.7 per cent.
merchandise
In
Malaysia,
the
sharp
depreciation
of
the
exports
of
exports
was
manufactured
The expansion in
mostly
goods
due
as
to
the
higher
drought,
ringgit did not have much impact on trade perfor-
combined with lower international prices for some
mance in 1997.
traditional exports, led to lower exports of agri-based
In dollar
terms, exports as well as
imports recorded marginal
growth of less than 1 per
cent.
In the case of exports, expansion in volume
and mineral products.
tronics
and
As in previous years, elecwere
semiconductors
the
top
export
was offset to a large extent by the decline in the
products, expanding by 30.6 per cent in 1997 and
dollar
contributing 65 per cent to the expansion of total
price.
Keen
competition
larger exchange rate depreciation
region enabled overseas
ward
adjustment
in
arising
from
the
in countries in the
buyers to demand down-
export
prices.
Manufactured
merchandise exports during the year.
Export growth
was estimated to slow down to 16.9 per cent in
1998, still considerably better than most countries in
exports grew faster than those of primary comm odi-
the region.
ties, which in term s of volume registered a marginal
the first half of 1998.
The effects of poor weather
decline.
were
continued
mainly
Exports of manufactured goods expanded
because
conductors
chemicals
and
and
of
improved
electronic
chemical
demand
components
products,
and optical and scientific equipment.
semi-
mance
and
parts,
slight
products
Total exports
for 1998 were expected to contract by about 8 per
82
evident
for
metal
Exports grew by 18.8 per cent during
of
in
the
non-manufactured
recovery
in
sugar
lacklustre
exports,
and
other
nics
exports
while
equalled
the
garments
previous
exports
a
agri-based
products was recorded during the period.
mance,
perfor-
although
year’s
already
Electroperforposted
positive
growth,
a
turnaround
from
the
previous
recovery in global demand for electronics.
Exports
As a whole, the growth of manufac-
of oil declined in 1997, resulting mainly from slower
tured exports, however, slowed down to 19.5 per
regional demand, keen competition from the regional
years’ decline.
cent during the period.
There was a noticeable shift
refineries and mild winter weather in the northern
in export markets in 1998 towards Europe, which
hemisphere.
emerged as the second largest export destination of
currency, export volume growth has failed to pick
up.
products from the Philippines, replacing Japan.
Despite
Intense
the
competition
depreciation
in
the
of
the
electronics
and
consumer electrical goods sector kept prices down
The
currency
depreciation
led
to
a
slower
and thus export revenue
in
1998.
Merchandise
import growth of 14.0 per cent for 1997 compared
exports in United States dollars decreased by about
with the previous year’s hefty 20.4 per cent expan-
18 per cent during the first nine months of 1998.
sion.
Merchandise imports grew by 1 per cent in 1997.
Consumer goods imports, which were declin-
ing even before the crisis, bore the initial brunt of
Import growth was registered in integrated circuits,
the sharp peso depreciation, as reflected in their
computer parts and peripherals, disk drives, parts of
decline by 7.2 per cent in 1997.
aircraft, printed circuits, cellular and radio phones,
equipment and
Except for capital
special transactions,
all the
other
and cigarettes.
Imports fell sharply, by 23.4 per
categories of imports expanded by a slower rate in
cent, during the first nine months of 1998.
1997,
have been
reflecting the start of the anxiety over the
effects of the currency crisis on domestic demand.
running
down
stocks to
Firms
meet export
orders.
Imports have been on the decline since the start of
1998
estimated to
In 1997, the merchandise trade deficit widened
For the first half of 1998,
as a result of positive growth in imports, in the face
and for the whole year were
decline by 17.5 per cent.
import growth
about
88
was down
by
per cent of the
14.0 per cent,
decline
due to
with
lower
of stagnant exports.
services
account
However, the surplus in the
strengthened
The net travel receipts fell because of the financial
both
of which were
transport
sector
higher
mineral fuels
lubricants,
and
to
investment
and
income
owing
imports of raw materials and intermediate goods and
receipts.
crisis in the region and the hazy climatic conditions,
reflective of a slowing economy.
as well as the continued increase in Singaporeans
The decline in service exports, which started in
1997, was expected to continue in 1998.
In fact, for
travelling
overseas.
The
overall
current
account
recorded a surplus equivalent to 15 per cent of GNP
the first half of 1998, net services exports declined
in 1997 against 16 per cent in 1996, and the surplus
by 68 per cent as the lower payments were not
was expected to
enough to compensate for the lower growth in export
sharp reduction in imports.
receipts.
There was also a noticeable slowdown in
personal
income remittances, which accounted for
improve
in
1998
because
of a
Since the flotation of the baht on 2 July, the
The fact that
exports of Thailand have rebounded; they grew by
exports grew at a respectable positive rate while
about 4 per cent in 1997, compared with a modest
about a third of total services exports.
imports
suffered
substantially
contraction
brought
lower trade deficit in
about
1998.
a
Hence,
decline
in the
previous
facturing exports, which
year.
Growth
in
manu-
accounted for more than
despite the reduction in net services exports and
80 per cent of total exports, was led by exports
lower
of chemical
transfers,
the
current
account
deficit
was
estimated to go down drastically in 1998 to about
and
$786 million, equivalent to 1.1 per cent of GNP, from
as
parts,
products,
plastic
products,
integrated
circuits
and
parts,
and
labour-intensive
domestic
resource-based
computers
as
well
the $4.4 billion deficit (5.3 per cent of GNP) incurred
exports.
in 1997.
the other hand, fell because of the decline in rubber
Export earnings of agricultural products, on
and tapioca prices.
Merchandise exports of Singapore in United
Rice and shrimp exports were
restrained by supply limits, despite
the significant
States dollar terms remained unchanged in 1997
increases in world prices.
compared
were estimated to contract by 6.6 per cent in 1998
with
1996.
However,
in
domestic
currency, they increased by 5.3 per cent in 1997.
because
Non-oil domestic exports increased
external demand.
owing to the
of
the
tight
Exports in value terms
credit
condition
and
soft
83
Capital inflows/outflows
In consequence of the slowdown in domestic
demand and
higher costs,
imports fell sharply in
durable consumer goods, vehicles and parts, inter-
The capital accounts of the countries in SouthEast Asia generally remained under severe pressure,
mediate products and raw materials.
some registering negative balances.
1997, by 13.4 per cent.
The reduction was led by
Capital goods
imports also contracted with the sharp slowdown in
domestic production and investment.
Along with the
large private capital outflows, especially in the banking sector. The FDI situation remained mixed.
deceleration in industrial activities, diesel oil imports
also declined, while crude oil imports rose owing to
the recent expansion in the domestic oil refinery.
Slower
domestic
demand
and
higher
prices
Improvements
in the current account balances and official inflows
helped in easing the pressure. However, there were
The
capital
account
in
Indonesia
posted
a
for
deficit in fiscal year 1997/98 for the first time since
imports in baht were expected to result in negative
import growth of 33.0 per cent in 1998.
Inventories
the late 1960s.
A huge deficit in private capital
flows, which occurred during the second half of the
for
down
fiscal
imported
components
were
drawn
and
replaced in some cases with less expensive domestic goods.
Import growth also declined because of
year,
was
responsible
for
this
outcome.
Government capital
flows
showed
a
surplus,
originating from an increase in the disbursement of
the lower demand for capital goods associated with
official borrowing from IMF.
fewer large investment projects.
1998, international aid to Indonesia suffered some
During the first half of
setbacks but it was later resumed and expanded.
The trade deficit narrowed significantly in 1997
On 15 July 1998, IMF approved an immediate loan
and, in fact, it turned into a surplus for the last four
payment of $1 billion and announced that donors
months of the year.
transfer
increase
account
in
Meanwhile, the service and
surplus
fell
marginally
interest payments, despite
decline
in travel
payments.
current
account
deficit
On
the
the
improved
from
an
sharp
whole,
the
significantly
to
had agreed to increase the total bailout lending by
$6 billion. The government has made serious efforts
to reschedule its external debt.
The Paris Club
creditor nations agreed on 23 September 1998 to
reschedule
$4.2
billion
in
payments
cent
series of negotiations between the Indonesian private
contraction
in
the
in
exports,
previous year.
the
Despite
current
account
a
was
Furthermore,
of
Indonesia’s sovereign
deficit
debt.
principal
approximately 2 per cent of GDP, against an 8 per
after a
external debt team and the Steering Committee for
expected to register a large surplus in 1998 as a
creditor banks, an agreement on
Indonesian debt
result of a drastic reduction in imports.
restructuring
The
covers
In Viet Nam, the value of merchandise exports
grew by about 22 per cent in 1997, compared with
an annual average increase of 35 per cent between
1993 and 1996.
The regional economic crisis had a
major impact on exports in 1998.
A smaller depre-
ciation of the dong compared with other regional
currencies also adversely affected exports.
exports
increased
by
only
about
one
In 1998,
per
cent.
Exports with better performance included computers
and accessories and tea, while exports of garments
and
textiles
remained
virtually
exports of footwear fell marginally.
goods, such as
quantity but
world prices.
unchanged
and
Exports of some
crude oil and rubber, increased
fell in value terms, owing
in
to the fall in
Merchandise imports increased only
three
was
accomplished.
areas;
interbank
facilities and corporate debt.
debt,
agreement
trade
credit
The creditor banks
agreed to extend the maturity of external debt.
In Malaysia, a large part of the long-term
private capital has been in the form of FDI, which
decreased in 1997.
However, there was an increase
in overall long-term capital inflows in 1997, mainly
due to the increase of borrowings by non-financial
public enterprises such as Syarikat Telekom Malaysia
and Petronas.
The pattern of short-term capital
flows reversed dramatically in 1997.
Since 1990,
Malaysia has enjoyed a strong short-term private
capital inflow, with the highest amount received in
1993.
However,
in
1997,
there
exodus of portfolio investment.
was
a
massive
The most obvious
liquidation was in the equity market.
The interven-
marginally (0.5 per cent) in 1997 and decreased by
tion measures adopted by the authorities to support
3.0 per cent in 1998, reflecting the slump in domes-
the ringgit at the beginning of the crisis could not
tic demand.
stem the outflow as market participants were not
The merchandise trade deficit in 1998
was 18 per cent lower than in 1997.
84
convinced of a successful
outcome.
The
overall
capital account surplus shrank in 1997 compared
with 1996. The level of long-term capital inflow in
investment started to flow back into the country
starting in February and March 1998. For the first
1998 was probably lower than in 1997.
half of 1998, net portfolio investments of both
residents and non-residents reached $299 million,
a turnaround from the $351 million net outflows
recorded for the whole of 1997. FDI inflows started
slowing down from the fourth quarter of 1997.
During the first half of 1998, the FDI inflow of $297
million was half of the 1997 level during the same
period.
The crisis has also triggered new official
flows into the country from IMF and the World Bank.
Under the $1.4 billion stand-by arrangem ent (referred
With the
recent imposition of some measures of exchange
controls, it is expected that future inflows may come
mostly from long-term capital, while short-term
capital, is likely to wait for clearer signs
making additional commitments.
before
The Government of Malaysia introduced foreign
exchange and capital controls in September 1998
with a view to stabilizing the currency, reducing
interest rates and stimulating the economy.
The
government fixed the exchange rate of the domestic
currency against the dollar and other currencies.
to initially as the “precautionary arrangem ent”)
approved for the Philippines by the IMF Board in
March 1998, around $260 million is expected to be
Effective 1 October 1998, ringgit held outside the
drawn during the last quarter of 1998.
country could not be imported; nor could they be
used to trade in or purchase goods from Malaysia.
Certain limits were imposed on the amount of ringgit
In Singapore, there was a deterioration in the
capital account balance in 1997 owing to a sharp
that citizens and visitors could bring into or take out
of Malaysia. Export and import activities remained
largely unaffected by these measures and the
general convertibility of current account transactions
was maintained.
However, rules for FDI remained
unchanged in that these investors were allowed to
repatriate interest, profits, dividend and capital gains.
decline in the net inflow of capital from the offshore
market to non-bank residents. There was a substantial increase in gross outflows of residents’ deposits,
partly in response to expectations of the continued
appreciation of the dollar. Foreign investment in the
manufacturing sector fell sharply in the first half of
1998, by 28 per cent. The slowdown of the dom estic economy and the regional economic situation
Some of the capital controls were eased in
February 1999 by allowing foreign portfolio
prompted this reversal. An even bigger decline in
overall foreign investment has been projected for the
investors to repatriate their capital and profits by
paying some taxes. The restrictions on the outflow
of portfolio investment have thus been replaced by a
system of taxes.
The new policy is aimed at
encouraging existing portfolio investors to take a
long-term view of their investment in Malaysia and
to attract new capital inflows.
At the same time,
end of the year as business sentiment remained
quite pessimistic, spanning many sectors, including
commerce, financial services and real estate.
early
these new measures are expected to discourage
destabilizing short-term flows.
Even prior to the crisis in July 1997, there
were signs of pressure building up in the capital
account of the Philippines; withdrawal of portfolio
investments exceeded placements starting May 1997.
When the crisis struck, the withdrawal of portfolio
investments further intensified.
At the same time,
overseas payments by residents were also accelerating as local investors wanted to prepay their
dollar obligations in anticipation of a further depreciation of the currency. As the distinctiveness of the
Philippines compared with other countries, in terms
of its continuing strong export performance and
relatively sound financial sector, was being slowly
recognized by financial market participants, portfolio
In Thailand, after many consecutive years of
surplus, the capital account registered a deficit of
$7.9 billion in 1997. Owing to large private capital
outflows, the private capital account recorded a
deficit of $6.9 billion. The outflow was particularly
acute subsequent to the flotation of the baht on 2
July.
The public sector recorded a deficit of $1
billion. The overall balance of payments turned into
a net deficit, most severely in the second half of
1997.
The rapid exhaustion of reserves prompted
the authorities to seek financial support from IMF.
The structural adjustment measures, along with the
balance of payments support package of IMF, helped
to improve the balance-of-paym ents situation and the
official reserves increased in 1998.
The current
account
surplus
reduced
the
country’s
financing
needs in 1998 and at the same time large disbursements from official creditors increased capital inflows.
FDI rose to $7.6 billion in 1998, the highest level in
the country’s history.
85
Since most FDI into Viet Nam used to come
from countries in the region (ASEAN, Japan and the
Republic of Korea), the regional economic crisis
resulted in a reduction in FDI. FDI approvals dropped
by 8 per cent to $4.1 billion in 1998, including a $1.3
billion Russian-Vietnamese joint-venture oil refinery.
Viet Nam issued more licences to wholly foreignowned projects than in the past. Three years ago, 36
per cent of new business licences issued were for
wholly foreign-owned firms, while in 1998 the figure
jum ped to more than half.
The government was
considering opening up foreign investment areas
such as insurance and entertainment services for the
first time, a major step in attracting foreign investment
in the
services
sector.
The
country
can
expect
substantial official inflows.
International donors in
December 1998 pledged financial support of $2.2
billion for 1999 and offered an additional $500 million
if the country accelerated reforms.
Financial sector developments
Foreign exchange rates, stock market indices
and interest rates remained volatile during 1998. In
general, during the first half of the year, exchange
rates depreciated, stock markets made losses and
interest rates remained high. During the second half
of the year, the currencies appreciated and became
more stable, stock markets made gains and interest
rates started to come down (figures II.4 and II.5).
Figure II.4. Index of exchange rates of selected South-East Asian economies, 1997-1998
(US dollar p e r dom estic currency: January 1997 = 100)
Sources.
various issues.
86
IMF, International Financial Statistics (Washington DC), various issuss, and Far Eastern Economic Review,
Figure II.5. Index of stock markets of selected South-East Asian economies, 1997-1998
(January 1997 = 100)
Source:
The Economist, various issues.
W eaknesses in the financial sector in coun-
In Indonesia, a financial sector action com m it-
tries of the region contributed to the deepening and
tee was established to set the overall strategy for
lengthening of the economic crises.
bank restructuring.
sector
was
burdened
loans,
partly
estate,
the
with
because
prices
of
large
high
of which
The banking
non-performing
exposure
collapsed.
to
real
The Indonesian Bank Restructur-
ing Agency and its Asset Managem ent Unit were
created.
Seven banks whose operations had been
Lack of
frozen since April 1998 were to be liquidated after
prudential regulations, and particularly their ineffec-
all their assets had been transferred to the Agency.
tive implementation, exacerbated the situation.
In
Four state banks were merged into one bank and
some countries, banks advanced unhedged foreign
the
currency
loans
and
Indonesia
external
funds
were
a
large
used
share of short-term
to
finance
long-term
investment. The depreciation of domestic currencies
current
corporate
were
to
merged bank, which
be
loans
of
transferred
Bank
to
Rakyat
the
newly
will specialize in handling small
credits and retail banking business to sustain the
made servicing of these loans very expensive for
development of small-scale enterprises and coopera-
borrowers
tives.
and
caused
widespread
bankruptcies.
Moreover,
under the amended
Commercial
Banks were facing serious liquidity problems and
Banking Act, major changes were introduced such
needed
as
various
recapitalization.
measures
problems.
to
Countries
overcome
some
introduced
of
these
the
reformation
elimination
of
the
of
legal
ownership of listed banks.
bank
secrecy
restrictions
law
on
and
foreign
To facilitate dealing with
87
non-performing
loans,
the
revised
bankruptcy
In Malaysia,
law
interest
rates
increased
signifi-
was approved by the government in the second half
cantly when the base lending rate rose from 10.3
of 1998.
However, efforts to restructure private debt,
per cent in June 1997 to 12.7 per cent in June
including
the
1998.
foreign
component,
have
met
with
So did the level of non-performing loans from
limited
success despite the fact
that some agree-
3.6 to 10.2 per cent over the same period.
ments
were signed
foreign
relaxation of monetary policy started in July 1998,
to restructure
private
The
To avoid panic, the government continues to
when the statutory reserve requirement was lowered
provide the guarantee on deposits and other liabili-
from 10 to 8 per cent, and then to 6 per cent on 1
ties of locally incorporated banks.
September
debt.
1998,
September 1998.
Attempts to
strengthen the
national
banking
with
review
banks
recapitalization
considered
that
and
sound
were
whose
could
deemed
business
obtain
4
per
cent
effective
16
the cost of fund and to provide the banking sector
sector were made by the government through the
recapitalization programme.
All banks were under
and
and
This reduction was both to lower
additional
liquidity.
bank’s three-month
In
addition,
intervention
rate
the
was
central
reduced
to
need
progressively from 11 per cent on 3 August to 7.5
plans
were
per cent on 5 October.
capital
investment
from the government under certain conditions.
In
As a result, the average
base lending rate of commercial banks was reduced
from
11
to
8.5
per cent.
Furthermore,
banking
early 1998, the government announced new capital
institutions
requirements
margin over the quoted base lending rate from 4 to
under
which
a
bank
must
post
a
are
required
to
reduce
the
maximum
minimum paid-up capital of 1 trillion rupiah by the
2.5
end of 1998, compared
with the previous stipulation
Banking
of 150 billion
The move was aimed to force
minimum credit growth of 8 per cent in 1998.
rupiah.
percentage
points
institutions
effective
were
also
1 O ctober
given
a
1998.
target
of
banks to merge or close.
The government introduced certain improvements in prudential regulations, particularly in making
the loan-loss provisions conform to the international
standard.
In addition, the government submitted a
draft amendment to Banking Act No. 7 of 1992 to
parliament aimed at enhancing the soundness of the
banking sector.
The changes in the proposed rules
and regulations included
(a) transferring the bank
Malaysia is implementing two key initiatives to
reform and restructure the banking sector, namely
recapitalization and solving the non-performing loan
problem.
An agency to address the problem of non-
performing
established
and
a
special
For the purpose of minimizing the growth of new
committee
the Minister of Finance to Bank Indonesia, (b) giving
borrowers
loans.
bank shareholders and
was
non-performing loans, a corporate debt-restructuring
licensing authority which was previously vested in
greater opportunities to foreign investors to become
loans
institution set up to recapitalize the banking system.
was
and
formed
to
lenders
to
encourage
restructure
corporate
outstanding
(c) changing the definition of
The financial sector problems in the Philippines
bank secrecy, which previously covered all asset and
liability information to merely cover information
were
related to depositors and their deposits.
Credit expansion in the country has not been excessive.
In
early
1998,
greater autonomy to
the
government
accorded
Bank Indonesia to formulate
and implement monetary policy.
Further revision of
relatively
The
less
severe
exposure
of
for
several
Philippine
banks
reasons.
to
the
property sector has also been relatively low at about
13.6 per cent (as of June
about
25
per
cent
for
1998) com pared
those
in
Malaysia
with
and
the Central Bank Act was under way to strengthen
Thailand.
the
and
tion, with a capital adequacy ratio of 16.5 per cent,
formulating its monetary policies and in selecting its
which puts them in a stronger position to deal with
central
bank’s
policy instruments.
autonomy
in
conducting
To ease financing problems of
The banks also have a higher capitaliza-
non-performing loans.
The banking
regulations in
corporations with heavy foreign debt, the government
the Philippines are generally more stringent than in
established
neighbouring countries.
Agency.
for
the
Indonesian
Debt
Restructuring
It offers official exchange rate guarantees
debtors
who
have
reached
agreement
with
foreign creditors on the restructuring of obligations.
88
Nevertheless, the financial
sector in the Philippines was affected by the crisis.
Interest rates rose to the highest level in the last five
years.
For example, the average bank lending rate
rose to 18.6 per cent in August 1997 from 15.5 per
In April 1998, the government announced that
cent in July and 13.3 per cent in June of the same
it would be injecting an additional S$25 billion in
year.
public sector funds into the private fund management
Interest
months.
rates
have come down
in recent
However, there is a disturbing trend toward
an increase in non-performing loans: around 9.6 per
market over the next three years.
The government
would also permit Central Provident Fund managers
cent as of July 1998, a big jump from the 1997 level
more flexibility in diversifying portfolios, and would
of 2.8 per cent.
ease
Despite the
Philippine banks,
high
the
capital adequacy ratio of
central bank raised the
regulations to spur the growth
of the fund
management industry in Singapore. Measures have
been taken to free up all stock brokerage rates
within three years, deregulate the fledgling unit trust
minimum capitalization requirements for new banks
industry and speed up approval procedures for share
only by 20 per cent for universal banks, 40 per cent
offerings.
for regular commercial banks and 60 per cent for
In
rural and thrift banks from the mandated requirement
issued earlier.
Existing banks were given two years
Thailand,
caused
severe
large
private
liquidity
capital
problems
for
outflows
financial
to comply with the new minimum capital build-up.
institutions in 1997 and weakened confidence in their
Stiffer penalties are to be imposed on banks which
viability which, in turn, exacerbated capital outflows
even further.
Money market interest rates conse-
are unable to comply with the requirements for the
build-up.
The higher capitalization requirement is
quently rose sharply in 1997.
The interbank lending
expected to encourage mergers and consolidations
rates, for example, jumped from 11.0 per cent per
among banks.
annum at the end of 1996 to 19.3 per cent per
annum in the third quarter of 1997, reaching a peak
To
address
the
issue
of
transparency,
all
of around 30 per cent per annum in September.
banks were required by the central bank to post
Following the movements in the short-term money
information on interest rates on their loans.
Banks
market, deposit and lending rates also began to rise
listed on the Philippine Stock Exchange also have
to disclose the amount of non-performing loans and
from the end of 1996 throughout 1997. With the
baht appreciating and becoming stable, interest rates
its proportion to their total loan portfolio, the amount
started to come down during the second half of
of
1998, resulting in an improvement in the liquidity
situation.
Nevertheless, commercial banks are
classified
and specific
loans,
general
loan-loss
loan-loss
reserves
reserves
in their quarterly
published statement of condition effective December
reluctant to lend for fear of accumulating more bad
1998.
debts.
the
Since
Insurance Corporation.
the
have
Thailand.
interest in obtaining funds from the Exim Bank for
of
banks
of
ordered closed by the central bank and were placed
receivership
17
Bank
However, commercial banks have not shown much
the
1998,
(Exim)
been
under
January
For example, large funds were available at
Export-lmport
Philippine
Deposit
Five of these banks were
lending to exporters.
ing
instructing
the
The government was considerExim
Bank to
grant
lending
growth,
loans to
thrift banks, while the remaining 12 were rural banks.
exporters
No commercial bank has yet been reported to be in
whole, was on the decline in the second half of
1998.
the red.
In Singapore, the problem of non-performing
directly.
Bank
on
the
However, the banks
The problem of non-performing loans of
financial institutions is quite serious, som e estimates
have advanced a significant share of their loans to
putting non-performing loans at about 40 per cent in
loans is relatively less serious.
investors in Indonesia, Malaysia, the Philippines, the
September
Republic of Korea and Thailand.
1998.
A
large
num ber
of
finance
In response to
companies were closed down by the government
calls from the Monetary Authority of Singapore to
and some commercial banks were taken over by the
help boost confidence in the economy, banks made
Bank of Thailand. Two new agencies, the Financial
Restructuring Authority and the Asset M anagement
provision to
substandard,
cover all classified loans (that is,
doubtful or bad) as of mid-January
1998 and made large general provisions on regional
loans that were still performing.
Company, were established to oversee and manage
the bad debts held by the closed finance
companies. In the middle of Decem ber 1998, the
89
Financial
Restructuring
Authority,
in
one
of
auctions, put up tor sale 371 billion baht worth of
assets
of
56
closed
finance
companies.
In Viet Nam, too, there are w eaknesses in the
its
The
banking
and financial sector.
institutions
have
Multilateral
suggested
that
the
lending
government
response of both local and foreign investors was
close down financial institutions that are not viable or
poor.
merge them with bigger banks.
Initially, bids for about 10 per cent of assets
were accepted.
Later on, negotiations with bidders,
and consequently their willingness to
revise their
bids, raised the sale of assets to around 40 per
cent.
Also,
the
Reforms in the financial sector need to
be considered within a comprehensive package of
the
market-oriented reforms that are urgently required,
including tax reforms, trade liberalization, reform of
closed
state-owned enterprises, as well as prudent fiscal
companies.
established
state banks.
Radanasin Bank to manage the good assets of the
finance
government
Large bad loans
have adversely affected the capital position of the
The
government
provided guarantees to depositors and creditors to
and monetary policy.
maintain the confidence of the public in the banking
system.
In May 1998, the Bank of Thailand took
control
of
seven
finance
companies,
ordering
a
Policy issues and responses
capital write-off of bad debts and reducing the value
of shares from 10 baht to one satang each.
Financial Institutions Development Fund.
Economic
The
finance companies were to be recapitalized by the
Regarding
recovery
is
the
major
facing countries in the subregion.
challenge
Stabilization of
exchange rates and containing inflation rates were
the commercial banks, the Bank of Thailand took
seen as the
over the Bangkok Metropolitan Bank, the Siam City
tight
Bank, the First Bangkok City Bank and the Bangkok
achieve these objectives but, later on, this policy
Bank of Commerce, wiping out shareholders’ equity
stance was reversed in many countries and less
key prerequisites for recovery.
monetary
and
fiscal
policies
Initially,
were
used
to
by ordering a massive capital write-down to clear
restrictive monetary and fiscal policies were adopted.
bad debts.
Some signs of progress towards revival of growth
The central bank’s Financial Institution
Development Fund swapped its loans to the four
have
banks
issues in both the financial and the real sector that
for
an
equity
stake,
shareholder of the banks.
becoming
a
major
Later on, the Bank of
Thailand seized control of two more banks and five
become
visible,
but
there
are
still
several
require urgent resolution in order to establish a firm
foundation for recovery and sustained growth.
finance companies.
As
discussed
in
the
previous
section,
bad
A comprehensive announcement on financial
debts and undercapitalization of banks are among
sector reforms was made in August 1998. There are
the major problems in the financial sector in most of
four major aspects of the package.
these countries.
First, the con-
solidation of the banks and the finance companies
has been
Bank of
performing loans.
mergers.
rates in recent months should help in easing the
Thailand
accelerated through
interventions
and
additional
proposed
rates
In the wake of the crisis, high
interest
Second, private investment and entry (domestic and
problem.
foreign)
been slow.
into
couraged.
the
banking
system
is
to
be
en-
Third, public funds are to be provided for
aggravated
the
problem
of
non-
The trend towards lower interest
Progress on debt restructuring has so far
Countries have been trying to improve
their bankruptcy
and
foreclosure
laws.
Once
in
recapitalizing all remaining financial institutions, with
place, such laws should prevent the future accumula-
appropriate safeguards and conditions, and linked to
tion of non-performing loans.
progress
in corporate debt restructuring and
resources needed to solve the problem of accumu-
lending.
The government has allocated 300 billion
baht for this purpose.
new
Fourth, a framework has been
lated
non-performing
challenge
for a
faster
The large amount of
loans
flow
remains
of
the
a
major
much-needed
developed for the creation of private asset manage-
capital
ment companies.
incidence of business failures increased the vulner-
government
financial
has
sector
As a longer-term measure, the
also
initiated
legislation,
a broad
regulation
review of
and
super-
to
the
productive
sectors.
ability of the financial institutions.
institutions
have
been
closed
The
rising
Insolvent financial
or
taken
over
by
vision, as well as of the information systems of the
governments in some countries.
Bank of Thailand.
being encouraged to merge to improve their capital
90
Existing banks are
position.
capital
In some countries, the imposition of higher
requirements
merge or close.
recapitalization
is
meant to
banks
to
Public funds are being offered for
purposes
if
banks
conditions and requirements.
solution
force
of the
problems
meet
certain
W ithout a satisfactory
of the
financial
sector,
crisis
not
only
affected
the
financial
sector but also the corporate sector, which remains
beset with problems of credit crunch, debt restructuring and excess capacity.
In general, bank lending
virtually dried up as a result of the crisis.
As noted
before, despite improvement in the liquidity situation
in recent months with the fall in interest rates, banks
remain reluctant to extend credit for fear of accumulating more bad debts.
themselves
to
meet
In addition, they need funds
their
recapitalization
needs.
Progress on private debt restructuring has been very
slow in the countries.
Without a resolution of this
problem, banks cannot extend new credit to existing
businesses that are in arrears and need additional
capital urgently.
crisis
revenue.
has
reduced
However, the
government
tax
At the same time, governments have little
option other than to adopt an expansionary fiscal
policy to expedite recovery.
in
some
Large public funds are
countries
to
rehabilitate
the
financial sector. The crisis poses a major threat to
the social gains achieved over many years (see
chapter
III).
Governments
will
have
to
devote
sizeable sums of fiscal resources to prevent
potentially large numbers of people from falling far
below the poverty threshold and being deprived of
basic social services.
All of these elements mean
large
and
fiscal
deficits
growing
public
debt.
Servicing of this debt can become a serious problem
unless economic recovery is strong and sufficient tax
revenue is generated.
Governments will therefore
have to plan their strategies on how to generate
enough resources in the coming years to service the
growing public debt, much of which is also denominated in foreign currency.
Excess capacity has become a
serious problem in the manufacturing sector.
example,
economic
required
sustained economic recovery will not be possible.
The
The fiscal situation of many of these countries
has been comfortable in recent years.
capacity
utilization was
per cent in Thailand
only around
For
East and North-East Asia
50
in September 1998 for the
manufacturing sector as a whole and much lower in
Growth performance
subsectors such as food, construction materials and
petroleum products.
The existence of huge excess
capacity is a major disincentive for new investment
by both
domestic and foreign
investors.
Several
measures will be needed to deal with this problem.
These would
corporate
include measures to
sector,
ease
the
restructure the
liquidity
crunch
and
Growth in the economies of East and NorthEast Asia declined sharply in 1998 with Hong Kong,
China and the
a
growth in China, while Mongolia improved its growth
somewhat.
stimulate aggregate demand.
Republic of Korea experiencing
dramatic recession for the first time in many years
(table II.16).
There was some deceleration in
Both
consumption
and
investment
remained weak more or less across the board, with
The
deep
depreciation
of
currencies
of
several countries has, at least temporarily, enhanced
the export competitiveness of several countries.
For
others, this has implied an erosion of competitiveness.
In the long run, competitiveness has to be
grounded
in productivity, which
decline in some countries.
productivity
growth
rate,
has been on the
Estimates of the factor
as
well
as
China being a major exception in that it succeeded
in maintaining investment.
incremental
In
which
China,
started
the
in
trend
of
growth
moderation,
1996 as a matter of deliberate
policy choice to avoid overheating, continued into
1998.
The slight drop
in
growth
rate
in
1998,
estimated at 7.8 per cent com pared with 8.8 per
cent in 1997, was largely the result of the regional
capital-output ratio, suggest that the use of capital
economic
in
1998
has been increasingly less efficient.
remained one of the highest in the world.
The
The declining
crisis,
but
efficiency is partly due to the fact that investment
decline
is
weak export growth.
and
being
channelled
capital-intensive
to
less
projects
underutilization of capacity.
productive
or
sectors
because
of
the
in output growth
rate
achieved
is mainly attributable to
The loss of C hina’s com peti-
tiveness against many Asian econom ies as a result
of its relatively strong currency played
a
role
in
91
Table II.16. Selected East and North-East Asian economies: growth rates, 1995-1998
(Percentage)
Rates o f growth
Services
Industry
GDP
Agriculture
1995
1996
1997
1998
10.5
9.6
5.0
5.1
3.5
3.5
13.9
8.4
12.1
10.8
8.8
11.1
Hong Kong, China
1995
1996
1997
1998
3.9
5.0
5.2
–5.0
Mongolia
1995
1996
1997
1998
6.3
2.4
3.3
4.5
4.2
14.6
0.5
2.3
1995
1996
1997
1998
8.9
7.1
5.5
– 6.0
China
Republic of Korea
8.8
7.8
10.0
2.6
7.8
10.0
0.2
–4.1
5.3
10.0
3.7
4.0
2.5
8.7
7.2
5.9
– 2.7
7.4
5.6
– 11.0
2.0
S o u rc e s : ESCAP secretariat calculations based on IMF, International Financial Statistics,
vol. LI, No. 9, Septem ber
1998; ADB, Key Indicators o f Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); and Asian
D evelopm ent O utlook 1998 (Oxford University Press, 1998); Far Eastern Econom ic Review, 10 Decem ber 1998; and national
sources.
N o te s : Data for 1998 are estimates.
power; and construction.
dampening its exports.
Industry com prises mining and quarrying; m anufacturing; electricity, gas and
In addition, it suffered from
credit policy -
and, since mid-1998, expansionary
a large contraction in demand from within the region
fiscal policy.
evidenced by a sharp drop in exports, notably to
state-owned enterprises, particularly those engaged
Indonesia, Japan, Malaysia, the Republic of Korea
in export-oriented production, was supported by a
and Singapore.
fared no better.
rest
of the
corporate sector, however, did not fare well.
Small
fear
job
security
among
those
rapid
increase
in
bank
credit.
The
employed,
and medium-sized enterprises, represented mainly by
consumer confidence eroded; this is reflected in the
indications that consumer expenditure grew less than
the town enterprises (formerly known as town and
income.
difficulties caused by the credit crunch since 1996.
urban
of
The trend in domestic consumption
With unemployment rising, and the
Robust capital formation among the
For example, consumer spending among
households grew by only 5.5 per cent as
against an income increase of 9.7 per cent.
Further
village enterprises),
have continued to
experience
Many of them went bankrupt in the coastal areas
and
their
share
in
total
output
fell
significantly.
slowdown in private consumption in the near future
Apart from the
cannot be discounted as job uncertainty increases
state-owned enterprises, domestic investment growth
and
was
the
prospect
of
losing
housing,
school
and
medical entitlements looms large among the employees of state-owned enterprises.
boosted
increase
by
in bank credit to
massive
government
some
spending,
hence, the budget deficit in China was estimated to
increase to 1.2 per cent of GDP in 1998 from 0.8
per cent in 1997.
Altogether, growth of gross fixed
Among the components of aggregate demand,
capital formation remained high in 1998 and the ratio
only domestic investment remained robust in China.
of investment to GDP was maintained at around 40
per cent.
Significantly, this is due to the recent relaxation in
92
On the supply side, the industrial sector growth
Macroeconomic policy
in Hong
Kong,
China
was estimated to decline to 8.8 per cent in 1998
gravitates around the defence of the rigid domestic
from 10.8 per cent in 1997.
currency peg to the dollar through the currency
board system. Adjustment to capital flows is trans-
The agricultural sector
was estimated to maintain the same rate of growth
as of last year, despite severe flooding
parts of China.
in many
The services sector’s growth fell
from more than 11 per cent in 1997 to 10.0 per cent
in 1998.
In
the
light of
the economic slowdown,
the
mitted directly to domestic interest rates as the
domestic monetary aggregates are beyond the
control of the government. Thus, as the government
rarely intervenes in the market, the interest rate
fluctuates wildly at times, as in October 1997 when
the overnight interbank rate shot up to 300 per cent.
the
However, there has been a marked change in policy
stance recently. In August and Septem ber 1998, the
interest rate failed to boost the economy in the first
government spent quite a large amount of money,
half of
estimated to be US$15 billion, by investing in blue
chip shares to prop up the stock market.
The
effects were muted as the stock market barely
macroeconomic policy stance in China was expansionary
in
1998.
1998,
launched,
After
more
successive
cuts
in
aggressive bank lending was
especially
to
state-owned
enterprises
engaged in export activities or producing profitable
was injected in the second half of 1998 to repair
moved during that time, but there has been no major
slide in the stock market since then. In the face of
damage caused by severe flooding.
the
goods sold in the home market.
Further liquidity
On the fiscal
economic
slump,
the
fiscal
stance
was
also
infrastructure spending was planned over a three-
eased. A stronger stimulus package was launched
in June 1998 following the May package which failed
year period to stimulate the domestic economy in the
to boost the stock and property markets.
This new
expansionary
deficit
front, infrastructure spending was boosted.
short to medium term.
sector, value-added
Massive
Also, to boost the external
tax
rebate was
increased for
exporters in addition to the lifting of export quota
Kong,
China
experienced
a
dramatic
reversal in output growth, with a negative year-onyear GDP growth of 2.7, 5.2 and 7.0 per cent in the
first, second and third quarters of 1998 respectively.
With
this
trend,
the
economy
was
estimated
to
contract by 5.0 per cent in 1998, a stark contrast to
the
positive growth of around 5 per cent in the
preceding two years.
In fact, this is the first reces-
sion in 13 years for Hong Kong, China.
Domestic
demand
declining
fell
consumer
sharply
confidence
as
a
and
result
rising
of
unemployment.
Coupled with the declining number of tourists, this
caused some leading economic indicators such as
retail
sales
sharply.
pegged
and
department
stores
sales
to
fall
In addition, the economy, with its currency
to
the
a sizeable surplus in 1997), and included tax cuts
In addition,
favourable terms for first-time property buyers were
initiated to stimulate weak property market.
Mongolia has been making steady economic
progress in recent years. Its GDP growth increased
to 3.3 per cent in 1997 from 2.4 per cent in 1996.
A further increase in growth to 4.5 per cent was
estimated for 1998. The governm ent’s stabilization
policy contributed to a substantially low inflation
environment as the growth of money supply and the
budget deficit declined.
In addition, a series of
liberalization and privatization measures helped to
create a healthy and competitive environment where
the private sector increasingly plays an important
role in the economy.
Domestic expenditure showed
sustained growth in 1997 and 1998. However, the
external
environment
was
not
encouraging.
For
Its domestic exports, that is, net of
exports, copper and cashmere, declined in 1997 and
remained low in 1998. Moreover, its exports were
sluggish in 1998, which
not only dampened
With
loss
of
HK$21 billion, or about 1.5 per cent of GDP (against
re-export from China, fell by 2.1 per cent in the first
1998.
from
fiscal
example, the world prices of its two most important
half of
suffered
a
of
competitiveness.
dollar,
envisaged
and a freeze on all public land sales.
and licensing requirements for certain commodities.
Hong
policy
tight credit conditions,
poor
growth prospects and asset price deflation, invest-
aggregate
ment dropped significantly as well.
impacted on government revenue.
A fall in imports
demand
directly
but
also
adversely
As no less than
explained by a significant drop in both consumption
one third of government revenue comes from traderelated taxes, the prospect of an increasing budget
and investment.
deficit caused by this revenue shortfall loomed large.
by 5.7 per cent in the first half of 1998 was largely
93
sector
the second quarter of 1998, following an initial tight
comprising 40 per cent of GDP provided the main
policy in late 1997 and early 1998 mandated by the
impetus
IMF-led stabilization
On
the
supply
for
growth
stabilization,
in
abolition
restructuring
trade,
side,
have
transport,
the
services
1997.
of
Exchange
price
generated
controls
rate
and
bank
and
hotels
the
fiscal
package.
deficit
was
In agreement with
increased
to
promote
of
growth and provide a social safety net; a budget
and
deficit of 4 per cent of GDP was envisaged for the
a healthy growth
communication,
IMF,
restaurants activities; thus, the services sector on
1998/99
the whole grew
by 5.3
government bonds and proceeds from privatization.
agricultural
industry
and
per cent in 1997.
sectors,
each
The
of
which
Also,
fiscal
year
to
be
monetary policy was
accounted for about 30 per cent of GDP, grew by
credit
crunch,
2.6 and 2.3 per cent respectively in 1997.
to the
with
promotion
financed
from
loosened to
special
attention
of the small and
issuing
ease the
being
paid
medium-sized
enterprises.
The
Republic
of
Korea
was
the
economy
worst affected by the crisis in this subregion, its
output estimated to have fallen by 6.0 per cent in
1998.
Inflation
W eak domestic demand was responsible for
such a dramatic compression of output.
Consistent
In fact,
with
recessionary
pressures,
the
consumption fell even more than output, by 11 per
inflation rate remained subdued in many economies
cent in the first half of 1998, suggesting that house-
of the subregion. The exception was the Republic of
holds increased their savings in anticipation of a
Korea, which recorded an increase of inflation from
further drop in income and employment.
Investment
4.4 per cent in 1997 to around 8 per cent in 1998
also contracted severely, by a staggering 27 per
largely as a result of the depreciation of the won
cent in the first half of 1998, owing to the credit
(table II.17).
crunch, the rise of corporate bankruptcies and re-
deflationary pressures in 1998.
structuring.
China, in contrast, was suffering from
In turn, imports fell tremendously, by
Domestic
more than 37 per cent in the first nine months of
prices
in China
continued
on the
1998 relative to the same period the year before.
declining trend which began in 1996.
Meanwhile,
tic demand, coupled with a further fall in money
export contraction
in the
Republic of
Korea in dollar terms was moderate.
Compared
supply growth
Weak dom es-
rate in three consecutive
years to
with the same period a year earlier, it fell by 1.4 per
1998, depressed the goods market.
cent in the first nine months of 1998.
oversupply of goods manifested in large increases in
In domestic
gave
rise
to
The resulting
currency terms, however, owing to the sharp depre-
inventory
ciation of the currency and some gains in volume,
Indeed, in the first half of 1998,
deflationary
pressures.
exports increased by 20 per cent in the first nine
cent was recorded.
months of 1998 compared with the same period in
was estimated at a negative 0.8 per cent.
deflation of 0.6 per
For the whole year, inflation
1997.
Tight domestic demand
In terms
of sectoral
growth, the
agricultural
conditions
in
Hong
Kong, China put downward pressure on the infla-
sector was estimated to record a positive, but slightly
tion rate in 1998.
Declining confidence of investors
lower, growth in 1998 compared with
and
coupled
industry
and
services
sectors
were
1997.
The
estimated
contract as a result of weak internal demand.
significant
fall
industry
The
tionary pressures.
Consumer prices fell in the last
the previous year and the inflation rate declined to
contraction following depressed domestic consump-
2.6 per cent for the full year from 5.7 per cent in
1997.
tion and investment.
suffered
due
monetary
quarter of 1998, compared with the same period
which
largely
slower
major
output,
was
with
growth and the credit crunch, contributed to defla-
to
manufacturing
in
to
consumers,
a
The strong recession caused a
severe drop in capacity utilization, which reached its
historical low of only 62.9 per cent in August 1998.
Inflation
from
The
Republic
94
macroeconomic
of
Korea
has
policy
been
stance
expansionary
in
the
since
in
Mongolia
44 per cent in
the first
caused
quarter of
by
weak
dropped
1997 to
1998.
domestic
15.2
This
dramatically,
per cent
sharp
demand
as
fall
well
in
was
as
Table II.17. Selected East and North-East Asian economies: summary of macroeconomic
indicators, 1995-1998
(Percentage)
China
Hong Kong, China
Mongolia
Republic of Korea
1995
1996
Savings/G DP
Investm ent/G DP
Budget balance/G DPa
M oney supply growth (M2)
Inflation ratec
41.0
40.8
41.4
39.2
– 0.8
25.3
8.3
42.6
39.8
– 0.8
20.7
2.8
– 0.8
Savings/G DP
Investment/GDP
Budget balance/G DPa
Money supply growth (M2)
Inflation ratec
30.5
34.8
– 0.3
14.6
8.7
30.7
32.3
30.0
31.0
– 1.5
4.5
6.0
30.6
34.5
5.6
8.4
5.7
Savings/G DP
Investment/GDP
Budget balance/GDP
Money supply growth (M2)
Inflation ratec
21.8
19.9
25.2
– 2.6
17.2
49.5
19.3
23.0
– 8.4
42.2
44.0
35.5
38.4
0.5
15.8
4.9
35.2
35.0
29.5
17.1
2.2
10.9
26.4
– 1.1
32.6
56.7
Savings/G DP
Investm ent/G DP
Budget balance/G DPa
M oney supply growth (M2)
Inflation ratec
1997
36.8
37.0
0.6
15.6
4.5
1998
39.0
39.0
– 1.2
1 5 .8 b
2.6
16. 2 d
15.0
34.9
26.4
– 4.0
13.1
7.5
0.2
14.1
4.4
Sources: ESCAP secretariat calculations based on ADB, Key Indicators o f Developing Asian an d Pacific C ountries 1998
(Oxford University Press, 1998) and Asian Developm ent O utlook 1998 (Oxford University Press, 1998); IMF, International
Financial Statistics, vol. LI, No. 9, September 1998; and national sources.
Note:
Data for 1998 are estimates.
a Excluding grants.
b January-March.
c Refers to changes in the consumer price index.
d January-June.
contractionary fiscal and monetary policies.
The
Trade performance
inflation rate in 1998 was estimated to be around
15 per cent.
The pattern of domestic prices in the Republic
of Korea was heavily influenced by fluctuations in
the foreign exchange value of the won.
won
having
reached
its
lowest value
With the
in January
1998, inflation in February 1998, compared with the
All economies in the subregion suffered from
an export slump that was more than offset by a
sharp contraction in imports. This naturally resulted
in considerable improvement in the merchandise
trade balance in 1998.
There are concerns,
however, that this improvement will only be tem porary and that it may disappear as soon as domestic
demand revives.
same month in the previous year, reached 9.5 per
cent.
As the won strengthened from early 1998 and
had stabilized by mid-1998 (after a severe loss in its
The case of China’s exports was dramatic.
Although its exports were back to a high growth in
value in late 1997), the cost push pressures were
1997,
muted and domestic inflation has receded since mid-
perform ance in 1996, its exports growth fell again in
1998 (table II.18). Exports growth in 1998 was only
marginal at 0.5 per cent.
A significant part of the
1998.
Despite expansionary macroeconomic policy,
the inflation rate was estimated at 7.5 per cent in
1998.
at
about
20
per
cent,
from
a
sluggish
explanation for this decline is loss of competitiveness
relative to other Asian economies in the global export
95
Table II.18. Selected East and North-East Asian economies: merchandise exports and imports
in United States dollars and their rates of growth, 1995-1998
Imports (c.i.f.)
Exports (f.o.b.)
Value
(millions of
US dollars)
1997
China
Hong Kong, China
Mongolia
Republic of Korea
182 690
188 063
452
136 741
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1995
1996
1997
22.9
14.8
32.9
30.3
1.6
20.8
4.0
– 10.4
3.7
4.0
6.4
5.4
1997
1998
0.5
– 2 .1 a
– 23.7b
– 1.4b
142 377
208 616
575
144 615
Annual rates of change
(Percentage)
1995
1996
1997
1998
11.6
7.6
3.0
2.5
5.1
27.5
– 3.8
– 0.4
– 5 .7 a
11.7 b
– 37.3b
19.1
60.8
32.0
8.6
11.3
Sources: ESCAP secretariat calculations based on United Nations, M onthly Bulletin o f Statistics, vol. LII,
Septem ber 1998; IMF, International Financial Statistics, vol. LI, No. 11, November 1998; and national sources.
Note:
a
b
No. 9,
Data for 1998 are estimates.
January-June.
January-Septem ber.
market, as well as weak demand from other Asian
with the same
economies affected by the crisis.
For example,
China’s exports to Indonesia, Japan, Malaysia and
the Republic of Korea fell in the first half of 1998
compared with the same period in 1997, by 38, 6, 14
domestic
per cent in the first half of 1998.
and 30 per cent respectively.
Exports to the United
States and EU remained buoyant, growing at around
20 per cent in the first half of 1998 compared with
the economy’s domestic exports com prised apparel,
clothing and textile yarns in 1997. The next highest
item by value was electrical m achinery and appara-
the same period in 1997.
Meanwhile, imports fell
marginally, by 0.4 per cent, in 1998.
tus.
Garments, clothing and textile yarns continued
to record a large share in China’s exports, altogether
about 25 per cent of its export value in 1998.
Footwear and toys came next, with about a 5 per cent
share each, and the rest was widely spread among
various diverse products such as vegetables, crude
oil, petroleum, steel and pharmaceutical products.
period of the
demand
crashed
previous year.
in the
face
As
of wealth
losses (mainly as a result of the property slump) and
rising unemployment, imports sank as well, by 5.7
About one third of
Recent trends show that, when the economy's
domestic exports declined between January and May
1998, apparel, clothing and textile yarns still
increased by 11 per cent in this period compared
with the same period in 1997, suggesting that
competitive advantage was maintained on world
markets in these industries.
6.4
Mongolia’s mechandise exports increased by
per cent in 1997 compared with 1996, mainly
W hile merchandise trade surplus in China was
estimated to increase in 1998, its current account
driven by an increase in the production of copper.
surplus was estimated to decline owing to an
increase in the services deficit, notably income and
transfers by foreign direct investors.
first nine months of 1998 compared with the same
period of 1997. The export slump was generated by
a combination of weak demand from its two largest
However, exports contracted by 23.7 per cent in the
trading partners, China and the Russian Federation,
In Hong Kong, China, a fall in exports was
observed in 1998.
Its domestic exports, that is, net
and
falling
prices
of
its
major
export
namely, copper, cashmere and gold.
products,
In turn, this
of re-exports from China, declined by 2.1 per cent in
affected the trade balance.
the first half of 1998 compared with the same period
11.7 per cent in the first nine months of 1998, the
the year before.
Losses in the econom y’s domestic
exports to EU, Japan and Singapore were very
merchandise trade deficit increased during this period. Also, as noted earlier, the collapse of exports
significant: they declined by 15, 34 and 34 per cent
respectively from January to May 1998 compared
put pressure on the fiscal balance as government
revenue from trade taxes was substantial.
96
With imports rising by
In the case of the Republic of Korea, export
growth increased to 5.4 per cent in 1997 from 3.7
per cent in 1996, and then it surged to 9 per cent in
the first quarter of 1998 compared with the first
quarter of 1997, before contracting by 2 per cent in
the second quarter of 1998, and further dropping 11
per cent in the third quarter. In view of contraction
of exports by 1.4 per cent in the first nine months of
1998, it was expected that exports would fall by
more than 1.4 per cent in the whole year. Exports
of transistors and semi-conductors, iron and steel,
office
machines,
and
refined
petroleum
and
petrochemicals performed better in 1998. However,
exports of apparel, clothing, textile yarns, cars and
electronics were either sluggish or declining.
The trade of the Republic of Korea with Asian
countries, which comprised about one half of the
total, collapsed.
Its exports recorded heavy falls
ranging from 50 per cent to Indonesia to 15 per cent
to Japan in the first quarter of 1998 compared with
the same period a year earlier. However, exports to
the United States and EU, boosted by the won
depreciation, increased significantly.
On the other
side, as a manifestation of domestic demand
compression, imports fell tremendously in the first
nine months of 1998, by more than 37 per cent
compared with the same period in 1997. So severe
was the contraction of imports that the Republic of
Korea’s trade balance surged into a large surplus for
the first time in many years: from a trade deficit of
$3.8 billion in 1997 to a surplus of $13.4 billion
during the period of January to April 1998 and a
further rise to $25 billion in January to September
1998.
As regards the current account, the cumulative surplus in the first nine months of 1998
amounted to $25.5 billion, which was a sharp
contrast to a deficit of $8.6 billion in 1997.
tremendously, rising from $105 billion in 1996 to
$140 billion in 1997. Meanwhile, in late 1998, there
was some concern over the stagnating foreign
reserve accumulation in China, even when the
current account surplus continued to increase,
suggesting that unrecorded capital outflows might
have taken place as well. Despite a current account
surplus of $35 billion in the first nine months of
1998, the foreign reserves increased by only $1
billion to $141 billion.
A series of new measures to further tighten
capital outflows have recently been
These include ordering Chinese firm s
introduced.
involved in
foreign trade or listed overseas to repatriate all of
their foreign exchange held in offshore accounts,
tightening regulations on foreign currency buying,
and requiring central government agencies and local
governments to seek permission before issuing
foreign debt and extending financial guarantees.
Until recently,
FDI had been growing rapidly
and had become the most im portant source of
foreign capital inflow to China.
However, there has
been a tendency for FDI in China to stagnate. The
amount of actual FDI in 1998 was sim ilar to that of
1997, at around $45 billion, which is still very large
in comparison with FDI inflow to other countries.
There are indications that the contractual amount of
FDI increased slightly, by 5 per cent, in the first half
of 1998 compared with the same period one year
earlier.
In the Republic of Korea, as a result of huge
capital outflows, there was a sharp drop in net
capital inflow in 1997.
Net capital inflows declined
by about two thirds in 1997 compared with a year
earlier, from $23 billion to $6.8 billion.
With the
Capital inflows/outflows
current account deficit sharply reduced in 1997 and
turning positive from the beginning of 1998, the
The main trigger of the regional economic
crisis was a dramatic and sudden reversal of private
overall external balance improved, as is shown by
large increases in foreign reserves, to $48.5 billion in
December 1998.
financial flows, with massive outflows in the second
half of 1997. To an extent, official capital inflows
helped to mitigate the overall position.
The economy of China experienced a decline
in the capital account surplus balance, from $39.9
billion in 1996 to $23 billion in 1997, or by about 40
per cent.
As merchandise imports fell sharply in
1997, the current account balance surged, from $7
billion in 1996 to $30 billion in 1997, and hence the
foreign exchange reserves continued to increase
Greater liberalization of foreign ownership has
had some positive effects on the level of new private
capital inflows. For instance, FDI in 1998 increased
by more 50 per cent to $8.8 billion, the highest level
ever received in one year.
A major part of foreign
investors’ activities was related to the acquisition of
existing assets of domestic companies rather than
new or greenfield investment.
The recent policy
initiative aimed at restructuring and privatizing
companies has facilitated acquisition. To illustrate,
97
Bowater, the largest newsprint maker in the United
States, has announced that it has bought the Halla
Pulp and Paper, one of the conglomerates of the
Republic of Korea.
Hyundai Electronics sold its
tion
and
banking
loans.
subsequent
system
recessionary
faced
mounting
pressures,
the
non-performing
In consequence, liquidity in the system was
severely squeezed.
Efforts to restructure the finan-
United States subsidiary Symbios to AT&T nonmemory chip division. The trend of acquisition by
cial sector are being pursued in earnest, but the
foreign strategic investors is likely to continue in the
continue for some time until banks are adequately
near future.
recapitalized
phenomenon
of
and
the
the
liquidity
problem
loans is successfully tackled.
Financial sector developments
crunch
of investors remains subdued.
of
is
likely
to
non-performing
Meanwhile, the mood
Although there has
been some rebound in stock prices since mid-1998,
the stock market indices of Hong Kong, China and
The financial sector in most countries of the
subregion remained under severe stress.
As a
the Republic of Korea were still below their 1997
result of massive capital outflows, currency deprecia-
level (figure II.6).
In China, owing to its alm ost fixed
Figure II.6. Index of stock markets of selected East and North-East Asian economies, 1997-1998
(January 1997 = 100)
Source:
98
The Economist, various issues.
exchange
rate, the yuan
renminbi did not record
significant fluctuations against the dollar in
(figure II.7).
As noted earlier, this may
seriously
affected
China's
export
1998
have
competitiveness
expansion,
was
instructed
to
against other Asian economies whose currencies
depreciated tremendously.
Pressures on corporate
enterprises.
profitability,
June 1998.
coupled
with
confidence, seem to have
market since mid-1998.
changing
dampened
investor
the
severely
curtailed.
However,
expand
The
credit
outstanding
to
loans
sector was
1997
was
The interest rate still plays a limited role in
stance;
not directly
money
affected
by the
The monetary situation in 1996 and
tight due
to
supply
an
financial
stock
Owing to its controlled capital account, China’s
regional crisis.
state-owned
of
institutions increased by 16 per cent year on year in
allocating financial resources in China.
financial
as
mentioned before, there was a shift in favour of
expansionary policy in 1999, when banks were
anti-inflationary
growth,
as
well
as
Monetary
control or expansion is exercised by direct measures,
such as the annual credit administered through state
banks.
China experienced negative real rates of
policy
interest as both the deposit and the lending rate
credit
from 1993 to 1995 were below the rate of inflation.
Figure II.7. Index of exchange rates of selected East and North-East Asian economies, 1997-1998
Index
(US dollar p e r dom estic currency: January 1997 = 100)
Sources: IMF, International Financial Statistics (Washington DC), various issues; and Far E astern E conom ic Review,
various issues.
99
However,
with
inflation
declining,
serious
financial
of 1998.
However, there was some rebound of the
repression was avoided and a positive real rate of
stock market in October 1998, when it surged by
interest has been in place again since 1996.
around 15 per cent from the August 1998 level.
The
positive interest rate was instrumental in maintaining
depositors’
confidence
in
the
banking
Another
system.
Household savings comprised around 60 per cent of
property.
asset
price
which
collapsed
was
Some estimates suggest that, compared
with their pre-crisis level, property prices were 40
bank deposit, or about $600 billion.
per cent
Banks in China continued to be saddled with
lower
in
the
third
comparison to mid-1997.
quarter
of
1998
in
In turn, the property slump
huge non-performing loans, mostly to state-owned
in Hong Kong, China has put some pressure on
enterprises, which,
banks’
according to official estimates,
were around $200 billion.
Most of these bad loans
balance
exposure
to
sheets
this
because
sector,
which
were concentrated in four major state banks, namely,
than half of total bank assets.
the
to
Construction
Bank,
the
Agricultural
Bank
of
strengthen
their
high
com prises
of
more
The efforts of banks
their balance
sheets,
coupled
with
China, the Bank of China and the Industrial and
massive capital outflow, resulted in a serious liquidity
Commercial Bank of China, which together control
crunch.
about 90 per cent of total banking assets.
The
loans and advances shrank by 18.5 per cent and
government made
and
domestic credit by 3.3 per cent.
some
effort to
restructure
In the first nine months of 1998, overall
Despite pressures
recapitalize these banks, requiring them to operate
on banks, financial distress in the economy is no
on
more
a
commercial
basis.
The
closure
of
some
than
a
remote
loans
possibility.
in Hong
Kong,
Although
China
non-
financial institutions has now become a possibility.
performing
In fact, the Hainan Development Bank was ordered
from 1.5 per cent of total bank assets in December
increased
to close in June 1998.
The Guangdong International
1997 to 2.5 per cent at the end of June 1998, they
Trust
Corporation,
still remain very low and are comparable to those of
and
Investment
the
investment
arm of the provincial government of Guangdong, was
advanced industrialized countries.
shut down in October 1998.
The latter case also
capital adequacy ratio was high by world standards,
pointed to some threats emanating from short-term
at 18 per cent, which is well above the Bank for
Also, the bank
overseas borrowing because some loopholes existed
International Settlements
that could be exploited notwithstanding the controlled
8 per cent.
capital account. Recently, foreign exchange controls
were tightened further as noted above.
prudential practice as banks tried to maintain their
recommended standard of
In fact, the liquidity crunch reflected
asset quality by increasing their provisioning for bad
debts promptly.
The recent shift in government policy to boost
credit to state-owned enterprises as part of efforts to
maintain
high
growth
raises
two
policy
issues:
Tight monetary conditions in the Republic of
Korea were evidenced in late 1997 and early 1998.
w hether it implies substantial comprom ises in the
Narrow money contracted severely from the second
implementation
quarter of 1997 as a result of a huge capital outflow
of
the
financial
sector
reform
measures and w hether it would jeopardize the plans
and the won depreciation.
for
sharply.
In consequence, the credit crunch ensued.
In
second
restructuring
and
reforming
state-owned
enterprises, many of which continue to suffer losses.
the
decreased
As a direct consequence of the regional crisis,
Hong Kong, China suffered massive capital outflows
by
4.8
quarter
trillion
Interest rates shot up
of
won
1998,
and
bank
by
a
loans
further
decrease of 1.2 trillion won in the third quarter.
and, at times, speculative attacks on its currency.
Armed with huge foreign exchange reserves, the
the
economy was able to maintain the fixed parity of its
stabilized in mid-1998.
currency to the dollar but, in the process, interest
rates shot up to exorbitantly high levels at times. In
level in January 1998, it regained some of its value
to the dollar and by October 1998 it had regained
consequence,
20 per cent of its value.
collapsed.
asset
prices
on
the
stock
market
The Hang Seng Index fell by 50 per cent
in mid-1998 compared with mid-1997 and fluctuated
widely throughout the second half of 1997 and much
100
The trend in the exchange rate showed that
won
appreciated
from
January
1998
and
Compared with its lowest
Similarly, the stock market
also showed an upward trend from September 1998.
Nevertheless, its value in November 1998 was still
about one half of its peak in June 1997.
Efforts to establish a sound banking system
Banks in the Republic of Korea remain saddled
with large loan arrears.
is
required
to
A huge amount of money
recapitalize
the
banking
system.
have begun in many economies in the subregion,
notably, in China and the Republic of Korea, where
According to the Financial Supervisory Commission,
banks were saddled with huge non-performing loans.
the amount needed is around $110 billion or equiva-
The guiding principle of the reforms should be to
lent to about 25 per cent of GDR
Given the rapid
require banks to operate on a sound commercial
deterioration of the economy, the final bill may be
basis which would imply, inter alia, that loans are
substantially higher. In an effort to restructure the
banking system, the government ordered five banks
granted on the basis of the objective assessm ent of
to close down: the Commercial Bank of Korea, the
intermediating
Korea Exchange Bank, Hanil Bank, Chung Buk Bank
and Kangwon Bank.
In addition, the government
investors,
sold two of the most troubled banks, Korea First
adequate provisions to cover risks.
Bank and Seoul Bank, to private investors.
The
risks and
security
returns.
they
of
and the
As institutions
the
flow
have
deposits;
of
a
responsible for
funds
from
responsibility
hence,
they
savers
to
need
to
ensure
to
have
In both China
Republic of Korea, some troubled
banks
government is urging the surviving banks to meet
the prudential standards of the Bank for International
were closed and the rest are required to comply with
Settlements, if necessary through mergers and
acquisition. The overall target is to have a capital
national Settlements by certain dates.
Financial
restructuring in these economies is a difficult process
adequacy ratio of 6 per cent by March 1999, 8 per
considering the scale of the problem.
the capital adequacy ratio of the Bank for Inter-
cent a year later and 10 per cent by the end of
non-performing
2000 .
the
banks
funding.
loans, the
would
With huge
recapitalization
require
a
massive
costs of
amount
of
In this context, one im portant issue that will
The Republic of Korea has been successful in
have to be dealt with is the equitable distribution of
restructuring short-term foreign debt and, as a result,
the burden between the government and the others,
including the debtors and shareholders.
its debt profile has improved.
By March 1998, a
very large part of the short-term foreign debt was
The corporate sector in these econom ies
rolled over and most of it for two years or more.
Also,
the
confidence
economy has shown
of
foreign
investors
in
signs of improvement.
the
also in need of massive restructuring.
For
major problem
instance, the government was successful in raising
lies in the
large
is
In China, the
number of loss-
making and highly indebted state-owned enterprises.
new funds from the international capital market by
Indeed, their leverage has worsened in recent years.
issuing global bonds worth $4 billion in April 1998.
Some estimates point to a surge in their debt-toequity ratio from 82 per cent in 1988 to a staggering
570 per cent in 1995 and, according to The Econo-
Policy issues and responses
m ist of 24 October 1998, may have become higher
The economic crisis has dampened the growth
and exacerbated the structural weaknesses of many
of the economies in the subregion.
In response to
these
problems,
government
policies
have
been
focused on restoring output growth and intensifying
structural reform, with particular emphasis on the
financial
and
corporate
sectors.
As
mounting
unemployment was in evidence in many economies
in
this
subregion,
and
in
the
absence
of
any
subsequently. The government has launched a major
initiative to reform state-owned enterprises.
Eventu-
ally, more than 99 per cent of sm aller state-owned
enterprises,
which
number
enterprises, will be divested.
about
1,000,
which
more
than
100,000
That would leave only
would
be
strengthened
become competitive by world standards.
to
Given the
employment and other social ramifications of such
massive restructuring, the programme
implemented in a phased manner.
has
to
be
comprehensive social safety net, governments had to
put a high priority on reviving growth and employment,
particularly
through
fiscal
stimulus.
It
is
In the
turing
Republic of Korea, corporate
remains an
issue of
restruc-
major concern.
The
important for governments to ensure that measures
restructuring
taken do not lead to prolonged delay in the funda-
forms a core part of the conditions of the IMF-led
mental restructuring that may be needed to enhance
assistance package.
the long-term competitive strength of the region.
concerns the resolution of the problem of corporate
of
the
chaebol,
the
conglomerates,
One aspect of restructuring
101
indebtedness in the Republic of Korea.
This was
stance, at least temporarily.
The expansionary fiscal
There
policy has transformed the normally fiscal surplus
seems to be a tendency for the debt equity ratio to
into a deficit, at around 1.5 per cent of GDP in
serious even before the onset of the crisis.
rise with the size of the firm.
For instance, of 448
1998.
The implementation of some public works
companies listed on the Korea Stock Exchange, the
was
accelerated
debt equity ratio has increased by 88 per cent to
increased
to
and
assist
government
the
small
spending
and
339 per cent in 1997; in contrast, the top 30 chaebol
enterprises.
recorded a debt equity ratio as high as 800 per
for
cent.
to help to prop up the weak property sector.
Some relaxation on m ortgage borrowing
first-time buyers was also introduced, especially
Managing the process of transition to a market
The restructuring of the chaebol would also
and
economy
remains the dominant
policy
consolidation.
A broad framework has been laid
down under which each chaebol will concentrate on
Mongolia,
which
stabilization
include
issues
such
as
divestment,
mergers
was
medium-sized
encompasses
structural adjustment measures.
agenda
in
and
In recent years, the
four to six core businesses, cut their debts and
dispose of marginal subsidiaries. An incentive has
g o v e r n m e n t h a s b e e n s u c c e s s f u l in s t a b i l i z i n g th e
been provided for the conglomerates to comply by
reduction in the government budget deficit and eco-
economy
providing that they will be rewarded with a debt-for-
nomic
equity
swap
by
has
Efforts
have
been
their
creditors,
liberalization.
been
The
privatization
implemented.
With
through
a
programme
the
improved
governance.
These include the requirement that
large conglomerates publish combined financial
to deal with issues related to the long-term develop-
statements,
problems of supply bottlenecks in infrastructure, es-
and
shareholders’
that
improve
banks.
down
macroeconomic situation, the government will have
thened
to
state
bringing inflation
corporate
that
initiated
the
by
rights
bankruptcy
are
streng-
procedures
are
improved.
ment
of
the
country.These
include
addressing
pecially power, and human resource and institutional
development.
Also, particular attention will have to
be paid to the development of the private sector.
In the end, financial sector restructuring and
corporate restructuring are closely intertwined in the
Republic of Korea, as in several other economies,
DEVELOPED COUNTRIES
OF THE REGION
because of the heavy dependence of the corporate
sector on
debt financing,
with
commercial
banks
being the primary source.
That, in turn, raises the
issue
capital
of
development
of
markets
in
the
Australia, Japan and New Zealand
medium and long term.
As a regional and international financial centre,
Growth performance
Hong Kong, China is not immune to the financial
turmoil affecting the region.
With its currency rigidly
The Australian economy continued its generally
pegged to the dollar, economic adjustments following
impressive growth in 1997, with GDP growth at 2.8
an external shock are manifested in domestic prices
per
and
Owing to resilient domestic demand, the economy
output
as
witnessed
by
sharp
changes
in
cent
compared
with
3.7
per
cent
in
1996.
interest rates, property and stock prices, and output.
remained strong in 1998 with estimated growth at
The government’s policy response to the problems
4.5 per cent despite the adverse impact of the Asian
has been concentrated on tightening regulation on
crisis (table II.19).
the stock market to dampen speculative attacks on
rates
its currency and mitigating the deflationary pressures
Australia to maintain export momentum by finding
at home.
September
supervise
strengthen
A series of measures were introduced in
1998
to
securities
curb
and
frameworks
investor protection.
for
short
futures
risk
selling,
markets
to
better
and
management
to
and
and
a
A combination of low interest
weakening
new markets outside the region.
experienced
economic
a
negative
crisis.
enabled
Tourism, however,
impact
Tourism
rate
and
from
the
related
Asian
services
have been a key activity in the diversification of
The severity of the crisis has
Australia’s
economy,
led the government to modify its non-interventionist
traditional
commodities
102
exchange
reducing
such
its
as
dependence
coal,
wool
on
and
Table II.19. Developed countries of the ESCAP region: major macroeconomic indicators,
1995-1998
(Percentage)
1996
1997
1998a
2.8
0.2
85.3
17.0
– 0.2
5.4
7.3
4.5
0.3
86.4
17.0
0.7
5.0
6.4e
– 2.7
0.3
71.0
27.9
– 5.7
Australia
GDP growth
Inflationb
Consum ption/G DP
Investment/GDP
Budget balance/G D Pc,d
Short-term interest rates
Money supply growth (M2)
3.7
4.1
4.7
84.1
17.0
84.5
16.3
– 2.0
– 0.8
7.7
8.5
10.6
2.6
7.1
Japan
GDP growth
Inflationb
Consum ption/G DP
Investm ent/G DP
Budget balance/G DPd
Short-term interest rates
M oney supply growth (M2)
1.5
3.9
– 0.1
0.2
69.9
28.6
– 3.6
69.6
29.8
– 4.3
0.9
1.7
70.4
28.5
– 3.1
1.2
2.8
0.6
0.6
0.8
2.3
3.1
3.0e
2.7
3.8
82.3
18.7
3.3
9.0
4.9
2.8
3.2
0.2
2.3
81.5
18.0
1.1
1.5
81.4
18.8
1.3
New Zealand
GDP growth
Inflationb
Consum ption/G DP
Investment/G DP
Budget balance/G DPd
Short-term interest rates
M oney supply growth (M2)
81.7
18.6
2.4
7.7
4.5
2.8
9.3
17.6
8.6
6.1f
S o u rc e s : ESCAP secretariat calculations based on United Nations, Project LIN K W orld Outlook, various issues; IMF,
International Financial Statistics, vol. LI, No. 11, November 1998 and World Econom ic O utlook (W ashington DC), O ctober
1998; OECD, O ECD Econom ic Outlook, No. 63, June 1998; and United Nations D epartm ent of Econom ic and Social Affairs,
The W orld Econom y a t the Beginning o f 1999 (E/1999/INF/1).
a Estimate.
b Refers to percentage changes in the consum er price index.
c Data exclude net advances (prim arily privatization receipts and net policy-related lending).
d Refers to general governm ent fiscal balance.
e January-June.
f January-M arch.
wheat.
Furthermore, international commodity prices
contributed to growth in employment and higher retail
have fallen sharply as a result of the drop in Asian
spending.
demand.
domestic
Domestically, the fall of commodity prices
was, however, partly cushioned by the depreciation
of the Australian dollar and domestic incomes were
therefore maintained.
of
consumer
spending
and
half of 1997.
estimated to
particular,
housing)
expe-
almost a decade, 7.7 per cent, in O ctober 1998.
The
Japanese
severe recessionary
(in
example,
private
following the reduction in interest rates in the second
investment
(for
rienced strong growth, manufacturers engaged in
exporting to Asia or exposed to import competition
faced difficulties. However, unemployment remained
on a declining trend, recording its lowest level in
Economic growth in 1998 was led by continued
expansion
W hile those sectors dependent on the
economy
housing
investment),
Strong housing construction, in turn,
economy
remained
under
pressure in 1998 and is
have contracted
by 2.7 per cent in
103
1998,
following
growth
of 0.9
per cent in
1997.
During 1998, industrial output continued to decline
and
inventories
increased
with
depressed
private
1998.
While some large firm s have been able to
shift their source of finance to the capital market,
smaller
firms
and
lower-rated
firm s
have
faced
Industrial production fell by an extraordi-
difficulty in obtaining support from this source of
nary 7.9 per cent by October 1998 on a 12-month
finance. The decline in business investment appears
basis.
to
demand.
The automotive sector was hit particularly
hard.
With the economic crisis in Asian countries,
Japanese
exports
to
the
decreased significantly.
countries
in
crisis
Private housing investment
declined sharply, recording a 22.3 per cent fall (year
on year)
in the first quarter of
1998, the fourth
consecutive quarter of contraction.
confirm
this
downward
trend.
The
Bank
of
Japan’s “tankan” surveys showed consistently deteriorating business confidence during 1998, with no
positive
signs
on
the
horizon.
The
government
introduced two stimulus packages in 1998 to boost
public spending.
Also, the government budget for
the fiscal year 1999/2000
is highly expansionary.
W hether these packages and budgetary measures
Deterioration in private demand is the major
cause
of
economic
contraction
in
Japan.
Low
can actually arrest the downward pressure on output
in 1999 remains to be seen.
consum er confidence reflects economic uncertainty
caused by rising unemployment, worries over the
The New Zealand economy slowed in 1998 to
future in an ageing society and mounting govern-
an estimated growth rate of 0.2 per cent, sharply
ment debt.
down from
lifetime
The inexorable change in conventional
employm ent
and
a
higher
unemployment
3.2
per cent
in
1997,
reflecting the
Asian crisis, drought, w eaker domestic demand and
rate among the younger generation have had an
much
adverse impact on consum er confidence, in addition
With its greater reliance on primary production, the
to stagnation in real wage growth.
Another poten-
lower international
farm
economy contracted by
com m odity
prices.
1.0 per cent in the first
tial negative factor for consumer confidence was
quarter on an annualized basis, reflecting a 40 per
expected
cent drop
to
come
with
a
surge
in
mortgage
in
agricultural
output
because
of
the
payments in 1998 for those who took government
severe
mortgages under the special scheme launched in
agricultural regions since late 1997.
1993 as part of the economic stimulus package.
consumer
Under
exports to Asia also contributed to the contraction.
this
scheme,
borrowers
could
enjoy
low
drought
conditions
spending,
housing
mortgage rates in the first five years, while after this
A
fall
in
manufacturing
period the rates would be much higher.
visible
in
such
when
this
scheme
was
launched,
At the time
economic
re-
products,
with
affecting
their main
as
main
A decline in
investment
output
industries
the
was
particularly
paper
export
and
and
markets
wood
in
the
also
de-
covery was expected to take place within one or
Asian
two years.
creased, reflecting lower consum er confidence and
The recovery has been neither strong
economies.
Domestic
demand
nor sustained, and borrowers have been left with a
rising
burden of higher repayments in the face of stagnant
negative
earnings, as well as uncertainty over their future
annualized
income and job security.
further by 0.8 per cent in the second quarter from
In this context, it is worth
noting that
unemployment has
level
the
since
end
of
the
reached
its worst
Second World War,
with the rate standing at 4.4 per cent in November
1998.
unemployment.
in
the
first
basis)
and
the previous quarter.
from
Domestic
quarter
the
of
demand
1998
economy
turned
(on
an
contracted
However, improved demand
EU and United States markets helped GDP
growth to recover to some extent in the second half
of
1998,
and
the
economy
was
able
to
avoid
slipping into recession for the year as a whole.
As
a
result
of
these
developments,
the
business sector is confronted with poor profit prospects.
Above all, the reluctance of the financial
sector to
provide
new
activity downwards.
loans
has
pushed
Inflation
overall
Bankruptcies increased from
Inflation
in
Australia
remained
exceptionally
14,201 in fiscal year 1994 to 17,496 in fiscal year
subdued in 1998 at 0.3 per cent (table II.19).
1997.
can principally be attributed to low growth in w ages/
19,565
104
The trend continued throughout 1998, with
bankruptcies
being
recorded
by
October
This
earnings and low or falling prices for imported items,
despite
the
depreciation
of
the
Australian
dollar.
In
New
Zealand
too,
inflationary
pressures
W hile some import prices increased, the increases
remained subdued at 1.5 per cent in 1998, despite
were not passed on to consumers as a result of
the
strong competition in the domestic market.
exchange
Instead,
substantial
rate,
fall
in
though
the
New
some
Zealand
concerns
dollar
about the
im porters’ mark-ups were squeezed to retain com-
inflationary impact of the currency’s fall had emerged
petitiveness.
Instruments such
rate
during the year.
hedging
long-term
also
services
and
fixed
as exchange
price
contracts
assisted in reducing the upward pressure on retail
prices relative to changes in import prices.
and
Increases in charges for credit
budget changes
announced
in
May
were the main factors influencing consum er prices.
Thus,
An increase in tax rates raised tobacco prices, while
currency weakness did not lead to an immediate
transport costs were lowered as a result of lower car
increase in consumer prices.
prices
after the
Strong
With producer prices rising only 1.6 per cent,
concern
over inflation
removal of vehicle
competition
between
petrol
import tariffs.
retailers
also
lowered petrol prices in the second quarter of 1998.
in Japan was non-existent
Subdued producer prices were mainly due to the
during 1997, despite a loosening of monetary policy.
weakness in agricultural prices that were part of the
The
lower overall commodity price environment prevailing
same
conditions
applied,
if
anything
with
greater intensity, in 1998, with an absolute decline
in producer prices and earnings in the third quarter
in 1998.
Overall, inflation continued to remain low
as a result of sluggish
of 1998, combined with markedly lower oil and other
consumer
commodity prices. Wholesale prices declined by 0.5
and
business
domestic demand, falling
confidence
and
weak
commodity prices.
per cent in the first quarter of 1998 and by 1.6 per
cent in the second quarter.
By October 1998, they
Trade performance
stood 2.8 per cent lower than 12 months earlier.
Overall
in
1998,
consum er
estimated to be 0.3 per cent.
currently
relates
to
a
price
inflation
is
Compared with most other developed countries
The greater concern
deflationary
spiral,
(with the exception of Japan and the United States),
where
consumers delay their purchases in the expectation
foreign trade plays
a relatively small
of a further fall in prices.
Australian economy.
The majority of exports consist
This increases invento-
role in the
ries, and firm s are inevitably forced to cut their
of raw materials, fuels and food products.
prices to reduce inventories, confirming the consum -
have been slightly larger, with capital goods and
ers’ expectation
of
deflation,
creating
a
machinery the
vicious
dominant items
(table
Imports
II.20).
The
current account deficit stood 3.2 per cent of GDP in
downward spiral.
Table II.20. Developed countries of the ESCAP region: merchandise exports and imports in
United States dollars and their rates of growth, 1995-1998
Exports (f.o.b.)
Value
(millions of
US dollars)
Australia
Japan
New Zealand
Imports (c.i.f.)
Value
(millions of
US dollars)
Annual rates of change
(Percentage)
1997
1995
1996
1997
1998
– 10.3a
62 902
11.7
13.6
4.3
421 053
11.6
– 7.3
2.5
14 052
12.0
5.3
– 2.2
1997
Annual rates of change
(Percentage)
1995
1996
65 910
12.9
8.5
0.7
– 0.7a
– 6.5a 338 840
22.1
3.9
– 3.0
– 17.6a
17.2
5.5
– 1.4
– 14.9a
– 18.3a
14 520
1997
1998
Source: ESCAP secretariat calculations based on United Nations, Monthly Bulletin of Statistics, vol. LII, No. 11,
November 1998.
a
January-June.
105
1997.
Japan’s overall trade surplus surged in 1998,
A sharp deterioration to over 5.0 per cent
followed in 1998 as export growth slowed as a result
reflecting lower imports and a modest increase of
of the crisis in Asia.
export demand from EU and the United States, while
By October 1998, on a 12-
month basis, the trade deficit stood at $4.3 billion
exports
compared
declined.
with
corresponding
a
surplus
period
of
up
to
$2.3
billion
October
in
1997.
the
The
to
ASEAN
and
the
Republic
of
Korea
Exports to the Republic of Korea declined
by 37.5 per cent and to ASEAN countries by 27.3
current account deficit, which was $13.2 billion up to
per cent in the first quarter of 1998; those to North
the third quarter of 1997, expanded to $15.5 billion
America increased by 10.8 per cent and to EU by
in the corresponding quarter of 1998 and on an
24.8 per cent over the same period.
annualized basis had reached 5.0 per cent of GDP.
economic
crisis
in
East
and
W hile the
South-East
Asian
countries reduced export demand, which accounted
Australia depends on Asian markets for 60 per
for around 40 per cent of Japan’s exports in 1997,
cent of its exports, of which 20 per cent is directed
export growth to developed economies more than
to Japan and 15 per cent to ASEAN countries.
offset the decline. In terms of particular industries,
car sales to Asian countries dropped by a huge 54
crisis
in
the
Asian
economies
has
The
dramatically
decreased Australian exports to these countries.
For
per cent in the first five months of 1998.
instance, exports of commodities to the Republic of
The current account surplus recorded a 30 per
Korea and to ASEAN countries declined by 13 per
cent, while the number of tourists arriving from these
countries declined by 51.2 per cent during the three
months
to
August
1998.
However,
commodity
exports to the rest of world increased by around 20
per cent, resulting in a 12.7 per cent increase in
commodity exports from the
previous year.
The
depreciation of the Australian dollar also helped in
mitigating the loss of export momentum.
during the same period, partly offsetting the decline
the
Asian
countries
and
holding
the
total
decline at 3.2 per cent.
compared
role
with
vis-a-vis
most
the
domestic
economy
other
developed
countries.
However, particular industries are very dependent on
export markets.
Japanese declined.
persisted
throughout
The trend is estimated to have
the
year,
with
the
current
account surplus reaching $119.3 billion in the
12
months to October 1998 compared with $91.9 billion
in the previous year.
New Zealand’s current account deficit widened
in 1998, essentially reflecting a fall in exports to
Asian countries.
The adverse effect of weakening
demand from Asian countries was partly offset by
the strong demand from the United States and EU,
In Japan, international trade plays a relatively
smaller
trade surplus widened and overseas travel by the
Visitors
from the rest of the world increased by 5.3 per cent
from
cent year-on-year increase in October 1998 as the
Fluctuations in the exchange rate of
the yen have had a major impact on Japanese trade
performance and on corporate balance sheets with a
large trading component.
In 1997, export volume
rose 9.5 per cent but the dollar value of merchandise exports rose only 2.5 per cent.
In 1998, export
volume is estimated to have risen by 4.5 per cent
but the dollar value is estimated to have declined.
Import volume has risen only modestly but imports in
as well as improvements in service receipts resulting
from an increase in tourist arrivals from Europe and
North America.
however,
The decrease of exports to Japan,
had a significant
influence
on
the
New
Zealand economy as exports to Japan account for
14 per cent of total exports and are the equivalent
of 3.3 per cent of the country’s GDP, but the United
States is becoming a more important export market
for New Zealand, in place of Japan, as the largest
export
market
next
to
Australia.
For
example,
exports to the United States increased by 23.5 per
cent
(to
$NZ822.2
million)
in
the
three
months
between March and May 1998, while those to Japan
dropped by 3.9 per cent in the same period.
value terms have declined significantly.
The poorer trade performance, which recorded
The immediate direct effects of the Asian crisis
on foreign trade are not likely to be large for the
a deficit in June for the first time
in
13 years,
increased concerns about the current account deficit
domestic economy, but longer-term, indirect effects,
and contributed to a fall in the New Zealand dollar.
such as the decline in competitiveness compared
The deterioration of the current account deficit also
with the Republic of Korea, could be substantial.
reflected the difference between foreign com panies’
106
large
profits
in
New
Zealand
and
domestic
source
of
capital
for
other
developed
and
for
com panies’ relatively small foreign profits. In 1997,
outflows of this kind exceeded inflows by a substan-
developing countries. This has been traditionally in
the form of investments in United States Treasury
tial amount ($NZ8.2 billion). The trend is expected
to have continued during 1998.
bills, bonds and notes and in FDI flows to several
economies in the ESCAP region, as well as other
economies outside the region.
Capital inflows/outflows
During
domestic
In
common
with
several
other
developed
1997
interest
and
1998,
rates,
with
extremely
Japanese
investors
greater incentives to channel their funds overseas for
countries, Australia is both a source and a recipient
higher yields.
of foreign capital.
were expected to remain strong throughout
of
the
In net terms, however, on account
persistent
deficit
in
the
current
account,
Australia is a recipient of foreign capital flows.
Since
low
found
Thus, capital outflows from Japan
1998.
All remaining foreign exchange restrictions were lifted
as part of the financial deregulation (the “big bang”)
1993, these have been largely made up of portfolio
and this should also encourage such outflows as
and FDI flows, and the proportion of debt in foreign
Japanese institutional investors seek higher returns
liabilities has declined.
abroad.
As of end December 1997, the gross external
debt totalled about 62 per cent of Australia’s GDP
while the net external debt equalled about 42 per
cent of GDP.
Of the total gross external debt, nearly
two thirds is owed by the private sector.
While high
domestic interest rates in the past encouraged the
private
sector
declining
to
trend
obtain
of
funding
domestic
offshore,
interest
rates
the
has
reduced this incentive.
Companies have been
reducing total borrowing in order to strengthen their
financial position.
rushed
have contributed to the
reduction in external borrowing.
Australia’s
As a result of these
external
debt
burden
has
stabilized and should begin to decline over the next
few years.
October
banks
to
1997
and
reduce
life
and
March
insurance
their
1998,
companies
non-performing
assets.
Foreigners purchased these discounted assets to the
extent of 3 trillion yen.
These purchases increased
further by 2 trillion yen
in April-Septem ber 1998.
The motive force behind these purchases was the
availability of Japanese assets at heavily discounted
prices.
In addition, declining federal and
state government deficits
changes,
Between
Japanese
In October 1998, despite continuing domestic
weakness,
Japan
announced
a
$30
billion
aid
package for crisis-hit Asian countries in the form of
short-term financial support,
currency support in an
bond guarantees and
effort to
ease the
credit
crunch affecting the entire region.
OECD
predicts
that the
crisis
in
Asian
Notwithstanding these phenomena, the troubled
economies is likely to have only a minor effect on
Australian
com panies’ foreign
investment
income,
Japanese financial sector will have a serious impact
which is mostly derived from outside South-East and
on
East Asia.
capacity to provide credit support through loans to
Equally, Australian banks appear to have
Asian
economies
on
account
of
its
limited
sufficient reserves to absorb potential losses from
the real economy, both within Japan and outside.
the
view
crisis
as
they
have only
moderate
Asian
of its
impaired
asset
quality,
the
In
Japanese
banks’ global
financial sector does not currently have the capacity
Nevertheless, the Australian stock market
to provide new loans either to Japanese com panies
showed little buoyancy during 1998, staying more or
or to Asian economies, although it is rolling over
exposure
assets).
(6 per cent of Australian
less unchanged in local currency terms but declining
existing loans.
marginally in terms of the United States dollar.
volume of loans outstanding in Asia, estimated at
Japanese banks have a substantial
around a third of total foreign lending in the region.
Japan
has traditionally run
a current account
These
loans
are
mostly
denominated
in
dollars.
surplus of about 2 per cent of GDP, or over $100
Further weakness in the balance sheets of Japanese
billion in absolute terms. This trend has persisted in
banks
the
withdraw or curtail these credit lines.
1990s.
As such,
Japan
has been
a major
may
leave
them
with
no
choice
but to
107
As already slated, New Zealand is a net
recipient of foreign capital flows on a significant
scale. These are mainly in the form of portfolio or
FDI flows. Like Australia, the debt-to-GDP ratio has
stabilized in recent years. After remaining steady at
about $2.5 billion during the 1980s, assets of foreign
companies in New Zealand rose from $8.1 billion in
1990 to $33.2 billion in 1996, and subsequently fell
back to $29.5 billion in 1997. In this period, New
Zealand companies, too, have been investing
overseas at a modest rate, and aggregate foreign
assets almost tripled between 1990 and 1996, from
$3.3 billion to $9.4 billion, but declined to $6.8 billion
in 1997.
With
the
sharp
deterioration
in the
GDP by end March 1998. The increase in total debt
was primarily on account of the rise in corporate
sector debt. This was caused by especially strong
demand for housing finance, since domestic saving
was not enough to meet this demand.
The
depreciation of the New Zealand dollar further
contributed to the rise, as much of the new debt is
denominated in foreign currencies.
Financial sector developments
Australian financial markets were affected by
global developments in the past 12 months.
This
was most evident in the exchange rate, with the
current
Australian dollar coming under intense speculative
account, the overseas debt of New Zealand
increased to a record high of over 100 per cent of
selling pressure, which drove it to new lows against
the
United
States
dollar
(figure
II.8).
Several
Figure II.8. Index of exchange rates of developed countries in the ESCAP region, 1997-1998
Index
(US dollar p e r dom estic currency: January 1997 = 100)
Sources: IMF, International Financial Statistics (Washington DC), various issues; The Economist, various issues; and
Far Eastern Econom ic Review, various issues.
108
c o u n tr ie s e x p e r i e n c in g s i m ila r p r e s s u re s ra is e d i n t e r est rates sharply in response.
In Japan, the monetary authorities have kept
In Australia’s case,
their policy stance generous with the official discount
the Reserve Bank judged that the most appropriate
rate at the historically unprecedented level of 0.5 per
way for it to deal with the exchange rate pressures
cent since 1995.
was by intervening in the foreign exchange market,
Japan further cut its interest rate (uncollateralized
In September 1998, the Bank of
since the selling pressures reflected speculative ac-
overnight call rate) to 0.25 per cent while it main-
tivity rather than any loss of confidence in Australia.
tained
The Bank undertook two rounds of intervention, in
However, the greatest impediment to growth in the
May/June and August/Septem ber 1998.
Japanese economy is not the cost of credit but the
Australian
financial
system
has
Overall, the
thus
far
come
the
impaired condition
inability
through the global turmoil without serious difficulty.
to
economy.
This favourable outcome can be attributed to
the
econom y’s
capacity
to
adjust
to
changed
circumstances, including the success of exporters in
finding new markets.
favourable
discount
rate
at 0.5
per cent.
of the financial sector and
extend
financial
support
to
the
its
real
The problems of Japan’s corporate sector
are reflected in the chronic weakness of the stock
market, which declined by nearly 8 per cent in 1998
following a decline of nearly 22 per cent in 1997.
A stable macroeconomic policy
environment has made an important contribution to
the
official
outcome.
The task for monetary
Low
interest
rates,
combined
with
slightly
higher margins between deposit and lending rates,
policy has been to try to minimize the damage to
have, however, helped some of the major problems
the economy from the Asian crisis and to ensure
facing
that inflationary pressures remain in check.
It was
Banks at the core of the financial system
always
would
been able to begin absorbing existing losses and
recognized
that
the
first
of
these
involve some decline in the exchange rate.
same
time,
it
is
in the
nature
of
financial prices are liable to overshoot.
the
exchange
rate can
At the
markets
that
Instability in
itself damage
confidence.
to
the
banking
increase
their
industry
loan
loss
higher operating profits.
to
be
reserves,
addressed.
have
helped
by
Nonetheless, the resolu-
tion of the problems still facing some banks may
have to wait for some time.
This may be why
Despite these risks, adjustment has occurred with
capital markets remain uncertain over the full ex-
comparatively
little
tent of bad loans and the share prices of banks
economy,
financial
and
disruption
to
the
domestic
conditions
and
short-term
remain chronically weak.
interest rates remained within the narrow band of
5.00 to 5.75 per cent in 1997 and 1998.
favourable
inflation
outlook
for
the
Since
With the
Australian
Japan
and
December
monetary
measures
to
1997,
the
authorities
deal
with
Government
have
the
of
announced
economy, the official discount rate was cut to 4.75
several
bad
loans
per cent in December 1998.
problem, which goes back to the asset bubble of the
late 1980s, and to improve the ability of the banks to
In
nounced
response
September
an-
provide the real economy with greater credit support.
a number of financial sector reforms in
The most recent of these measures was in October
to
the
1997,
the
government
recommendations
Wallis
1998. Prior to this, under the total plan announced
The reforms are aimed at
in July 1998, a state-managed bridge bank is to be
increasing competition and improving efficiency while
created to take over insolvent private institutions and
preserving the integrity and security of the financial
sell off their assets.
Financial System Inquiry.
system.
of
the
The centrepiece of the reforms is a new
by the
The bridge bank will be set up
Deposit Insurance Corporation,
which
has
regulatory structure based on three agencies, each
been given 2.3 trillion yen over the next five years,
of which will be respectively responsible across the
plus
financial system for financial safety, systemic stability
guarantees.
and payments, and conduct and disclosure.
to the bridge bank will be evaluated by the newly
The
a
borrowing
facility
backed
by
government
The viability of banks to transfer assets
new institutional framework is being established in
formed Financial Supervisory Agency.
place of existing institution-based regulation because
process, the bridge bank will continue to provide
of changes in the nature of the financial sector in
healthy companies with loans, thereby preventing the
which boundaries between financial instruments and
closure of insolvent financial institutions from ruining
institutions are blurring.
healthy firms.
During this
109
Under the financial stabilization bills approved
efficient financial intermediation revolving around the
by the Japanese parliament in October 1998, the
removal of a wide variety of controls and restrictions
governing financial sector transactions and institu-
government
weak
has
institutions
been
and
allowed
to
to
nationalize
recapitalize
failing
banks
through the injection of public funds. The financial
stabilization plan will involve an injection of 60 trillion
tions.
Reform
yen, consisting of 17 trillion yen to protect depositors, 25 trillion yen to recapitalize banks and
18
trillion yen to buy the shares of nationalized banks.
The reforms succeeded in generating a major
rationalization of the country's financial sector.
of
the
financial
sector
characterized by a learning process.
most
obvious
in
the
case
of
has
been
This has been
m onetary
policy
implementation, where ways of dealing with the new
With
the
of
operating environment took time to emerge.
It is
Japanese banks to extend existing loans or provide
also true of financial services rationalization.
After
new
an
loans,
current
large
reluctance
companies
or
with
inability
access
to
the
initial
period
of expansion
and
diversification,
capital market increased corporate bond issues in
many institutions
1998.
subsequently forced to leave some business lines,
Such bond issues are expected to exceed
became
overstretched
and
were
the record high of 6.5 trillion yen in 1997, although
reassess their competitive strengths and consolidate
this
their
may turn out to be more expensive for the
positions.
M acroeconom ic
developments
borrowing entities.
Furthermore, they are not
necessarily available to all, as access to capital
asset price slump of the late 1980s was important in
market varies depending on the financial conditions
highlighting the risks of rapid expansion into new
of companies, even within the same industry.
business activities.
The
Financial
Supervisory
Agency
has
estimated that the magnitude of bad loans in the
Japanese banking system was 87.5 trillion yen (11
per cent of total loans) at the end of March 1998, of
which 45.4 trillion yen was accounted for by the top
19 banks.
reinforced this learning process.
The Agency later revised the figure
upward in November by another 10 trillion yen. The
fall in bank share prices has reduced banks’ capitalto-assets ratios, which is forcing them to cut back on
In particular, the
As a result of the reforms, monetary conditions
are
now
measured
by
the
M onetary
Conditions
Index, whose core component is price prospects.1 In
the monetary policy statement in August 1998, the
Reserve Bank stated that the Index at zero was at
the “desired level”.
In other words, there were no
incipient inflationary pressures in the economy for
which policy measures were required.
new lending to companies in order to comply with
international standards.
Following
the
outbreak
of
the
Asian
crisis,
interest rates in New Zealand increased from the
Since
1997,
the
experienced the closure of several
institutions.
The
effectively
Credit
Bank,
one
of
credit
institutions
October under the
in
has
middle of 1997 onwards, reflecting a weakening of
large financial
the New Zealand dollar in tandem with the weaker
financial
three
Japan,
sector
insolvent
specialized
was
Long-Term
yen and concerns over export demand from Japan.
long-term
The benchmark 90-day rates rose to about 9 per
nationalized
new banking legislation.
in
The
cent from
between
around
m id-1997
7
per cent
and
during
m id-1998,
with
the
period
the
rate
nationalization of this bank was seen as a blueprint
recording 9.7 per cent in mid-June 1998 triggered by
for
the currency’s fall.
future
institutions.
Credit Bank
nationalizations
of
troubled
financial
In December 1998, the insolvent Nippon
1998.
Until the mid-1980s, New Zealand’s approach
to the financial system was largely protective.
programme
motion
dramatically.
110
of
which
economic
changed
The
and involved
From 1984,
liberalization
the
signs
of
falling
growth
late June and stood at around 5 per cent in October
was also nationalized.
regulatory regime was extensive
multiplicity of policy objectives.
With
becoming clearer, interest rates began to ease in
financial
was
set
New Zealand banks are essentially dom esti-
cally oriented and have not suffered from the Asian
crisis.
a
a
in
environment
The reforms sought to achieve more
1 The M onetary Conditions Index is an am algam of
the exchange rate (trade-weighted exchange rate index)
and the interest rate (90-day interbank bill rate).
In
New Zealand’s stock market performed poorly
in 1998.
This was partly due to the volatility in
international
financial
Asian crisis.
The market declined over the year in
markets
resulting
from
the
the
early
1990s,
Australia’s
economic
performance surpassed that of most other OECD
countries.
growth,
There
have
been
unemployment
low
and
has
six
years
fallen,
productivity
of
solid
inflation
remained
following the successful share flotation of the govern-
strong.
ment’s stake in Auckland’s international airport.
made in fiscal consolidation by means of expenditure
reforms
should
All
three
economies
have
been
negatively
In
all
three
countries,
policy
issues
are
largely
introduced
help
to
by
the
reduce
The labour market
government
structural
in
1997
unemployment,
but further reforms may be required to achieve the
employment objectives.
There are also other areas
of reform, such as fiscal reform, which need to be
dominated by the need to counter the effects of the
considered
Asian crisis.
Australian economy.
In Japan, there is considerable concern
been
While unemployment has fallen, it remains
high for this stage of the cycle.
affected by the economic and financial crisis in Asia.
has
In addition, significant progress has been
restraint.
Policy issues and responses
growth
has
1998, while it showed a temporary upsurge in July
to
stimulate
greater dynamism
in the
at the long-lasting domestic problem of consumer
confidence and a gravely impaired financial sector,
The tax reforms proposed in August 1998 by
coming on top of deep-seated recessionary trends.
the Government of Australia include the introduction
The precise impact of the crisis on the economies
of a 10 per cent goods and services tax from July
individually will, however, depend on three sets of
2000 and substantial cuts in personal income tax, as
factors: the importance of trade and financial links
well as an increase in welfare payments.
with the economies hit by the crisis; their current
words, there is to be a rebalancing between direct
In other
cyclical position; and the impact of developments on
and
the w orld’s financial markets.
expenditures to make supply-side improvements and
indirect
taxes
and
between
improve work incentives.
With
respect
to
the
first
factor,
the
worst
revenue
and
While the budget deficit
declined over the years from 4.7 per cent of GDP in
affected will be Japan, although neither Australia nor
1993 to 0.6 per cent of GDP in 1997, the new tax
New Zealand will be completely immune from the
package
adverse effects of the crisis.
changes
As regards the second
factor, it is self-evident that the contractionary effects
and
associated
are
expected
to
welfare
reduce
expenditure
the
expected
budget surplus during the first two years of operation
of adjustment in the economies in crisis will aggra-
of the package.
vate conditions
the wake of the Asian crisis will, however, further
in those economies,
where confi-
dence and overall activity are already weak.
Japan is liable to be worst hit.
developments
in financial
Again,
Finally, as far as
A period of weaker GDP growth in
affect fiscal performance.
Most forecasts indicate
growth weakening to around 2 per cent in 1999.
markets are concerned,
and
Japan’s economy is presently in recession as a
redirection of capital flow to safe havens will also
result of the domestic financial crisis following asset
affect performance during 1999.
price deflation and the crisis in a number of Asian
the
exaggerated
swings
in
exchange
rates
economies.
In this regard, it is important to remember that
Even though
financial
markets
have
stabilized to a degree through a massive provision of
Japan has been a traditional source of capital for
liquidity and a series of moves designed to ease
much of the region for several years.
credit supply and boost spending, GDP looks set to
It is unlikely
that it will be able to play this role for some time in
contract further in 1999.
the
predicated on a return of private sector confidence
future,
given
the
perilous
state
of
own
A resumption of growth is
To what
associated with a successful conclusion to the twin
New Zealand have to suffer
crises in the Japanese banking system and in the
financial sector and weak fiscal position.
extent Australia and
its
from a heightened perception of risk affecting the
rest of Asia.
Asian and Pacific region as a whole and the redirec-
some time, putting downward
Slack in the economy will continue for
tion of capital flows remains uncertain for the time
and prices.
being.
domestic
pressure on wages
The restraining effects of depressed
demand
conditions
on
the
volum e
of
111
imports are expected to outweigh the unfavourable
the developing countries of ($1.8 trillion or approxi-
impact of the Asian crisis on exports, leaving the
mately 208 trillion yen).
current external surplus on a rising path beyond 3
deficit problem will have to be tackled.
Before too long, the fiscal
per cent of GDP and increasing the likelihood of
friction with trading partners.
The policy challenges facing New Zealand are
The challenge facing
comparatively benign.
policy makers is thus enormous.
Prior to the Asian crisis, New
Zealand had enjoyed seven years of stable growth,
The Government of Japan launched two major
with falling unemployment.
Inflation had remained
stimulus packages, one in April 1998 and another in
low, despite exchange rate weakness.
At the same
November
time,
considerable
1998
to
boost
the
economy,
in
the
process postponing the commitment of achieving a
fiscal
balance.
The
November
1998
package
fiscal
consolidation
had
made
progress, as evidenced by a substantial decline in
public debt relative to GDP.
economic
growth
In the wake of the
included additional public spending and loans to the
crisis,
has
slowed,
corporate sector to ease the credit crunch, as well
surplus has slipped and the current account deficit
the
budget
as an issue of “shopping vouchers" for households
has widened sharply.
with children or elderly persons to stimulate con-
been less pronounced than they were in the past.
sumption.
Nevertheless, given external deficits and debt levels,
Permanent tax cuts in corporate taxes
and reductions in the maximum rate of combined
preserving
income and local government taxes have also been
announced.
The budget for the fiscal year 1999/
maintaining
2000 is also expansionary, aimed at reviving the
economy.
the likelihood of growth of the economy in 1999 at
economic
packages
and
budgetary
sound
fiscal
confidence
in
position
the
is
crucial
currency,
to
thereby
reducing pressure on m onetary policy. However, with
only
1.0 per cent, the fiscal
government
These
a
So far, such imbalances have
may experience
performance
a significant
of the
deterio-
ration in 1999. The government has launched an
measures will clearly worsen the fiscal balance in
economic
the short term. With the increasing debt burden and
rise in interest payments, as much as 21 per cent of
government finances and alleviating possible budget
shortfalls over the medium term. The package in-
the expenditure in the budget for the fiscal year
cludes proposals for further privatization and reform
1997/98 was spent on interest payments for
government bonds already issued. It is noteworthy
of the pension system. The overall success of these
that the accumulated public debt of 285 trillion yen
economy adjusts to a more
economic environment in 1999.
in Japan now exceeds the total debt burden of all
112
proposals
policy
is
package
critically
aimed
dependent
at
on
difficult
boosting
how
the
international
S o c ia l I mp a c t
INTRODUCTION
is is
The organization of the chapter is as follows.
number of countries in East and South-East
Asia are experiencing economic and social
A
E c o n o mic C r
of t he
shocks of unprecedented severity.
Output has
contracted, inflation has increased and unemployment
rates have soared. The status of health and education has greatly deteriorated. This is in sharp contrast
to the picture in the recent past when these economies saw high growth, low unemployment and visible
The next section provides a brief review of the
pre-crisis achievements of the four countries in the
area of economic growth, employment, poverty,
health
and
education.
This
is
followed
by
an
analysis of the social impact of the economic crisis.
The policy responses of the governments are
discussed in the following section and the concluding
section offers some thoughts on policy discussions
for the future.
improvements in many indicators of social development. The crisis threatens to reverse much of the
past achievement. However, efforts are being made
by
national
governments
and
the
community to minimize the damage.
PRE-CRISIS ACHIEVEMENTS
international
Economic growth and
social development: the links
The primary
objectives of this chapter are to analyse the impact
of the economic crisis on selected social indicators
and to indicate policy directions for the future.
Economic growth and social development are
closely
and
The effects of economic contraction in East
South-East Asian countries are being felt
throughout the ESCAP region and beyond in varying
degrees.
However, the present review is concentrated on Indonesia, Malaysia, the Republic of Korea
and Thailand. These are among the countries badly
affected by the crisis and three of them (excepting
Malaysia) had to seek emergency assistance from
IMF.
Although the present analysis is limited to four
countries, the major conclusions derived from the
analysis should have relevance for others.
The
indicators chosen to assess the social impact, based
on the available data, which are admittedly scanty
and unsystematic, are employment, poverty, health
and education.
It is
recognized that there
dimensions of social impact.
are
many other
The increase in unem-
ployment and poverty is certain to have led to a rise
interlinked
through
a complex
process
of
mutual causation.
That economic growth, in most
circumstances, fosters social development is com monly understood. Of late, there has been increasing recognition of the reverse causation. A detailed
examination
of
interlinkages
between
economic
growth and social development is beyond the scope
of the present exercise.
However, it is useful to
indicate briefly some of the channels through which
they interact in order to appreciate the pre-crisis
achievements in the four countries.
Social development contributes to economic
growth through improvement in the quality of human
resources, which is becoming increasingly important
as a factor of production. The ability to meet basic
needs and the avoidance of glaring disparities
create conditions for social and political stability,
which is an essential prerequisite for investment
(both domestic and foreign) and hence growth.
in the incidence of crime, violence within the family,
mental stress and suicides, drug trafficking, begging,
One of the most important links in the line of
prostitution, industrial unrest, racial or ethnic strife
causation from economic growth to social develop-
and political discontent.
ment is the effect of the form er on employment.
However, the data available
on these dimensions are even
these
issues
are
therefore
analysis in this chapter.
more scanty,
excluded
from
and
the
It is
evident that, for any given output-labour ratio, the
faster the growth of output the greater is the
quantum
of employment.
Moreover,
at the
early
113
stages of development, growth
is typically engen-
strong
export
performance
countries
trajectory usually occurs with a fundamental change
employment.
in a development strategy that favours increase in
labour
the overall employment-intensity of output. The increased employment, in turn, generates income for a
ensured low rates of open unemployment.
greater number of people, enabling them to acquire
labour force could find reasonably good jobs in the
social services for themselves and their families.
growing
Another
extensive
link
in
the
use
line
of
the
of
factor
causation
from
economic growth to social development has to do
with the role of the government. The private sector
is generally unwilling to provide many social services
such as basic education and primary health care
because of a significant divergence between private
and
social
costs
and
benefits.
Private
sector
provision is largely profit-motivated and caters for the
needs of the urban areas and higher income groups.
The
government
deficiencies.
has
A
to
step
growing
in
to
meet
economy
these
enables
the
government to generate resources required to fulfil
this responsibility. There is evidence that statistically
significant positive correlation exists between public
expenditure on social services and achievements in
social indicators such as adult literacy and life
expectancy.1
increased
manufacturing,
in
export
manufacturing
production with which a country is most abundantly
endowed,
namely,
labour
in most
developing
countries.
Thus, a major upward shift in growth
more
increase
their
sectors.2
by
To
of
of
dered
production
which
volumes,
of
these
labour-intensive
they
had
a
natural
comparative advantage, leading to increased wage
Employment growth
force
growth.3
High
often
exceeded
employment
growth
A very
substantial percentage of the new entrants to the
economies.
Large
numbers
of
workers
migrated from villages to cities and secured jobs.
Labour markets
rates
became
increased
so
tight
much
and
that
nominal
many
wage
countries
allowed foreign labour, both skilled and unskilled, to
the
domestic
workforce.
immigrate
temporarily
Overall employment steadily
increased
and,
with
along
and
this,
the
population.
Women’s
market
boosted
women
was
were
employment
able
income
of the
participation
significantly.
to
take
opportunities
export-oriented
augment
industries
industry and electronics.
in
in
the
In
general
labour
particular,
advantage
of
the
labour-intensive
and
such
as
the
garment
Between 1980 and 1996,
the share of women in the labour force in Indonesia
increased from 38 to 41 per cent; in Malaysia, the
increase was from 34 to 37
per cent.
Women
accounted for 70-80 per cent of the labour force in
Malaysian export-oriented industries in the 1990s.4
It should
also
be
noted
that
rising
income
provides scope for the private sector to become
actively engaged in the provision of many social
services.
The benefits of the higher economic growth thus
trickled
through
widespread
employment
Public services cannot usually keep pace
with the increase in demand induced by the fast
growth of per capita income. Moreover, the affluent
Table
Korea
quality than are typically available in public facilities,
and they are willing to pay a higher price.
In
capita
consequence, a market is
investment to be profitable.
created
for
success
presents
data
which
show
the
during
and Thailand in the areas of growth, per
income, employment, health and education
the
period
from
the
mid-1980s
to
the
private
2 Richard R. Nelson and Howard Pack, The Asian
Miracle and M odern Growth Theory, Policy R esearch Paper
1881 (Washington DC, W orld Bank, Development Research
Group, 1998), p. 5.
The evidence
spectacular
III.1
achievements of Indonesia, Malaysia, the Republic of
sections of populations demand services of better
The
down
creation, which led to a major reduction in poverty.
in
achieving
a
under discussion has been largely attributed to the
3 ILO, The Social Im pact o f the Asian Financial Crisis,
technical report for discussion at the High-level Tripartite
Meeting on Social Responses to the Financial Crisis in
East and South-East Asian Countries, Bangkok, 22-24 April
1998, p. 12.
1
See Survey 1996 (United Nations publication, Sales
No. E.96.II.F.18), pp. 151-152.
4 “Women contribute to Asian econom ies” , Women in
a Global Econom y (Bangkok, United Nations Development
Fund for Women, O ctober 1998).
consistently high growth rate in the four countries
114
115
2 150
800
7.7
8.4
Republic of Korea
Thailand
2 960
10 610
4 370
1 080
1.8
3.1
3.3
3.0
1985-1996
of employmenta
growth rate
Annual
2.0
1.1
3.7
2.5
4.9
1996
4.0
6.9
2.1
1985
rate
Unemployment
Employment (%)
Poverty
22e
20b
17
1987
11
9c
13
1996
(percentage)
headcount index
Life
64
69
68
55
1985
70
72
71
64
1995
at birth
expectancy
44
27
28
79
1985
27
8
11
50
1995
live births
rate per 1,000
Infant mortality
Health sector
45
74
66
49
58
58
1990
54
51
1980
53
82
62
62
1995
of those age 6-23)
levels (as percentage
Gross enrolment for all
91
96d
74
74
1985
94
98
84
84
1995
rate
Adult literacy
Education sector
1984.
1995.
Refers to m ales only.
1988.
c
d
e
Refers to em ployed persons.
b
a
1987) and The S tate o f the W orld's Children 1997 (New York, Oxford University Press, 1997).
table 1; W orld Developm ent R e p o rt 1987 (Oxford University Press, 1987); and UNICEF, The S tate o f the W orld’s Children 1987 (New York, Oxford University Press,
E.98.II.F.59) and S urvey 1990 (United Nations publication, Sales No. E.91.II.F.10); and World Bank, W orld Developm ent R eport 1997 (Oxford University Press, 1997),
University Press, 1998); UNESCO, S ta tistica l Yearbook, various issues (UNESCO Publishing and Bernan Press); S urvey 1998 (United Nations publication, Sales No.
Press, 1994); ADB, Key Indicators o f D eveloping A sian a n d Pacific C ountries 1998 (Oxford University Press, 1998) and A sian Developm ent O utlook 1998 (Oxford
UNDP, H um an Developm ent R eport 1997 (New York, Oxford University Press, 1997) and Hum an Developm ent R eport 1994 (Delhi, Oxford University
2 000
5.7
Malaysia
S o u rc e s :
530
6.0
Indonesia
1996
(percentage)
1985
($)
GNP
1985-1995
GNP
per capita
per capita
growth rate of
Annual
Table III.1. Economic and social development in selected Asian countries, various years
mid-1990s.
growth
extremely impressive, far above
most other developing countries, excluding
China.
There were steep increases in per capita income,
which more than doubled in Indonesia and Malaysia
and more than tripled in the Republic of Korea and
Thailand.
rising
Consistent with the preceding analysis, rapidly
per capita income brought about major
improvements
in
social
indicators.
With
healthy
growth in employment during the period, unemployment rates by 1996 had become very low.
The
Republic of Korea had virtually eliminated absolute
poverty by the mid-1980s, and significant reductions
in poverty have been recorded in the other countries
since then.
Comprehensive improvements in health
took
life
place;
mortality
The transmission channels
Their performance in terms of economic
has been
expectancy
increased
rates fell substantially.
and
infant
Achievements in
education were equally impressive:
gross enrolment
ratios increased noticeably, with a very favourable
A major feature of the economic crisis which
began in the second half of 1997 in the four
countries was the flight of foreign capital leading to a
steep depreciation of the national currencies which,
in turn, induced further outflows. The huge depreciation made it extremely difficult for many private
commercial enterprises to service their loans, which
were denominated in foreign currency. Commercial
banks and financial institutions became extremely
conservative in extending credit and many enterprises which were
significantly affected
otherwise healthy and not
by the currency depreciation
could not operate for lack of working capital.
others became bankrupt and closed down.
amount
system
of non-performing
rapidly increased,
Many
The
loans in the banking
further worsening the
credit crunch. Output fell, unemployment increased,
wages and income were reduced and the incidence
of poverty multiplied.
impact on adult literacy rates, which in 1995 stood at
well over 80 per cent for Indonesia and Malaysia
The depreciation of national currencies led to
and at more than 90 per cent for the Republic of
increased prices of imports, which fuelled inflation.
The combination of rising prices and falling income
Korea and Thailand.
countries
could
In short, by 1996, all four
achieve
high
levels
of
social
development, aided by, as well as supportive of, fast
economic growth.
It follows that a dramatic deceleration in growth could break this virtuous circle.
quality goods and services for better-quality, expensive varieties. Similar adjustments took place in the
consumption of social services, particularly health
and educational services.
IMPACT OF
THE ECONOMIC CRISIS
The initial causes of the crisis, the path it has
traversed since the outbreak and responses to deal
with it clearly have a bearing on the social impact.
A
large
body
of
literature
has
already
emerged
analysing the causes of the crisis, how it has played
itself out and the propriety or otherwise of associated policy responses.5 No effort is made here to
summarize
this
contentious views.
some
of
the
literature,
which
is
replete
with
This next section looks briefly at
channels
by
which
the
transmitted to social areas, and the
eroding of the gains achieved earlier.
was responsible for a large contraction in private
consumption expenditure.
The quantitative decline
was also accompanied by a change in consumption
patterns involving the substitution of cheaper, low-
crisis
was
consequent
Government revenue came under severe strain.
As real GDP contracted, the tax base shrank. Also
tax-to-GDP ratios fell.
The estimated tax-to-GDP
ratio in 1998 was four percentage points less for
Malaysia and 2.8 percentage points less for Thailand
than in 1997. With a shrinking base and lower ratio,
tax revenue declined sharply.
Simultaneously, with
increases in general price levels, the cost of
providing public services tended to increase.
The
options to increase budget deficits were limited by
the conditions of the various bailout packages
negotiated by three of the four countries.
In the
wake of falling revenue and limits on deficit, governments had to impose expenditure cuts which affected
their capacity to maintain or augment the level of
5
For the contribution of the ESCAP secretariat to this
literature, see Survey 1998, pp. 86-103 and Development
Papers No. 20 (forthcoming).
116
services. There was also a reduction in the supply
of these services by the private sector, which was
confronted with
lower profits.
falling
demand,
rising
costs
and
Figure III.1 shows the channels of transmission
are, of course, somewhat different for each area.
of the economic crisis to employment, poverty, health
These are discussed in some detail in the following
and education.
paragraphs.
The specific impacts of the crisis
Figure III.1. Major channels of transmission of the economic crisis to social areas
Source: Adapted from Am m ar Siam walla and Orapin Sobchokchai, Responding to the Thai Econom ic Crisis (Bangkok,
UNDP, 1998), p. 19.
117
institutional unemployment benefit schemes in most
Employment and poverty
of the affected countries.7
Higher inflation triggered
by the currency depreciation led to severe erosion in
The sudden reversal of economic growth as a
result of the
crisis
dealt a
blow to
employment
real purchasing power and pushed the consumption
of a
large
prospects and, in fact, caused a major reduction in
thresholds.
the labour force employed by the private sector.
As
sharply.
output contracted, so did the demand for labour.
In
consequence, substantial retrenchment of labour took
place
and
new
hiring
came
to
a
halt.
labour force to secure employment.
Even in the
public sector, the workforce had to be downsized as
a result of expenditure cuts.
Some of the retrenched
labour found jobs in the urban informal sector; some
went back to their villages to earn a livelihood in the
rural informal sectors and in agriculture, somewhat
reversing the village-to-city migration trends which
had
occurred
economic
in
the
growth.
In
pre-crisis
addition,
years
many
of
high
immigrant
workers were forced to go back to their countries of
origin.
However, despite these adjustments, open
unemployment in all the affected countries increased
The
persons
number
of
to
the
below
poor
poverty
increased
Table III.2 shows the unemployment rates for
This
minimized the opportunities of new entrants to the
number of
the four countries in 1997, when the crisis had just
started, and in 1998 when the full effect was felt.
The estimated number of unemployed in
also shown.
1998 is
The increases in unemployment rates
were extremely large in the span of one year:
over
130 per cent in Malaysia and Thailand, around 200
per cent in the Republic of Korea and over 350 per
cent in Indonesia.
The numbers of unemployed in
1998 varied between 600,000 in Malaysia, 1.5 million
in the
Republic
of
million in Indonesia.
Korea
and Thailand,
and
20
These numbers amply indicate
the graveness of the unemployment problem created
by the economic crisis.
substantially.
Among
The impact on women workers, who were able
entrants
to
the
the
unemployed
labour
market
are
both
new
and
those
who
to secure employment in the pre-crisis high-growth
were retrenched from their jobs.
period, was severe.
Owing to their position in the
workers has been widespread in all the countries.
labour market, where they were concentrated in the
In Thailand, at the onset of the financial crisis, 56
“most precarious” forms of low-skilled wage employ-
financial firms were closed down, rendering a large
ment,
women
were
more
vulnerable
to
lay-offs.
Retrenchment of
number of professionals unemployed; in the third
Their vulnerability was further exacerbated by the
quarter
attitude
as
250,000 workers were retrenched and by the end
secondary income earners and so terminated their
of 1998, another 200,000 were likely to become
of
employers,
who
regarded
women
employment before that of men.6
of
1998,
unemployed.
The falling labour demand had a depressing
effect on formal sector wage rates.
it
was
In Malaysia,
July
1998,
a
were
reported.8
total
In
of
estimated
that
between January
49,479
Indonesia,
the
some
and
retrenchments
figures
are
At the same
time, owing to the influx of new entrants and workers
who had lost formal sector jobs in the informal and
agricultural sectors, underemployment increased and
the
average
income per worker decreased.
The
combined effect of falling earnings per worker and
rising
unemployment
amounted
viduals
to
sizeable
and families.
exacerbated
by
the
and
of
These
losses
absence
6 ILO, Social Impact, p. 27.
118
underemployment
losses
of
income for
indi-
7 Only the Republic of Korea has form al unem ployment insurance, although coverage is lim ited to firm s with
more than five workers (before June 1998, the threshold
was 10 workers). See Sanjeev G upta and others, “M itigating the social costs of the Asian crisis” , F inance and
Developm ent (Septem ber 1998), pp. 18-21.
were further
any
significant
8 Raj Karim and Rabbi Royan, “The im pact of the
crisis on population and reproductive health in M alaysia” ,
report prepared for the UNFPA/ANU study on the effects of
the financial and econom ic crisis on the attainm ent of
ICPD goals in the East and South-E ast Asian region,
Bangkok, 15-17 O ctober 1998, p. 17.
Table III.2. Open unemployment in the affected countries before and after the crisis
1998
1997
Unemploym ent rate
(percentage)
Unem ploym ent rate
(percentage)
N um ber unem ployed
(m illions)
2 1 .3a
20.0
2.7b
6.4c
0.6
2.6
7.7c
1.5
1.9
4.4
1.5
Indonesia
4.7
Malaysia
Republic of Korea
Thailand
S o u rc e s : ADB, Key Indicators o f Developing Asian and Pacific Countries 1998 (Oxford University Press, 1998); data
provided by the Human Resources Planning Division, National Economic and Social Development Board, Thailand; The
Nation, 24 July 1998, Asian Wall Street Journal, 24-25 July 1998; Far Eastern Econom ic Review, 9 July 1998; and “The
im pact of the crisis on population and reproductive health in South-East Asia” , draft integrative report prepared for the
UNFPA/ANU study on the effects of the financial and econom ic crisis on the attainm ent of ICPD goals in the East and
South-East Asian region, Bangkok 15-17 O ctober 1998.
a
b
c
Estim ate refers to end of 1998.
Estimate refers to
June 1997.
Estimate refers to
June 1998.
overwhelming:
13.4 million people lost their jobs
in the period
were
forced
up to June
to
close
1998 as corporations
or trim
their payrolls
and
downsize.9
w ere w om en.
M a n y s m a ll b u s in e s s e s w e r e b a n k -
rupted by the credit squeeze and cash flow problems
and the process of adjustment has turned out to be
particularly difficult for women who have lost their
jobs (see box III.1).
Disaggregated
retrenchments
by
information
gender,
on
lay-offs
of
education
level
category of skill or sector is not available.
information
presented
below
relates
mostly
and
or
Although contraction in private sector activities
The
was the major cause of retrenchments, reductions in
to
Thailand, but it can be reasonably assumed that the
public sector employment were also responsible.
It
has been reported that about 70,000 prim ary school
nature of the labour market problems generated by
teachers in Thailand will find them selves without a
the crisis is similar for the other countries as well,
job
though the scale is bound to be different.
streamline and rationalize the education system as
a
Women formed a large, and at times disproportionately
workers.
higher,
proportion
of
the
retrenched
In Indonesia, the textile industry, which
employed mostly women, had already laid off half a
million workers by March
1998.
In Thailand, by
February 1998, women comprised 80 per cent of the
in
1999
result
because
of the
of
government
economic
crisis.
policies
Also,
a
to
large
number of government contractors and tem porary
staff were out of work during the course of 1998
owing to fiscal constraints of the government.
Loss
of work of government contractors has had a multiplier effect on the unemployment situation.
These
contractors must have downsized or retrenched a
unskilled labour laid off in the manufacturing sector.
large
In the Republic of Korea, 60 per cent of workers in
who were working for them, and they did not hire
number of skilled
and
semi-skilled
workers
small businesses employing fewer than five persons
new workers.
A sizeable proportion of those who lost their
jobs may not be able to rejoin the workforce when
9 “Millions out of work as firms close shutters” , The
Nation, 24 June 1998.
economic growth resumes in the future.
It will be
difficult for some of them to find work as their skills
119
Box III.1.
The plight of women workers and their adjustment
to the crisis
A recent survey conducted in Thailand found that
mass lay-offs in 1998 m ostly took place in the textiles
and electronics industries, where 90 per cent workers
were wom en.
Business losses were claim ed as the
m ajor reason for laying off workers. M ost of the laid-off
wom en workers were aged 40-50 or near retirement.
The employers chose to retrench the more senior
workers to cut operating costs arising from higher
em olum ents associated with seniority.
M ost of them
were workers with low skills who had spent m ost of their
lives in the industrial sector.
Many found it difficult to
find new jobs or did not expect to find new jobs as their
qualifications did not m atch current requirements.
Most of these women workers were supporting
their fam ilies and had children to take care of.
To
cope with the situation, some turned to sm aller or
may
become
economies
growth.
obsolete
during
the
with
the
restructuring
next
phase
of
of
subcontractor factories, m ost of which paid much lower
wages, maintained very poor working conditions and
violated labour laws. Some switched to inform al occupations such as selling fruits and desserts and m aking
dresses, while many returned to their hom es in rural
areas.
A large number of retrenched w om en were
forced to depend com pletely on their husbands and
relatives.
Many of them were refused help by their
husbands, who did not want to bear the burden of an
unemployed wife.
Some w omen were beaten by their
husbands, who often looked for new wives.
Source: Anjira Asvananda, “W om en
hard’’, Bangkok Post, 20 Decem ber 1998.
budget
cuts
and
a
manpower
w orkers
freeze.
hit
These
economic
graduates who, under normal circumstances, would
They could face long-term unemployment
be absorbed into government hospitals and clinics,
unless they are provided with retraining and appropriate skill development facilities to prepare them for
have to find
employed.
jobs
elsewhere
or
become
self-
future job markets.
Self-employment activities sometimes provided
As
adjustments
from
a
higher standard
of
living to a much lower one caused visible misery
viable
options
for skilled
professionals
who
were
first-time job-seekers but could not find employment.
and pain, the plight of workers retrenched because
However, the option for most low skilled or unskilled
of the economic crisis caught considerable national
was
and
increase in underemployment.
international
dreams
attention.
of achieving
One
group
a higher standard
whose
of
living
to
join
the
informal
sector,
the number of underemployed
leading
to
an
It was estimated that
people in Thailand
were shattered by the economic crisis consisted of
who worked less than 40 hours a week increased
those who
to 7.4 million in 1998 from 5.3 million in 1997, an
had newly entered the labour market
and could not find jobs.
to be large.
This group was expected
In Thailand, 490,000 persons, includ-
ing the highly educated, could not secure jobs in
1998.
It
follows
that
a
large
number
of
increase of about 40 per cent.10
Of 2.1
additional
930,000
in
public
sector
resources
has
been
responsible for the lack of job opportunities for new
entrants.
million
were
new
The reduction
also
persons,
working less than 20 hours a week.
university graduates in Thailand will join the ranks
of the unemployed in early 1999.
underemployed
In
addition
to
retrenchment
underemployment, wage
reductions,
and
increasing
including
non-
payment of salaries, contributed to the misery in the
form of reduced earnings.
It was reported that, in
In Thailand, over 8,000 medical gradu-
ates who received scholarships from the Ministry of
Public
Health
will
not
be
accommodated
in the
public sector health services in 1999 as a result of
120
10
‘“ Not enough attention’ paid to underemployed”, The
Nation, 23 September 1998.
Thailand, wages were cut for those who were kept
$4 a month, and the number of the country’s poor
in their jobs during the economic crisis.11
swelled to 40 per cent from only 11 per cent in
In the
Republic of Korea, an increasing number of workers
1997.15 In Malaysia, poverty was estimated to have
were
risen from 6.8 per cent in 1997 to 8 per cent in
not
paid;
according
to
one
estimate,
the
amount of unpaid wages more than tripled to $334.6
1998.16
million in May 1998 from January of the same year
increased from 11.4 per cent in 1996 to 15.3 per
as companies withheld pay in a bid to survive the
cent in 1998.17
In
Thailand,
the
incidence
of
poverty
economic dow nturn.12
The
phenomenon
of
reverse
cities to villages was visible.
migration
Health
from
A significant number of
the unemployed went back to rural areas to avail
The sharp decline in income had a negative
themselves of the traditional support system provided
impact on the consumption of health services and
by families and communities.
during the third quarter of 1998, at least one million
this was exacerbated by the increase in prices of
health-related inputs during the crisis. These nega-
people
tive effects were magnified by a reduction in health
who
were
It was estimated that,
working
in
cities
had
already
facilities provided by employers in the formal sector;
retrenched workers mostly lost access to the
returned to their villages.13
Another fallout of the crisis was the repatriation
facilities whereas those who kept their jobs faced a
of foreign workers, and a significant percentage have
reduction in coverage.
already been sent back to their countries of origin.
and
It was reported that, from the beginning of the crisis
stantial portion of the cost of medical services in
up
to
the
third
quarter of
foreign workers left Thailand.
1998,
some
250,000
The Republic of Korea
other accessories,
The cost of imported drugs
which
constituted
a
sub-
most countries, escalated substantially because of
the depreciation of national currencies.
Along with
granted amnesty to illegal foreign workers who left
downward adjustments in the quantity of services
the country voluntarily and about 50,000 did so in
demanded in response to income losses and price
1998. About 50,000 out of an estimated 2 million
increases, some adverse substitution also occurred.
legal and illegal foreign workers left Malaysia in the
In particular, the use of expensive medical services
available in private hospitals and clinics declined in
same year.14
favour of the less expensive services provided by
The mounting retrenchment, the failure of the
new job-seekers to find employment, the erosion of
earnings
of those who
managed to
stay on the
government
hospitals,
received attention to
preventive services.
and
the
urgent
curative
comparative
care
neglect
of
payroll and the increase in inflation brought about a
sharp increase in poverty.
It was estimated, in the
middle of 1998, that nearly 80 million Indonesians
out of a population of 200 million earned less than
15
However, som e studies indicate that although the
crisis has been very severe in Indonesia, different parts of
the country and society are affected unevenly and the
extent of increase in poverty m ay not be that high.
11 Som sak Tambunlertchai, “The social im pact o f the
financial crisis in Thailand and p o licy responses”, paper
prepared for the Regional Conference on Social Im plications of the Asian Financial Crisis organized by the Korea
Development Institute and UNDP, Seoul, Republic of Korea,
29-31 July 1998.
16 “The im pact of the crisis on population and reproductive health in South-East Asia", draft integrative report
prepared for the UNFPA/ANU study on the effects of the
financial and econom ic crisis on the attainm ent of ICPD
goals in the East and South-East Asian region, Bangkok,
15-17 O ctober 1998, p. 26.
12 “South Korea sees increase in ranks of
workers’’, Asian Wall S treet Journal, 6 July 1998.
17 Damrong
Boonyoen,
Kua
W ongboonsin,
Viroj
Tangcharoensathien and Patcharawalai W ongboonsin, “The
im pact of the crisis on population and reproductive health
in Thailand” , report prepared for the UNFPA/ANU study on
the effects of the financial crisis on the attainm ent of ICPD
goals in the East and South-East Asian region, Bangkok,
unpaid
13 Keith B. Richburg, “Jobless Asian migrants ending
up down on the farm ” , International Herald Tribune,
9 Septem ber 1998.
14
Ibid.
15-17 O ctober 1998.
121
in
Recent facts and figures on the effect of the
augmenting health facilities in the four countries was
substantial and in each of the countries, the supply of
economic crisis on the health sector in the four
countries are scanty, but some illustrative informa-
private health care services was adversely affected.
Because of the demand substitution discussed above,
the scale of operation of private health facilities was
reduced and often became no longer profitable. New
investment in private hospitals stopped, and many
hospitals with a large foreign debt faced closure.
The reduction in private health facilities put a further
burden on government as people were compelled to
tion
make more use of public facilities.
15-18 per cent.19
The
extent of
private
sector
participation
is given
below which
supports the situation
discussed in the above paragraphs.
The price of health services in some countries
increased mainly because of increases in drug
prices. In Thailand, by January 1998, the wholesale
price of imported drugs had increased by 20-25 per
cent.
Prices of locally produced drugs increased by
On the other hand, the public sector’s ability to
Loss of real purchasing power induced con-
cope with the increased demand for its services was
constrained by the increased cost of medical
sumers to substitute less expensive health services
supplied by government hospitals and clinics for the
services, especially drugs, and the limited budgetary
resources at its disposal (reflecting reduced govern-
sector.
ment revenue and limits on budget deficits).
Constrained by reduced resources, governments often
late 1998 found clear evidence of substitution; a
private hospital in a Bangkok suburb watched its
downsized their professional workforce (doctors,
nurses and health technicians), which adversely
affected their capability for maintaining quality of
the year while 5 kilometres away the average number
service.
In many cases, expenditure on fixed investment in government hospitals and clinics was
reduced. This could have reduced the capacity of
hospitals to buy diagnostic health machines and other
important equipment.
Such reductions could affect
both the quality and the quantity of health services in
the short and long run.
Many health programmes
and services were discontinued altogether, including
some programmes in the area of preventive health.
Many of the impoverished were compelled to
cut consumption of health services to dangerously
low levels. The crisis increased the opportunity costs
of health care; time spent on visiting health care
expensive health services provided by the private
A health survey carried out in Thailand in
average daily patient count drop from 900 to 400 in
of patients in a government hospital increased from
2,000 to 2,300 per day.20 It was reported in the
survey that 92 government hospitals run by the
Ministry of Public Health had already had to take 1.4
million patients in the first six months of 1998, a 50
per cent increase over the same period in the
preceding year. It was reported that, in Malaysia,
many more women in 1998 chose to deliver their
babies in government hospitals as they could no
longer afford delivery charges in private hospitals.21
The concern of a paediatric specialist in Malaysia
that parents waited for their children to be really sick
before consulting a doctor could be taken as an
evidence of reduced demand for health services.
centres could be spent on pursuing income-earning
activities.
Children are likely to have been badly
Bangkok had substantial foreign currency loans and
affected.
had to confront serious repayment problems in the
A study on the effect of the Latin American
In Thailand, many of the private hospitals in
economic crisis on the health sector showed that,
whereas mortality and morbidity in the short run were
somewhat independent of economic conditions, child
malnutrition and infant mortality increased appreciably
during the crisis.18 A similar effect can be expected
as a result of the current Asian crisis.
18 “Health and development:
repercussion of the
econom ic crisis” , a report (C E 103/7) presented at the
103rd Meeting of the Executive Com m ittee of the Pan
Am erican Health O rganization, W ashington DC, June-July
1989, p. 9.
122
19 Suwit W ibulpolprasert,
Viroj
Tancharoensathien
and Jongkol Lertiendumrong, “The econom ic crisis and
responses by health sector in Thailand in 1997-98”
(SEA/NHP/M eet/98.2/lnf.Doc 7/11), paper presented at the
Regional Consultation on Health Im plications of the
Economic Crisis in the South-East Asian Region, 23-25
March 1998, Bangkok, p. 2.
20
“Poor fight for place in clinics as queues go middle
class”, The Nation, 5 O ctober 1998.
21
Karim
M alaysia” , p. 29.
and
Royan,
“ Im pact
of
the
crisis
in
wake
of
the
steep
devaluation
of
the
national
equipment,
including
large
diagnostic
machines.
currency.
Newly opened private hospitals suffered
most. Experts have estimated that 35 per cent of
Second, both the quality and the quantity of medical
services were reduced. Budget cuts and increased
the private hospitals could be closed in the next two
inflation forced government hospitals in Thailand to
abandon many prevention programmes, including the
to three years.
In 1998, these institutions resorted
to steep expenditure cuts,
under-occupied wards.22
including closing down
Expenditure reduction by
distribution of free condoms and contraceptive pills.
In
addition,
cheaper
medicines
and
cheaper
governments also affected the liquidity position of
powdered milk for HIV-infected mothers were used in
private
government
government hospitals. As noted earlier, the budget
cut in Thailand also led to a reduction in manpower
employees under which they were entitled to use
inpatient services in private hospitals. This action
associated with providing health services:
8,000
new medical graduates, including medical tech-
was expected to seriously affect cash flows in
private hospitals, especially at the provincial level, as
nicians, would not be hired by the government.
This may lead to a deterioration of the quality and
civil
clientele.23 A reduction in medical facilities provided
coverage
hospitals.
by private sector employers also had a similar effect.
In Malaysia, in 1998, several private companies
improve in fiscal year 1999, when the Ministry of
Public Health is expected to operate with a budget
hospitals.
Finance
servants
imposed
In
terminated
were
limits
load
in
private
the
privileges
the medical
Ministry
of
a significant
on
employees, which
Thailand,
the
part
of
claims
of
their
of
their
resulted in a decreased patient
hospitals
and
clinics
that
suffered
countries,
budget
cuts.
the
In
services provided
in government
The situation was not expected to
of 57 billion baht, dropping from 59 billion baht in
the previous fiscal year.27
private
In Indonesia, the nominal health budget for the
sector employees used to visit.24
In some
of
fiscal year 1998/99 was cut by 4 per cent from its
public
health
Thailand,
budget for 1998 was cut three times.
the
sector
level in the previous year.28
overall
rate existing
The 1998
in
1998,
Given the high inflation
which
showed
a sevenfold
increase over that of the previous year, this cut must
budget of 800 billion baht was 5.1 per cent smaller
have adversely affected the governm ent’s capacity to
than the 1996 budget of 843 billion baht.25
provide services.
When
However, nominal health budgets
the effect of inflation is included, there was a very
were not reduced in all the countries.
high real reduction of the overall budget. It may be
noted from chapter II that inflation in 1998 increased
the budget allocation for the Ministry of Health for
by nearly 50
rate
with 5.75 per cent in 1997 in contrast to cuts of 18 to
for the
Ministry of Public Health in 1998 (59 billion baht)
20 per cent across the board for all other sectors. It
has been further reported that the procurement,
was in real terms far less than the budget in 1997.
supply and availability of essential drugs, including
The effect of the cut was felt in two ways.
vaccines and contraceptives, were not affected.
recorded
in
per cent as compared to the
1997.
The
specific
budget
First,
In Malaysia,
1998 was 6 per cent of the national budget compared
The
within the health budget, investment expenditure was
operating budget of primary health care and family
reduced significantly from 39 per cent in 1997 to 27
heaith development for 1998 was increased by about
per cent in 1998.26 This was expected to constrain
20 per cent to 307 million ringgit.29
the capacity of government hospitals to acquire fixed
27 W ibulpolprasert
Thailand” , p. 10.
22 W ibulpolprasert
Thailand” , p. 14.
23
24
p. 29.
others,
“ Economic
crisis
Karim and Royan, “Im pact of the crisis in M alaysia”,
Ibid.
and
others,
“Econom ic
crisis
others,
“ Econom ic
crisis
in
in
ibid.
25 W ibulpolprasert
Thailand” , p. 9.
26
and
and
in
28 Sri M oertiningsih Adioetom o and Siswato Agus
Wilopo, “The im pact of the crisis on population and
reproductive health in Indonesia” , report prepared for the
UNFPA/ANU study on the effects of the financial and
econom ic crisis on the attainm ent of ICPD goals in the
East and South-East Asian region, Bangkok, 15-17 O ctober
1998, p. 39.
29 Karim and Royan, “Im pact of the crisis in M alaysia” ,
pp. 25-26.
123
The rising incidence of poverty
will further
compound health problems by causing
more widespread malnutrition.
Lack of nourishment weakens
the immune system of the impoverished, and they
become
highly vulnerable to diseases.
The
incidence of infectious diseases such as tuberculosis is likely to increase. Among the impoverished
groups, the most vulnerable are pregnant women,
children and the elderly.
Lack of provision of
health services, including immunization facilities and
nourishment for these sections of the population
have long-term consequences.
The health of
children could be permanently impaired.
At the
same time, the erosion of preventive services such
as anti-mosquito programmes could increase the
incidence of malaria and dengue fever.
It has been reported that, in 1998,
malnutrition
in Indonesia was rising rapidly as families could no
longer afford rice, sugar, flour, vegetables and
cooking oil, the prices of all of which doubled.
Severe malnutrition was beginning to show up
among children in remote villages. Many pregnant
women could no longer afford prenatal care and the
Box III.2.
state
The crisis had a considerable impact on the
of reproductive health in some countries
(box III.2).
Budget cuts forced many government
30
“ UNICEF m alnutrition w arning” , Bangkok Post, 20
O ctober 1998.
The economic crisis and reproductive health
The econom ic crisis has m ost probably produced
a disproportionately adverse effect on reproductive
health, which encom passes the state of wom en’s health
with an emphasis on fam ily planning. W hile no documented evidence is readily available, there are indications that the following forces have been in operation.
The crisis has increased pressure on young
women to join the com m ercial sex industry. The rising
incidence of poverty has left no alternative for many
jobless and retrenched women but to sell their bodies to
supplem ent fam ily incomes.
Com mercial sex workers
and their clients (who have the potential to infect their
wives) face increased exposure to sexually transmitted
diseases, including HIV/AIDS, as the use of condoms
has fallen because of higher costs and the disruption of
the free distribution programmes.
A strong foundation for a long and healthy reproductive life requires that the needs of adolescents and
youth are m et effectively. Even before the crisis, prom oting sex education for unmarried persons and catering for
their associated needs were regarded as too sensitive for
m any governm ents. This issue has become even more
com plicated because the increasing number of drop-outs
from the education system (discussed in detail in this
chapter) and increasing unemployment, including that of
young workers, im ply that these young people have been
124
nutrition and health of the newborn could be
damaged.
Child immunization had been nearly
universal in Indonesia, but this could be affected by
the dislocation of Indonesia’s volunteer-based health
care system. A system of 250,000 local health and
welfare centres were no longer working well as many
of the volunteers, numbering more than one million,
had to engage in work to feed their own families. As
a result, child health deteriorated severely.
In the
third quarter of 1998, 65 per cent of children under
three years of age were anaemic and 50 per cent
under two were suffering from lack of micronutrients.30 According to one estimate, infant mortality
in Indonesia could rise by 30 per cent after being
reduced by two thirds in the last 25 years.
forced to abandon
become dispersed.
their
norm al
activities
and
have
Providing access to a safe abortion facility is
another controversial issue, but it is im portant for ensuring
the improved reproductive health status of wom en.
A
major m otivation for seeking term ination of pregnancy is
pressure on family budgets and such pressure has in creased during the crisis. As legal abortion facilities were
already either restricted or not available, unsafe abortions
to term inate unwanted pregnancies could increase.
Even in the pre-crisis period, the provision of
many reproductive health services (with regard to
premarital sexuality, unwanted pregnancies etc.) by
governm ents provoked m oralistic objections. During the
econom ic crisis, with national budgets facing deep cuts,
governm ents are not well placed to strengthen or
preserve com prehensive reproductive health program m es
as there is no popular pressure on assigning priority to
such programmes.
Source: The inform ation in this box is taken from
UNFPA/ANU, Southeast Asian Populations in Crisis (New
York, UNFPA, 1998), pp. 19-26 and input provided by the
UNFPA Country Support Team for East and South-E ast Asia.
hospitals, such as those in Thailand, to abandon
many prevention programmes, including the distribution of free condoms and contraceptives.
The
absence of these programmes could have serious
long-term implications.
Such actions could significantly increase the number of HIV-infected persons
in the future, leading to loss of both financial and
human resources.
For education to be effective, two aspects can
be considered to be of equal importance: access to
education and the absorption ability (power of brain)
of the students.
The latter is related to the
maintenance of adequate nutritional standards.
aspects
expected
to
fall
during
the
Both
crisis,
resource constraints affecting access and heightened
poverty affecting nutrition.
One other health problem which has become
exacerbated during the crisis is related to mental
health. With rising unemployment, a severe drop in
were
The
available
supports
the
Thailand,
no
evidence,
admittedly
repercussions
systematic
sketchy,
noted
above.
In
on
movements
of
data
income and the increased cost of basic needs, there
students studying in overseas schools and universi-
have
ties were available.
been
persons
such
sharp
affected
increases
by the
in
mental
stress
crisis, creating
of
problems
as suicide, family tensions, violence against
women and child abuse.
However, it has been noted that
many students studying abroad were unable to bear
the high costs after the depreciation of the national
currency and might have returned home.31 A survey
carried out in February 1998 to assess the impact of
the current economic crisis on recruitment at British
Education
universities showed that the number of withdrawals
was highest for Malaysia, which had offered liberal
The
impact of the
crisis
on
education
been broadly similar to that on health.
has
Specifically,
government
abroad.
scholarships
reductions in income suffered by the population led
faster
to downward adjustments in demand.
education.32
Less expen-
to
students
studying
Furthermore, Malaysia was likely to move
towards
localization
in
the
provision
of
sive education provided by government-run schools
or by domestic universities was substituted for higher
On the domestic front, both private sector and
cost (and presumably higher quality) education such
public sector educational institutions faced resource
as that provided by private schools and foreign
universities.
The cost of education provided by
severely eroded.
foreign universities became prohibitively high owing
suffered
to steep depreciations of national currencies.
uncollected tuition fees.
problems.
The capacity of students to pay fees was
Many private schools and colleges
from
a
liquidity
crunch
The
because
amount
of
of delayed
tuition fees rose sharply to 1,889 million baht ($47
Both
institutions
resources.
private
and
public
had to cope with
sector
decreasing financial
This affected their capacity to provide
educational services.
The quality of education was
expected to be adversely affected.
lack of resources
number
educational
of
could
teachers
lead to
and
For example,
cutbacks
equipment
in the
such
million) in 1998 from 517 million baht ($13 million)
in
1997.
The phenomenon
of education.
cut across all levels
Among privately owned institutions,
402,252 students in secondary schools defaulted in
their
payments,
followed
by
129,000
students
in
colleges and 233 students in universities.33
as
The financial conditions of government educa-
computer and laboratory apparatus.
tional institutions were affected as budgets were cut.
For many in the impoverished groups, education
In Thailand,
the
1998 budget for the
Ministry of
of children was no longer affordable, leading to dropouts at all educational levels. In certain cases, former
students took to income-earning activities to augment
family incomes. Drop-outs from school, especially of
young children opting out at primary level, are cause
for serious social concern.
to
get these
students
It may never be possible
back
into
the
educational
system, causing permanent loss to society.
31
Tambunlertchat, “Social im pact in T hailand” , p. 19.
32 “Asian crisis hits British institutions” , U KE F H igher
Education News, 16 March 1998.
33 “Slump deals a blow to private schools, colleges” ,
Bangkok Post, 18 O ctober 1998.
125
It was mentioned earlier that drop-outs from
Education reflected a 6 per cent reduction over the
1997 budget.34
possibly
the
much
In real terms, the reduction was
more
government’s
and
efforts
could
to
have constrained
maintain
educational
standards.
schools, especially of young children, poses a longterm problem for society.
It will be very difficult to
bring them back into the educational system.
Also,
the absorptive capacity of those who remain in the
school system or who may eventually return to the
Loss of family income caused a large number
of children to drop out of the educational system.
In Thailand, it was estimated that, by July 1998 a
large number of students (254,217) had had to end
their studies because of the effect of the economic
crisis on their family income.
Data from another
source show that the highest drop-out rate was at
system may be impaired by malnutrition.
anaemia among children in Indonesia, experts have
warned that the current economic crisis could drive
down the average IQ level of a generation by seven
percentage points.37
the primary level (47 per cent), followed by lower
secondary (13 per cent) and then the upper
secondary level (4 per cent).
The proportion of
Thai elementary school students who went to middle schools in 1998 was down to 81 per cent from
90 per cent in 1997.
The proportion of middleschool students going on to high school also fell by
7.3 percentage points.35
According to one estimate, about 25 per cent
of children and youth in Indonesia who should have
been in school in mid-1998 could have dropped out.
The biggest number of drop-outs is likely to have
been among 12-15-year-olds whose parents could
not afford school fees charged by the school.
A
survey conducted in provinces far from the capital
observed that families were finding it difficult to pay
Owing to
the widespread lack of nutrition and the incidence of
RESPONSES TO THE CRISIS
As
indicated
before,
countries
in
East
and
South-East Asia benefited from a virtuous circle in
which
economic
growth
and
social
development
reinforced each other until the onset of the crisis.
The designing of safety nets to provide a cushion for
a large number of people affected by a prolonged
jolt of high intensity did not feature prominently on
their policy agenda as they did not perceive any
major
threat
momentum.
to
the
continuation
of
their
growth
Suddenly hit by unprecedented turmoil,
these countries had quickly to design and implement
even the “parent association fees” . Absence from
schools grew as children spent more time helping
parents to make money, showing the high opportu-
programmes and policies to arrest rapidly deteriorat-
nity cost of children’s time during the crisis. Among
the children who dropped out of elementary schools
in poor areas of Indonesia, a great majority were
girls.
Girls were often discriminated against with
regard to education as it was thought that, during
the impact was enormous and the misery suffered
the crisis, it was better for girls to stay at home, so
that the money saved could be spent on boys.36
this, international organizations and donor com m uni-
ing social conditions without much prior preparation.
As the preceding section has shown, the scale of
by
the
people
35 “ Poverty forces Thai pupils from school” , Asian Wall
Street Journal, 7 Septem ber 1998.
sometimes
constrained
overwhelming.
by the
paucity
of
resources, financial as well as human and institutional, to develop a rapid response.
In recognition of
ties came forward and augmented national capacities
for formulating
programmes.
34 W H O
Regional
O ffice
for
South-East
Asia,
"Background paper” (SEA/NHP/M eet/98.2/lnf.Doc 8/12) for
the Regional Consultation on Health Implications of the
Economic Crisis in the South-East Asian Region, Bangkok,
23-25 March 1998, p. 4.
was
Governments were
and
implementing
policies
and
The following paragraphs provide an overview
of the policies and programmes designed and implemented by governments to save vulnerable groups
from slipping into extreme social deprivation.
Given
the scope of the chapter, only selected programmes
36
“Because of these constraints wom en are more
affected by the crisis” , Women in a G lobal Econom y
(Bangkok, United Nations Development Fund for Women,
O ctober 1998).
126
37
“ UNICEF malnutrition warning” , Bangkok Post, 20
O ctober 1998.
and policies designed or implemented in the four
consumers and
countries have been used as examples.
have accomplished the primary goal of stabilizing
It should
drug
manufacturers,
but seem
be noted at this stage that the responses have not
drug prices.
been identical.
little increase in drug prices in rupiah term s.38
The rationale is that, despite simi-
to
In the first half of 1998, there was very
larity in the broad contours of the social impact,
At
there are considerable differences in detail among
the
initiative
of
the
Governments
of
Indonesia and Thailand, W HO has agreed to work
the countries.
out a mechanism to enable countries in the region to
purchase
Indonesia
other
essential drugs and
countries
in
the
raw materials from
region,
which
could
sub-
stantially reduce the import cost, and thus the price
In Indonesia, a major social safety net programme has been initiated to overcome the immediate adverse effects of the economic crisis.
priorities
include
employment,
improving
developing
food
small
security,
and
The
creating
medium-sized
enterprises, and providing basic services, particularly
in health and education.
allocation
of
billion).
17.25
The programme has a total
trillion
Non-government
rupiah
(around
community
$1.8
development
groups are involved in supervising and monitoring
the use of funds.
The
A study has revealed that Indonesia could
save 30 to 40 per cent in the cost of drugs if it
procured raw materials for certain life-saving drugs
from
countries
such
Republic of Korea.
as,
China,
India
and
the
It has also been reported that
bilateral negotiations between some exporting
importing countries have started.
produce
finished
Indonesia
and
drugs
already
Thailand,
and
As the capacity to
such
exists
in
imports
both
could
be
immediately utilized for manufacturing drugs at lower
cost, as well as for stimulating the pharmaceutical
industry.
programme
is
intended
to
strengthen
the ability of the persons affected by the crisis to
cope, especially in the villages and small towns,
which have been worst hit.
The programme has a
number of specific objectives.
These include ensur-
ing the supply of basic staples at affordable prices
through
of drugs.
subsidies;
creating
employment
In the area of education, the Government of
Indonesia has been trying to keep as many students
as
possible
in
school
through
a
combination
of
waiving fees, financial aid programmes and grants.
Resources from the World Bank and ADB have been
mobilized for this purpose.
opportu-
nities by promoting labour-intensive production and
reinvigorating economic activities, especially through
small and
medium-sized
teeing
basic
health
prices
which
the
Malaysia
enterprises; and guaran-
and
education
services
at
The
The Government of Malaysia has introduced
implementation of the programme is yet to begin
both direct and indirect measures to ameliorate the
with full force.
decline in social welfare arising from the economic
general
public
can
pay.
crisis.
One
of
the
earliest
measures
taken
in
Indonesia was to minimize the impact of the crisis
on access to curative health care.
the import of drugs and raw materials for the manufacture of drugs in the country at levels far below
Initially, the exchange rate was
set at 5,000 rupiah to the dollar in contrast to a
prevailing
exchange
Later,
the
as
rate
market
of
twice
exchange
that
rate
to
prevent
runaway
inflation,
ensure
One of the main concerns was to ensure that
price increases would
not be
excessive.
In this
regard, direct subsidies were given for selected basic
food
items such
as cooking
oil,
rice
and
sugar.
Steps were also taken to liberalize imports of food
amount.
climbed
15,000, the fixed rate was raised to 6,000.
The objectives of these social programmes
been
adequate food supply and minimize retrenchment.
Drug prices were
kept under control by fixing the exchange rate for
the market rate.
have
to
These
actions implied a considerable amount of subsidy to
38
“ Impact of the crisis’’, UNFPA/ANU draft integrative
report, p. 33.
127
With
such as beef, chicken and vegetables, with the aim
respect
to
health
services,
the
1999
Export of
budget allocation has been increased by 29 per cent
some basic items, namely sugar, flour, cooking oil
from that in 1998 to meet the heavier burden faced
and condensed milk, was disallowed for the same
by public hospitals and clinics.
reasons.
is to
of ensuring an adequate food supply.
In addition, price controls were instituted
for basic food items.
In another attempt to increase
increase the
Allocation in the
Part of this amount
number of medical
personnel.
1999 budget for development of
the food supply, a project to increase the production
agricultural
of vegetables
sum
grammes for training on the use of new technology
called the
is being maintained and this will benefit the rural
and
allocated for this
fish
was
initiated.
programme
in
The
1998,
Fund for Food, was increased from $157 million to
poor.
$263 million.
for
The pegging of the ringgit exchange
infrastructure,
rural
roads
and
pro-
It is estimated that the budgetary allocation
poverty
eradication
households.
programmes
School
will
textbook
benefit
rate of M$3.80 to $1 from 1 September 1998 was
41,300
expected to restrict the effect of imported inflation
supplement schemes will receive $150 million.
and
food
and minimize the erosion of consumers’ purchasing
power.
Republic of Korea
Malaysian companies facing a severe business
downturn are being encouraged to introduce other
schemes
rather
than
terminate
employees.
For
The Government of the Republic of Korea has
responded to the sharp increase in unemployment
example, in the automotive industries, which faced a
with
drop in production, more than 60 per cent of car
package.39
a
comprehensive
The
unemployment
package
includes
an
benefits
expanded
assembly companies have embarked on schemes to
unemployment insurance system, a subsidized loan
give workers half pay (half-time employment) for a
programme for the unemployed, and venture busi-
certain period, in the hope that business will recover
nesses,
and the workers can be given full employment again.
works programmes.
To
help
retrenched
electronic
match
labour
the
needs
employees.
workers
exchange
of
find
has
employers
Retrenched
workers
other jobs,
been
with
are
set
up
active
labour
market
policies
and
public
Among these, the expansion of
an
unemployment
to
grammes appear to have the strongest potential for
insurance
and
public
prospective
providing
also
direct and immediate assistance.
being
the
people,
affected
by
works
the
crisis
prowith
encouraged to enrol in training programmes and the
Unemployment insurance was expanded, from
government has expanded training facilities.
firms with more than 30 employees to those with
To reduce the cost of tertiary education, the
government
conduct
has
selected
Malaysia.
permitted
10 private
colleges to
foreign
programmes
entirely
in
Before the start of the crisis, students
undergoing
joint
foreign
degree
courses
in
local
more than 10 employees in January 1998, and then
to firms with more than 5 employees in March 1998.
The government was further considering extending
unemployment insurance to all employees, including
firms
with
fewer
than
5
employees
and
with
private educational institutions were to spend the last
temporary or part-time workers in 1999.
one or two years of their studies in foreign universi-
benefits were raised as well, to a level of 70 per
ties, which award the degrees.
cent
Now the students
of
minimum
wages.
In
addition,
need not undertake foreign residency; they can thus
duration for receiving benefits was to be
save
under special circumstances.
on
higher fees
and
living
expenses.
The
became
longer
allowed
Approxim ately 25 per
cent
universities has also been increased by expediting
were estimated to be eligible for payments in 1998.
the construction of facilities in two new universities.
The full impact of the expansion was expected to be
felt in 1999.
nities for training in skills for women.
who
a
capacity for the intake of students in local public
Efforts have also been channelled to widen opportu-
of those
Minimum
recently
unemployed
The objective
of this measure is to improve the opportunity for
women to earn a better income and M$50 million
($13 million) has been earmarked for this purpose in
1999.
128
39
Hyungpyo Moon, “Growth with equity: experience of
the Republic of Korea” , Seoul, Korea Development Institute,
O ctober 1998, pp. 48-49.
The present unemployment insurance is likely
primarily to cover workers laid oft from larger firms.
of loans to municipalities all over the country.
The major portion of the unemployed from small
physical infrastructure in urban centres.
bankrupt firms will not be eligible immediately as the
the state projects, the immediate contribution of the
extended unemployment insurance system will take
some time to be effective. To extend benefits to
activities to the alleviation of the economic crisis will
be the creation of new employment opportunities for
those
the unemployed.
groups
unable
to
receive
unemployment
object
assistance, the government deployed a new, subsidized loan programme.
In addition, public works
programmes received higher priority.
quarter of
1998,
Up to the third
about one trillion won
(approxi-
of the
fund
is to
help
to
The
strengthen
the
Similar to
The other component namely, the social investment fund, has gained the most attention.
About
$120 million allocated to this com ponent is to be
mately $900 million) was allocated for public works
used to develop comm unity-based
programmes. This amount is likely to increase in the
initiated, planned and implemented by local people.
near future.
The fund
Amidst allegations that women have
projects to
be
is thus expected to benefit the people
been discriminated against and retrenched unfairly,
directly.
The project menu of the social investment
the government has established a special “window
fund, managed by the Social Fund Office under the
for reporting discriminatory dismissal of women” and
introduced a system of publicly identifying firms that
responsibility of the Government Savings Bank, has
four categories: projects which support training and
do not act to correct gender discrimination.
education
for
career
development,
create
social
welfare and community security, encourage protection of the environment and natural resources, as
well as culture, and develop communities.
Thailand
Money is
available as grants to projects which emphasize the
needs of the poor, including the jobless who have
One of the largest programmes for providing
returned to their villages.
Those eligible for grants
the poor with comprehensive assistance in the form
are
of creation of employment, provision of training and
networks and
access to improved health services during the crisis,
community
as well as building long-term social capital, has been
proposals initiated by the above groups are to be
launched
screened by the Social Fund Office.
in Thailand.
The ambitious programme
active
community
organizations,
community
local administrations that work with
groups
and
local
institutions.
Project
entitled the “social investment project” , with a total
cost of $462.2 million, is being implemented by the
government.
Financial
resources
for the
project
The expected short-term impact of the social
investment fund and the other com ponents of the
have come from the World Bank, with assistance of
social investment project are impressive:
$300 million, and
including UNDP.
tion of 500,000 man months of employment over two
from
other
donor
agencies,
the crea-
and a half years, support of 300,000 three-month
training programmes and improved health coverage
The project is divided into two parts.
part,
with
envisages
an
allocation
projects
for
of
around
strengthening
$312
The first
million,
activities
in
irrigation, public health, labour and social welfare,
of 1.5 million people.
Ten thousand disadvantaged
women and disabled persons in 40 provinces are
expected
to
programmes.
benefit
from
vocational
training
Some 2,800 youths between 15 and
tourism, industry, and activities under the Ministry of
16 years of age are to receive stipends and skill
the Interior and the Bangkok Metropolitan Adminis-
development training in the use of new technologies.
tration.
A large number (105,000) of lower secondary school
The immediate emphasis is on employment
creation and improved access of the population to
graduates
certain social services such as health.
improve their future employment prospects.
The second part of the project consists of two
components:
a regional
urban development fund
will
also
receive
similar
assistance
to
The innovative feature of the project is the
fusion of short-term needs during the crisis with the
and a social investment fund. The regional urban
development fund will be set up with about $30
long-term requirements of
generation of employment,
the country.
While
provision of improved
million and the money will be disbursed in the form
health services and vocational training would be very
129
beneficial
to
the
people
immediately
affected
the crisis, a number of project activities are also
expected to strengthen government agencies, locallevel
institutions
and
local-level
To
by
environmental
facilitate
the
return
of
students
to
the
education system, a targeted fee waiver programme
has been introduced.
Under the programme the
Bangkok Metropolitan Administration is waiving fees
management skills, which will lead to long-term
social capital formation. Strengthening of local-level
for students whose parents have been laid off.
The
students
free
institutions is expected to contribute strongly to the
lunches, textbooks and uniforms.
The authority has
efforts being made to decentralize the development
appealed to eligible parents to
make
activities of the country.
facility.
The project could thus
potentially turn the crisis into future opportunities.
However,
there
have
criticisms of the project.
important.
been
a
number
of
Among these, two are
The first was whether borrowing money
This was especially relevant as
the relationship between the activities of the project
and the future repayment capacity of the country
was not obvious.
The second one was procedural.
Especially in the case of the social investment fund,
community-level organizations and NGOs that were
responsible for initiating project proposals found the
procedures complicated and the guidelines difficult.
It has been reported that, in late September 1998, a
number
of
representatives
of
various
also
be
eligible
to
receive
use of the
The government was already implementing a
for the project from foreign sources at this juncture
was prudent or not.
would
community
organizations in Bangkok gathered in a job fair and
programme of providing education loans for students.
Loans are interest-free during the period of schooling
and students are required to pay back the am ount of
the
loan
after
graduation.
During
the
years
of
economic boom, loan disbursement under the
programme was low.
Since the beginning of the
economic crisis, the programme has become very
popular, and the educational fund of the government
was quickly depleted.
It was
expected
that the
social sector loan from ADB would be used to
provide funding for the program me.41 In addition to
increasing
the
programme,
the ADB loan would be used to improve
the
of
quality
budget for
education and
the
student
participation
loan
of the
private sector in providing education and training in
rural areas.
complained that the procedures for accessing the
funds
were
confusing
and
complicated
therefore had failed to apply.
and
they
It was further reported
POLICY DIRECTIONS FOR
THE FUTURE
that most communities and NGOs knew very little
about the details of the social investment fund.
This
would cause delay in the utilization of funds and in
providing the people
much-needed relief.
affected
by
the
crisis
with
Governments face an inescapable responsibility
to
minimize the
crisis
In addition to the social investment fund, the
Government
of
Thailand
was
able
to
mobilize
and
exposure
provide
that one occurs.
social
of their societies
to a
protection
event
in the
This is a political necessity, a
moral imperative, and is also justified on economic
substantial finances in the form of a social sector
grounds.
programme loan from ADB.
preceding pages, a severe economic crisis can have
The $500 million loan
As has been amply demonstrated in the
would enable the government to implement activities
in three social areas:
labour market and social
a
welfare,
This does not mean that governments should or can
education
and
health.40
On
the
labour
debilitating
impact
serious consequences
on
human
for future
resources,
growth
with
potential.
market, the policy priorities would be establishing
bear this responsibility entirely on their own.
centres for assistance to laid-off workers, strengthen-
with the social impact of an economic crisis requires
ing the social security coverage of the unemployed,
concerted action by many agents in societies, includ-
and
ing the
providing
private
enterprises
with
more
tax
incentives for investment in the training of workers.
40
130
ILO, S ocial Impact, p. 39.
religious
41
private
and
sector,
charitable
civil
society
institutions,
Dealing
organizations,
fam ilies
and
Tambunlertchai, “Social im pact in T hailand” , p. 25.
individuals,
but
governments
have
a
particularly
extreme urgency.
The periods of prosperity would
important role to play for several reasons.
They
alone can provide the framework for macroeconomic
enable the government to build up this fund, which
would provide it with some resources at its disposal
management that minimizes the vulnerabilities of an
to meet immediate needs in a dire situation before
economy to a major shock or to mitigate the impact
alternative sources were identified and mobilized.
of a shock.
Many aspects of social development
cannot be effectively addressed by the private sector
because of various kinds of externalities and market
The major objectives of budgetary expenditure
on social services in the immediate aftermath of a
failures.
The private sector faces severe financial
crisis should be protecting the incom es of the poor
stress in the event of a crisis and may sharply
and ensuring that their access to food and basic
reduce even the services that it might have been
social services is not jeopardized.
offering in the past.
to accomplish these objectives could
action
may
be
In many instances, government
needed
to
create
a
congenial
atmosphere for the private sector to play a role that
it may be willing to play in addressing the social
repercussions of a crisis.
Accordingly, this section
The instruments
include, the
creation of employment through public works; cash
transfer; free or subsidized provision of certain
essential goods and services, particularly food; and
extended credit facilities.
seeks to identify a number of areas for attention by
The
policy makers in the future.
measures
to
augment
or
protect
budgetary resources for social services should be
complemented by efforts to enhance efficiency in the
Augmenting and protecting the
social sector budget
delivery of services.
The analysis in this chapter has shown that a
rapid increase in unemployment, reduced wages and
hours of work, loss of purchasing power because of
a rise in prices,
It has been estimated that in
many developing countries the cost of a $1 gain by
the poor in a typical welfare programme is $2.50.
This indicates that there is significant scope for
enhancing the productivity of welfare programmes.
and so on create conditions in
Prioritization
which there is a tremendous increase in demand on
social services provided by the government. At the
same time, governments face severe resource
W hatever the level of resources available, it is
constraints because of falling revenue, the need to
important
to
maintain certain mandated expenditure such as
interest payments, and expenditure requirements for
maximum
positive
priority-setting need attention.
other unavoidable purposes such as financial sector
with the identification of vulnerable groups within a
restructuring.
Yet, in the light of the crucial role of
the government noted
above,
efforts have to
be
define
priorities
impact.
in
Two
order
to
derive
dim ensions
of
The first has to do
broad category of social services.
For example, in
the area of health, pregnant women, children and
made to ensure that social sector allocations are
the elderly may be the most vulnerable groups.
protected or even augmented.
the area of education, children of parents who lose
Some of the options
In
expenditure cuts in such areas as defence or large
jobs as a result of crisis-induced retrenchment may
be the most susceptible to drop out of the educa-
projects
tional system as their families may no longer be able
that
can
be
with
considered
long
deficit financing
macroeconomic
to
accomplish
gestation
subject
to
periods,
the
management,
limits
and
a
this
are
resort to
of
prudent
external
donor
to pay school expenses
or the
supplement the family income.
financing.
children
may be
forced to pick up odd jobs in the informal sector to
In the case of unem -
ployment, women are likely to become easy victims
Governments
formal “social
income
poverty.
may also
fund” in
wish to establish
order to
extend
a
minimum
support to those who slide into extreme
The fund could be created through regular,
because of the perceived economic interests of the
employers or cultural bias against women.
At any
rate, what is important is that target groups need to
be
identified
within
each
area
and
programmes
government budget
designed and implemented in such a manner that
and should be drawn upon only in circumstances of
benefits reach these groups without much leakage
annual
contributions
from
the
131
along the way.
The second dimension of priority-
to discriminatory treatment in terms of severance pay
setting has to do with the kind of assistance to be
maintained or strengthened.
For example, in the
and other compensations.
area
able.
of
prevent
priority.
health,
the
protection
of
expenditure
to
child malnutrition may receive a higher
In the area of education, prevention of
And yet disaggregated
labour market information by gender is rarely availSimilarly, in the area of education, the family
profiles of school drop-outs would be a vital piece of
information in designing a programme for securing
the re-entry of school-leavers into the educational
drop-outs may be the most urgent priority.
system.
In some cases, as explained below, the
response
Institution-building
to
the
crisis
has
been
significantly
influenced by the perception that there would be
large-scale reverse migration from the cities to the
The
design
and
implementation
of
priority
programmes to respond to the social consequences
of a major economic downturn require an effective
institutional infrastructure.
tion-building
merit
Several aspects of institu-
consideration.
First,
various
government agencies and local-level institutions must
develop
the
targeted
projects
programme.
capacity
as
to
formulate
integral
Second,
the
appropriately
parts
of
a
implementation
national
of
any
villages, while others have raised doubts about it.
These are but some examples of information gaps
revealed
by the
present
crisis.
The
system
of
collecting and processing information needs to be
developed,
including
through
strengthening
of
national statistical offices, so as to be able to meet
these
and
designing
other gaps
in
cost-effective
information
needed
programmes,
as
well
for
as
monitoring and evaluating their impact.
comprehensive programme requires concerted and
coordinated action by many actors.
These include
Developing the
urban informal sector
the various ministries, departments and agencies of
the central government, provincial and local government organizations and NGOs.
should
encompass
bilities
among
clear
various
Institution-building
delineation
actors.
of
responsi-
In addition, there
should be an important focus on the creation and
strengthening
of
modalities
for
coordination
and
cooperation among agencies of different layers of
government and between them and various locallevel stakeholders, including NGOs and beneficiaries.
Governments also need to consider how to engage
NGOs and other civil society organizations as true
partners in the design and delivery of social programmes.
as
In particular, regulatory bottlenecks such
complex
removed,
registration
and
positive
requirements
incentives
providing tax-exempt status
safeguards to prevent abuse.
given
subject
to
should
be
such
as
adequate
Many programmes have focused on community-level activities in rural areas.
This was based
on the argument that, during the boom period, there
was a migration of people from villages to cities on
a
large
market
reverse
scale
in
to
urban
migration
contraction.
join
the
areas
would
Rural
rapidly
and
increasing
hence
occur
significant
during
economic
programmes
were
needed to accommodate the returnees.
the extent of a permanent reverse
been questioned.
job
a
therefore
However,
migration
has
It is argued that many of Asia’s
new jobless from the formal sector no longer had
strong village ties and do not want to go back to the
village to make a living.42
Such a situation could
raise doubts about the effectiveness of some of the
present programmes in providing the groups most
Strengthening the information base
affected by the crisis with assistance and would call
for strengthening the urban informal sector, which
The crisis
has demonstrated weaknesses in
possibly absorbed a substantial portion
ployed workers from the formal sector.
of unem-
the information system to be able to identify the
target groups
and to
monitor the
impact of pro-
grammes designed for their benefit.
It is generally
true that women have disproportionately lost more
jobs than men. They may also have been subjected
132
42
Michael Vatikiotis, “No safety
Economic Review, 8 October 1998.
net’’,
Far
Eastern
adopted to
cost to the government and at this low level of
reinforce the role of the urban informal sector as a
A number of measures can
be
payroll tax any negative impact of labour cost on
cushion.
investment
Many of the retrenched workers possess
some skills, but these may not be entirely appropriate for informal sector activities.
would
be needed.
and
economic
efficiency
would
be
minimal.
Some retraining
In a situation of generalized
credit crunch in the wake of a financial crisis, infor-
Reshaping development
strategies
mal enterprises whose access to credit is highly
constrained under normal circumstances would find it
harder to get credit.
Special credit windows might
be needed to address this problem.
down
on
cleanliness,
hygiene,
The
Standards laid
registration,
book-
above
suggestions
are
mostly
nature of mitigating adverse social
in
the
impact in the
keeping, etc. are often taken advantage of by official
event of a crisis.
enforcement agencies to harass existing or potential
these respects, efforts should be made to minimize
W hile maintaining preparedness in
informal sector enterprises and workers and these
the vulnerability to major shocks.
are discriminated against in respect of access to
tive, the crisis in East and South-East Asia offers an
infrastructure facilities such as electricity or water.
opportunity to re-evaluate certain aspects of deve-
From this perspec-
lopment strategies and domestic policies.
These problems should be attended to.43
It should
be noted that there is no unanimity of views on what
should have been done to avoid the calam ity that
befell the
Unemployment insurance
East and
South-East Asian
economies.
The issues involved are complex and wide-ranging,
encompassing
The
most
such
as
monetary,
social impact of an economic crisis is clearly the
aspects such as management of the financial sector,
loss of employment.
As noted before, most coun-
corporate governance and the relative im portance of
region hardly had any unemployment
large conglomerates versus small and medium-sized
coverage,
Republic of Korea.
with
the
aggravating
aspects
fiscal and exchange rate policies, as well as micro
insurance
factor
macro
the
tries in the
important
exception
of
the
The introduction of a system of
unemployment insurance can be a very efficient way
of establishing
unemployed.
of
Korea
institutionalized safety nets for the
The initial experience of the Republic
with
a
partial
unemployment
enterprises.
permit
issues.45
crisis, amply demonstrates the feasibility and desirFeasibility studies undertaken
in other countries have shown that a self-financing
insurance
scheme
can
treatm ent
a
few
of
which
particularly prominent in the wake
all
relevant
have
become
of the
current
insurance
been a major government response to the present
unemployment
in-depth
However,
crisis are noted below.
scheme and its subsequent expansion, which has
ability of this modality.
The scope of this chapter does not
any
be
imple-
mented on the basis of a modest payroll tax (1 per
cent) paid by workers and employers.44 There is no
One of the issues that has come to the fore is
the speed and the sequencing of capital account
liberalization.
One concern in this context is the
state of preparedness needed to benefit from open
capital accounts while minimizing potentially disruptive consequences.
A related issue is the question
of reliance on external resources to finance a high
level of investment and growth.
There is no ques-
tion that a major part of the explanation for the
crisis lay in dependence on easily reversible, shortterm
43 For details of these and other m easures for
developing the urban informal sector, see United Nations,
Role o f the Inform al Service Sector in Urban Poverty
Alleviation (ST/ESCAP/1706) (New York, United Nations,
1996), pp. 244-245.
44 Eddy Lee, The Asian Financial Crisis:
The
Challenge for Social Policy (Geneva, International Labour
Office, 1998).
ment.
external
The
capital
crisis
to
has
finance
also
long-term
shown the
invest-
immense
importance of paying close attention to the quality
45 Som e of these issues were discussed
1998, pp. 96-103.
in Survey
133
and composition of growth, not only to its rate.
high
rates
of
growth,
particularly
in
the
The
“crony capitalism”, improper exercise of bureaucratic
years
and political power and erosion of values such as
immediately prior to the crisis, were the result of
thrift and self-reliance.
unsustainable
rise to demands for decentralization, transparency,
markets
capital
financed
inflows.
backdrop
sector
bubbles
by
The
in the
the
upsurge
crisis
of considerable
management
and
stock
and
in
occurred
property
short-term
against the
accountability and political restructuring.
It is impor-
tant for policy makers to take note of these diverse
weaknesses
in financial
issues, evaluate their significance for economic and
corporate
governance.
social stability and adopt remedial m easures suitable
There have been widespread allegations of greed,
134
In turn, these have given
for each country.