ASIA PACIFIC ECONOMIES SHOULD BE FORWARD-LOOKING; CAREFUL POLICY CHOICES URGED
Press Release
REC/24
ASIA PACIFIC ECONOMIES SHOULD BE FORWARD-LOOKING; CAREFUL POLICY CHOICES URGED
19980408 1998 Asia-Pacific Economic and Social Survey Says Current Crisis Should Not Undermine Development Plans,BANGKOK, 8 April (UN Information Services) -- The preoccupation with the current economic crisis in several Asian countries should not undermine their commitment to the fundamental objective of long-term development: growth with equity.
This is one of the major conclusions of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) in its 1998 Economic and Social Survey for Asia and the Pacific.
While economic growth in developing economies had decelerated in 1997 as a result of the serious economic turmoil faced by several countries of South-East and East Asia, countries of South and South-West Asia maintained robust growth. Also no major deceleration is anticipated for China. "Most Central Asian republics staged a significant recovery from the prolonged recession which had plagued them since the early 1990s", the Survey says.
For the least developed countries, economic growth generally strengthened during 1995-1996 and remained strong in 1997. The Pacific island economies, which have their own diverse structures and ability to respond to internal and external shocks, have not been directly affected by the financial turmoil in the region, but their general economic performance remained unsatisfactory, the Survey points out.
The Survey cites a trade slowdown and reduced financial flows to the region as two major elements in the international economic situation that have adversely affected the economies of the region. It states that the slowdown in world trade, particularly in sectors of major interest to exports of developing countries of the region, was the principal factor in sharply widening the current account balance-of-payment deficits of a number of countries. At the same time, many of the countries had linked their currencies primarily to the United States dollar which had appreciated significantly since 1995 against other major currencies.
The resulting appreciation of local currencies was a factor adversely affecting exports while encouraging rapid import growth. As a result, the current account deficits widened sharply. The deficits, in turn, were funded by financial flows with a growing component of short-term debt, explains the Survey.
The Survey further notes that these inflows caused domestic banking assets to expand. A large portion of the assets went into unsound investments, for example, in the property sector. Oversupply in that sector and a fall in property values then started a chain reaction. The financial institutions found themselves saddled with bad loans, stock markets slid down. Ultimately, a loss of creditor confidence in the financial system and in the debt repayment abilities of countries worsened the crisis, which spread to a number of countries.
In the years to 2000, according to the Survey, economic growth will remain sluggish. Many economies in South-East Asia were adversely affected by the crisis and their economic growth slumped to an average of 4.2 per cent in 1997 from 7.2 per cent in 1996, and further to 1 per cent in 1998.
Among the economies most affected, Thailand and Indonesia will register negative growth in 1998 -- with a growth rate of -3.5 per cent for Thailand and -1.5 per cent growth rate for Indonesia. The growth rates of Malaysia and Singapore will be cut back to almost half of the rates achieved in 1997. Growth in the subregion will pick up to 4 to 5 per cent on the average during the years 1999-2000.
The Survey further points out that average economic growth in the developing East Asian economies is expected to be reduced to around 5 per cent in 1998 compared with more than 7 per cent in 1997. The most serious reductions in growth rate will be suffered by the Republic of Korea while China, Hong Kong, China and Taiwan province of China will suffer only moderate slowdown in rates of growth. The subregion is expected to achieve 6 to 7 per cent growth during the years 1999-2000.
Economic growth in South Asia, by contrast, is expected to remain on a steady course at above 6 per cent to the year 2000 in line with their actual achievements during the last two years. In India, Iran and Turkey their gross domestic product were relatively strong and steady at 6 to 7 per cent throughout 1996-1997.
In Pakistan and Sri Lanka, growth decelerated considerably in 1996, though Sri Lanka was expected to recover in 1997. Industrial production has responded well to recent policy reform and restructuring measures in countries of the subregion. However, industrial output expansion in many countries
- 3 - Press Release REC/24 8 April 1998
remained severely constrained by power shortages and other infrastructural weaknesses. Services sectors have been more resilient and have contributed significantly to overall growth.
As the crisis in the region raises a number of fundamental policy issues, the Survey provides a detailed analysis of the main policy implications in the context of trends towards liberalization currently visible over much of the region. Most of the developing economies in the region have been pursuing long-term policies and measures for macroeconomic stabilization and structural reforms since the 1980s. The crisis has intervened amidst the ongoing process of reform. Although further reforms and liberalization are advocated as a way out of the crisis, the Survey warned that countries may find it more difficult to proceed with their reform agenda, or at least may opt to proceed more cautiously.
The Survey reveals that the crisis in the region has served to focus attention on two crucial areas: the establishment of an appropriate exchange rate regime, and the need to overcome weaknesses in the domestic financial sector.
It suggests that national policy responses to pre-empt the emergence of such crises in the future should include a more careful choice of policy targets and instruments. It further suggests a strengthening of the institutional and supervisory frameworks of the financial sector; development of markets and instruments to deal with risks in financial transaction; a reduction of the savings-investment gap; and an enhancement of export competitiveness.
At the regional level, consideration should be given to the proposals for setting up an "Asian Fund" as a supplement to the International Monetary Fund, the use of regional currencies for intraregional trade, the establishment of an insurance scheme dealing with cross-border financial claims and cooperation in more effective management of financial sector institutions, the Survey recommends.
At the international level, it states that an international debt strategy including rollovers and rescheduling, and external liquidity support for revival of export growth, are important steps necessary to deal with immediate crisis. In a longer term perspective, the establishment of a system of global governance of private financial flows merit serious attention.
Regarding policy responses for promoting growth with equity in the region, the Survey places high priority on enhancing agricultural productivity, human resources development, development of small- and medium-sized enterprises, providing education for women, and enhancing child health care.
- 4 - Press Release REC/24 8 April 1998
The Survey suggests that in order to meet the cost required for investment in human resources development, it will be necessary to improve systemic efficiencies and secure greater involvement of the private sector, non-governmental organizations and communities.
The 1998 Survey will serve as the main document for discussion at the ministerial-level fifty-fourth session of the Commission, to be held in Bangkok from 16 to 22 April.
* *** *