Whodunnit? Financial crisis and the death of the Asian developmental state Jayati Ghosh
Whodunnit? Financial crisis and the death of the Asian developmental state Jayati Ghosh.
Mar 27, 2015
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Whodunnit?Financial crisis and the death
of the Asian developmental state
Jayati Ghosh
The “new” view on the Asian crisis
• Recent argument that the Asian financial crisis was not so bad - even in general a good thing.
Why?
• It did not destroy the basic economic growth trajectory of the region – “crisis” economies have since recovered.
• It forced these economies to intensify liberalising reforms, especially in the financial sector.
• Thereby it reduced “crony capitalism”. • Other positive by-products like the break up of the
some the large South Korean “chaebols” and the collapse of the Suharto dictatorship in Indonesia.
• This view is now current even among policy makers in India and other developing countries.
• This creates a complacency about crisis, so that governments are less likely to take adequate precautionary measures, such as controls on finance.
• So it is particularly important to evaluate the subsequent performance of those economies that were particularly affected by the 1997 financial crisis.
• This analysis looks at the post-crisis experience of Thailand, South Korea, Malaysia, Indonesia and the Philippines.
Output per worker in constant prices (2000 US $ base)
Output per
worker
Per change annual change
as per cent of I Cs average
1995 2005 1995 2005 South Korea 20633 35769 4 43 64 Malaysia 13434 21051 3.3 28 38 I ndonesia 5945 8666 2.7 12 16 Philippines 6348 7180 0.9 13 13 Thailand 8291 13507 3.5 17 24 China 3258 8240 6.9 7 15 I ndia 3484 5995 4 7 11
Nature of recovery
• These economies have recovered from the most intense effects of the crisis in terms of output and employment declines.
• Export growth has been strong.
BUT
• Both aggregate GDP growth and industrial growth are still substantially below the average rates achieved in the period before the crisis.
• They have also been more volatile and fluctuating.
Malaysia: Value added in industry
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
1990 1991 19921993 1994 19951996 1997 1998 19992000 2001 20022003 2004 2005
0.0
100.0
200.0
300.0
400.0
500.0
600.0
per cent change in $ bn
Rep. Korea: Value added in industry
-10.0
-5.0
0.0
5.0
10.0
15.0
1990 1991 19921993 19941995 1996 19971998 1999 20002001 20022003 2004 2005
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
per cent change in $ bn
Philippines: Value added in industry
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
150.0
170.0
190.0
210.0
230.0
250.0
270.0
290.0
per cent change in $ bn
Indonesia: Value added in industry
34
36
38
40
42
44
46
48
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
Industry, value added (% of GDP) Industry, value added (annual % growth)
Thailand: Value added in industry
-10.0
-5.0
0.0
5.0
10.0
15.0
1990 1991 19921993 1994 19951996 1997 1998 19992000 2001 20022003 2004 2005
0.0
500.0
1000.0
1500.0
2000.0
2500.0
3000.0
per cent change in $ bn
Employment
• Aggregate employment growth is much slower than before
• The quality of employment has deteriorated: greater proportion of insecure casual contracts, low-grade self-employment and part-time work, especially for women workers.
• Even in the sectors where export growth has been buoyant, such as manufacturing, employment has not picked up (and in South Korea and Malaysia it has actually fallen in absolute numbers).
• Unemployment rates in the entire region have also been at historically high levels.
Indonesia: Elasticity of employment with respect to GDP
0.32 0.33 0.31
-0.29-0.26
-0.33
0.25 0.26 0.24
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
All workers Male workers Female workers
1992-1996 1996-2000 2000-2004
Malaysia: Elasticity of employment with respect to GDP
0.33 0.34 0.32
0.62
0.52
0.81
0.48 0.49 0.46
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
All workers Male workers Female workers
1992-1996 1996-2000 2000-2004
Philippines: Elasticity of employment with respect to GDP
0.810.75
0.93
0.460.37
0.620.640.57
0.75
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
All workers Male workers Female workers
1992-1996 1996-2000 2000-2004
Republic of Korea: Elasticity of employment with respect to GDP
0.310.27
0.38
0.23
0.15
0.35
0.260.29
0.22
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
All workers Male workers Female workers
1992-1996 1996-2000 2000-2004
Thailand: Elasticity of employment with respect to GDP
0.16 0.170.15
0.11
0.07
0.15
0.24 0.24 0.25
0
0.05
0.1
0.15
0.2
0.25
0.3
All workers Male workers Female workers
1992-1996 1996-2000 2000-2004
Divergence between savings and investment rates
• The East and Southeast Asian region generally had very high savings rates – between 30 and 45 per cent in the different countries – for some time now.
• After the financial crisis, savings rates have increased further and investment rates have plummeted, especially in the “crisis” countries.
• 1997-98 marks a clear break in this. Before then savings rates were higher than investment rates, as expected in developing countries.
Malaysia: GDP growth, savings and investment rates
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Savings rate Investment rate GDP growth rate
Rep. Korea: GDP growth, savings and investment rates
0.0
10.0
20.0
30.0
40.0
50.0
60.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Savings rate Investment rate GDP growth rate
Philippines: GDP growth,savings and investment rates
10.0
15.0
20.0
25.0
30.0
35.0
40.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Savings rate Investment rate GDP growth rate
Indonesia GDP growth, savings and investment rates
10.0
15.0
20.0
25.0
30.0
35.0
1990199119921993199419951996199719981999200020012002200320042005
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Savings rate Investment rate GDP growth rate
Indonesia: Savings and investment rates (excluding 1998 and 1999)
15.017.019.021.023.025.027.029.031.033.0
Savings rate Investment rate
Thailand: GDP growth, savings and investment rates
15.0
20.0
25.0
30.0
35.0
40.0
45.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
Savings rate Investment rate GDP growth rate
Why has this happened?
• This growing “savings surplus” is not simply the result of the decisions of private agents in these countries.
• A very large role is played by governments, who have increased their savings and cut down on fiscal deficits or increased fiscal surpluses across the region.
• The financial crises (which was brought on by private profligacy in a financially liberalised environment) has led to an excess of caution on the part of governments.
• So governments in these countries have not spent as much as could be easily sustained by the economy, to ensure better conditions for the people or to encourage more sustainable growth and generate more employment.
Fiscal deficits as per cent of GDP
-2
-1
0
1
2
3
4
5
1997 1998 1999 2000 2001 2002 2003 2004 2005
Asian NICs Other Developing Countries
Fiscal deficits as per cent of GDP
-2
-1
0
1
2
3
4
5
1997 1998 1999 2000 2001 2002 2003 2004 2005
United States Euro Area Asian NICs Other DCs
The implications• This is why growth rates are in general lower, why
employment generation has been inadequate and unemployment rates are rising, and why conditions of a large section of the poor do not improve in these countries, despite the apparent aggregate economic “recovery”.
• More critically, the project of the developmental state, which was such an essential feature of economic progress in the region in the past, has effectively been abandoned.
• So financial crises do more than simply create sharp and painful economic shocks for the residents of the country – they also alter longer-term economic trajectories in unfortunate ways.
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