The Social Impact of the Asia Crisis

The Social Impact of the Asia Crisis Edited by

Tran Van Hoa

The Social Impact of the Asia Crisis

Also by Tran Van Hoa THE CAUSES AND IMPACT OF THE ASIAN FINANCIAL CRISIS (co-editor with C. Harvie) CONTRIBUTIONS TO CONSUMER DEMAND AND ECONOMETRICS (co-editor with R. Bewley) ECONOMIC DEVELOPMENT AND PROSPECTS IN THE ASEAN (editor) NATIONAL INCOME AND ECONOMIC PROGRESS (co-editor with D. S. Ironmonger and J. O. N. Perkins) SECTORAL ANALYSIS OF TRADE, INVESTMENT AND BUSINESS IN VIETNAM (editor) THE MACROECONOMIC MIX IN THE INDUSTRIALIZED WORLD (with J. O. N. Perkins) PROSPECTS IN TRADE, INVESTMENT AND BUSINESS IN VIETNAM AND EAST ASIA (editor) VIETNAM: Market Intelligence and Business Analysis VIETNAM’S REFORMS AND ECONOMIC GROWTH (with C. Harvie)

The Social Impact of the Asia Crisis Edited by

Tran Van Hoa Associate Professor University of Wollongong Wollongong New South Wales Australia

Editorial matter, selection and Chapters 1, 2, 6 and 10 © Tran Van Hoa 2000 Chapters 3–5, 7–9 © Palgrave Publishers Ltd 2000 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2000 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). Outside North America ISBN 0–333–79249–1 In North America ISBN 0–312–23592–5 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The social impact of the Asia crisis / edited by Tran Van Hoa. p. cm. Includes bibliographical references and index. ISBN 0–312–23592–5 (cloth) 1. Asia—Social conditions. 2. Asia—Economic conditions—1945– 3. Financial crises—Social aspects—Asia. I. Tran, Van Hoa. HN652.5 .S63 2000 306'.095—dc21 00–040440 10 09

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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To Souraya, Danielle, Cybele and my sisters Mui and Thom

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Contents Preface and Acknowledgements

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Notes on the Contributors

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1 The Social Impact of the Asia Crisis: An Overview Tran Van Hoa

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2 Indonesia: The Human Dimension of the Asia Crisis Tran Van Hoa

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3 Asia Crisis and the Philippines: Counting the Social Costs Ma. Rebecca Valenzuela

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4 Thailand: The Asian Financial Crisis and Social Changes Sauwalak Kittiprapas

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5 Korea: Financial Crisis, Structural Reform and Social Consequences Young Youn Lee and Hyun-Hoon Lee 6 Vietnam: Economic and Social Impact of the Asia Crisis Tran Van Hoa 7 Social Influences of the South East Asia Financial Crisis on China Zhao Yanyun and Zhang Xiaopu

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8 Australia: Has It Weathered the Crisis? David Johnson

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9 The Asian Crisis and Australia’s Export Sector Peter M. Summers

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10 Social Impact of the Asia Crisis: A Fundamental Prescription and Management Tran Van Hoa

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Index

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Preface and Acknowledgements The Asian financial crisis has, since its emergence in July 1997, brought about untold economic and social damages and political instability to the countries in trouble (Thailand, Indonesia, Korea, Malaysia, and the Philippines) and, to a lesser extent, to other Asian economies (Hong Kong, Singapore, China and Vietnam). While numerous studies have been undertaken to deal with the causes and remedies of the turmoil, its social effect has only recently become the focus for debates and investigations by international organizations such as the World Bank and the Asian Development Bank. The book is the third in a series of books we plan to publish on this crisis (Causes and Impact of the Asian Financial Crisis (editor with C. Harvie, Macmillan, 1999) and The Asia Crisis: The Cures, Their Effectiveness and the Prospects After, Macmillan, 1999), and contains pertinent findings of lasting quality of recent research and analysis, at the country level, by well-known academics and researchers. These experts are widely experienced in their national issues and deeply involved in studies of their social aspects. A distinct feature of the book therefore is that, being a scholarly intellectual effort with practical grass-roots policy implications, it is likely to contain more objective analysis of media reports, statistical and economic data, and more relevant interpretation of the social issues and problems encountered by the people of the countries in crisis under study. The book has four objectives. First, it is to provide a better and deeper understanding of the human dimension of the crisis for a number of countries in Asia and Oceania. Second, it is to help governments and organizations to identify the relevant issues and to formulate more appropriate economic and social policy and programmes of national and international significance and interest. Third, the book provides an unbiased, authoritative and comprehensive assessment by national and international experts on the various aspects of the social impact and proposes, in many cases, proper remedies for it. Finally, it provides a background and vision for restoring growth and minimizing the damaging impact of the ix

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Asia crisis on specific issues such as poverty, education, training, health, nutrition and employment. The editor is indebted to Tim Farmiloe for his quick response and encouragement to the book’s initiative. He is also indebted to his colleagues and friends from the various countries in crisis for generously giving their support and advice to the project. Finally, the editor would like to thank all his contributors for their marvellous cooperation and contribution to an area of contemporary significance with world-wide interest. TRAN VAN HOA Melbourne, Australia

Notes on the Contributors David Johnson is Deputy Director, Melbourne Institute of Applied Economic and Social Research, Melbourne University. Sauwalak Kittiprapas is an economist Development Research Institute, Bangkok.

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Hyun-Hoon Lee is Associate Professor, Division of Economics and International Trade, Kwangwon National University, South Korea. Young-Youn Lee is Professor of Economics, Division of Economics and International Trade, Kwangwon National University, South Korea. Peter M. Summers is Senior Research Fellow, Melbourne Institute of Applied Economic and Social Research, Melbourne University. Ma. Rebecca Valenzuela is Research Fellow, Melbourne Institute of Applied Economic and Social Research, Melbourne University, and formerly Lecturer, University of the Philippines. Tran Van Hoa is Associate Professor, Department of Economics, and Director of Vietnam Research Program, Wollongong University. Xiaopu Zhang is an economist in the Department of State Administration of Foreign Exchange, Beijing, China. Yanyun Zhao is Professor of Economics and Chairman of the Department of Statistics and Economics, the Renmin University of China, Beijing, and an Adviser to the Central Government, China.

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1 The Social Impact of the Asia Crisis: An Overview Tran Van Hoa

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The Asia crisis and its social impact

During the two-year period July 1997–July 1999, the world as a whole had been preoccupied with the South East Asia crisis, its contagion to East and North Asias, the European Union, North and South Americas, and its economic and financial impact worldwide. Our previous contribution to the subject, to provide a better understanding of the causes, impact, cures, effectiveness and outcomes of the crisis, includes two books, Causes and Impact of the Asian Financial Crisis (editor with C. Harvie) (Macmillan, 1999), and The Asia Crisis: The Cures, Their Effectiveness and the Prospects After (Macmillan, 1999), and a number of other reports and publications. Numerous other studies, undertaken by individual researchers, national institutes or international organizations (see, for example, Roubini’s 1997–99 Internet pages; McCleod and Garnaut, 1998; and publications by the International Monetary Fund, the World Bank, the Asian Development Bank and the United Nations Development Programme), have been internally circulated or widely published in the normal or electronic media. They all have dealt, to a large extent, simply with the economic, financial and governance issues of the crisis. For some inexplicable reasons, they have avoided or sidestepped almost entirely the important human aspects of the turmoil and the challenges they pose to academic economists, policy makers and advisers, and governments alike. In fact, the social or human dimension (the ‘total quality’ 1

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The Asia Crisis: An Overview

concept) of the Asian meltdown has only recently become the point of focus for research funding and forum support, debates (e.g., the Regional Meeting on Social Issues Arising from the East Asia Economic Crisis and Policy Implications for the Future, Bangkok, January 1999) and investigations by national and international organizations mentioned above (see, for example, Severino, 1999). The book is the third in a series of books on the causes and impact of the Asia crisis and the first serious academic contribution to the important human dimension of it. The chapters of the book contain extensive research, sound analysis of facts and data, and unrestricted and concise presentation by national and international experts, and they deal with such major issues of significant national and international interest as: poverty, education, training, governance, health, nutrition, woman exploitation, child labour, and unemployment and employment for a number of major economies in Asia and Oceania affected by the crisis. The contributing authors are well-known national and international academics and researchers with a deep knowledge, sensitive understanding and wide experience on relevant Asian and world economies. It is a rather sad state of affairs that, since the Asia crisis first emerged in July 1997 in Thailand, the world is, at the time of writing, still at a loss to develop appropriate and credible longterm policies and programmes to bring effectively the countries affected by the turmoil to a quick recovery and back to the familiar path of at least the last three decades or so, to continue their sustainable development and growth. More unfortunately, the social impact of the crisis and its link to the economic slowdown in major economies in Asia and Oceania is less understood. As a result, appropriate responses are not yet properly prescribed and associate resources are insufficiently available to generate effective outcomes especially for the most vulnerable in the economies in crisis. The book brings together a collection of important studies on these issues for a number of Asian countries in trouble and also for Australia, and is a valuable addition in helping to understand pertinent deep-rooted issues and also in helping develop suitable economic and social policies of national and international interest.

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The social impact in regional economies

Chapter 2, written by Tran Van Hoa, first deals with the social problems in a general context of economic and social development and then focuses on these problems in Indonesia, arguably the country worst hit by the Asia crisis. Some recent analyses use the results of the law of weighted averages for countries with a large proportion of rural population and claim that the social impact of the Asia crisis is, on the whole, rather negligible. This chapter regards this approach, while popular with a number of economic and social analysts, as inappropriate, and looks at the fundamental engines of growth and the real turmoil in the economic, political and social fabrics of Indonesia. Chapter 2 predicts that unless foreign trust and investment capital are attracted back to Indonesia the country’s current problems will continue into the foreseeable future. The social impact is therefore a long-term one and demands attention as such. In Chapter 3, Ma. Rebecca Valenzuela gives a concise overview of the main human aspects (employment, income/poverty, prices, health, education, and migration) of the Asia crisis in the Philippines and concludes that these aspects exist as a result of the crisis but they are not that serious considering the reforms already put in place by successive Philippine governments in the years since the ‘People Power’ days. Focus has to be on the economic and social issues above though, if the country wants to move forward economically, politically and socially. Chapter 4, written by Sauwalak Kittiprapas, provides economic and social statistics and their analysis for Thailand after the Asia crisis, and the transmission or pathways whereby the crisis affected the economy. These areas of analysis include social change, migration, community and family networks, human resource problems, a declining budget for social expenditure, and safety-net policy. She also details the responses and programmes the government has undertaken to recover sustainable development, to promote employment, to alleviate poverty, to protect the vulnerable, and to minimize family and community conflict problems caused by the crisis. More importantly, the crisis should be used as a golden opportunity by the government to initiate economic, political and social reform for Thailand.

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The Asia Crisis: An Overview

The Asia crisis and its economic and social impact on South Korea is analysed by Young Youn Lee and Hyun-Hoon Lee in Chapter 5 in which a genesis of the economic turmoil (and the stroke hypothesis) is given. The authors also describe the wide-ranging reforms the country has embarked on since late in 1997 to deal with the crisis and its contagion: structural reform, financial restructuring, the chaebols, labour and the public sector. The social impact in South Korea of the crisis is finally studied via employment and unemployment, income distribution, poverty and private consumption. The economic and social problems of Vietnam as a result of the Asia crisis and its contagion is discussed in Chapter 6 by Tran Van Hoa. He argues that the country, a major transition economy in the Association of the South East Asian Nations (ASEAN), which has a political system of a socialist-oriented economy with free market tendencies, seems to have escaped reasonably well the economic effects of the crisis. Nevertheless, the country has its economic and social problems arising from a weakened Asian market, lesser foreign direct investment inflows, smaller government budget shares for some social policy programmes, and economic regionalization (e.g., the ASEAN and the Asia Pacific Economic Forum) and globalization (e.g., the World Trade Organization). Reforms and capacity development are therefore necessary not only in the area of trade and investment but also in the spheres of public administration and social policy. Chapter 7, written by Yanyun Zhao and Xiaopu Zhang, provides a concise study on the economic and social aspects of the Asia turmoil on China, the biggest economy in the world and which, to us, seems to have avoided the worst of the Asia crisis so far. However, there has been some impact, and this is investigated first via economic aspects such as trade and foreign investment, domestic capital restructuring, the exchange rate of the RMB (the national currency) and China’s international reserves. Second, the human dimension is analyzed via such incidences as the increasing activities of the underground economy, reduced employment or rising unemployment and a reduction in private incomes. The likely impact of the Asia crisis on Australia is the subject of Chapter 8, prepared by David Johnson. He argues that the crisis seems, on evidence, to have had few short-term effects on the Australian economy but that long-term effects are possible. The

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links used for the predictions in the analysis are: shared transnational corporations operating in Australia and the Asian countries in trouble, a loss of confidence, less demand for Australia’s exports, less trade, less capital and labour flows, and less opportunities for knowledge and technology transfer. The impact of the crisis on disaggregated or individual industries in Australia is however very probable. Finally, in Chapter 9, Peter Summers looks at the effect of the Asia crisis on Australia’s export sector and the consequences of this effect on employment and income. His diagnosis is that while Australia’s export income from some Asian economies in crisis trading with Australia fell substantially, it was compensated for by exports to other markets outside Asia, due to currency fluctuations. The long-term effect of the crisis is to be studied further, taking into account such fundamental problems of the Australian economy as high unemployment and a serious current account deficit problem.

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General remarks

While the book provides a timely and useful analysis on the consequences of the Asia crisis on the major Asian countries in trouble and also on Australia, it is by no means a definitive work on the subject. Since the crisis is still unfolding even though at a slower pace, it is rather premature to speculate on its effects, economic or social, either in the short or long term. The book has however given us a better understanding of the extent and nature of the human dimension of the Asia crisis and valuable lessons and experiences in the process. It also makes a significant contribution to national and international debates and practical effective social policy to ‘help us reshape our strategies for the future’ (World Bank President, James D. Wolfensohn, 1999). Further work in the area is therefore highly recommended. References McLeod, R. H. and Garnaut, R. (eds) (1998), East Asia in Crisis: From Miracle to a Needing One?, London: Routledge. Roubini, N. (1999), ‘The Asia Crisis’, Internet, August 1999. Severino, J. M. (1999), ‘Is Asia Rising? An Update’, The World Bank, Internet, July 1999.

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World Bank (1999a), Macroeconomic Crises and Poverty: Transmission Mechanisms and Policy Responses’, Working Paper, Internet, 2 June 1999. World Bank (1999b), ‘Social Crisis in East Asia’, Internet, August 1999.

2 Indonesia: The Human Dimension of the Asia Crisis Tran Van Hoa

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Introduction

The Asian financial or economic crisis that started in July 1997 in Thailand has had a widespread impact on the economic growth, development and political stability of the major countries in Asia. The contagion of the crisis with damaging consequences has also spread to a lesser extent to the countries beyond Asia such as the USSR, Latin and North Americas and the European Union. The economic and political impact of the crisis is serious in the sense that it has retarded decades-long growth and development in the once ‘miracle economies’ in Asia and destroyed a number of governments in it in the process. But at the same time, this impact may not be that serious if it does not adversely affect the social fabrics or the well-being of the ordinary people of these countries. The social or human impact of the Asian crisis has however not been adequately investigated and reported by experts from either academia or international organizations. This is unfortunate as it has been widely recognized that this kind of impact is probably the most profound and with severe consequences in the case of Indonesia, a major ASEAN (Association of the South-East Asian Nations) country with a population of 210 m people and strategically situated in one of the busiest sea-routes in the world. This chapter focuses on this human dimension of the Asia crisis in Indonesia, analyses its various aspects and explores its possible remedies. 7

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2

An economic overview

Almost two years after the start of the Asian financial crisis in the country, Indonesia was still paralysed by it on many fronts, despite the numerous rescue packages put up by the international organizations (e.g., the International Monetary Fund (IMF) or the World Bank (WB)) and the various reforms introduced successively by the government. In 1998, the country’s growth rate was –13.7 per cent. Even during the general election of June 1999, it was widely speculated by the international community that a change of government and the ruling party might not significantly change the inherent problems facing Indonesia. A report released in June 1999 (Dabkowski, 1999) indicated that the country would need US$87 billion to rescue even the banking sector alone. At the same time, the Ministry of Investment released figures showing that, in the first four-and-a-half months of 1999, approved foreign investment into Indonesia fell 75 per cent to US$1.52 billion, as compared to that in the same period in 1998. Since foreign investment plays a crucial role in growth and development of a developing country, the downsize indicates the size and severity of the task confronting the government in its effort to reverse or even to halt the trend of foreign investors turning their back on Indonesia. The trend had been worsened since 1997. In fact, in 1998 approved foreign investment stood at US$13.6 billion as compared to US$22.1 billion in 1997. In early 1999 international financial institutions and agencies had early also issued warnings about the long-term impact of the Asia crisis on Indonesia. The ratings agency Standard & Poors, for example, issued its own assessment of Indonesia’s banking system and suggested that the problem is more fundamental than most analysts had envisaged and that it might take up to 10 years for the country to correct it. To support its argument, the agency cited the amount of money required to recapitalise banks and pay out creditors as being 24 per cent higher than the government’s estimate. This amount was US$87 billion and placed the cost of resolving Indonesia’s banking crisis among the highest of financial crises in the world in the past two decades. The cost increases with the time it takes to fix the crisis (Dabkowski, 1999), due partly to the user’s increasing costs of capital or loans. What were the causes of Indonesia’s banking problems in 1999? It has been suggested that it was a combination of issues: the crippling

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effect of a slump in the rupiah, a stalled economy, soaring interest rates, corruption, political uncertainty, social unrest, the Aceh uprising, and the East Timor independence question. All these had helped to fuel the uncertainty on the level of profits and the security of investment in the country by foreigners. The government hoped, on the other hand, that more foreign capital should, on its investment-attracting policy initiatives such as more foreign ownerships and government take-overs, flow in. This is important as this capital is necessary for the banks to lend again to cash-starved companies and to help pull the economy out of its worst recession in a generation. Standard & Poor had predicted however that non-performing or bad loans would rise to between 75 and 85 per cent of all loans by the end of 1999. These troubles apply not only to badly managed banks but also to well-managed and professionally run banks such as Bank Bali, the fourth largest bank in Indonesia. This state of financial and banking affairs in Indonesia is not helpful to the government’s official programmes to attract capital or financial assets from risk-aversion foreign investors. The international economic climate was not that helpful to Indonesia either. While it was recognized in June 1999 that the pulse of the world economy might start to quicken, the G7 finance ministers still warned that the flurry of robust economic indicators had to be interpreted with caution. Mr Robert Rubin, the US Treasury Secretary, even conceded that the world seemed calm as of June 1999, but that a single sign of recovery of 1.9 per cent growth in Japan in the first quarter of 1999 did not really tell anything about the situation. In addition, new pressing problems for the international community needed more attention and resources. These included: debt reliefs to the poorest and most heavily indebted countries in the world; the strengthening of the global financial system; plans to rebuild the war-torn economies in the Balkans after the cessation of hostilities; and some negative economic factors lurking in the shadows of the US economy.

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General aspects of the social impact

From the above perspective, it is unfortunate that the recovery in Indonesia may be slow in coming. This has profound impact on the

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country and its management, economically and socially. The economic impact has been discussed elsewhere (see, for example, Tran Van Hoa, 1999). The social impact of the Asia crisis on East Asia at the regional level can be grouped for convenience into four broadly-defined sectors: poverty, education, health and nutrition, and employment and income. In terms of poverty, the incidence of economic contraction since the onset of the Asia crisis in July 1997 is affecting the lives of millions, and aggravating social vulnerability of the already disadvantaged people. The World Bank’s assessment is that poverty is likely to have many dimensions. Each of them is intimately linked to the other in the way aggregate supply and demand interact or adjust to achieve their dynamism and equilibrium. These dimensions include: declining incomes due to job losses and less demand in the economy, rising absolute poverty and malnutrition for the population, falling public services due to less government revenue, consequent threats to educational and health status, increased pressure on women to bear more burdens of responsibility for the family, and increased crimes and violence. In terms of education, which has been regarded as essential human capital for further economic and social development especially in Asia, the Asia crisis is placing pressure on governments in the region to reduce their expenditures to scale down their budget deficits. This action will potentially affect education in two important ways: access to and the quality of education. These issues have however to be considered in the context of an economy in crisis with many national programmes competing for priority. It has been argued, for example, that if governments, within their trimmed budgets, fail to prioritize pro-poor programmes and make efficiency gains, they risk losing much of the progress in the human capital formation made over the past thirty years or so. The effect of this loss could be damaging especially in the long term. In terms of health and nutrition, it has been claimed that, in the context of development, no country can secure sustainable economic growth or poverty reduction without a healthy, wellnourished, and educated population. To ensure the rapid return to growth in East Asia, it is essential, as is the case of education above, to protect the gains in health made over the past thirty years or so, especially among the poor of the countries in crisis.

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Finally, in terms of employment generation and income improvement, it has also been claimed that the challenge for East Asian countries is to resume growth, not necessarily to the pre-crisis level but at least to the level considered relatively acceptable after the Asia turmoil. This resumption is achieved by ensuring that adjustments to crisis-related problems proceed quickly, that efficiency in labour and product markets is promptly restored, and that the vulnerable are protected with appropriate social transfers and other means (World Bank, 1999a).

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Social impact in Indonesia

Since the arrival of the financial crisis in Indonesia, its impact on the economy and the people has manifested itself in many ways: social, political, financial or economic. First, food shortage and large price hikes had caused riots and looting to take place in the country. Second, mob violence against ethnic Chinese and Chinese businesses had spread to many cities in Indonesia. Third, massive demonstrations on alleged corruption at the highest level of government had occurred. Fourth, action by the police or armed forces on the demonstrators had incurred many fatalities. Fifth, surging unemployment had driven people into sweatshops and using more child labour. Finally, ethnic and racial unrest had taken place in many parts of the country (see also Box 2.1). In the poverty sector, the increase in poverty will depend on the decline in real GDP (due to less demand or more unemployment) or changes in inequality. Projections by the World Bank suggest that a 12 per cent decline in GDP alone could increase the poverty rate by almost 40 per cent (see also Table 2.1 below). In 1996, some 4.5 million people (4.9 per cent) were unemployed. During 1999, official estimates were that an additional ten million may lose their jobs, although it is likely that many of them would move into lowpaying urban and rural informal sector work rather than into open unemployment. When we use the official poverty line of US$2 per person a day in 1985 purchasing power prices (adopted mainly for middle-income countries), it has been estimated that half the population in Indonesia still lives on less than this per day. When we use the official poverty line of US$1 per person a day, it has been calculated that poverty in Indonesia would double after

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Box 2.1

The impact of the Asia crisis: anecdotal country facts:

Indonesia At the peak of the crisis, the national currency lost 80 per cent of its US dollar value; already sizeable layoffs, especially in importintensive industries (more than two million people may have already lost their jobs and this number may double or triple by the end of 1998); sectoral effects more severe (e.g. some 15 per cent of two million textile workers may face layoffs by mid-year and the construction bust will idle thousands of workers especially unskilled labourers); fears for increases in the prices of basic basket goods; Government considers providing income security to the poor via short-term, labour-intensive projects for a period between 80 and 90 days; drought conditions in agriculture (El Nino) are aggravating the situation particularly in specific regional pockets. Source: The World Bank, ‘The Impact of the Crisis’, Internet, 18 June 1999.

Table 2.1 Estimated impact of the East Asia crisis: poverty incidence (using national poverty linesa)

c

1997 1998 Change in average standards of living 1997/98 (per cent)

Indonesiab

Thailand

Korea (urban)

11.0 19.9 –24.4

11.4 12.9 –13.6

8.6 19.2 –21.6

Notes: a Poverty lines of around US$1/day in Indonesia, US$2/day in Thailand and US$4/day in Korea; b Survey evidence from selected areas; c Poverty incidence for Thailand as of 1996. Source: World Bank, News Releases, Internet, 2 June 1999.

the Asia crisis (World Bank, 1999a). In addition, allowing for a 10 per cent worsening in the country’s inequality, the number in poverty would triple. Only a 10 per cent improvement in inequality of income distribution here would maintain the same level of poverty at the pre-crisis level.

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In the education sector, it has been claimed that education is the heart of development and helps people build productive lives and cohesive societies. A proper delivery of education requires appropriate policy and physical, human and financial resources. A good education policy means getting every child to school and delivering a high-quality education. It also means that teachers need to be well trained and equipped with materials that reflect the history and heritage of the nation. It means making everyone literate and requires a strong university sector with world-class teaching, learning and research. It demands a vocational education and training system that is responsive to and shapes the demands of the people and economy (World Bank, 1999a). According to the World Bank’s Human Development Report Education Index, Indonesia is one of those poor countries in Asia that have relatively good educational outcomes (the others are China, the Philippines and Vietnam). The government has heavily invested in education over the years and has dramatically increased the education level. This has enabled workers to increase their earnings by moving from lower-paid to higher-paid jobs across regions. Gender differentials have also narrowed more rapidly than in all but a few countries around the world. The impact of the Asia crisis on Indonesia’s education is mainly on the poor, as a result of reduced incomes, increasing prices, higher unemployment and underemployment and of their inability to invest in human capital in order to improve their potential future income-earning capacity. The impact is measured in terms of a decline in primary and junior secondary school enrolment among the poor which in turn risks long-term irreversible losses in human capital accumulation. It has been calculated that during the period 1997/99, the enrolment, drop-outs and drop-out rates are: –1.0 per cent, 117.1 per cent and 119.2 per cent respectively for primary education, and –14.0 per cent, 136.1 per cent and 125.5 per cent respectively for junior secondary education (World Bank, 1999a). The impact of the Asia crisis on education is, as most experts have agreed, most severe among the poor children in Indonesia. Health and nutrition in Indonesia has also benefited tremendously from the country’s sustained economic growth and the government’s continuous commitment in terms of publicly-provided health care facilities in the past 30 years. The immediate impact of

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the Asia crisis was felt through the collapse of the rupiah (an 80 per cent fall in one year) and an annual inflation rate of 10 per cent in 1998. Small surveys by the World Bank indicated that drug prices increased by 200 to 300 per cent between November 1997 and March 1998. The fall of Indonesia’s currency has also affected the food supply and created a need for large food imports when these imports became more expensive. The combination of food shortage and health input shortage is expected to increase vulnerability to communicable diseases. It is our view that, unless the government maintains an acceptable level of expenditure on health services, priority public health programmes such as immunization against childhood diseases and TB control will be seriously cut back. The experience from Indonesia’s earlier crises (e.g., in the mid-1980s) indicates that a decline of up to 20 per cent in health experience can be expected as a result of the 1997 crisis. Over the past decade, Indonesia has also relied on high economic growth to keep unemployment low and absorb new entrants into the workforce. Market-oriented reforms, long-term changes in the structure of the labour supply and demand, increased participation by women in the labour force, a shift from the demand from unskilled to skilled labour, and formalization and industrialization of the economy all have helped the situation. This was achieved despite a rise in real wages (due to an increase in the minimum wage and labour costs) and some unrest between workers and employers. The impact of the Asia crisis will be mainly on the poor, through falling real wages, fewer employment opportunities, and increased prices on basic commodities. For example, the immediate effect of the exchange rate depreciation in 1997 was a collapse in domestic demand: –2.5 per cent in the last quarter of 1997, –7.9 and –17.9 per cent in the first and second quarters of 1998. The reduction domestic demand has led to reduced labour demand, especially in urban areas, which has shown up as increased unemployment and lower wages (World Bank, 1999a). This is aggravated further by an El Nino-induced drought and by the fact that formal safety nets are still limited in Indonesia. The final consequence is that the women and children will have to bear a heavy burden from the crisis: women are often the first to be sacked from formal sector jobs, and children are pulled out of school to work to support or help the family.

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General comments

The above discussions seem to indicate the severity and long duration of the social impact of the Asia crisis on Indonesia and also on the East Asia region in which Indonesia plays an important role, politically, geographically and economically. They also indicate that the most vulnerable of the crisis are the women and children if the experience of the similar economic turmoil in the Latin American countries in the past is any guide. The latest report by the World Bank estimated that the overall poverty levels in Indonesia in 1998 were 18 per cent of the population (up from 11 per cent in 1996), bringing the number of people to be living below the poverty line to over 36 million. The impacts of the Asia crisis were also heterogenous in the sense that some areas of the country have suffered large and persistent increases in the incidence and depth of poverty, while others have rebound quickly or even prospered during the crisis. The impact of the turmoil on human capital has also been severe. Survey data from late 1998 demonstrated that, in 1997, Indonesian households spent an average of 3.4 per cent of their budget on education but by 1998 that share had declined to 2.9 per cent of household income. Since household income itself has declined in real terms, substantially less is being spent on education. In addition, whereas in 1997 there was no correlation between per capita expenditure and enrolment rates, by 1998, lower per capita expenditure was associated with a substantially lower probability of enrolment (World Bank, 1999b). The efforts and responses by the government, national agencies and international organizations have been numerous. They include for example corporate and banks restructuring, private bank recapitalization, legal and regulatory reforms, the setting up of the Indonesian Bank Restructuring Agency (IBRA) and the Social Monitoring Early Responses Unit (SMERU), improved budget allocations for social protection, improved social safety-net programmes, improved transparency and reduced corruption in the social safetynet, urban poverty projects, and social safety net adjustment loans. They are commendable in the sense that they have all been designed to minimize the impact of the crisis. However, these efforts and responses have not been sufficient in restoring the high economic growth of the past decades or in preventing the contagion of

16

Indonesia: The Human Dimension

other economic and financial woes from the rest of the world to Indonesia. This kind of diagnosis is compounded by the current political problems in both Indonesia itself and in East Timor. In fact, it has been conceded by the World Bank that uncertainties will likely persist in Indonesia, with politics largely determining the country’s economic fortunes (Severino, 1999). It seems to us that the real cure for the social problems in Indonesia, generated by the Asia crisis, is an integrated national policy with the support from international organizations that can attract once more foreign direct investment into the country. It is FDI that had generated high growth, prosperity, social harmony, improved living standards and more equality in the past three decades or so in Indonesia. To be able to attract more FDI in the face of economic globalization and a currently almost disintegrated economy is not an easy issue to deal with. It requires substantial economic, administrative and, especially, political reforms in the country in order to provide a favourable climate for international competitiveness. With some good positive signs being posted recently in, for example, the growth rates and the stock market (Cameron, 1999), or falling inflation and interest rates, and exports in modest recovery (Severino, 1999), the road to recovery and development is there for Indonesia to travel on, but the hurdles are numerous and need to be overcome. References Cameron, L. (1999), ‘Indonesia’s Social Crisis’, Far Eastern Economic Review, 8 July 1999. Dabkowski, S. (1999), ‘Indonesia’s bank rescue bill swells to $132b’, The Age: Business, 11 June 1999. McLeod, R. H. (1998), ‘Indonesia’, in McLeod, R. H. and Garnaut, R. (eds), East Asia in Crisis: From Miracle to a Needing One?,London: Routledge. Severino, J. M. (1999), ‘Is Asia Rising? An Update’, The World Bank, Internet, 17 August 1999. Tran Van Hoa (ed.) (1999), The Asia Crisis: The Cures, Their Effectiveness and the Prospects After, London: Macmillan. World Bank (1999a), ‘Social Crisis in East Asia’, Internet, 4 August 1999. World Bank (1999b), ‘Social Impact of the Asia Crisis’, Internet, 21 August 1999.

3 Asia Crisis and the Philippines: Counting the Social Costs Ma. Rebecca Valenzuela

1

Introduction

The Philippines is one among a number of Asian economies that have fallen victim to the Asian crisis, but unlike Thailand, Korea, Malaysia or Indonesia, the impact of the financial crisis to the country has not been as dramatic and alarming. That this is so is, to a large extent, a product of ten years of economic and political reform that the country has gone through since the ‘people power’ revolution of 1986. The demise of the 20-year-old Marcos dictatorship in the mid-1980s brought with it an era of reform for all aspects of the Philippine economy, inclusive of the government, the financial and the corporate sector. The reform process was led by democratically elected presidents and, though it was slow and often painful, it checked the abuse of power and rampant corruption in government. During this reform process, the unhealthy links between the Philippine government and local banks and between these banks and their clients were revealed, and policies to instil market discipline in the financial sector were put in place. Approval of bank loans has thus since become increasingly based on firm performance rather than by the compadre or buddy system that once dominated the relationship between government officials, bankers and their corporate clients. Philippine authorities have also learned to become more transparent and more accountable for the actions and decisions they make. Thus, in the five years that preceded the crisis, the financial institutions and the political situation in the Philippines 17

18

The Philippines: Asia Crisis and the Social Costs

were relatively sound, strong and stable. As a consequence, by the time the 1997 crisis hit the region, the Philippine economy was in a better position to weather the storm compared to most of its neighbours. The Philippines has gained a head-start compared to its Asian neighbours because, in one sense, it has learned its lessons earlier. In addition, having had to experience reform a decade earlier was certainly an added advantage because the external situation at that time was much more supportive of a fast economic recovery than it is today. A speedy economic recovery in the context of the current regional crisis is certainly much more difficult for the affected economies because of the hostile external environment and greater trade interdependencies that currently exist between the countries which are simultaneously affected by the crisis. This is not to say that during the ten-year reform process, the Philippines managed to correct all the institutional, economic and political flaws of its system. That the country suffers relatively less compared to Thailand, Korea, Malaysia and Indonesia indicates that ten years of reform strengthened the domestic economy and brought with it a good degree of resiliency to external shocks. At the same time, the fact that the Asian crisis adversely affected economic growth in the Philippines signals that economic and socio-political reform needs to be continually and vigorously pursued.

2

Some key indicators

As in the other Asian countries, the Philippines experienced a significant withdrawal of foreign capital by nervous investors in the months following April 1997. This capital flight, coupled by a substantial depreciation of the local currency, caused a severe contraction in the economy in the months to follow. The Philippines officially came into a recession period when official growth rate estimates began registering negative values during the first quarter of 1998 (see Figures 3.1 and 3.2). The economy contracted by as much as 1.28 per cent during this period. At the same time, prices increased dramatically as inflation levels moved upwards to two-digit figures. The Philippine currency, the

Ma. Rebecca Valenzuela

Figure 3.1

GDP/GNP growth rates, Philippines, 1991–99

Figure 3.2

Peso–US exchange rate, 1991–99

19

peso, has dropped in value by more than 40 per cent since April 1997, decreasing in value from P26.94 to P41.82 to US$1.00. The contraction of the economy post-April 1997 is generally attributed to the twin effects of the Asian crisis and the prolonged dry spell that has caused a decline in agricultural production. Unfortunately, it is very hard to isolate the individual effects of these two causes. It is generally concluded however that the El Nino weather problem was primarily responsible for the big slump in

20

The Philippines: Asia Crisis and the Social Costs

agricultural production in 1998. On the other hand, it is believed that the contractions in the industry sectors (including the manufacturing, wholesale and retail trade) are mainly due to reduced market demand for commodities brought about by the Asian crisis. Official statistics also show that the effect of the Asian crisis was more pronounced in the construction sector, manufacturing, mining and quarrying – where there was heavy foreign capital dependency. Employment levels also contracted in the finance, insurance, real estate and business services as a result.

3

The employment effects of the crisis

Since the onslaught of the Asian crisis in the Philippines, it has been estimated that one in every five jobs has been lost in the Philippines as firms contract and lay off workers. While the scale of shut-downs and lay-offs is nowhere near the scale in Indonesia or Korea, this statistic translates into the fact that a large number of households in the Philippines have experienced significant reductions in incomes. The unemployment rate in the Philippines edged up from 8.1 per cent in mid-1997 to 10.5 per cent in mid-1998 and further increasing to 10.7 in December 1998. With a total workforce of about 32 million Filipinos, these figures represent about one million who became unemployed in the intervening 18 months. The Philippines’ Department of Labour and Employment (DOLE) reports that establishments in the National Capital Region (NCR) were most adversely affected by the Asian crisis. About 60 per cent of total establishment closures and retrenchments occurred in Metro Manila (the capital city) alone in 1998, and these firms were mostly firms in the manufacturing, wholesale and retail trade sectors. A DOLE survey indicated that the slump in market demand was identified as the main instigator of these closures and retrenchments, though a significant number of firms directly linked these developments to the depreciation of the peso. The months of March and July 1998 recorded the biggest volume of laid-off workers in the region. Official statistics further indicate a decline in full-time employment and a corresponding expansion in part-time employment since the crisis began in 1997. There is also evidence showing an increase in the underemployment rate.

Ma. Rebecca Valenzuela

Box 3.1

21

Mindanao factories cancelled due to the Asian crisis

Aurelio Pena, a journalist for the Philippine News Agency, reports in December 1998 of foiled plans to put up a number of factories and processing plants in Mindanao in the preceding fifteen months: ‘Things were going great before the crisis set in. We can’t go ahead without available funds,’ says Paul Chapman, a US consultant for Eagle Mindanao Inc. which cancelled plans to import capital equipment from the United States and Italy that would have included an integrated meat processing and canning plant, a huge refrigerated warehouse, poultry breeding plants, manure composting plant, and leather tanning plant, all costing 10 million US dollars in importation costs. Plans for a sack-making factory in Koronadal, South Cotabato by Bendita Development Corporation had been postponed by its owners last year when they were caught by the falling peso in the last stages of their bank negotiations to import the machineries from Taiwan. ‘It’s too expensive now to import those machineries and equipment considering we based our computations on 26 pesos to the dollar. We can’t go ahead on the 40 pesos to the dollar rate, that’s too much for us,’ says Fr. Ernesto Bendita who heads the family-owned company in South Cotabato whose planned sack factory would have benefited hundreds of rice millers and food processing plants in the province. Plans to import machineries for a coir peat factory which turns coconut husk into exportable peat – used as a soil medium – had also been postponed by the Coir Dust and Fiber Philippines Inc. here in Davao City. Its chairman, Pedro Durano, said banks here had become very stiff in their requirements when financial conditions in Asia started to turn for the worse sometime last year. ‘Our factory would have provided employment and livelihood for hundreds of coconut farmers if we have the factory,’ he said. Plans to import additional wood-working machineries from Taiwan were also postponed by Rosewood Manufacturing, the biggest furniture factory in Mindanao. Although the factory has met the market demand for office and home furnitures in Davao

22

The Philippines: Asia Crisis and the Social Costs

Box 3.1

Continued

and General Santos, more capacity to meet more demand next year prodded owners to get more machineries but cancelled plans at the last minute when the dollar rate shot up. ‘We’re just waiting for the peso to stabilize before we’ll even think of importing more equipment,’ says Ramesh Pursuani, general manager of Rosewood. Plans to import processing and packaging machineries for a complete Durian Candy Processing Plant in Davao was also cancelled last year by the Mindanao Industrial Confectionary (MINCO) when they were caught by the fast-rising dollar rate. The plant equipment which would have modernized factory operation in the processing and packaging of durian candies for both local and export markets, was supposed to come from Taiwan. ‘It’s too expensive to import these machineries at this time. Perhaps it’s best to wait for the economy to recover before making any move,’ says Joseph Domingo, MINCO president who runs one of the most successful durian candy businesses in Mindanao. Plans to import drilling equipment from mainland China for big construction projects in Davao were also cancelled by A. E. Botuyan Construction in the middle of import negotiations with the Chinese supplier when they were caught by the Asian financial crisis and the peso was hovering around P43 to a dollar. ‘There’s just no way we can import with that kind of exchange rate. If it doesn’t fall back to 26 or 30 to the dollar, we’ll cancel the order,’ says owner Shang Feng Liu.

The effect of the Asian crisis is not limited to the closure of plants, factories and business establishments. Opportunities for employment generation were lost as year-long negotiations to secure finance of labour-generating business projects have been abruptly put on hold, as investors grew increasingly wary of the financial situation in the region (see Box 3.1).

Ma. Rebecca Valenzuela

23

There is also an international dimension to the unemployment effects of the Asian crisis in the Philippines owing to the large numbers of overseas workers who provide significant income to households through remittances. The Asian Development Bank estimates that the deployment of migrant workers from the Philippines fell by 23.4 per cent in the first quarter of 1998 as many overseas contract workers from ailing neighbouring economies returned home and joined the ranks of the unemployed. Labour Secretary Leonardo Quisumbing reports (in a presidential statement) that Filipinos are among those thousands of workers in the construction, hotel and tourism industry in Malaysia who were displaced by the economic difficulties there. Thailand, Indonesia and Japan have also retrenched foreign workers, including Filipinos, he added.

4

Reduced incomes

The poor and nearly poor have borne the brunt of the impact. In the urban areas, those initially affected are the unskilled workers, who are the first to be laid off, followed by labouring families whose livelihoods depend entirely on daily wages, such as factory workers, construction workers, taxi drivers and casual labourers. DOLE data show that the lay-offs in the city have predominantly affected male workers who were mostly the main breadwinners in their respective households. The data also suggest that more than half of laid-off workers gave up full-time and permanent positions. Evidence is also widespread that job losses due to the economic crisis cut across a wide range of occupational groups. In the rural areas, the Asian crisis plus the droughts caused by the El Nino have cut into the income of households, particularly those of subsistence farmers. The low level of produce brought about by the drought compelled many farmers to buy seeds and fertilizer necessary for the next year’s crop. But because of the high interest rates and a lack of available credit, many had difficulty borrowing for these investments. In times like these, most people resort to some informal lending practices in the Philippines that thrive in times of general hardship (see Box 3.2). For other households, there was mounting concern, especially by non-government organisations, that urban unemployment would significantly decrease remittances to the rural areas and compound the income effects of the drought.

24

The Philippines: Asia Crisis and the Social Costs

Box 3.2

Informal lending practices in the Philippines

• It is common practice in the Philippines to borrow money from employers through the form of cash advances. Many wage and salary personnel have resorted to this loan mechanism to meet their regular commitments such as mortgages and school fees. Cash advances are a big help in easing the family’s current financial difficulties, but do not assist the situation in the long term as repayments will have to be deducted from future salary periods. This lending mechanism is usually available to wage and salary earners only. • For the self-employed and small entrepreneurs who find themselves in a tight money situation, borrowing on a ‘5:6 arrangement’ is one way to go around the problem. The 5:6 arrangement is so called because for every 5 pesos borrowed in the early morning, 6 pesos is returned at the end of the day. This is usually resorted to by all kinds of market vendors who go out to make a living buying and selling wares on a day-today basis. • Pawnshops and traditional money-lenders are the other options open to lower-income households if they need to borrow money. These forms of obtaining short–medium-term cash are preferred over banks because they usually require minimum paperwork (sometimes none is required) and are less time-consuming. Interest rates from these creditors are usually above average. For traditional money-lenders, who usually operate in the black market, it is normal to find rates which clearly exploit the crisis situations. • Borrowing money from wealthier relations is also a common practice in the Philippines. Some people are fortunate enough to have parents, aunts, uncles or friends who they ‘can run to’ to help them out of some financial difficulties. It is usual to have no interest imposed on these types of loans, but it does impose on the borrower an utang na loob or ‘debt of gratitude’ to the debtor which usually lasts for a long time, way after the money debt has been paid back.

Ma. Rebecca Valenzuela

Figure 3.3

25

Employment rates, national and NCR, 1991–99

For the first half of 1999, the country’s labour market appeared to be improving, according to the latest available statistics. Official statistics from the National Statistics Office (NSO) showed a respectable growth in the national employment level, increasing by 6 per cent during the first half of 1999. This marked improvement is attributed to the strong recovery in agricultural employment and the reduction in the unemployment rate from 13.3 per cent to 11.8 in that sector (see Figures 3.3). However, the production slump in the industry sector employment continued and growth in the services sector employment remained sluggish during the same period. Also, the NSO figures suggest a continued increase in the number of persons looking for additional work, with the underemployment rate steadily rising to reach more than 6.3 million during the first half of 1999. This represents an increase of more than 300 000 people from late 1998. Ironically, the majority of these underemployed workers can be found in the rural areas, and mostly engaged in part-time or casual work in the agriculture, fishery and forestry sector (the sector that registered a marked improvement in overall employment levels in early 1999).

5

Rising prices

Many households in the Philippines have to make budget adjustments because of reduced incomes. A further squeeze in these

26

The Philippines: Asia Crisis and the Social Costs

25 20 15 10 5

Figure 3.4

99

98

19 Q1

98

19

Q3

97

19

Q1

97

19

Q3

96

19

Q1

96

19

Q3

95 19

19

Q1

Q3

95 19

QI

Q3

19

94

94 19

QI

Q3

19

93

93

92

19 QI

92 19

19

Q3

Q1

Q3

19

91

91

90

19 Q1

19

19 Q1

Q3

90

0

Inflation rate, Philippines, 1990–99

households’ budgets must be made to accommodate the substantial rise in the cost of living due to increased commodity prices. The inflation rate went up from the pre-crisis level of 4.5 per cent to 11.1 per cent in December 1998 (see Figure 3.4). Prices of basic food commodities such as rice, corn, fruits, vegetables, fish and meat all went up by at least 10 per cent overall, and the corresponding rate for Metro Manila and other urban areas of the country was higher, according to the Summary Inflation Reports of the National Statistics Office. Households also have to contend with higher prices for services (e.g., higher consultation charges by doctors and other medical specialists, higher telephone rates) and other essentials like medicines, clothing, rent and construction materials. The report also indicates significant increases in the prices of firewood, charcoal, kerosene, engine oils and electricity. In Metro Manila, electricity rates were pushed up above average rates on account of an increased purchased power adjustment rate by the local electricity authority. The price increases are largely attributed to the higher currency exchange rate effected by the depreciated peso. Price increases affect all households, of course, but expenditure on basic commodities comprises a larger share of a poor household’s budget; poorer households have, as a result, to make the larger sacrifices. Whereas the better-off can adjust by drawing on their savings, by purchasing less expensive clothing items, or by postponing the acquisition of a new car stereo, the poor adjust their budget by consuming less on all of

Ma. Rebecca Valenzuela

27

their necessities, be it food, clothing, medicine or medical services. Feedback reports provided by social workers in depressed urban and rural areas indicate that in the Philippines the latter scenario has increasingly become even more common in recent times (DSWD, 1999). Health effects Reduced incomes and higher prices induce households to cut back on food spending, and this has reduced people’s productivity and increased their vulnerability to illness. In the slum areas, people reported that they already had had to cut down from three to two meals per day and in some cases only one (Robb, 1998). Also, there is a tendency to cut back on health expenditures by delaying visits to clinics or buying medicine until it is too late. The distribution of health expenses is also a priority with women who stay at home tending to forgo valuable medical expenses in favour of the husband or the children. For Filipinos who use private facilities, the crisis will affect their ability to make the out-of-pocket payments because of increased prices, greater unemployment and reduced nominal wages. Further, private health services have been affected by the growing cost of drugs and higher cost of servicing loans from abroad. Many private clinics have either gone bankrupt or have put up their prices (World Bank, 1999a and 1999b). As a result, there is increased reliance on the already strained public health system, which is itself having to contend with a reduced budget allocation from the central government. 1 This has only intensified the mismatch between central government funding and local health care costs. Concerns that the quality of care that the public health system provides would drop substantially and also concerns about the serious under-funding of key government health programmes have been expressed by many health oriented nongovernment organizations (NGOs) such as the Council for Health and Development. These organizations have began a concerted effort to make the government aware of the long-term risks (i.e., potential damage to human capital formation) involved in implementing across-the-board cuts instead of considering the importance of programmes and services to the poor (e.g., cut in immunization programmes). For their part, the NGOs have also expressed fear that

28

The Philippines: Asia Crisis and the Social Costs

their capacity to provide health and other services to the poor is already being affected by decreased support from government and major reductions in private sector donations. Education Many households are curtailing food expenses. To the extent that the children in these households are still going to school, the lack of proper nutrition can affect their attention span, learning ability and, ultimately, their school performance. A World Bank study found evidence that many households in the Philippines are pulling their children out of school because the households cannot afford the fees (one-third has to be shouldered by parents in publicly funded schools), or lunch money, or because they need the children to work at home or for money. Children are also being pulled out of school to do household chores – such as to take care of younger siblings – so adults can be left free to engage in paid work, at substantially reduced wages where they can find any. There was widespread evidence of this occurring in the rural households in the southern Luzon province of Camarines Sur, where children were found to have taken on greater responsibility for household chores, such as laundry, food preparation, house cleaning and the like so the parents can devote additional time to outside income-generating activities (World Bank, 1999a and 1999b). The reduction of government allocation to the education department has also resulted in less resources for children in public schools. For example, the World Bank reports that textbooks have become less accessible to primary-school children. It is also highly likely that a further increase in the student–teacher ratio has occurred in many regional areas of the country. Migration Urban to Rural. Diminished economic opportunities in the urban areas have increased flows of people from the cities back to the rural areas. This has resulted in greater competition in the supply of farm labour. The agricultural sector was hardly in a position to take in extra labour because of the reduced production effected by the lingering dry spell in 1998. And early in 1999, official statistics show that even as agricultural output started to improve and employment levels increased in the rural areas, the majority of the

Ma. Rebecca Valenzuela

29

underemployed workers were found in the agricultural sector of the economy. Cross-border-migration. The flow of Overseas Contract Workers (OCWs) back to the Philippines has also increased as a result of the Asian crisis. The Asian Development Bank estimates that the deployment of migrant workers from the Philippines fell by 23.4 per cent in the first quarter of 1998 as many OCWs from ailing neighbouring economies returned home and joined the ranks of the unemployed. In addition, an NSO poverty survey showed that 5 per cent of reported jobless was due to the retrenchment of migrant workers. Indeed, Filipinos are among those thousands of workers in the construction, hotel and tourism industry in Malaysia who were displaced by the economic difficulties there. Thailand, Indonesia and Japan have also retrenched foreign workers, including a sizable number of Filipino workers (Quisumbing, 1998). Concerns about the mental and psychological well-being of returning migrants have been repeatedly expressed by worried relatives, according to a World Bank team which conducted random interviews of individuals in selected Philippine communities. Their findings indicate that some NGOs feared that the migrants who were forced to return to their family homes (from the cities or from overseas) may find it difficult to assimilate back to the rural way of life and that this may lead to a sense of alienation. It is highly likely that this regressive movement (from urban to rural) will impact on mental health, and even increase suicide rates. Although families had been under stress before the crisis, the sharp increase in the need to migrate to find work would further contribute towards family ties breaking down (Robb, 1998).

6

Other social outcomes

The hardships that Philippine families have suffered as a result of the Asian Crisis, compounded by the drought, has brought in social developments that are not all negative. Cielito Habito, Philippine Minister for Economic Development under the Aquino and Ramos administrations, attests to an increase in the participation of private citizens and non-government organizations in the formulation and implementation of community social policies and welfare programmes. In a speech to an ASIALINK forum, he asserts that the

30

The Philippines: Asia Crisis and the Social Costs

turmoil has heightened cooperation between community members and that private and government organizations have increased their level of partnership in providing much needed assistance to those most affected by the drought and the crisis. Investigations by the World Bank support this claim. In the southern city of Davao, the World Bank study finds growing support and reliance in a community savings scheme called bubuwai , where everyone contributes to cover costs of festivals; and the community self-policing programme (ronda) had increased participation from members of many communities in response to the increased crime rate (Robb, 1998). New associations or cooperatives have been formed in some other communities to provide household credit, to bulk-buy consumption goods or to arrange for shared childcare. Habito (1998) says that the spirit of cooperation and community among Filipinos has been brought out by the crisis. This only goes to show that a crisis event may in fact help in strengthening social cohesion and may even forge new relations that improve overall social capital as poor communities find resourceful ways of overcoming their problems.

7

The responses of the government

As an immediate response, the government announced a 25 per cent mandatory budget savings on all government agencies to control the fiscal deficit in 1998. This was thought of by many as a wise move for the long-term ends, but it also meant reduced social expenditures including those on health and education, and reduced coverage of social services. With significant reductions in household incomes, the need for assistance from local government welfare units increased. This included direct and indirect forms of assistance to enable households to keep the children in school, and to avail themselves of health services if required, and to help the family maintain minimum dietary requirements. In a situation like the Philippines where most households had few formal mechanisms of risk management and virtually no social safety-net mechanism, such a fiscal move became very difficult to manage. It was clear from the beginning that the increased reliance on government forms of assistance was not compatible with the fiscal-tightening reaction of the government (which may have been advised by international organizations such as the International Monetary Fund).

Ma. Rebecca Valenzuela

31

Fortunately, the government immediately recognized the longterm negative effects of fiscal tightening. As a result, mandatory savings for agencies in the social service sectors including education, health, labour and employment were partially lifted towards the end of 1998. The government is also quick to point out that total social sector spending was maintained in real terms in 1998, though spending in sub-sectors such as health, social security, welfare and employment, housing and community development fell in real terms. To further assist in easing the burden on those most affected by the crisis, several other initiatives were taken by the government, where some projects have been supported by the World Bank and its other partners. During 1998, The National Food Authority distributed 1.6 million tons of imported rice which helped ease the effects of the increase in rice prices. The DOLE has allocated extra funds to provide direct assistance to those who have been laid off or retrenched as a result of the crisis. In cooperation with local government units, DOLE has also allocated additional resources for the rural works programmes for displaced workers in the depressed rural communities. The government has also taken measures to relax the qualifying conditions to facilitate access for salary and other emergency loans to social security members. The government as a whole, supported by several international agencies, has also accorded prime importance to efforts that monitor social effects of the crisis. The World Bank, for example, provides financial support to enable the conduct of social crisis surveys. The first of these surveys was conducted by the National Statistics Office in October 1998, another in 1999, and plans are under way for a third wave in the year 2000. Similar monitoring activities in the education and health sectors have also been given priority so that provision of social services can be better achieved through effective programme targeting.

8

Conclusions

The Asian financial crisis which began in July 1997 in Thailand has adversely impacted on many households in the Philippines, although it is recognized that the El Nino occurrence of a long dry spell also was an important compounding factor. Household finances have been attacked from both ends – one, via the reduced

32

The Philippines: Asia Crisis and the Social Costs

income effect due to a tighter labour market situation, and secondly by the reduced purchasing power of the peso on account of higher prices for most commodities. The latest economic data for the Philippines show a more optimistic view of the economy, with strong signs of recovery within the next few years. After a three-quarters contraction, GDP grew by about 1.2 per cent (year on year) in the first quarter of 1999. The farm sector also showed even stronger recovery and increased employment levels. The government is encouraged by this glimmer of hope but, at the same time, is very conscious that it has to keep up the difficult balancing act of pursuing economic growth strategies alongside strategies that aim to improve upon poverty and equity gains, protect the most vulnerable people from further economic deprivation, and prevent the erosion of social capital. The effect of the Asian crisis on the economies of Thailand, Malaysia, Indonesia, Korea and the Philippines is devastating, particularly for the poor and the disadvantaged. There is now heightened awareness of the economic deprivation, social violence and political instability that this has caused (in varying degrees) to the peoples of these countries. The Philippines has been relatively fortunate in the sense that the effects have been somewhat less damaging. This has afforded the Philippine government greater flexibility in adopting medium-term strategies in managing both the economic and the social effects of the crisis. Effective policies have been put in place and social programmes are continuously being administered. It is, however, not enough to be content with these initial successes as many more Filipino men, women and children continue to struggle against poverty and deprivation. Note 1. The central government in Manila has effected a 25 per cent acrossthe-board cut for all government agencies in response to the crisis.

References Annual Poverty Indicators Survey (1998), Manila: National Statistics Office, The Philippines. CHD Bulletin (various issues 1998 and 1999), Manila: Council for Health and Development, The Philippines. Department of Social Welfare and Development (1991), Report from the project Basic Needs Approach, Quezin City, Philippines.

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Habito, C. (December 1998), ‘Asian Crisis and Sustainable Development’, Invited speech, ASIALINK Forum on the Asian Crisis, Melbourne, Australia. Labstat Update, Labour Force Survey in Brief (various issues), Manila: Department of Labour and Employment, The Philippines. Pena, Aurelio, (December 1998) Philippine News Agency. Quisumbing, Leonardo ( April 1998), Presidential Statement, Office of the President, Manila. Robb, C. (July 1998), ‘Social Aspects of the East Asian Financial Crisis: Perception of the Poor Communities’, Paper prepared for the DFID seminar on the Implications of East Asian Crisis for Poverty Elimination, World Bank. Summary Inflation Report (various months), Manila: National Statistics Office, The Philippines. World Bank (1999a), ‘Social Issues Arising from the East Asia Economic Crisis’, Social Policy Group, East Asia and Pacific Region, World Bank. World Bank (1999b), Social Crisis in East Asia, World Bank. World Bank (1999c), Social Issues Arising from the East Asia Economic Crisis, World Bank.

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4 Thailand: The Asian Financial Crisis and Social Changes Sauwalak Kittiprapas

1

Introduction

In Thailand, the 1997 financial crisis has resulted in adverse impacts on economic and social systems more seriously than anyone could anticipate. This crisis originated from problems in many sectors: finance, real production, government and management. Since financial liberalization of the early 1990s,1 foreign capital has been attracted to the country by high profit margins in stocks, high interest rates, and a relatively lower risk in Southeast Asia, due to the US dollar-pegged currency (Lauridsen 1998). With cheaper interest rates for off-shore loans and a perceived fixed exchange rate, the Thai private sector continued to borrow. This increased the burden of foreign debt. Without effective management and supervision, the increasing capital inflows mostly came in the form of short-term loans and went into speculative (such as real estate and stock market) rather than productive sectors. Excessive private investment, particularly in risky and non-tradable sectors, and property price inflation soon led to a bubble economy. The increased overconsumption and the high investment–savings gap in the economy caused the balance-of-payment deficit to blow out. Signs of an impending economic crisis appeared in 1996 when the export growth slowed down, manufacturing competitiveness fell, 2 asset prices began reflecting misalignment, and the balance-ofpayments deficit shot up, 3 increasing short-term speculations and creating scandals in the financial sector. Problems in the financial sector have increased due to perceived financial management 35

36

Thailand: Asian Crisis and Social Changes

misconduct. The baht had been under attack often since late 1996, but so fiercely only in mid-1997, when the Bank of Thailand (BOT) spent a large amount of foreign reserves to defend the currency, which was finally floated on 2 July 1997. The rapid depreciation of the baht quickly deepened the economic crisis, leaving Thailand no choice but to apply for a US$17.2 billion loan from the International Monetary Fund (IMF), which was granted starting from 1997. The immediate adverse effects of this de facto devaluation were: increasing external debt burdens and capital outflows, the closing down of 56 finance companies, and tight fiscal and monetary policies (under the IMF conditions). The Thai financial system and real sectors were severely disrupted; non-performing loans (NPLs) rose considerably. These adverse effects from currency depreciation soon spread to other Asian economies in which weak economic institutions were already being overburdened before the Thai crisis. The Thai economic turmoil quickly turned into a region-wide contagion. The financial mismanagement by the BOT and the wrong prescription of policy responses have worsened the situation in Thailand. The BOT interventions in the money market proved to be very costly and ineffective. The financial restructuring plan has incurred huge public costs (Lauridsen, 1998). In addition, as companies in Thailand have high debt-to-equity ratios, debt-restructuring process through a bankruptcy law would incur loss of production and employment. This would result in social costs and problems in Thai society. The economic slump of 1997 contrasts sharply with the rapid growth period of the mid-1980s, though both were triggered by the depreciation of the baht. While a devalued baht in the mid-1980s boosted the export sector, in 1997 the collapse of the financial system and a regional melt-down compromised the sector’s ability to benefit from a falling baht. While rapid growth during the 1980s was led by the private sector’s investment under sound policies and economic conditions, the financial collapse in 1997 was largely caused by a private sector failure in managing loans and operations under weak macroeconomic policies and financial management, lack of investment confidence and political instability, and worsening external conditions. Under such conditions, capital inflows, mostly invested in short-term unproductive sectors, turned overnight into a

Sauwalak Kittiprapas

37

capital flight. Domestic operations had now incurred high debt burdens and credit risks; the banking sector was besieged with the problems of NPLs and lack of liquidity. The whole economy had faced a severe credit crunch. The economic slump which was ignited by a weakness in the financial system has brought about a deterioration in the real sector and the whole economy.

2

The financial turmoil and its social impact

How the financial and economic crisis in Thailand has affected people and their families, which would lead to social problems, can be viewed from the pathways in Figure 4.1. The initial capital flight triggered currency depreciation, domestic credit shortages, widespread corporate financial difficulties and severe contractions in demand and output. In addition, the second round of contagion effects led to falling export demand (through a fall in other currencies), which further dragged in income and output. Consequently, this mechanism would lead to further drops in employment and wages as well as lower government revenues and budgets for a number of social public programmes. After all, the vulnerable groups and their family members might experience an increase in tensions and stresses, which can lead to social problems, due to insufficient social safety-nets.

3

Social problems and changes

Problems from unemployment and income reduction There are overall reductions in employment and income. Unemployment increased to 1.48 million people in February 1998 (dry season) and 1.3 million in August (wet season) (Table 4.1). In 1998, unemployment rate in the dry season was 4.6 per cent and in the wet season 3.4 per cent. Regarding the impact of the Asia crisis on sectoral employment, Table 4.2 shows that the construction sector was hit hardest: its employment was reduced more than 30 per cent for both dry and wet seasons. Surprisingly, the agricultural sector there was also a drop in employment which fell more heavily in the dry season (–2.25 per cent versus –1.31 per cent in the wet season). That means

38

Thailand: Asian Crisis and Social Changes

Initial

Initial Impulse

Causes Second Round/ Contagion Effects

Local Currency (Baht) Depreciation

Capital Flight Other Currencies Depreciation

Unviable Corporate Balance Sheets

Rising costs of tradable inputs

Credit Crunch

Increasing Export Competition and Falling Export Demand

Falling Output

Falling Demand for Labour

Impacts on People / Families

Figure 4.1

Higher food price/Costs of living

Lower Wages or Rising Unemployment / Poverty

Falling Gov't Revenue

Lower Budgets for a number of Social Programmes

Pathways of financial and economies crisis to social impacts

Source: Sussangkarn, Flatters and Kittiprapas (1999).

that the agricultural sector cannot absorb a large number of laid-offs or the unemployed affected by the crisis. On the other hand, the service sector gained more employment for both periods (5.6 per cent and 3.3. per cent in the dry and wet seasons respectively). Commerce gained more employment in the

Table 4.1

Labour force status of population (number in thousands)

(a) February 1995–1998 (dry season) Labour force status

1995

1996

1997

1998

Total population Total labour force Employed Unemployed Looking for work Available, but not looking for work Seasonally inactive labour force Unemployment rate Open unemployment rate

59,112.9 31,347.9 29,055.1 723.5 167.8 555.7 1,569.2 2.3 0.5

59,750.4 1,898.4 30,099.2 641.3 119.6 521.7 1,157.8 2.0 0.4

60,350.7 32,000.2 30,266.4 697.9 179.6 518.3 1,035.9 2.2 0.6

60,949.0 32,143.1 29,412.9 1,479.3 402.8 1,076.5 1,250.8 4.6 1.3

1995

1996

1997

1998

59,450,877 33,001,856 32,575,085 375,100 100,559 274,541 51,671 1.14 0.30

60,045,315 32,750,018 32,232,360 353,948 110,159 243,789 163,711 1.08 0.34

60,648,992 33,560,709 33,162,369 292,571 96,447 196,124 105,769 0.87 0.29

61,248,436 33,352,966 32,138,011 1,137,982 476,295 661,687 76,973 3.41 1.43

(b) August 1995–1998 (wet season) Labour force status Total population Total labour force Employed Unemployed Looking for work Available, but not looking for work Seasonally inactive labour force Unemployment rate Open unemployment rate

39

Sources: Labour Force Survey, round 1 and 3, 1995–1998; National Statistical Office, Office of the Prime Minister. Notes: Unemployment rate = Unemployed population / Total labour force Open unemployment rate = Unemployment population looking for work / Total labour force

40

Thailand: Asian Crisis and Social Changes

dry season (4.33 per cent) but reduced it in the wet season (–1.84 per cent). This implies that in dry seasons when the agricultural sector has absorbed less employment, the number of employees increased in the service and commerce sectors. However, this increasing number of employed may be due to a shift in the working conditions in the informal sector and, mostly, in the form of underemployment. There is evidences that the crisis has led to an increase in underemployment problems (Ammar and Orapin, 1998; Kakwani, 1998; Kiltiprapas, 1999). Concerning the spatial impact, Table 4.3 shows that the hardest hit in terms of unemployment was the Northeast. The Northeast has the highest incidence of unemployment in the dry season: 8.6 per cent in 1998. This is not a surprising result as the region is the largest source of rural–urban migration. When the demand for labour sharply declined due to the Asia crisis, these former emigrants returned home as unemployed (Kittiprapas, 1999). Data for round 3 (wet season) is interesting as the unemployment rate in the Northeast had sharply declined. This may be due to the positive gains of the agricultural sector in 1998 and therefore the sector could absorb more employment of the returned migrants. Unemployment leads to problems of income reduction and poverty. Data from the National Economic and Social Development Board (NESDB) revealed that the number of the poor had increased by about 1 million from 1996 to mid-1998. The NESDB estimation also revealed that per capita real income had declined by 11.5 per cent between the third quarter of 1997 and the first quarter of 1998, and declined 2.5 per cent between the first and the third quarters of 1998 (NESDB, 1998). The estimation from the Labour Force Survey also indicated that the impact on income reduction in the rural areas was even higher than that in the urban areas. An explanation is that this may be due to the movement of temporary migrants and a deepening of the recession. The Northeast was the hardest hit region in terms of employment and income reduction. Thus, the crisis tends to increase regional inequality, although Thailand’s economic growth during the past few years seems to benefit the poor regions. The impact of reduction in real wages and employment of small and medium-size enterprises was more severe than that experienced by large enterprises. Unskilled labour (with an education level of less

Table 4.2

Employment by sectors (number and percentage of total employment) (number in thousands)

(a) February 1994–1998 (dry season) Sector Agriculture (per cent) Industry (per cent) Construction (per cent) Commerce (per cent) Finance and real estate (per cent) Services (per cent) Total employment

1994

1995

1996

1997

1998

Change from 97 to 98

12,621,038 44.38 4,511,991 15.87 2,283,630 8.03 3,627,836 12.76 325,906

11,811,629 40.81 4,888,533 16.89 2,637,677 9.11 3,994,460 13.80 263,941

12,093,552 40.33 5,016,052 16.73 3,113,754 10.38 4,123,594 13.75 311,972

11,895,015 39.42 5,046,384 16.73 2,977,500 9.87 4,204,441 13.94 381,901

11,626,797 39.61 4,974,658 16.95 2,035,383 6.93 4,386,573 14.94 344,736

–268,218 –2.25 –71,726 –1.42 –942,117 –31.64 182,132 4.33 –37,165

1.15 5,067,066 17.82 28,437,467

0.91 5,350,227 18.48 28,946,467

1.04 5,327,715 17.77 29,986,639

1.27 5,666,196 18.78 30,171,437

1.17 5,987,379 20.40 29,355,526

–9.73 321,183 5.67 –815,911

1994

1995

1996

1997

1998

Change from 97 to 98

17,960,352 55.96

16,929,344 51.97

16,127,108 50.03

16,691,282 50.33

16,471,792 51.25

–219,489 –1.31

(b) August 1994–1998 (wet season) Sector

41

Agriculture (per cent)

42

Table 4.2

Continued

(b) August 1994–1998 (wet season) Sector Industry (per cent) Construction (per cent) Commerce (per cent) Finance and real estate (per cent) Services (per cent) Total

1994

1995

1996

1997

3,901,464 12.16 1,698,057 5.29 3,297,350 10.27 320,390

4,422,742 13.58 1,846,030 5.67 3,810,013 11.70 284,560

4,381,343 13.59 2,171,980 6.74 4,049,295 12.56 292,228

4,338,900 13.08 2,020,778 6.09 4,194,379 12.65 406,745

1.00 4,917,466 15.32 32,095,079

0.87 5,282,396 16.22 32,575,085

0.91 5,210,406 16.17 32,232,360

1.23 5,510,285 16.62 33,162,369

1998 4,230,731 13.16 1,279,623 3.98 4,117,238 12.81 346,364

Change from 97 to 98 –108,170 –2.49 –741,155 –36.68 –77,142 –1.84 –60,381

–14.84 1.08 181,978 5,692,264 3.30 17.71 –1,024,358 32,138,011

Sources: Labour Force Survey, round 1 and 3, 1994–1998; National Statistical Office, Office of the Prime Minister.

Table 4.3

Number and unemployment rate by region, Thailand, 1998 Region

Bangkok (Round 1) Bangkok (Round 3) Bangkok Metropolis Region (Round 1) Bangkok Metropolis Region (Round 3) Cere Eastern Seaboard Region Chon Buri, Rayong, Chachoengsao (Round) Chon Buri, Rayong, Chachoengsao (Round 3) Central (Round 1) Central (Round 3) North (Round 1) North (Round 3)

Number of unemployment and unemployment rate 1998

56,014 1.4 38,833 1.0

123,095 3.0 189,367 4.6

33,564 1.7 16,752 0.8

49,051 2.5 71,093 3.5

16,389 1.4 11,322 1.0

20,844 1.9 16,824 1.4

60,654 1.4 40,766 0.9

156,720 3.7 133,117 3.0

122,801 2.0 47,409 0.8

233,407 4.0 218,063 3.4

% Change 1.6 3.6 1.8 2.3

0.5 0.4 2.3 2.1 2.0 2.6

43

1997

44

Table 4.3

Continued Region

Northeast (Round 1) Northeast (Round 3) South (Round 1) South (Round 3) Whole Country (Round 1) Whole Country (Round 3)

Number of unemployment and unemployment rate 1997

1998

357,693 3.7 84,217 0.7

815,216 8.6 405,592 3.6

50,477 1.2 53,930 1.3

80,937 2.0 103,872 2.5

697,5920 2.2 293,229.0 0.87

1,479,270.0 4.6 1,137,928.0 3.41

% Change

4.9 2.9 0.8 1.2 2.4 2.54

Sauwalak Kittiprapas

45

than the elementary school) experienced the most severe adverse impact (NESDB, 1998). Migration The NSO statistics support the evidence of a reverse migration from Bangkok to other regions. During the survey period of January 1997 to January 1988, most of the formerly working unemployed migrants were headed for the Northeast (67 per cent 4 – of which 48 per cent used to live in Bangkok). The main reason for migration was to return home (70 per cent), as shown in Figure 4.2. As the Northeast has traditionally been the largest source of rural–urban labour migrations, the region is now absorbing a large number of returned migrants affected by the crisis. The factors affecting reverse migration seem to be the push-factors from the laying off and unemployment in Bangkok, and not the pull-factors at home. From the survey cited above, 94 per cent of unemployed migrants used to work and 43 per cent of these were unemployed during October–December 1997. Most of the returned migrants used to work in the non-agricultural sectors (87 per cent), of these, 98 per cent worked as employees. The majority of unemployed migrants used to work as craftsmen or labourers (66 per cent). This indicates that the agricultural sector may not be suitable for immediately absorbing these returned migrants who used to work in the nonagricultural sectors. Although the majority of returned migrants during the survey period lived in the rural areas, the main reason for them was to return home, and not for a new job. The majority of the returned migrants have an education at the primary or lower level (93 per cent), while the rest at the lower secondary standard. These insufficiently educated and unskilled workers would have limited opportunities in the labour market. Community and family problems and changes The economic crisis has affected both the family and community structures. Falling income and employment in the modern urban sectors have pushed the vulnerable groups to the informal sectors where women and children were forced to work. The families now have more burdens in taking care of the increasing number of unemployed family members. Tension and stresses might increase between family members in a crowded place, and this can lead to

46

Thailand: Asian Crisis and Social Changes

B : Reason for migration

Figure 4.2 Percent distribution of former workers unemployed during January 1997–January 1998 who migrated within last year by place of residence and reason for migration in 1996

Sauwalak Kittiprapas

47

family breakdowns. High competition for jobs may also lead to violence and a breakdown in community trust. It should be noted that all is not that bad in this situation. In fact, it has been suggested that people should use this opportunity to strengthen community ties. As the families have more members from the returned migrants who are relatively young, the youth could be an important resource for their community development. Individuals and communities alike should also come up with new strategies to cope with the crisis. Some of these may be new careers or new strategies for community management. Communities with an efficient management would have less adverse effects from the crisis. Uses of social and natural resources The Asia crisis has affected the urban poor in Bangkok, who would like to migrate back to the provincial areas. This movement of people would lead to increasing pressure for these towns in the form of providing municipal services or, for the rural areas, in providing resources. An increasing number of people living in the deteriorated areas with limited resources will bring in more social and security problems such as natural resource use (i.e., water and energy uses, and deforestation), drug abuses and more crimes. Some vulnerable groups in the urban areas could go back to the rural areas with the expectation that the agricultural sector would be able to absorb them. However, unemployment in the agricultural sector was already existent and the sector could not absorb a large number of these returned migrants. Thus, many of them would not be able to find jobs in the area, and could only wait for the opportunities to re-enter the non-agricultural labour markets. If they have no additional income and resources, it is expected that natural resources in rural areas would decline. Human resource deterioration During the Asia crisis, there was an increasing number of school dropouts and an increasing incidence of malnutrition, because of higher education expenditures for investing in human capital and family incomes. Although there was an increase in total school enrolment rates during the period 1994–1997, there was a slight drop in 1998 (from 77.82 per cent to 77.51 per cent).5

48

Thailand: Asian Crisis and Social Changes

A report compiled by the Health Intelligence Unit6 indicated that the number of underweight children had increased in 1997 (11.84 per cent compared with 7.9 per cent in 1996) due to the economic crisis. Worsening situations were also found in the rural areas, particularly in the Northeast. A decline in the quality of education was also observed. A recent report7 from the NESDB found that some 126 000 children left school in the middle of their education and 276 000 children did not rejoin school when it opened the following semester. It also noted that 7.2 per cent of children shifted to schools with lower fees and the number of children joining public schools fell by 1.8 per cent. There were some increases in child labour, where the young had to work to support their family’s declining income. However, child labour does not receive a proper return. Almost 40 per cent of income of the poor people in 1998 was contributed by the children (up to 17 years old) in the family. Changes in social expenditure programmes Changes in the pattern of government expenditure affected social infrastructure and welfare. For example, due to tight fiscal policies according to IMF’s earlier Letters of Intent, the 1998 budget for social services was contracted by 35 per cent (compared to that in 1997), and the cut for agricultural development was 26 per cent, for energy and environment 27 per cent, for transportation 16 per cent, for health 11.4 per cent, and for education 4 per cent. The budget cut would without doubt affect development in these areas. Table 4.4 shows the budget programmes and percentage changes from the previous year. Social safety nets Social safety nets can be considered from formal and informal systems. Formal safety-nets Formal safety-nets can be considered from three structures: social security scheme, social infrastructure, and social assistance programmes. Informal social safety-nets can be family and communities assistance. Important social security schemes are pension systems, severance payment, and unemployment insurance – the

Table 4.4

Government budget by programmes, 1997–1999

Programmes

Agriculture Industry and Mining Communications and Transport Commerce and Tourism Science, Technology, Energy and Environment Education Public Health Social Services Defense Internal Security General Administration Debt Servicing Total

Fiscal expenditure Expenditure for 1998 Finalized % Approximate % for 1997 as submitted for 1998 Difference fiscal expenditure Difference from 1998 to Parliament (after 3 cuts and from 1997 for 1999 in June 1997 (1) refunds of 30,000) 83,964.3 3,005.5 95,939.5

76,184.9 3,694.6 111,777.8

62,475.7 2,989.5 80,470.7

–25.6 –0.5 –16.1

60,932.9 3,230.2 66,444.5

–2.5 8.1 –17.4

6,935.5 19,514.5

7,084.7 20,734.7

6,374.9 14,203.1

–8.1 –27.2

6,911.2 13,240.5

8.4 –6.8

216,278.5 75,023.0 158,696.4 119,429.3 44,278.1 114,139.0 46,796.4 984,000.0

227,390.3 75,568.7 135,305.8 115,862.1 50,866.7 112,435.3 45,094.4 982,000.0

208,274.8 66,455.2 103,082.2 92,565.6 43,785.2 104,811.2 44,421.9 830,000.0

–3.7 –11.4 –35.0 –22.5 –0.9 –8.2 –5.1 –15.7

209,926.7 62,546.3 93,008.7 87,297.4 44,679.6 100,413.8 76,368.5 825,000.0

0.8 –5.9 –9.8 –5.7 1.8 –4.2 71.9 –0.6

Source: Bureau of Budget. Thailand’s Budget in Brief 1998, and 1999 (in Thai).

49

50

Thailand: Asian Crisis and Social Changes

system has not yet been introduced in South East Asian countries. Social security programmes should cover not only workers in the public sector but also those in the private sector. Aspects of social infrastructure, for example, are education and health facilities, housing, and other public infrastructure. Social assistance programmes are aimed at assisting the disadvantaged groups or vulnerable groups of the crisis. In addition to these programmes by the government, families and communities serve as the closest safetynets for the unemployed. Current social security programmes in Thailand cover private enterprises employing at least 10 workers and self-employed professionals. In December 1998, beneficiaries of the social security programme nationwide were 5.42 million people and 93 093 business establishments – of which 36 917 were based in Bangkok. 8 The insurance covers cases of sickness, childbirth, death and disability, but not the unemployed. Thus, during the Asia crisis, which has caused massive lay-offs and increased unemployment, the unemployed were seriously affected due to a lack of social insurance. According to a source at the Social Security Office, the International Labor Organization (ILO) has suggested that Thailand should be ready for an introduction of an unemployment insurance programme (applied in many developed countries) in 2002. For the Thai unemployed, the obvious safety-net so far has been the severance pay – which works only in the formal sector – handed down to laid-off workers. Before 19 August 1998, it was six months for those who have worked for at least three years, but after that date, the severance pay was changed to a maximum of ten months. In addition, in order to reduce the social impact of the economic crisis on the unemployed, a new joint programme launched by the Ministry of Public Health and the Ministry of Labour will provide free health treatment and care for laid-off workers and their families. They can receive health care from hospitals under the Ministry of Public Health scheme for one year but this period can be extended if they are still unemployed.9 Thailand has not yet had an unemployment insurance scheme. The crisis reflects the need for it. However, the unemployment insurance scheme will not cover the first-time job-seekers. It may cover the young and new graduates who start entering the labour market, and the self-employed in the informal sector. In addition,

Sauwalak Kittiprapas

51

unemployment insurance as well as severance payment may not cover needed periods and basic subsistence for the unemployed themselves and their dependents. Thus, it is important for Thailand to have additional social assistant programmes, especially with a focus on the target groups. Regarding the social assistance programmes, the government planned to spend over 3 per cent of GDP for safety-net programmes in the 1998/99 budget. It would include the expansion of a large public works programme, the extension of a student loan programme to maintain student attendance, the provision of free medical treatment and improved rural health-care facilities, and the maintenance of a subsidy on transportation in the urban areas (Heller, 1999). For the existing programmes, the Thai government has set up a 10 billion baht fund, called ‘Fund to Aid the Unemployed Workers’, the Centre for Assistance to Laid-off Workers, as a one-stop service, committees for addressing unemployment situations and the formulation of a comprehensive programmes for skills training for the unemployed and fresh graduates. The various ministries have to focus their help on the poor in the rural areas and vary their assistance according to the incidence of poverty in each province. In the areas of education and health, the programmes aim to minimize the incidence of dropouts and maintain operational budgets for teacher training and instructional materials in science, mathematics, and foreign language education. For health, the budget will be reallocated for the poor and redeploy health staff to rural areas, as well as maintain programme coverage for maternal, child health and HIV/AIDS activities. The Ministry of Interior has launched a ‘Centre for Community Business Development Programme’ to coordinate government and private sector efforts to promote community business, while the Department of Local Administration has established a network of centres to assist people at the grassroots level ( RTG/UNDP 1998). However, the problems of these programmes are their effectiveness and information provision. Many of the unemployed do not know about these assisted programmes or have difficulties in accessing these services. The Ministry of Labour and Social Welfare should use its provincial offices and local officers more effectively in providing the needed information.

52

Thailand: Asian Crisis and Social Changes

Thailand has also been receiving aid from international donors under the programmes aimed at mitigating unemployment problems. These programmes include, for example, the Social Investment Programme (SIP) with US$300 million from the World Bank and another US$111 from Japan’s OECF; and the Social Sector Programme with US$500 from the Asian Development Bank (ADB). The implementation of these programmes which focus on labour markets and social welfare, education and health, will be over a fouryear period. The World Bank’s SIP programme will fund existing labour-intensive government programmes, expand training for the unemployed, and support low-income health insurance schemes, small-scale community projects, and municipalities’ investment projects. The latest loan package for economic stimulus (US$1.45 billion) was from the combination of: $600 from the World Bank, $600 from Japan’s Ex-Im Bank, and $250 from Japan’s OECF. The problems with using these international funds, however, are the inefficiency arising from the current project management and bureaucratic procedures of Thai government agencies. The SIP projects, for example, have not yet released a majority of fund, and this is mostly due to a combination of unqualified projects and poor management systems. Informal safety-nets As a matter of fact, the immediate assistance to the unemployed seems to be from their families. Many Thai workers are in the informal sector that is not covered by these assistance systems and programmes. Many of them even do not know about government assistance programmes. When they were hit by the Asia crisis, many of them returned to their hometown to stay with their families. Although Thailand needs to develop social safety-net schemes such as unemployment insurance and coverage of the workers in the private sector, the Thai society should also develop informal social safety-net schemes in order to strengthen family and community institutions. Informal safety-net from the private sector and organizations are also important. Instead of only waiting for assistance from the government or resources from outside, local communities and organizations should utilize local resources more effectively. Local resources in terms of natural resources, knowledge, and culture can be used positively to cope with the crisis. Local

Sauwalak Kittiprapas

53

communities should organize to discuss their problems and try to find alternative ways out of the crisis by their means as well. This would lead to an increase in social capital – the relationship of trust and cooperation within a society. Social capital may be referred to as social infrastructure which, similar to physical infrastructure, can increase economic productivity and considerable positive externalities (Unger, 1998). If a network of individuals is strengthened, this would imply an increase in cooperation and social capital.10 There may be positive as well as negative changes in social capital. During the heat of the crisis, supporting networks in families and communities can absorb the vulnerable groups. Supporting networks for the family and community members can be strengthened as these members come back and share ideas of how to cope with the crisis. This can contribute to an increase in social capital. However, social capital could decline. The limited opportunities in income and jobs may weaken the network relationship in the long run as they have less ability to support each other. As people are more concerned with individual problems, the contribution to social activities would decline as well. A weakened social capital is possibly due to a breakdown in community trust: increased competition for jobs among neighbours who once cooperated; increased incidences of theft, violence, crime, drug dealing, and higher dropout rates among school-children. Frustration and psychological stress can also lead to heightened household and community tension. This kind of observation and analysis necessarily calls for the attention of the government to mitigate the problems and to create income and job opportunities for the rural people. This is a chance to turn the crisis into an opportunity to strengthen the social capital of the communities. There was a suggestion to construct an immune system of social development from the ground up. A rehabilitation plan should focus on: enhancing social capital, supporting social initiatives, providing alternatives to people’s education and resource management, reforming the legislative and regulatory system to facilitate participation of civil societies in community development, and improving the social welfare system (RTG/UNDP, 1998). Government, NGOs, and local people organizations should also coordinate in brain-storming as well as budget planning for local target groups more effectively.

54

Thailand: Asian Crisis and Social Changes

People participations and political reforms One important phenomenon of social changes during the Asia crisis is political reform arising from constitutional changes. The passage of a new constitution was a fundamental change and a bright outcome of the crisis. Although what was happening in Thailand during the crisis was a despairing of the political system, the dramatic constitutional change in the latter part of 1997 meant that, along with deep and widespread economic hardship, the economic crisis has given birth to a future political system (MacIntyre, 1999). The new constitution has a purpose, to consolidate democratic institutions and to try to eliminate the old-style ‘money-politics’ regime. The crisis should provoke some policy improvements. Thailand’s political parties have seemed, as usual, to be more competing with policy options to overcome the crisis situation in order to win popularity. At the same time, people who are more enthusiastic to learn about problems and to try to cope with the crisis will pay more attention to policy measures of political parties. As the impact of the Asia crisis has spread to the various groups and areas, a participation of civic groups such as NGOs and the private sector are encouraged. Problem-solving strategies are more focused on people participation. As a result of the new constitution, the Thais can play a more active role in political participation. Although it is too early to say something definite about the outcome of the new constitution, it is expected that the quality of politicians would be improved and Thailand’s old-style money politics would be weakened.

4

Concluding remarks

Thailand has experienced serious adverse economic and social effects from the Asia crisis. However, the crisis can help Thailand to make major steps forward in reforms in its economic system, social order and politics. The crisis has called for major economic restructuring, new social development strategies, and improving political systems. The crisis can be an opportunity for the country and push forward for major reforms. It also calls for improved accounting standards and accountability, transparency, and

Sauwalak Kittiprapas

55

people participation in decision-making, and hopefully for democratization. Notes 1. “The establishment of the Bangkok International Banking Facilities (BIBF) was perhaps the most significant step taken by the Thais in the direction of financial liberalization. The system allowed local and foreign banks to engage in off-shore and on-shore lending activities, accept deposits and lend in foreign currencies. BIBF dollar loans soon became the conduit for most foreign capital flowing into Bangkok – about US$50 billion over a three-year period’ (Bullard et al., 1998). 2. In mid-1996, export growth rates sunk suddenly to negative or very low levels (Ammar and Orapin, 1998). 3. Balance of payment turned into deficit reaching 14.4 per cent in 1996 and the deficit gap was funded by short-term capital inflow and equity investment rather than direct investment (RTG/UNDP, 1998). 4. About 99 per cent of migrants returning to the Northeast were living in non-municipal areas. 5. Data from the National Educational Council. 6. The Nation, 15 April 1999. 7. Ibid. 8. Statistical and Planning Office, Social Security Card Division. 9 Under this programme, the unemployed have to submit a document to the Employment Division proving that they have been laid-off, in return for a certificate that can be used to apply for the low-income card from a local health-care establishment. This card covers general medical costs for the worker and his/her family for one year and can be extended if the worker is still unemployed. 10. An accumulated stock of cooperation-facilitating social arrangements constitutes social capital, which with a relative dearth of sociability, can foster cooperation (Unger, 1998).

References Ammar, Siamwalla and Orapin Sopchockchai (1998), Responding to the Thai Economic Crisis, Bangkok: United Nations Development Programme (UNDP). Bullard, N. et al.1 (998), ‘Taming the Tigers: The IMF and the ASIAN Crisis’, in K. S. Jomo (ed.), Tigers in Trouble: Financial Governance, Liberalisation and Crises in East Asia, London: Zed Books. Bureau of Budget (1998), Thailand’s Budget in Brief: Fiscal Year 1998, Bangkok, Bureau of Budget (1999), Thailand’s Budget in Brief: Fiscal Year 1999 (in Thai), Bangkok. Heller, Peter S. (1999), ‘Human Dimensions of the Asian Economic Crisis’, Presented to the World Bank Regional Meeting on Social Issues Arising

56

Thailand: Asian Crisis and Social Changes

from the East Asia Crisis and Policy Implications for the Future, Bangkok, January 1999. Kakwani, N. (1998), ‘Impact of Economic Crisis on Employment, Underemployment and Real Income’, Bangkok: Asian Development Bank. Kittiprapas, Sauwalak (1999), ‘Social Impacts of Thai Economic Crisis’, in Social Impacts of Asian Economic Crisis: Thailand, Indonesia, Malaysia and Philippines, Bangkok: Thailand Development Research Institute. Lauridsen, L. (1998), ‘Thailand: Causes, Conduct, Consequences’, in K. S. Jomo (ed.), Tigers in Troubles: Financial Governance, Liberalisation and Crises in East Asia, London: Zed Books. MacIntyre, Andrew, 1999, ‘Political Institutions and, the Economic Crisis in Thailand and Indonesia in Economic Crisis: Origin Lessons, and the way Forward, edited by arndt, B. F. W. and Hill, H., Institute of south East Asian Studies, Singapore National Economic and Social Development Board (NESDB) (1998), ‘Indicators of Well-Being and Policy Analysis’, A Newsletter, vol. 2, no. 4. NSO (National Statistic Office) (1998), ‘The Impact of the Economic Crisis on Employment, Unemployment and Labor Migration’, Bangkok. RTG (Royal Thai Government) and UNDP (United Nations Development Programme) (1998), ‘Social Impact of the Economic Crisis and Responses from the Government, Private Sector’, Civil Society and International Community, Bangkok (March), mimeo. Sussangkarn, C., Flatters, F. and Kittiprapas, S. (1999), ‘Comparative Social Impacts of Asian Economic Crisis in Thailand, Indonesia, Malaysia and the Philippines’, in Social Impacts of Asian Economic Crisis: Thailand, Indonesia, Malaysia and the Philippines, Bangkok: Thailand Development Research Institute. Unger, Danny (1998), Building Social capital in Thailand: Fibers, Finance, and Infrastructure, Cambridge University Press. World Bank (1998), East Asia: The Road to Recovery, Washington, D.C.: The World Bank.

5 Korea: Financial Crisis, Structural Reform and Social Consequences Young Youn Lee and Hyun-Hoon Lee*

1

Introduction

The year 1997 was a nightmare for Korea. For three decades before the Asian financial crisis, Korea had experienced very high growth rates and this had transformed it from one of the poorest countries in the world into the 29th member country of the OECD in December 1996. Less than a year after its admission to the OECD, however, Korea experienced a severe financial crisis. On 3 December 1997, Korea and the International Monetary Fund (IMF) signed an agreement for a financial aid package totalling US$58.3 billion. However, the immediate contractionary policy with a drastic increase in interest rates intensified the financial crisis, and caused it to become a full-fledged economic crisis. Over 1.5 million jobs were lost in 1998, boosting the unemployment rate from 2–3 per cent to 7.9 per cent in December 1998. In 1998, the nominal wage rate decreased by 2.5 per cent, consumer prices rose at a rate of 7.5 per cent, and hence the real wage rate decreased by 10.0 per cent. In general, the crisis hit low-income households and marginal workers such as women, young workers, the less educated, wage workers, and first-time job-seekers the hardest. As a consequence, income distribution in Korea has deteriorated. The existing system of social protection was unable to cope adequately with the social consequences. This chapter is organized as follows. Section 2 discusses briefly the causes of the crisis, the IMF programme and its aftermath. Section 3 explains Korea’s structural reform efforts in the financial, corporate, 57

58

Korea: Crisis, Reform and Social Consequences

labour and public sectors. In section 4, the social consequences of the crisis and structural reform are discussed. Section 5 briefly evaluates the Korean government’s counter policies to contain the social costs of the crisis.

2

Extent and nature of the crisis

Causes of the crisis Korea’s financial crisis underwent a very similar process to a typical stroke.1 To most people, it appears to have erupted all of a sudden when the panicked foreign investors turned their backs on Korea. In retrospect, however, fundamental weaknesses, policy mistakes, unfriendly international circumstances and exogenous shocks all contributed to the crisis. That is, the financial crisis of Korea had its roots in fundamental weaknesses in the Korean economy. Since the late 1980s, the government-led economic policy, which was once considered to have led the nation to its remarkable economic success in the 1960s–1980s, was no longer suited as the Korean economy became larger and more complex, and as global competition became more intense. Instead, it resulted not only in corruption but also in moral hazard and inefficiency in the general economic sector, and a weakening of the international competitiveness of Korean corporations. On the other hand, the international environment, which used to be somewhat friendly to Korea’s export-oriented growth strategy, became rapidly hostile. Since the late 1980s, Korean companies have faced intense competition from foreign companies in both domestic and international markets. Competition has mainly come from the rapid opening of Korea’s domestic market, and the rapid catch-up growth of the newly new industrializing countries (NICs) such as China, Indonesia, Thailand and Malaysia. This also put intense pressure on Korea’s competitiveness, and made the Korean economy even more vulnerable to the sudden changes in the world economy. However, the Korean government overlooked the signs of weakening competitiveness and possibility of financial crisis. Instead, it aggravated the situation by making consecutive mistakes, especially in its exchange rate policy and financial sector supervision. Finally, sudden exogenous shocks in early 1997 triggered the financial crisis to erupt. There were two different shocks in early

Young Youn Lee and Hyun-Hoon Lee

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1997: one came from inside, and the other came from outside. That is, along with economic cycle of downturn in early 1997, a series of large corporate bankruptcies began with Hanbo Steel, the fourteenth largest chaebol (huge family-controlled conglomerate) in Korea. In fact, before Korea turned to the IMF for assistance in November 1997, seven out of its top thirty chaebols including Kia Motors, the eighth largest, faced insolvency. This resulted in a surge in the nonperforming loans of commercial banks. At the end of September 1997, non-performing loans of all financial institutions was W32 trillion (7 per cent of GDP), about double their level at the end of 1996.2 On the other hand, the financial crisis in Southeast Asia acted in two ways as another trigger of the Korean crisis. First, a drastic devaluation of the currencies of the crisis countries impeded Korea’s already-shredded international competitiveness, and this exerted downward pressure on the Korean currency. Second, trouble in Southeast Asia acted as a wake-up call for foreign investors to reevaluate the risk of Korea, and to find out that Korea was already experiencing difficulties in the financial market with the surge in non-performing loans. When the Hang Seng Index of the Hong Kong stock market recorded a big downturn on 23 October 1997, foreign investors suddenly panicked and withdrew their investment and cut back their short-term loans to Korea one after the other. The won depreciated by about 20 per cent against the US dollar through 30 November and the stock market index fell by about 30 per cent to a ten-year low. Usable foreign currency reserves declined sharply as the Bank of Korea financed the repayment of short-term debt of Korean commercial banks’ offshore branches. Finally, Korea turned to the IMF on 21 November 1997, as the rollover ratio of short-term external borrowings by domestic financial institutions kept decreasing and the country’s usable foreign currency reserves plummeted to US$7.3 billion, down sharply from US$22.3 billion only a month before. The immediate IMF programme3 On 3 December 1997, Korea and the IMF signed an agreement for a financial aid package totalling US$58.3 billion, subject to a broad range of conditions including macroeconomic stabilization and structural reform. The IMF committed emergency funds

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Korea: Crisis, Reform and Social Consequences

amounting to US$21 billion. Additional US$14 billion was committed by the World Bank and the Asian Development Bank. As a second line of defence an additional US$23.3 billion was pledged by the United States, Japan, Australia and other interested countries. When the IMF programme was announced, the IMF expected that the announcement of a large financing package and a reform plan would be enough to turn around the market sentiment. Accordingly, upon the announcement of the programme, only US$5.5 billion was disbursed, and any discussion on debt rescheduling with international creditors was not attempted. In line with the IMF Stand-By Arrangement, the Korean government was required to implement tough measures including tight monetary policy, fiscal austerity and the immediate closures of insolvent financial institutions. As an emergency measure, the Korean government was asked to raise interest rates sharply. This measure was expected to stem the outflow of the foreign funds and the rapid depreciation of the exchange rate. The call rate was raised from 12.3 per cent on 1 December 1997 to 20.7 per cent on 3 December, and further to 30.1 per cent on 23 December. As a consequence, yields on three-year corporate bonds soared from around 14 per cent before the crisis to above 30 per cent, and yields on 91-day commercial paper rose sharply from 13–14 per cent to peak at 40.8 per cent on 31 December (Figure 5.1). Broad money growth (M3) was reduced to 13.9 per cent at the end of December 1997 from 16.3 per cent at the end of November 1997. The IMF also asked Korea to target fiscal surplus of 0.2 per cent of GDP in 1998 by making contractionary adjustments. Troubled financial institutions would be closed, or if they were deemed viable, restructured and/or recapitalized. Nine insolvent merchant banks, which had been suspended on 2 December, were required to submit a rehabilitation plan within 30 days. If these plans were not approved the institution’s licence would be revoked. The remaining merchant banks were required to present a programme of recapitalization by 31 December 1997. They were required to meet at least a 4 per cent capital adequacy ratio of the Bank for International Settlements (BIS) by 31 March 1998. Other commercial banks were also required to prepare a plan to meet the BIS 8 per cent minimum requirement by September 1998. In

Young Youn Lee and Hyun-Hoon Lee

61

Market Interest Rates (1/3/97-12/31/98) 45.00 40.00 Yields on commercial paper (91 days)

35.00 30.00 25.00 % 20.00 15.00

Call market rate (overnight)

10.00 Yields on corporate bond (3 years)

5.00

1/ 3/ 9 2/ 7 3/ 9 3/ 7 3/ 97 4/ 3/ 97 5/ 3/ 9 6/ 7 3/ 97 7/ 3/ 9 8/ 7 3/ 97 9/ 3/ 9 10 7 /3 /9 11 7 /3 12 /97 /3 /9 1/ 7 3/ 9 2/ 8 3/ 98 3/ 3/ 9 4/ 8 3/ 9 5/ 8 3/ 98 6/ 3/ 9 7/ 8 3/ 98 8/ 3/ 9 9/ 8 3/ 10 98 /3 / 11 98 /3 /9 12 8 /3 /9 8

0.00

Month/Day/Year

Figure 5.1

Market interest rates

addition, virtually all capital account restrictions on foreign investors’ access to the bond markets were to be lifted as of 1 January 1998. However, the roll-over ratio of short-term debt declined sharply and usable official reserves were almost depleted in mid-December. For example, the roll-over ratio of the seven largest commercial banks fell to 32.2 per cent in December from 58.8 per cent in November and 86.5 per cent in October. After a brief increase to 435 on 6 December from 379 on 3 December, the Korea Stock Price Index (KOSPI) kept sliding to reach 351 on 24 December (Figure 5.2). As the speed of depreciation accelerated the exchange rate plummeted from about W/US$1150 at the beginning of the month to almost W/US$2000 at the end of the year (Figure 5.3). All of these were in fact much worse than the IMF had predicted. When Korea faced imminent default by 24 December, the IMF decided to press the foreign commercial banks to roll over their short-term credits on an enforced basis. The IMF insisted on the comprehensive debt rollover as a condition for further disbursements

1/ 3/ 2/ 97 4/ 9 3/ 7 7/ 4/ 97 8 5/ /97 12 6/ /97 13 7/ /97 15 8/ /97 18 / 9/ 97 22 10 /9 /2 7 3 11 /97 /2 12 4/97 /2 6 1/ /97 24 2/ /98 23 3/ /98 20 4/ /98 15 5/ /98 13 6/ /98 10 / 7/ 98 6/ 9 8/ 8 1 8/ /98 28 9/ /98 23 10 /98 /2 11 2/98 /1 12 7/98 /1 2 1/ /98 12 2/ /99 11 /9 9

W/US$

200

Figure 5.2

Figure 5.3

W/US$ exchange rate

Month/Date/Year 3/3/99

2/3/99

1/3/99

12/3/98

11/3/98

10/3/98

9/3/98

8/3/98

7/3/98

6/3/98

5/3/98

3/3/98 4/3/98

2/3/98

1/3/98

12/3/97

11/3/97

10/3/97

9/3/97

8/3/97

7/3/97

6/3/97

5/3/97

4/3/97

3/3/97

2/3/97

1/3/97

62 Korea: Crisis, Reform and Social Consequences

Korean Stock Price index (KOSPI, 1/3/97-12/31/97)

900

800

700

600

500

400

300

Month/Date/year

Korean stock price

2000 Exchange Rate (W/US$, 1/3/97-3/3/99)

1800

1600

1400

1200

1000

800

600

Young Youn Lee and Hyun-Hoon Lee

63

of the IMF lending package. Initially, the banks and the Korean government announced a freeze on debt servicing. On 16 January, the Korean government and the banks formally agreed to a complete rollover of all short-term debts falling due in the first quarter of 1998. On 28 January, an agreement was reached to convert US$24 billion in short-term debt into claims of maturities between 1 and 3 years (Radelet and Sachs, 1998, p. 30). The new arrangements put a brake on the fall of the won and on the decline in the stock market in Korea (Figures 5.2 and 5.3). Evolution of the crisis As the market interest rates soared to the 30 to 40 per cent level, the financial difficulties of corporations deepened. As the IMF programme required financial institutions to meet the BIS capital adequacy ratios, they became reluctant to provide corporations with funds for fear of incurring new non-performing loans. Even strong banks came under intense pressure as foreign creditors refused to roll-over loans and domestic depositors fled to foreign owned banks. The merchant banks, in particular, which used to provide corporations with short-term funds, virtually suspended new lendings to corporations and tended to refuse rolling-over loans falling due. This, in turn, made the situation even worse for the debt-ridden corporations, resulting in a boost of the number of insolvencies (especially of small and medium-sized companies) to three times the pre-crisis level. Bankruptcies in Korea hit 3 197 in December 1997, rising to 3323 in January 1998, before falling back to 2749 in March 1998. The ratio of dishonored bills rose drastically to 2.1 per cent in December 1997 from 0.5 per cent in November 1997. As a consequence the external liquidity crisis became a fullfledged economic crisis as the full extent of the collateral damage to the real sector became apparent. Table 5.1 summarizes the principal economic indicators. During the first quarter of 1998, gross domestic product (GDP) recorded a negative growth rate of –3.6 per cent in real terms for the first time in eighteen years, followed by –7.2 per cent, –7.1 per cent and –5.4 per cent in the second, third and fourth quarters. In 1998, GDP dropped 5.8 per cent on a year-on-year basis. Per capita GNP is estimated to have remained at about US$6300 in 1998, down

64

Table 5.1

Trends of major economic indicators (unit: per cent) 1996 Annual

Gross Domestic Product (GDP) Agriculture, forestry, fishery Manufacturing Services Private consumption Machinery and equipment investment Construction investment Current account (US$ billion) Export (FOB) Import (CIF)

1997 1/4

2/4

3/4

1998 4/4

Ann

1/4

2/4

3/4

1999 4/4

Ann

1/4

6.8

4.9

6.2

5.5

3.6

5.0

–3.6

–7.2

–7.1

–5.3

–5.8

4.6

3.3

5.3

4.0

3.8

5.2

4.6

6.2

–3.5

–7.0

–9.0

–6.3

–7.6

6.8 7.8 7.1

5.6 6.6 4.5

7.8 7.2 4.4

7.9 5.7 5.3

4.9 2.2 0.1

6.6 5.4 3.5

–4.6 –4.5 –9.9

–10.4 –7.4 –11.2

–9.1 –6.2 –10.4

–4.7 –3.4 –6.9

–7.2 –5.4 –9.6

10.7 6.6 –6.3

1.0

4.2

1.3

–12.6

–25.9

–8.7

–38.3

–46.1

–39.3

–27.4

–38.5

12.9

6.1

–1.9

2.9

2.7

4.5

2.3

–5.9

–7.8

–12.0

–13.7

–10.2

–13.7

–23.0

–7.4

–2.7

–2.1

–4.1

–8.2

10.8

10.9

9.6

8.7

40.0

6.8

3.7 11.3

–5.6 3.9

7.1 0.8

15.6 –3.8

3.6 –14.8

5.0 –3.8

8.4 –36.1

–1.8 –37.0

–10.8 –39.8

–5.5 –28.7

–2.8 –35.5

–5.4 8.3

Note: Except for the current account, numbers represent percentage change in real terms compared with the same period in the previous year. Source: The Bank of Korea.

Young Youn Lee and Hyun-Hoon Lee

65

sharply from US$9511 in 1997 and US$10542 in 1996, and fell short of $ 6745 recorded in 1991.5 On the production side, the manufacturing and construction industries were affected most by the financial crisis. Manufacturing industry’s output shrank by 7.2 per cent in 1998. Agriculture, forestry, and fishing output increased by 6.2 per cent in the first quarter on a year-on-year basis, but it also recorded negative growth rate of –6.3 per cent in 1998. The services industry also recorded –5.4 per cent output growth in 1998. On the demand side, private consumption began to record a negative growth of 9.9 per cent in the first quarter of 1998 as consumers’ confidence for the economy contracted. Private consumption shrank by 9.6 per cent in 1998 on a year-on-year basis. Conditions for factory investment in the private sector deteriorated because of high interest rates and credit crunch in the financial market. Both facilities and construction investment declined by 38.5 per cent and 10.2 per cent respectively in 1998. Meanwhile the current account, which used to record a deficit every month until October 1997, has recorded surpluses since November 1997. In 1998 the current account recorded a surplus of US$40 billion, which was the largest in history. However, this was brought about mainly by a decline in imports rather than an increase in exports. Despite the potential for increased profitability from the exchange rate depreciation, exporters were also badly affected because those with confirmed orders were unable to obtain trade credits. In 1998 Korean exports declined 2.8 per cent on a year-on-year basis to US$132.3 billion, while imports plunged 35.5 per cent to US$93.3 billion.

3

Structural reform

Because the Korean crisis had its roots in the weakened fundamentals of the Korean economy, attempting to stabilize only the financial market without an emphasis on structural reforms is like treating symptoms without addressing the cause. Upon the signing of the financial aid package on 3 December 1997, the Korean government agreed with the IMF that it would pursue an economic reform programme in the financial sector, the corporate sector, and labour market. In addition, the Korean government has pursued

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Korea: Crisis, Reform and Social Consequences

public sector reform to achieve the efficiency necessary to keep up with other sectors’ reform.6 Financial sector restructuring Traditionally, the Korean government has been actively involved in the market. This government-led economic policy, which was once considered to have led the nation to its remarkable economic success in the 1960s–1980s, resulted not only in corruption but also moral hazard among enterprises and banks. On the other hand, the financial market underwent a very rapid liberalization during the early 1990s. This allowed domestic financial institutions to have easy access to foreign capital to finance domestic investment. The problem was that appropriate supervision and prudential regulation did not accompany financial liberalization. Especially the secondary financial institutions such as merchant banks, which had increased sharply from six until 1993 to thirty by 1996, were not under appropriate supervision. With the belief that the government would not allow financial institutions to fail, Korean banks borrowed unhedged short-run foreign capital at lower rates, denominated in the US dollar, and made long-term loans at higher rates, with expectation that they could continually renew short-term borrowing. This led to a serious mismatch in maturities between borrowing and lending. Short-term loans accounted for 63 per cent of the total foreign debts on the eve of the financial crisis. This fragile structure of foreign debt played a crucial role in causing the financial crisis. Also, the financial crisis revealed major weaknesses in the financial sector, including unsound lending practices, unhedged foreign borrowing, weak liquidity positions, and an ineffective supervisory system. In order to facilitate the financial sector reform, the National Assembly passed several economic legislation early in 1998, thus newly creating the Financial Supervisory Commission (FSC), the Korea Asset Management Corporation (KAMCO) and Korea Deposit Insurance Corporation (KDIC). Authorities closed or suspended the operation of a number of non-viable financial institutions. As of 20 January 1999, eighty-six financial institutions (five commercial banks and 81 non-bank financial institutions) have been closed or suspended of operation.

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Of the 25 commercial banks, 12 ‘unsound’ banks, which did not satisfy the BIS ratio requirement of 8 per cent at the end of 1997, were classified into two categories. Five banks were ‘disapproved’ and seven banks were ‘conditionally approved’. The five ‘disapproved’ non-viable banks were liquidated through purchases and acquisitions in July 1998. The seven ‘conditionally approved’ viable banks took corrective actions imposed by the FSC to further improve their soundness. The FSC dictated a similar restructuring of non-bank financial institutions. As of 20 January 1999, 43 non-bank financial institutions had their licences revoked, and 38 were suspended. For the remaining non-bank financial institutions, self-rehabilitation measures under the initiative of major shareholders have been implemented. Disposal of non-performing loans and recapitalization has also been an important part of the financial sector restructuring. By the end of 1998, KAMCO and KDIC together financed a total of W 40.9 trillion for the financial sector restructuring. An additional W 23.1 trillion is to be financed in 1999. Meanwhile, the number of people employed by the financial sector has been cut by a third, from 114 000 before the crisis. More redundancies were expected to be unavoidable in 1999 and 2000. Capital market liberalization and promotion of FDI have also been an important aspect of the restructuring. Various measures have been taken by the Korean government to liberalize the capital market and promote FDI. For instance, since May 1998, the foreign equity ownership ceiling has been completely removed, and hostile mergers and acquisitions (M&A) by foreign investors has been allowed. Corporate sector reform It is well known that the chaebols in Korea tended to borrow excessively through cross-payment guarantees among interlinked subsidiaries.7 By the end of 1997 the top 30 chaebols had debt–equity ratios of 519 per cent, in sharp contrast with 154 per cent in the United States and 193 per cent in Japan. The very high leverage of Korean firms and the lack of transparency of their financial statements played another crucial role in causing the financial crisis. Hence, priority in corporate sector reform has been put on

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Korea: Crisis, Reform and Social Consequences

achieving a major reduction in corporate indebtedness and bringing accounting practices into line with international standards. In January 1998, an agreement on five principles of corporate sector reform was made between the then President-elect Kim DaeJung and the leaders of the five largest chaebols. The five principles are enhancement of corporate governance, prohibition of crossguarantees between affiliates, improvement of corporate financial structure, business concentration on core competence, and responsibility reinforcement of governing shareholders and management. Under the five principles, the creditor banks have led the corporate sector reform. The top five chaebols and their creditors reached agreement on debt reduction and other restructuring measures in early 1998, and verbalized the agenda for chaebol reform as follows: • Adoption of consolidated financial statements from fiscal year 1999 • Compliance with international standards of accounting • Strengthening of voting rights of minority shareholders • Compulsory appointment of at least one outsider director from 1998 • Establishment of an external auditors committee • Prohibition of cross-subsidiary debt guarantees from April 1998 • Resolution of all existing cross-debt guarantees by March 2000 Another element of the corporate restructuring has involved business swaps referred to as ‘Big Deal’ between the top five chaebols. The objective of the ‘Big Deal’ was to streamline over-investment and enhance efficiency in such key industries as semiconductors, petrochemicals, aerospace, rolling stock manufacturing, power plant equipment, vessel engines, and oil refining. In December 1998, the top five chaebols reached agreement on much of the deals. In addition, the top five chaebols were required to reduce their debt-toequity ratios and improve their financial structure by asset sales, recapitalization, and foreign capital inducement. Legal proceedings for corporate rehabilitation and bankruptcy filing were simplified in February 1998 to facilitate market exit of non-viable firms, and ensure better representation of creditor banks in the resolution process. In May 1998, creditor banks assessed the viability of 313 client firms showing signs of financial weakness, and

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listed 55 corporations as non-viable. To facilitate the exit of those non-viable corporations, their banks denied them new credit and cross-subsidy bailout. As of February 1999 creditor banks have also carried out workout programmes for 72 corporations out of 83 candidates, which were subsidiaries of the 6th to 64th chaebols in terms of their size. The scope of corporate workout programmes has recently been expanded to include small and medium sized enterprises. Despite the corporate reform effort, however, there is evidence that chaebols are actually strengthening their grip over the economy. According to the Fair Trade Commission the total amount the of top five chaebols’ assets increased by 13.8 per cent in 1998, while that of the 6th to 30th largest chaebols decreased 0.2 per cent. Also, the total debts of the top five chaebols increased to W 234 trillion in 1998, up from W 221 trillion in 1997. Labour market reform With the advent of democratization in 1987 and the subsequent liberalization of trade unions, nominal wages increased 15 per cent per annum up until 1996, exceeding productivity that rose by 11 per cent. However, tight labour market conditions and strong trade union power ensured that labour market reform went untouched. The labour market was full of rigidities. An excessive degree of job protection prevented lay-offs and encouraged overmanning, inflexible working hours and few limits on strike action (Fitch ICBA, 1999). It is undoubtedly the case that rigidities in the labour market have weakened the international competitiveness of Korean firms. In February 1998, greater labour market flexibility was instituted with the revision of the Labour Standard Act (LSA), which legalized layoffs for ‘managerial reasons.’ The revision of the LSA facilitated necessary layoffs in the process of financial and corporate sector reforms. The Tripartite Commission composed of labour, management, and government was established in January 1998 to deal with industrial relations. The Tripartite Social Accord was signed in February 1998. The Accord covers not only the labour-related matters, but also a wide range of socio-economic matters. That is, it includes matters such as the promotion of freedom of association,

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Korea: Crisis, Reform and Social Consequences

management transparency and business restructuring, labour market policy, the extension and reform of the social security system, wage stabilization and the improvement of labour– management cooperation, and the enhancement of labour market flexibility. The Accord is a landmark turning point in the history of Korean labour–business relations and corporate culture. However, it is fair to say that the Tripartite Commission has seen ups and downs, as labour representatives have not considered it a truly beneficial body for workers. In addition to the new LSA, legislation allowing the establishment of manpower dispatching businesses took effect in July 1998. Manpower dispatching businesses provide employment-outsourcing services for 26 occupations. This measure is also expected to further enhance labour market flexibility. Public sector reform Poor productivity and rampant inefficiency in the public sector have been notorious and beg thoroughgoing reform. State-owned enterprises (SOEs), in particular, have been subject to drastic overhaul by means of privatization or management reform. Twenty public institutions of the 109 SOEs were privatized in 1998. The 89 subsidiaries of the 30 parent SOEs are also subject to privatization or management reform. Out of 24 non-financial SOEs (parent companies), five SOEs were privatized by 1999, six SOEs will be gradually privatized by 2002, while the remaining SOEs are targeted for managerial reform and consolidation. By 2001, the SOE workforce will be reduced by 21 per cent. Downsizing of the government is also an important feature of the public sector reform. The Korean government has pursued streamlining of its organizational structure and plans to reduce its employment by 11 per cent by the end of the year 2000. Local governments have also streamlined their organizations; by October 1998, 12 per cent of total jobs were eliminated. Also, the quasi-government sector including public institutions and various associations has also been streamlined. Elimination of excessive regulations has been another important task in the public sector reform. The Regulation Reform Committee (RRC) announced that in 1998 it abolished about 40 per cent of the total 11 125 government regulations of the private sector.

Young Youn Lee and Hyun-Hoon Lee

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71

Social consequences

In assessing the social impact of the financial crisis, this section will focus mainly on its impact on employment, the real wage, income distribution and poverty. Impact on unemployment and wage For the last two decades prior to the crisis Korea enjoyed rapid employment growth, rising participation rates and low unemployment rates. In 1996, the unemployment rate was 2 per cent, the lowest among the OECD countries. This outstanding performance, however, has deteriorated drastically since the crisis erupted at the end of 1997. Similar to a stroke, which can limit the body’s normal functions such as thinking, moving, speech and the senses, a financial crisis normally results in serious damage to the real economy. As briefly discussed in section 2, the IMF programme measures such as immediate closures of some financial institutions, tight budgets and high interest rates put a heavy strain on the already-troubled real economy, and caused the economic contraction to be a full-fledged one. In the face of a large number of bankruptcies and declining domestic demand, unemployment started to increase sharply. Also, the subsequent structural reform process contributed to hikes in unemployment in 1998. Table 5.2 summarizes the recent trend of unemployment in Korea. Within the first three months after the financial crisis more than 0.7 million people lost their jobs and accordingly the number of unemployed people recorded about 1.4 million in March 1998 up from 0.7 million in December 1997. As a consequence, the rate of unemployment recorded 6.5 per cent in March 1998, up sharply from 3.1 per cent at the onset of the crisis. The annual rate of unemployment was 6.8 per cent in 1998, a sharp increase from 2.6 per cent in 1997. The jobless rate kept increasing and in March 1999 it reached 8.1 per cent, which is equivalent to 1.7 million unemployed people. Unemployment problems are more serious than those featured in the official statistics. For instance, the participation rate also declined to 60.7 per cent in 1998 from 62.2 per cent in 1999. As of March 1999, it stood only at 59.5 per cent, a 2.7 percentage point decrease from 1997. Had the economic participation rate remained

72

Table 5.2

Unemployment trends (unit: 1,000 persons, per cent) 1996 Ann

Number of unemployed 425 Unemployment rate 2.0 Participation rate 62.0 Source: Ministry of Labour, Korea.

1997 Mar

Jun

Sep

1998 Dec

Ann

Mar

Jun

Sep

1999 Dec

Ann

724 469 469 658 556 1378 1529 1572 1665 1463 3.4 2.3 2.2 3.1 2.6 6.5 7.0 7.3 7.9 6.8 62.1 63.0 62.5 61.0 62.2 60.6 61.6 61.2 59.8 60.7

Mar 1704 8.1 59.5

Young Youn Lee and Hyun-Hoon Lee

73

normal, the unemployment rate would have been even higher. It is important to note that the crisis had a diverse impact on unemployment across different groups. In general the crisis hit marginal workers such as women, young workers, the less educated, wage workers, and first-time job-seekers the hardest. Table 5.3 and Table 5.4 clearly exhibit this pattern. Table 5.3 shows the changes in the composition of employment by gender, age, industry, and specification of worker. Between 1996 and March 1999, the highest decline was in employment of female workers, workers aged between 20 and 29 (the first-time workers are mostly in this group), workers in manufacturers, and wage earners.8 Table 5.4 shows the changes in the rate of unemployment. Between 1996 and March 1999, the rate of unemployment increased more among female workers, similarly to the findings of Table 5.3. Table 5.4 also shows that the rate of unemployment increased especially among workers with no tertiary education (i.e., with schooling of less than 16 years). This may reflect the deterioration of occupations, with displaced college graduates settling for inferior jobs that used to be taken by high school graduates, and high school graduates settling for jobs that used to be taken by the less educated workers, and so on. In other words, along with the increase in the rate of unemployment, the rate of underemployment has been on the rise in Korea. Table 5.5 reports changes in wages and in the productivity of labour. It is noteworthy that the nominal wage that grew by 7.0 per cent in 1997 dropped sharply after the crisis. In the first quarter of 1998 the nominal wage recorded a near zero growth rate, and since then has recorded consecutive negative growth rates. The freeze of nominal wage growth in the first quarter was largely due to a temporal outcome negotiated in the Tripartite Committee, which was formed right after the onset of the crisis. The subsequent decline in the nominal wage, however, was due to the deterioration of economic activity and hence the decline in labour demand. In 1998 the nominal wage recorded a –2.5 per cent growth rate on a yearon-year basis. As a consequence, the real wage decreased by 8.9 per cent in the first quarter of 1998, and since then has decreased continuously. In 1998 it recorded a –9.0 per cent growth rate on a year-on-year basis. Since early 1999 there has been a sign of reversal of this trend. In

74

Table 5.3

Composition of employment (unit: million persons) 1996

Total employed Gender Male Female Age 15–19 20–29 30–39 40–49 50–59 60+ Industry Agricult/Fishery Manufactures Services/Const. Specification Wage workers Non-wage w. Family w.

1997

1998

Annual

Mar

Jun

Sep

Dec

Ann

Mar

Jun

Sep

20.7

20.7

21.4

21.3

20.7

21.0

19.9

20.2

20.1

12.3 8.4

12.2 8.5

12.5 8.8

12.5 8.8

12.3 8.4

12.4 8.6

11.9 8.0

12.0 8.2

0.4 4.8 6.1 4.6 3.0 1.8

0.4 4.8 6.0 4.7 3.1 1.8

0.4 4.8 6.0 4.9 3.2 2.1

0.3 4.8 6.0 4.9 3.2 2.1

0.3 4.7 5.9 4.9 3.1 1.8

0.4 4.8 6.0 4.8 3.2 2.0

0.3 4.2 6.0 4.7 2.9 1.8

2.4 4.7 13.7

2.2 4.5 14.0

2.6 4.9 14.3

2.6 4.4 14.3

1.9 4.4 14.3

2.3 4.5 14.2

13.0 5.8 1.9

13.1 5.8 1.8

13.3 6.1 2.0

13.2 6.1 2.0

13.2 5.8 1.7

13.2 6.0 1.9

Source: Ministry of Labour, Korea.

1999 Dec

Ann

Mar

19.5

19.9

19.4

11.9 8.1

11.7 7.8

11.9 8.0

11.6 7.9

0.3 4.2 5.9 4.8 3.0 2.0

0.3 4.0 5.9 4.8 3.0 2.0

0.3 4.0 5.9 4.8 2.8 1.7

0.3 4.1 5.9 4.8 2.9 1.9

0.3 3.9 5.7 4.9 2.8 1.8

2.3 4.0 13.5

NA 3.8 13.6

2.6 3.8 13.6

1.9 3.9 13.8

2.4 3.9 13.6

2.0 3.9 13.6

12.2 5.7 2.0

12.2 5.8 2.2

12.1 5.9 2.1

12.1 5.7 1.7

12.2 5.7 2.9

12.1 5.6 1.7

Table 5.4

Composition of unemployment (unit: per cent) 1996

Unemployment rate Gender Male Female Schooling – 9 years 12 years 16 years +

1997

1998

1999

Annual

Mar

Jun

Sep

Dec

Ann

Mar

Jun

Sep

Dec

Ann

Mar

2.0

3.4

2.3

2.2

3.1

2.6

6.5

7.0

7.3

7.9

6.8

8.1

2.3 1.6

3.7 2.9

2.5 2.0

2.3 1.9

3.3 2.8

2.8 2.3

7.3 5.2

7.9 5.7

8.3 5.8

8.5 6.8

7.7 5.6

9.0 6.6

1.1 2.5 2.6

2.3 4.0 3.9

1.2 2.8 3.0

1.1 2.8 2.6

2.0 4.1 2.7

1.5 3.3 3.0

5.5 7.5 5.9

5.8 8.4 6.2

6.2 8.6 6.4

– 9.8 5.5

5.8 8.2 5.7

6.9 9.5 7.0

Source: Ministry of Labour, Korea.

75

76

Table 5.5

Changes in wages and labour productivity (unit: per cent) 1996

Nominal wage Consumer price Real wage Productivity

1997

1998

1999

Annual

1/4

2/4

3/4

4/4

Ann

1/4

2/4

3/4

4/4

Ann

1/4

11.9 4.9 7.0 11.9

11.6 4.7 6.9 12.3

9.7 4.0 5.7 14.3

6.8 4.0 2.8 15.8

0.9 5.1 –4.2 12.4

7.0 4.5 2.5 13.9

0.1 9.0 –8.9 6.6

–1.2 8.2 –9.4 3.7

–8.1 7.0 –15.1 6.5

–0.4 6.0 –6.4 NA

–2.5 7.5 –9.0 NA

5.6 0.7 4.9 NA

Note: All industries. Percentage change compared with the same period in the previous year. Source: Ministry of Labour, Korea.

Young Youn Lee and Hyun-Hoon Lee

77

the first quarter of 1997, the nominal wage increased by 5.6 per cent and the real wage by 4.9 per cent. On the other hand, labour productivity recorded positive growth rates, even though their magnitudes were smaller than the ones before the crisis. Impact on income distribution and poverty9 Table 5.6 shows the general trend of income inequality in Korea, with the quintile shares of total national income and the Gini coefficients. The lowest quintile’s income share dropped to 7.4 per cent in 1998 from 8.2–8.6 per cent in the years before the crisis. In contrast, the highest quintile’s income share rose to 39.8 per cent in 1998. As a consequence the ratio of the highest quintile’s income share to the lowest quintile’s income increased to 5.38 in 1998, up from the levels of 4.36–4.62 in the years before the crisis. The Gini coefficients also indicate the deterioration of income distribution: they used to remain stable at the level of 28–29 per cent, but increased to 31.6 per cent in 1998. The deterioration of income distribution can be attributed to several factors. The financial crisis and the subsequent structural reform led to increases in unemployment and underemployment. Also, as discussed above, the nominal wage rate decreased by 2.5 per cent in 1998. The poverty situation became worse as consumer prices rose at a higher rate of 7.5 per cent in 1998 than in the previous years. Prices of items such as food and energy that account for a large share of the consumption of low-income households rose even more rapidly. This was because the domestic currency prices of these items, which are mostly imported overseas, increased drastically as the exchange rate deteriorated due to the financial crisis. The number of the homeless increased as well. In late September 1998, the number of the homeless in Seoul amounted to 2550. This is a startling change from previous years when the total number of the homeless hovered just around 100. Impact on consumption patterns Deflated incomes led to a drastic decrease in household consumption. Table 5.7 summarizes the trend of consumption expenditures. As shown in the table, average monthly consumption expenditure of urban workers’ households decreased 10.7 per cent in 1998. Expenditures for foodstuffs, clothing and wear, education, and

78

Table 5.6

Quintile income shares and Gini coefficient (unit: per cent )

Bottom 20% Bottom 40% Top 20% Top 20%/ Bottom 20% Gini coeff

1990

1991

1992

1993

1994

1995

1996

1997

1998

8.4 21.6 38.8 4.62

8.5 22.0 38.0 4.47

8.5 22.1 37.6 4.42

8.6 22.0 37.5 4.36

8.5 22.0 37.6 4.42

8.5 22.0 37.5 4.41

8.2 21.5 37.9 4.62

8.3 21.9 37.2 4.48

7.4 20.2 39.8 5.38

29.5

28.7

28.4

28.2

28.5

28.4

29.1

28.3

31.6

Source: National Statistical Office, Korea, Annual Report on Urban Households, 1999. (Available at http://www.molab.go.kr/molw/owa/).

Table 5.7

Changes in monthly consumption expenditures of urban workers’ households (unit: per cent)

Total consumption Foodstuffs Clothing and footwear Education, culture and recreation

1996

1997

Annual

Annual

13.3 11.5 8.4

4.2 5.0 –6.8

16.1

7.7

1998 1/4

2/4

3/4

4/4

Annual

–8.8 –17.0 –23.7

–13.2 –16.3 –30.0

–16.8 –20.2 –35.3

–4.0 –4.0 –17.5

–10.7 –14.8 –26.0

–12.5

–16.7

–13.7

–0.3

–12.0

Source: National Statistical Office.

79

80

Korea: Crisis, Reform and Social Consequences

culture and recreation, in particular, recorded a bigger decline than the average. A recent survey by the National Statistical Office (NSO) confirms this; 62 per cent of respondents said that they had changed their personal consumption patterns by purchasing goods on a more practical and rational basis. Despite reduced incomes, private sector savings increased 2.3 percentage points at 25.1 per cent of GDP in 1998. 10 This is not much due to a sharp drop in consumption, but mainly due to the increased income of the upper class. The upper class (those in the first quintile) saw a 13 per cent increase in their savings due to their interest income being augmented by the soaring yield rates. In fact, savings of the middle class and the lowest class (those in the last quintile) drastically dwindled; the savings of the middle class decreased by 13.7 per cent and that of the lowest class decreased by 426.8 per cent. Other social impacts There was a drastic increase in criminal activities related to the current economic difficulties. Significantly, those arrested for law violations during labour disputes were the fastest-growing group. Up until August 1998, 8508 cases were recorded, which translates to an increase of 40.4 per cent compared with the same period of the previous year. During the same period, 63 493 cases of economic crimes, such as fraud, occurred, an increase of 6.2 per cent. As social instability has deepened, domestic crimes have also increased. During this period, there were 38 cases involving the murder of either of the parents and 259 cases of violence directed toward parents or close relatives, an increase of 65.2 per cent and 46.3 per cent, respectively. The financial crisis also appears to have affected the average Korean’s attitude to foreign investment. According to a November 1998 survey, jointly conducted by the Korea Development Institute (KDI) and the Korea Broadcasting System (KBS), a majority of Koreans believe that Korea has become more receptive to foreign direct investment. This survey also shows that the average Korean’s view on employment practices has changed from lifetime employment to a flexible one based on personal skills.

Young Youn Lee and Hyun-Hoon Lee

5

81

Concluding remarks

As discussed above, Korea and its people have endured dramatic changes in the economy and livelihood in their struggle against the worst economic crisis to strike the country in modern times. For a nation that attained an annual average GDP growth rate of 8.2 per cent from 1965 to 1997, contraction of the economy by 5.8 per cent in 1998 was a severe affliction. There have been tumultuous and painful effects for most of the Korean people in all segments of Korean society. In particular, the crisis has had significant adverse effects on equitable growth in Korea. The Korean government has introduced policies and programmes designed to assist the unemployed, including emergency employment creation schemes, labour redeployment schemes, and temporary replacement income schemes. The budgets available to finance them have been increased drastically. 11 However, they are still limited. Indeed, these policies and programmes have been able to provide support for only a fraction of those who have lost their jobs during the present crisis. According to a September 1998 survey 12 jointly conducted by the Korea Labour Institute (KLI) and the Korea Institute for Health and Social Affairs (KIHSA), 7.4 per cent of the unemployed households were the recipients of the unemployment insurance scheme, and only 2.3 per cent were the recipients of the social assistance scheme.13 Thus, Korea is in urgent need of a range of initiatives to contain the social costs of the financial crisis. The first and most important is to try to bring about an economic recovery as soon as possible, so that the numbers in need of relief can be reduced through a steady reabsorption into newly created high-income jobs. This requires the ongoing structural reforms to be completed early and successfully. Having analysed the distributional effect of the IMF programmes on all the developing countries that received stand-by and extended arrangements from mid-1973 to mid-1994, Lee and Rhee (1999) find that the pattern of short-term deterioration and long-term improvement of income distribution is quite a robust phenomenon. Hence it is expected that income distribution may improve in the long term as the Korean economy emerges from the current financial crisis. However, many observers agree that unemployment rates will

82

Korea: Crisis, Reform and Social Consequences

remain high for a long period even after the economy recovers from the worst of the crisis. Therefore, special efforts to strengthen systems of social protection are of great necessity, as existing systems of social protection were unable to cope adequately with the social consequences of the Asia crisis. The Tripartite Commission and the Tripartite Social Accord have played important roles in the development of social and economic policies to contain the social costs of the financial crisis. However, many complaints and problems suffered by labour and the unemployed have been unattended. Also, there is a great need for support of disadvantaged people who are unable to work, by providing cost-of-living expenses to cover food, clothing, medical services, and education. Marginal groups such as the less experienced, the less educated, women and young workers, who have been most severely affected by the crisis, deserve special help from society. The present hardship of Korea proves that the vision for the twenty-first century of a productive and mature society with a high quality of life cannot be accomplished without costs. Notes * 1. 2.

3. 4.

5.

The authors are grateful to Charles Harvie and Rebecca Valenzuela for their comments. Using a stroke hypothesis of financial crisis, Lee (1999a) systematically and comprehensively explains the causes of the Korean crisis in 1997. At the end of September 1997, non-performing loans of commercial banks stood at W 21.9 trillion, which was 6.4 per cent of total credit and was double the W 12.2 trillion at the end of 1996. At the same time merchant banks recorded non-performing loans of W 3.9 trillion at the end of October 1997, nearly three times the W 1.3 trillion at the end of 1996. This section draws heavily from Lee (1999b). Before the crisis Korea maintained the so-called market average foreign exchange rate system which was adopted in 1990. Even though the daily fluctuation band had been widened gradually with the progress of financial liberalization, it remained at only ±2.25 per cent just before the crisis. On the eve of its turning to the IMF, the Korean government widened the daily band for exchange rate fluctuation to ±10 per cent of the market average rate. On December 16 it shifted to a free-floating exchange rate system. The sharp fall in per capita GNP was attributed not only to the economic contraction, but also largely to the Korean won’s sharp depreciation.

Young Youn Lee and Hyun-Hoon Lee

83

6. The reader is referred to MOFE (1999) for the Korean government’s self-evaluation of the ongoing structural reform. 7. For more discussion of the chaebols, see Yoo (1995), and Lee and Lee (1996). 8. In absolute terms, male employment fell by 0.7 million and female employment by 0.5million between 1996 and March 1999. In percentage terms, however, male employment decreased by 5.7 per cent during the same period, while female employment decreased by 6.0 per cent. 9. For a general description of the poverty issues in Korea, see Park and Kim (1998). 10. The gross savings rate, which is composed of private sector and government savings rates, recorded 33.2 per cent of GDP in 1998, down from 35.9 per cent in 1997. The government savings rate was 8.1 per cent, down 2.5 per cent points from 1997. 11. Overall funding for unemployment and the social safety net was expanded from W 2.6 trillion in 1997 to W 5.7 trillion in 1998, and further to W 7.7 trillion (9.1 per cent of the total budget) in 1999. 12. KLI and KIHSA (1999). 13 . he unemployment insurance scheme was introduced in July 1995 for the first time, but was limited to employees in firms with 30 or more workers. The percentage of employees covered by the unemployment insurance scheme in 1997 was estimated at just 33 per cent. Its coverage was extended to all firms only in October 1998. On the other hand, recipients of livelihood protection benefits were 1 486 000 in 1998, which were only 72 000 up from the previous year.

References Fitch ICBA (1999), Rating Report: Republic of Korea, 1999. Korea Labour Institute (KLI) and Korea Institute for Health and Social Affairs (1999), ‘Results of Investigation on the State of Unemployment and Welfare Needs’, (in Korean). (Available at http://epic.kdi.re.kr) Lee, Hyun-Hoon (1999a), ‘A “Stroke” Hypothesis of Korea’s 1997 Financial Crisis: Causes, Consequences and Prospects’, University of Melbourne Research Paper No.696. (Available at http://www.ecom.unimelb.edu.au/ ecowww/research/696.pdf) Lee, Hyun-Hoon (1999b), ‘The IMF Rescue Programme in Korea: What Went Wrong?’, mimeo. Lee, Kyu-Uck and Jae-Hyung Lee (1996), ‘Business Groups (Chaebols) in Korea: Characteristics and Government Policy’, Occasional Paper, No. 23, Korea Institute for Industrial Economics and Trade, Seoul. Lee, Jong-Wha and Changyong Rhee (1999), ‘Social Impacts of the Asian Crisis: Policy Challenges and Lessons’, UNDP Working Paper No. 33. (Available at http://www.worldbank.org/poverty/eacrisis/library/index.html) Ministry of Finance and Economy (MOFE) (1999), ‘The Road to Recovery: Korea’s Ongoing Economic Reform’, Economic Bulletin, Korea Development Institute, Seoul. (Available at http://epic.kdi.re.kr/ecobul/ 19905/19905-2.htm)

84

Korea: Crisis, Reform and Social Consequences

Park, Chanyong and Meesook Kim (1998), Current Poverty Issues and Counter Policies in Korea, Korea Institute for Health and Social Affairs (KISHA). Radelet, Steven and Jeffrey Sachs (1998), ‘The East Asian Financial Crisis: Diagnosis, Remedies, Prospects’, mimeo. (Available at http://www.stern. nyu.edu/~nroubini/asia/AsiaHomepage.html) Yoo, Seong Min (1995), ‘Chaebol in Korea: Misconceptions, Realities, and Policies’, KDI Working Paper, No. 9507, Korea Development Institute, Seoul. Related Internet sources General Economic Data of Korea: Bank of Korea (http://www.bok.or.kr/ kb/indexe.html), National Statistical Office (http://www.nso.go.kr), Centre for Economic Information of Korea Development Institute (http:// epic.kdi.re.kr). Labour Related Data of Korea: Ministry of Labour (http://www.molab.go.kr), Korea Labour Institute (http://www.kli.go.kr). Welfare Related Data of Korea: Ministry of Health and Welfare (http:// mohw.go.kr). Social Crisis in East Asia: World Bank (http://www.worldbank.org/poverty/ eacrisis/library/index.html). Financial Crisis in East Asia: Nouriel Roubini (http:/www.stern.nyu.edu/ ~nroubini/asia/AsiaHomepage.html).

6 Vietnam: Economic and Social Impact of the Asia Crisis Tran Van Hoa

1

Introduction

Human development in Vietnam ranks 122 (out of 174 countries) according to the 1998 Global Human Development Report of the United Nations Development Programme (UNDP), and it has remained roughly around this level since 1995. This places Vietnam above Myanmar (ranked 131) and Laos (136) but below Sri Lanka (90) and well below other Association of South East Asia Nations (ASEAN) member countries such as Singapore (28), Thailand (59), Malaysia (60), Indonesia (96) and the Philippines (98), and China (106). Being a major transition economy in Asia, Vietnam has, on the other hand, enjoyed high growth rates and a better social standard in the past 12 years or so than many of its Asian neighbouring countries. With the advent of the Asia crisis in 1997, would Vietnam have serious social problems as a result and would it still be able to maintain this social standard and, at the same time, manage the economy well to maintain high positive growth and expanding trade and industry in an increasingly globalized market? To answer this question, it is useful to have a look at the progress in economic development and trade Vietnam has attained in recent years. The linkage between economic development and trade and social improvement or deterioration in the country follows the normal transmission mechanism of government revenue and disbursement in most countries in Asia where privatization of traditionally governmental functions in many sectors of the economy is not yet widespread or even in place. 85

86

Vietnam: Economic and Social Impact

Before the Asia crisis in 1997, Vietnam enjoyed a rapid economic growth with an average GDP growth rate of 8.2 per cent during the period 1991–95 as compared with that of 3.9 per cent during the period 1986–90. The highest GDP growth rate was recorded at 9.5 per cent in 1995. The Asian financial crisis did not immediately affect Vietnam’s economy as the annual GDP growth rate in 1997 was still as high as 8.8 per cent, compared to 9.3 per cent in 1996. In 1998, it was still 5.8 per cent. The economic situation in 1999 appeared however to be much more difficult than it was foreseen in 1997. It was characterized more specifically by a sharp decline of foreign direct investment (FDI) inflows, a dramatically shrinking external sector, and high corporate debts not only for state-owned-enterprises (SOEs) but also for joint ventures and private companies. This situation requires further economic reform and new policy moves to cope with it. The situation was also aggravated by the effects of both internal (the macroeconomic weaknesses prevailing prior to the Asia crisis) and external factors (the costs caused by natural disasters: the El-Nino effect, droughts for a long period, floods and the more apparent impact of the regional crisis). The difficult condition has led to a revision of the GDP growth rate projections. The real growth rate, however, is estimated to be about 4.5 per cent in 1999 (World Bank, 1999, and Figure 6.1). Inflation however stood as at May 1999 at 4.4 per cent, and as at April 1999 the bank lending rate was at 12.0 per cent and unemployment at 7.0 per cent. This slowed down economic performance, moderate inflation and relatively high unemployment will have important impact on the four human aspects of the development in Vietnam: poverty, education, health and nutrition, and employment or unemployment. It is worth noting that this growth rate is still a great achievement when compared with the economic performance of other economies in the region during the crisis period where the growth rates were around zero or negative. It is also worth noting that despite such a relative high output growth, inflation pressures remain under control. The year-on-year change of the consumer price index was very modest in December 1997 at only 3.6 per cent (as compared with 4.5 per cent in 1996 and 12.5 per cent in 1995) and it was expected to increase, but under two digits, in 1999. This low rate, relative to that of other Asian countries in turmoil, will undoubtedly have some positive

Tran Van Hoa

14

14

14 12 10

87

13.1 8.3

13.9

13.8

13.2

11 10.2

11.5

9.37

9.2

8.8

8.62 8 6

9.54 8

7 7.1

6

4

1992

1993

6

3.9

5.5

Agriculture, Foresty, Aquaculture Industry Services GDP

2 0 1991

8.7 5.1

3.8

2.2

9.3

8.6

7.99

1994

1995

4.4 3

1996

1997

1998*

Figure 6.1 GDP growth rates by economic sectors (per cent at current prices) Note: *Estimated. Source: Government Statistical Office (GSO) and Ministry of Planning and Investment (MPI).

effect on the social consequences of the Asia crisis in Vietnam. Our discussion on the human dimension of the Asia crisis below will be focused mainly on this twin aspect of growth and inflation (the popular misery index used in macroeconomics is simply a weighted mean of these two aspects), and the responses and plans the government in Vietnam has undertaken to minimize the impact of the crisis and to improve the performance of the economy and the standard of living of its people.

2 Assessment of the economic and social impact of the Asia crisis Production of the various economic sectors continued to expand, but at a slower speed, during the two years 1997 and 1998. Agriculture production grew at a rate of 5.5 per cent in 1997 and declined to about 3.0 per cent in 1998. Although being affected by natural disasters, agriculture production reached a record of 31.3 million tons in 1998 compared with 30.6 million tons in 1997. Industrial production continued to grow under the very difficult

88

Vietnam: Economic and Social Impact

condition generated by the regional economic crisis. The growth rate of industry had slowed down since 1995, from 13.9 per cent to 13.2 per cent in 1997 and to 11.5 per cent in 1998. Some areas of the service sector (e.g., airlines and tourism) appeared to face difficulties during the last two years which had led to a remarkable contraction in the growth rate of the sector: 8.7 per cent in 1997 and 6 per cent in 1998 (as compared to 9.3 per cent in 1996). The share of total investment to GDP increased from 27.1 per cent in 1995 to 29.0 per cent in 1997 while the share of domestic saving1 to GDP slightly increased from 19.0 per cent in 1995 to 20.1 per cent in 1997. However, a slowing trend occurred in 1998 with a total investment share to GDP at only 27.2 per cent. Total investment comes from a number of sources: state budget, state credits, investments by domestic enterprises (including state and private) and FDI. In 1997, investment financed from the state budget accounted for 19.7 per cent of total investment; investment financed with the state credits 14.1 per cent (which includes US$653 million from the official development assistance (ODA) loans); investment by domestic enterprises 42.2 per cent, and the remaining 34.1 per cent came from FDI. The structure of investment prior to 1997 showed that Vietnam much depended on the external resources. However, since 1997, FDI flows had shown a dramatic decline in terms of both project licences and capital (330 projects were granted licences with a total committed capital of US$4500 million in 1997 as compared with 366 granted licences and US$8836 million in 1996). This declining trend of FDI approvals was amplified during 1998. By October 1998, only 204 FDI projects were given licences with a total capital of US$1816 million, much lower than that at the same period a year earlier. This has forced the country to look for investments from domestic resources. In 1998, FDI continued to decrease. However, if the expected approval of big gas projects such as the join ventures between PetroVietnam, BP and Statoil was included, the FDI commitment would be US$4 billion in 1998 or decreased by 12 per cent as compared to 1997. It is worth noting that under the Asia (or regional) crisis condition, the trade and current account balances of Vietnam had been improved during the period 1997–98. Figure 6.2 shows a trend of significant trade deficit improvement since 1997. While the level of trade deficit reached a record at US$3889 million in 1996, there was

Tran Van Hoa

Figure 6.2

89

Exports–imports and trade deficit during 1991–98

Note: *Estimated. Sources: GSO and MPI.

a significant decline to a level of US$2470 million in 1997 and US$1900 million in 1998. This is the lowest trade deficit level since 1994, relative to GDP (in 1998, the trade deficit was about 7.2 per cent of GDP). This reduction had been the result of import restrictions rather than export expansion (the export growth in 1998 was about 0.3 per cent). Current account balance had also been improved despite of a sharp decline in FDI inflows during the period 1997–98. Current account deficit accounted for US$2361 million in 1997 (compared to US$2418 million in 1996) and even less in 1999. The above developments of Vietnam’s economy during 1997–98 had kept the country’s social and economic conditions fairly stable during the period, while many other countries in crisis in the region were experiencing economic, social and political uncertainty with no immediate prospect for a quick recovery to growth and continuing development (see Tran Van Hoa, 1999). This is coupled with the fact that Vietnam is a transition economy and up to 78 per cent of Vietnam’s population live in the rural areas isolated somewhat from the wild fluctuations of the international financial market or industrial down-turns. As a result, the impact of the Asia crisis would not be as apparent as in the urban areas of developed or fairly advanced developing countries. In this context, it can be said that the social impact of the Asia crisis on Vietnam has been negligible to date. But this may be regarded as a myopic view. It is reasonable to argue that

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it is the long-term effect of a prolonged economic and financial turmoil in East Asia with a severe slow-down in FDI in Vietnam that policy-makers in the country have to worry about. A slow-down in investment in infrastructure for example will be far more damaging to the economy and its economic and social fabric than a slowdown in imports of luxury cars. In addition, there were many prevailing issues and challenges that occurred even before the regional crisis in 1997 and became worse as they were compounded by the impact of the financial turmoil. From an economic perspective, it is expected that, in the next few years, economic growth will not be as high as that during the last 5 years and there will be more difficulties confronting Vietnam’s economy and its human or social dimension as a result of a continuing regional crisis. This prediction is based on the following analysis: • First, a decline in total investment, when combined with a large contraction of FDI flows in 1998, will influence the GDP growth rate as a whole. While the government wants to fill the gap created by the external resource slowing down by calling for more domestic resources, the mobilization of domestic capital appears to be more challenging as the domestic enterprises are facing financial and operational difficulties themselves. This will in turn exert a downward pressure on fiscal revenue and consequently, on budget expenditure with unfavourable consequences on expenditure on education, health and nutrition, and employment. • Second, as an engine of growth, the external trade of Vietnam has been a substantial contributing factor of GDP increase. A dramatic development of exports and imports during the period 1991–95 (with an average annual growth rate at 23 per cent for exports and 31 per cent for imports) was the result of the open-trade policy, started towards the end of the 1980s. This had contributed to a high GDP growth at an average rate of 8.34 per cent annually during the period 1991–97. However, the external sector was not found to be a major engine of growth in 1998 and 1999 when the 6 per cent GDP growth rate was achieved with almost a nil growth of exports and with an enforced decrease of imports by administrative restrictions. In addition, the regional demand has sharply contracted and competition in both the export and domestic

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markets from the ASEAN countries has become stronger after the currency depreciation in these countries in 1997. This requires Vietnam to look for new export markets and to expand existing export markets to other countries. • Third, although many policies have been introduced in Vietnam in order to improve the business environment and to give more incentives to both domestic and foreign investors to do business in the legalized sectors, there exist still factors and unfavourable conditions that have worried the potential investors. The most important obstacles confronting these investors are: the bureaucratic and administrative procedures in the establishment of a new business in Vietnam; the multiplication of (sometimes even contradicting and confusing) rules and regulations that renders the business environment uncertain; the different treatment of foreign and domestic entities and between SOEs and private companies that creates operational difficulties and requires higher transaction costs; an ineffective application of the rules, especially with a lack of clear-cut administrative jurisdiction, and the extensive regulatory powers of the administration that make the new rules hard to be examined in practice; and so on. • Fourth, the overall efficiency of the economy is low and the competitiveness of its enterprises is relatively weak as compared to other countries in the region. This situation continues to be a big challenge for Vietnam in the coming years when other countries in the region (e.g., China and Thailand) are able to produce and export a similar range of products. Some domestic products in Vietnam have unit costs higher than the imported goods (e.g., for sugar, cement, steel) which lead to pressure to adopt more protection measures for domestic production. • Finally, the service sector of Vietnam is underdeveloped, especially the service in the financing and banking sector. This fact, together with the weaknesses in management of this sector and the very frequently changing and confusing regulations, gives the potential investors concern about the high risk of investment in Vietnam. A very important question is whether Vietnam should continue its trade liberalization policy. What kind of resources should Vietnam use in the future to maintain its economic development

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under the conditions of the more complicated regional environment after the Asia crisis? The answer to these questions was clearly stated in the Fourth Plenum of the Communist Party of Vietnam (CPV) in December 1997: ‘to continue acceleration of reform process; to increase internal resources; to improve efficiency of international cooperation’.2 This implies that Vietnam will go ahead with its further economic reforms to achieve more integration into the international market.

3 Trade policy and regulation responses and the Asia crisis Foreign trade has been the main ingredient for economic development and growth in all developing countries in the past three or four decades. Its impact is symmetrical in the sense that a slowdown in FDI or exports for example will have a damaging impact on major aspects of the human dimension in an economy: employment, income, education, health and nutrition. This part of the chapter aims to analyse the trade and trade-related policy changes or adjustments of the Vietnamese government during 1997–98. These changes reflect the government’s responses to a deteriorating trade balance in 1996 and to the impact of the Asia crisis on Vietnam’s external trade. On the one hand, the government wants to improve the trade deficit situation by imposing policies to enhance exports. At the same time, it introduces more restrictions on imports by administrative measures with only short-run positive effects. A successful reform in trade will undoubtedly have some beneficial impact of the policies the government can use to deal with the social problems arising from the contagion of the Asia crisis. Changes in tariff barriers For most countries, import and export tariffs are a key mechanism for regulating trade and the economy. However, in a less-developed economy like Vietnam, export and import taxes are two of the major sources of budget revenue. The share of budget revenue from import and export taxes in Vietnam can be seen in Table 6.1 where this share is reported as the main source of budget revenue (though it decreased from 54 per cent in 1991 to about 38 per cent in 1996

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Table 6.1 The structure of tax and other sources of budget revenue (percentage) 1991

1992

1993

1994

1995 1996(a) 1997(b)

I. Total tax revenue 80.95 71.90 80.35 79.71 81.85 86.32 87.34 1. Taxes from small business 6.83 6.16 4.43 2.63 2.91 2.95 2.76 1. and handicraft, and 1. non-state services 2. Agricultural taxes 10.62 10.44 19.34 23.77 24.87 27.35 26.07 3. Export and import taxes 53.77 45.84 44.23 39.72 38.06 37.79 37.65 4. Taxes from SOEs 0.05 0.09 0.59 0.52 0.59 0.54 0.45 5. Income taxes 0.00 0.00 1.28 2.88 3.99 5.05 6.11 6. Taxes on land and housing 0.00 0.00 0.00 0.00 0.54 0.55 0.60 7. Taxes from joint ventures 1. (except for crude oil) 2.61 4.03 3.27 2.85 3.04 2.49 2.23 8. Taxes on transfer of 1. land use rights 16.44 24.06 16.38 17.44 15.11 11.19 10.43 II. Aid and grants 6.01 10.83 8.50 9.08 3.05 1.57 1.42 III. Other sources 10.43 13.23 7.87 8.36 12.06 9.62 9.01 Total Budget Revenue 100 100 100 100 100 100 100 Source: General Department of Taxation (a) Estimates, (b) Planned.

and 1997). This implies that any further reduction in the overall tariff has to take into account either the potential for an increased volume of trade or the development of other sources of government revenue. The most important feature of Vietnam’s import duties is that they tend to be high and very complex. In this regard, it is important to note that the number of tariff lines and their magnitudes are much higher than those in other countries in the region. During 1997–98 there were frequent changes in tariff rates and classification. The main changes in rates took place in March and September 1997. For the September 1997 change, a detailed comparison has been made with the original tariff structure established in 1992. The comparison shows that there is an increase in complexity of the tariff structure, as well as the upward-trend in tariff changes (Table 6.2). Obviously, when we have more tariff lines for the same group of products and an average increase of 3.7 per cent in the average rate,

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Table 6.2

Change in tariff structure between 1992 and 1997

Number of products/tariff lines affected in the September 1997 Decree Corresponding number of tariff lines in the March 1992 Decree Unweighted average tariff rate in the 1997 Decree Unweighted average tariff for the corresponding products in the 1992 Decree

552 438 11.6% 7.9%

Source: Trade and Investment Analysis, Brussels: European Union, 1998.

it illustrates a worrying trend towards a more complex and more open-to-arbitrary-manipulation at the custom points of entry, and a more protectionist overall tariff policy. When we look at the product groups with the largest increase in tariff between 1992 and 1997, we can see that there is a trend of increased selective protection on consumer goods, upstream activities related to textiles and garments (e.g., silk, cotton, fibres or certain fabrics), and some specifically protected intermediate goods (e.g., metal products, cement, glass). The only group of products with a decline in average tariff protection is equipment goods and a very limited number of processed food products. This high and complex tariff system with a lack of clarity even for taxation purposes has led to an implicit incentive for unrecorded transactions, corruption and smuggling. According to estimates by the Ministry of Trade, smuggled products that were detected and seized in 1997 were valued at 660 billion VND. Also, according to the estimates of the Ministry of Trade and other relevant Ministries, the smuggled products which have been detected and seized amount to only a small proportion of the total value of products smuggled into Vietnam. In 1997, the government required all legally imported products to have official stamps affixed to them. While administrative measures, such as tax stamps and increased enforcement efforts, may from time to time have a temporary arresting effect, these administrative measures cannot prevent the smuggling itself. This is because the incentives for smuggling – namely the opportunity for high profits created in substantial part by high tariffs – are too strong. The high profits from smuggling enable smugglers quickly to introduce counter-measures, such as counter-

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feit stamps or even actual stamps originally issued for other goods and, regrettably, bribes to low-paid officials which can easily exceed the newly offered bonuses. The increased complexity and heterogeneity of the tariff structure also creates more uncertainty for both domestic and foreign producers so that changes have to be made frequently. This would make the negotiations on the World Trade Organization (WTO) accession as well as on bilateral agreements with the US more difficult. It also appears that these tariff adjustments are more likely short-term answers to local or joint venture pressure requirements for protection and targeted discrimination than the results of a clearly defined strategy to encourage the development of industries in areas where Vietnam has a comparative advantage and which could increasingly create formal employment opportunities. In April 1998, for the first time after being a member of the ASEAN, Vietnam announced the list and tariff rates of products to be added in 1998 to the CEPT Inclusion List (implying rates under 5 per cent before 2003 and 2006 for fast-track and normal schedules respectively). According to this list, there is a small difference in protection (8.2 per cent unweighted tariff against 10.3 per cent for the ordinary tariff) among 1715 tariff lines. This is considered a significant step to illustrate that Vietnam has been doing more to integrate into the international market and to confirm its commitments to CEPT/AFTA agreements. Changes in non-tariff barriers In the context of a deteriorated trade balance in 1996 and the increasing impact of the Asia crisis on external activities (implying more pressures on Vietnam’s exports and on domestic products by cheaper exported goods from other Asian countries in crisis), the response of the Vietnamese government is, on the one hand, to promote exports, and on the other hand, to increase restrictions on imported goods, especially consumption goods and some intermediate goods to protect domestic production. During the last few years, the government has been using non-tariff barriers as the main measure to manage its external difficulties. The export liberalization policy is stated in the Fourth Plenum Resolution of the Central Committee of the Communist Party of Vietnam (in December 1997) as the following:

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Specify clearly the small number of goods either banned from export or exported with limited quantity; other goods are allowed to be exported freely with the easy and simple procedures. The registered enterprises from all economic sectors that are mainly the production enterprises are allowed to export directly their products meeting the conditions specified in laws. To implement this policy, the government has relaxed restrictions on exports in a series of steps. In 1997, the government allowed those organizations having export permits to export any items that did not belong to a small category of restricted goods (prior to this, the exporting companies were allowed to export only the registered commodities). Then, during 1998, further steps were undertaken to relax export procedures and to promote exports: • Decision No.11/TTg by the Prime Minister issued on 23 January 1998 allowed domestic private and joint-venture companies to engage in rice exports within a controlled process of quota allocations. • Prime Minister’s Decision No. 55/TTg in March 1998 permitted all enterprise from any economic sector to export directly their products without a need for a specific licence. Previously, in order to sign and implement foreign trade contracts, Vietnamese enterprises were required to obtain export and import permits from the Ministry of Trade. This Decision did not apply to those products subject to specific quotas or other restrictions – such as rice, explosive materials, gems, precious stones and metals, works of art, or antiquities (there are 12 items in the list of exclusion). • The new Trade Law in January 1998 explicitly authorized the creation of branches by industrial companies including foreign and joint ventures. This should, in principle, allow companies to operate representative offices as is the norm elsewhere (i.e., representative offices being able to conduct trade and sign contracts directly with customers – This was not allowed before then). • Prime Minister’s Decree No. 57 dated 31 July 1998 was the regulation to guide the Trade Law application. • Moreover, the exporting company enjoys tax exemptions for imported inputs of their production (Circular No. 106 dated

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23 July 1998 adopted by the Ministry of Finance) and get a bonus at 1 per cent of the export value (from the export bonus fund) that is higher than US$100 thousand (but not exceeding 150 million VND) as well as a bonus for the high quality of export products at export exhibitions or fairs, and so on. These adjustments are considered as significant moves towards trade liberalization, giving more opportunities for all companies to engage in exporting, including private and small and medium-sized enterprises (SMEs). In addition, these moves were expected to alleviate the high transaction costs that used to be imposed on exporting companies under the old system. However, there is a question about the real effect of these new regulations. For example, the authorization for private companies to engage in rice exports was accompanied by the devolution of large powers to local authorities to allocate quotas, knowing that these local authorities usually have their own exporting companies. Similarly, the possibility of all companies to engage in exports was banned by the requirement that such firms must have ‘staff with appropriate skills’ and a minimum capital of US$200 thousand. This virtually eliminates most private companies. The other major non-tariff barriers on trade are related to bans and quotas. As already noted above, the new Decree No. 57/CP dated 31 July 1998 to implement the new Trade Law, has set the list of banned or controlled products for export and import as follows: • The list of banned export goods – namely, weapons, munitions, explosives, military equipment, antiquities, drugs, toxic chemicals, rough, sawn and pilled timber, wood products, fired coal (clinker), prescribed furniture, naturally valuable wild animals and plants; • The list of banned import goods – weapons, munitions, explosives, military equipment, antiquities, depraved and reactionary cultural products, fire-crackers, toys which may impact badly on children’s psychology, cigarettes (except a small amount permitted as personal luggage), second-hand consumption goods except for personal use, right-hand-drive automobiles, and used spare parts for automobiles and motorbikes;

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• The list of exports subject to quotas – namely, rice and garments exported to the European Union (EU), Canada, Norway and Turkey under bilateral agreements; • The list of imports requiring special permits – namely, petroleum, fertilizers, motorbikes, vehicles with less than 12 seats, iron, construction steel, cement, refined sugar, paper, wine, and construction glass. Regarding export quotas set for Vietnam by foreign importing countries (e.g., export quotas for textiles to the EU, Canada, or Norway), there is a question about how to put in place an efficient mechanism to assure the budget revenue and, at the same time, to prevent corruption and rent-seeking, as well as to encourage participation by enterprises from any sectors. Presently, the distribution of export quotas for textiles and garments is still based on the ‘asking–giving’ mechanism. However, this mechanism is applied only to enterprises established before 1998. The enterprises established in 1998 or later are not able to export their products, if they themselves are not looking for the markets. In fact, many exporting enterprises do not rely excessively on quotas distributed by the government. Instead, they do their best to increase their competitiveness in the international markets. For example, Garment Company 10 is able to export 70 per cent of its products to non-quota markets due to the creditability established by the high quality of its products. 3 Presently, the proportion 4 of products exported under quota accounts for only 30–40 per cent of the production capacity of most state-owned-enterprises (SOEs) that are specialized in garments. However, the very slow allocation of export quotas by the Ministry of Trade causes difficulties for many enterprises. For example, the export quota allocations under the current system may lead to a situation where some export quota allocations may be distributed to enterprises that are unable to export, and they may then sell these quotas to other enterprises. To improve the system allocation of export quotas, it is necessary to specify clearly and reasonably the steps for carrying out a pilot study on auctioning export quotas. If auctions of export quotas are implemented publicly and without the pressure from the authorized agencies in power, it may reduce rent-seeking and corruption by officials and generate revenue for the government budget. However,

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it is necessary to build in incentives for those SMEs that are working efficiently and competitively but that for various reasons have not yet been able to participate fully in international trade. Without such incentives for SMEs, the export quotas may all go to the big corporations, especially in the present circumstances when a law to promote and facilitate competition is still not yet in place. If we consider only the purposes of preventing rent-seeking and corruption and mobilizing revenue for the budget, a reasonable tariff policy may be superior to quota allocations in terms of creating a more ‘level and fair playing field’. Adjustments to the list of banned or controlled products for export and import is adopted by the government, based on the proposal of the Ministry of Trade. In principle, import and export quotas are applied when tariff measures are not sufficient to overcome the overall imbalance of the economy or the imbalance of domestic demand and supply, or when the traded goods in question have a negative impact on domestic production. In addition, export quotas are also applied for products whose exports are limited by quotas set by Vietnam’s foreign trade partners. Here, it is important to mention those polices and practices related to the issued list of goods temporarily suspended from exports and imports. In past years, this list was announced suddenly without adequate warning or stating the reasons. As an example, the decision on the temporary suspension of imports of motorbikes and the allocation of import quotas for motorbikes was carried out without informing customers timely, widely, and properly. Regulations issued in this manner led to a ‘fevered’ demand for motorbikes and therefore did not serve the purpose of balancing the supply and demand as proposed. Moreover, such a sudden prohibition from imports should not apply to unfinished foreign trade contracts previously signed with foreign partners; otherwise, such contracts cannot be fulfilled, leading to a loss of confidence in Vietnam’s credibility in international trade circles. In addition to these bans and quotas, a large number of imported products require formal approval by various ministries: the Ministry of Industry for the import of chemicals, the Ministry of Agriculture and Rural Development for veterinary products and animal feed, the Ministry of Health for pharmaceutical and medical equipment, the Ministry of Aquatic Resources for aquatic products or upstream

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Vietnam: Economic and Social Impact

inputs, the General Department of Post and Telecommunications for transmitters and exchange boards, State Bank of Vietnam for specialized banking equipment, and the Ministry of Culture and Information for cultural goods. Foreign exchange controls – recent restrictive measures As has been mentioned earlier, international trade and FDI is crucial to economic development, growth and welfare improvement in a country, and foreign exchange is the life-blood of all these to the extent that production equipment, production components, technology, spare parts and other inputs must be obtained from abroad. Without access to foreign exchange, as a practical matter, an enterprise has no access to international markets for needed imports. While enlightened trade liberalization measures as described above have provided access to international markets for all enterprises from all sectors, recent tightening of foreign exchange controls have had the opposite effect of reducing access to international markets for Vietnamese enterprises – especially SMEs, who have relatively little influence on this policy. Presently, foreign exchange controls imposed in Vietnam are composed of the following elements: First, the controls seek to gather foreign exchange into the banks by requiring individuals and business organizations who transfer foreign currencies into Vietnam promptly to convert them into VND or keep them in a foreign exchange account at an authorized bank. More recently, Decision No. 173/1998/TTg (dated 17 September 1998) requires enterprises to sell 80 per cent of their foreign exchange to the banks. Enterprises that fail to sell will have the amount automatically purchased from their foreign currency accounts by the banks. Then, when foreign exchange is needed, enterprises must purchase the foreign exchange back from the bank usually at higher rates. Second, the controls do not permit enterprises freely to obtain foreign exchange. Instead, to convert VND into foreign exchange, enterprises are required to show that they have a ‘legitimate purpose’ for doing so. According to current foreign exchange regulations, having a ‘legitimate purpose’ for foreign exchange means that an enterprise is participating in producing specific items included in the government’s import substitution list or in particular infrastruc-

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ture and important projects. Enterprises included in this list or involved in import substitution activities described in it, are permitted to purchase foreign exchange for imports from the banks. Enterprises not included in this list do not have automatic permission to purchase foreign exchange for imports. Even when a ‘legitimate purpose’ is shown, however, enterprises can only obtain foreign exchange if the banks have it available. Third, the State Bank sets the foreign exchange rates rather than allowing the rate to be set by the market. There are great risks in this approach – especially from an overvalued exchange rate. Where the foreign exchange rate for the VND is set too high relative to the market rate, shortages in foreign exchange inevitably will occur as a result of the law of supply and demand. Such shortages will reduce the availability of foreign exchanges to banks and enterprises. Moreover, an overvalued exchange rate discourages exports by making them more expensive relative to other countries’ products and encourages imports by making them cheaper relative to domestic products: the result usually is further increase in demand for foreign exchange, a continual worsening in the country’s current account deficit and encouragement of black markets. Foreign exchange controls thus often have the opposite result from what they intended – namely, rather than protecting a country’s foreign exchange reserves, exchange controls often cause them to deteriorate. Some of the foreign exchange controls may not be working. Thus, according to the State Bank, 5 in practice, enterprises in fact do not sell their foreign exchange to the banks. This is hardly surprising since the enterprises cannot be sure that they can get the foreign exchange back when they need it because of the controls, and if they are permitted to buy the foreign exchange back they will probably have to pay a higher price for it. Indeed, there are indications that foreign exchange is not readily available even to those who can show a ‘legitimate purpose’ for it as indicated by the following report from a recent article in the Vietnam Investment Review: ‘A drastic shortage of hard currency has forced the State Bank of Vietnam to renege on foreign currency repayment guarantees, leaving foreign and state-owned enterprises without enough cash to pay outstanding loans and bills.’6 Access to foreign exchanges for import and factor payments is thus limited and uncertain for all enterprises, including and espe-

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Vietnam: Economic and Social Impact

cially SMEs; to the extent that access to foreign currency to pay for needed inputs is limited by the controls.

4

General assessment of the social impact

Being a major transition economy in Asia in the process of modernization and economic reform, Vietnam has achieved a great deal with its policy and programmes since the introduction of Doi Moi late in 1987. While being a transition economy, it has its advantages and disadvantages. The advantages are that Vietnam still is isolated to a large extent from the financial turmoil, political uncertainty and social unrest of other developing countries in the region. The disadvantages are that Vietnam still has not the opportunity to benefit more significantly from a globalized market and free access to trade, finance and technology in it. All this discussion does not preclude the fact that Vietnam has been trying very hard to reform its system and laws and to modernize its economy to integrate itself better into the world economy. As a member of the ASEAN and APEC and currently in the preparatory process for accession to the WTO, Vietnam has achieved much, not only in the economic and social spheres but also in the area of international relations in the past few years. In the short run, it is our view that Vietnam has escaped the worst impact of the Asia crisis but it still has to bear some economic and social consequences. These include an economic slowdown that has affected urban and formal workers more than the rural population. As exports and FDI have fallen, unemployment in urban areas has begun to creep up and now stands at about 7 per cent. The group of workers that is particularly vulnerable as the Asia crisis hit Vietnam are the people who might be retrenched due to the equitization (privatization) of state-owned-enterprises. The safety-nets provided by the law are based on a multiple of actual salaries (which have been low) and number of years worked and might provide an inadequate safety-net anyway. Poverty was reduced from 51 per cent to about 30–35 per cent of the population during the period 1993 to 1998 as a result of Vietnam’s growth and economic development. The benefits of this achievement have been shared by all income groups in the country. However, it has also been acknowledged by the World

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Bank (1999) that poverty which is largely a rural phenomenon, remains both widespread and deep. Poor families in Vietnam bear a high and disproportionate burden of sending their children to primary school – they spend 80 VND for every 100 VND spent by the state on primary education. The extra burden of the Asia crisis has fallen on women of Vietnam since they have been traditionally the people who would look after their children and the households when the fathers were retrenched. To provide assistance, the government, with the support from international organizations, has introduced new programmes (e.g., Vietnam: Attacking Poverty), policies (Public Sector Administration Reform) and funds (e.g., the SOE Restructuring Fund) to help the poorest communes, to assist in improving governance, and to finance voluntary redundancy. In the long run, however, Vietnam may have to face a more serious impact of the Asia crisis in terms of: a slow-down in FDI inflows into the country (by as much as 70 per cent in 1998 as compared to the peak level in 1996/97) with no sign of recovery, a delay in commencing needed infrastructure projects, an increase in the incidence of unemployment or underemployment, and a hold on education and health care and social programmes. It is worth noting that, even during 1997, government expenditure on medical and social benefits fell noticeably from 3876bn VND in 1996 to 2944bn VND in 1997 (see United Nations Development Programme, Vietnam, ‘Economic Classification of Current Expenditure’, Internet, August 1999). Other consequences of the crisis are: public sector reform, structural reform, and a diversion of some important rural and agricultural reforms and policies. The latter may be able to assist more effectively the country’s need for more income equality and distribution for both sexes not only in the urban and rural areas but also in the ‘difficult’ and mountainous regions of Vietnam. Further studies on the human dimension of the Asia turmoil in Vietnam in terms of all these aspects are urgently required.

Main macro-economic indicators of Vietnam during 1990–97 (in billion VND) 1990

GDP (at current prices) Industry Agriculture Services Growth Rate Consumption Private Government Gross capital formation Government Non-government Foreign direct (gross) Other private investment Gross fixed capital Change in inventories Export (goods & services) Import (goods & services) Statistical discrepancies GDP (at 1989 prices) Industry Agriculture Services

41955 9513 16252 16190 5.1 40736 37572 3164 6025

5495 530 11084 14960 –930 29526 6629 12003 10894

1991

1992

1993

1994

1995

1996

76707 18252 31058 27397 6.0 68959 63904 5055 11506 2135 9371 2023

110535 30135 37513 42887 8.6 95314 88943 6371 19498 6450 13048 2907

136571 39472 40796 56303 8.1 116719 106440 10279 34020 9600 24420 8852

170258 50481 48865 70912 8.8 141175 127120 14055 43375 9215 34160 11637

222840 66804 63219 92817 9.5 180522 162452 18070 60488 12479 48009 16776

258609 79501 70334 108774 9.3 214074 192478 21596 72117 17068 55049 20001

7348 10499 1007 23714 27639 167 31286 7228 12264 11794

10141 18965 533 38405 42921 239 33991 8242 13132 12617

15568 30635 3385 40286 52582 –1872 36735 9324 13634 13777

22523 43224 151 60725 77591 2574 39982 10631 14169 15182

31233 56648 3840 75106 95925 2649 43797 12113 14892 16792

35048 67539 4578 105542 135184 2060 47888 13861 15551 18476

1997 295696 93849 76028 125819 9.0 236197 212360 23837 85844

80460 5384 134030 160775 400 52197.9 15690.7 17603.7 20064.9

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Appendix 1

Appendix 1

Continued 1990

Consumption Private Government Gross capital formation Gross fixed capital Change in inventories Export (goods & services) Import (goods & services) Statistical discrepancies

28185 25738 2447 4754 4381 373 7587 10621 –379

1991 29211 26558 2653 4349 3938 411 9540 11570 –244

1992 30449 27598 2851 6118 5954 164 11342 12719 –1199

1993 31774 28558 3216 9004 8093 911 11796 15111 –728

1994 33354 29852 3502 10275 10240 35 14740 18720 333

1995 35800 32000 3800 11343 10588 755 15875 20094 873

1996 38815 34725 4090 13383 12492 891 16848 22390 1232

1997 41753 37352 4401 15019 14018 1001 22937 27381 –226

Source: GSO.

105

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Vietnam: Economic and Social Impact

Appendix 2 Main exported and imported commodities of Vietnam 1990–97 1990 Exports US$ 2404 (million) % 100 – Coal US$m 32.7 % 1.4 – Crude oil US$m 468.4 % 19.5 – Rubber US$m 66.4 % 2.8 – Rice US$m 304.6 % 12.7 – Cashew nuts US$m – % – Coffee US$m 92.5 % 3.4 – Marine products US$m 239.1 % 10.0 – Textile and garments US$m 214.7 % 8.9 – Footwear US$m – %

1991

1992

2087.1 2580 100

100

1993

1995

1996

2985.2 4054.3 5448.9 7255 100

100

100

100

114.3 1.6

111.8 1.3

52.0 1.7

581.0 27.8

805.0 31.2

861.0 28.8

53.3 2.6

67.0 2.6

74.7 2.5

134.0 3.3

157.0 2.9

149.9 2.0

195.9 2.2

187.6 9.0

300.0 11.6

363.0 12.2

405.7 10.0

546.0 10.0

853.0 11.8

868.3 9.8

26.0 1.3

41.0 1.6

44.0 1.5

72.5 1.8

97.7 1.8

95.0 1.3

130 1.5

74.0 3.6

92.0 3.6

110.6 3.7

328.2 8.1

595.5 10.9

333.8 4.6

507.6 5.7

285.4 13.7

307.0 11.9

427.2 14.3

551.0 13.6

621.4 11.4

651.0 9.0

760.0 8.6

158.0 7.6

220.0 8.5

335.0 11.2

554.0 13.7

850.0 1150.0 1300.0 15.6 15.9 14.7

10.5 0.5

16.8 0.7

68.0 2.3

115.4 2.9

296.4 5.4

39.7 1.6

116.9 3.0

88.9 1.6

8900

62.0 2.4

29.7 1.3

75.1 1.9

100

1997*

47.7 2.3

Imports US$ 2752.4 2338.1 2540.7 3924 (million) % 100 100 100 100 – Electrical machinery US$m – %

1994

976.0 1031.8 1345.0 1423.7 24.1 18.9 18.5 16.0

530.0 7.3

955.0 10.8

5825.8 8155.411144 11200 100

100

100

104 1.8

113.8 1.4

184.8 1.7

100

–

Tran Van Hoa

Appendix 2

Continued 1990

– Steel US$m % – Fertilizers US$m % – Petroleum products US$m % – Fabrics for textiles US$m %

107

1991

1992

1993

1994

1995

1996

1997*

–

25 1.1

85 3.4

233 5.9

211 3.6

365 4.5

529.2 4.8

487 4.3

–

236 10.1

237 9.4

205 5.2

247 4.2

339 4.2

341.1 3.1

419 3.7

–

485 20.7

615 24.3

687.4 17.5

701 12.0

830 10.2

1079 1111.6 9.7 9.9

–

42 1.8

13.8 0.5

60 1.5

81 1.4

199 2.4

158 1.4

Sources: National Commission for ASEAN, 1997 and GSO 1998.

–

Foreign trade of Vietnam by partners 1990–97

1. Exports to Asia + North East Asia + South East Asia + South Asia and Middle East Europe + North West Europe + CIS and Eastern Europe + Russia America + North America + Latin America Africa Australia 2. Imports from Asia + North East Asia + South East Asia + South Asia and Middle East Europe + North West Europe

units: per cent

1990

1991

1992

1993

1994

1995

1996

43.30 27.10 14.50 1.70

76.91 51.35 25.13 0.43

73.73 50.11 22.32 1.30

72.61 50.02 21.53 1.05

72.01 49.09 22.02 0.90

72.39 51.13 20.41 0.85

72.37 46.84 24.49 1.04

50.50 7.35 4.90 38.25 0.65 0.17 0.48 0.17 0.32

17.05 5.86 0.99 10.2 0.25 0.02 0.23 0.63 0.25

14.52 9.56 0.90 4.06 1.02 0.29 0.72 0.95 0.83

13.70 8.30 0.87 4.54 1.39 0.34 1.04 0.38 1.83

13.87 10.82 0.83 2.22 3.45 2.68 0.76 0.49 1.23

18.04 15.58 0.98 1.48 4.37 3.55 0.82 0.70 1.04

16.19 14.00 1.09 1.10 4.13 3.68 0.45 0.36 1.00

36.67 16.91 19.61 0.6

60.68 24.96 43.69 1.03

65.44 27.56 37.52 0.35

69.30 35.50 33.60 0.21

67.13 37.65 29.00 0.48

77.47 47.56 29.15 0.75

77.12 49.48 26.85 0.79

58.29 10.21

30.55 13.33

16.53 12.00

17.61 12.71

17.50 11.47

13.35 10.86

13.98 11.83

108

Appendix 3

Appendix 3

Continued

+ CIS and Eastern Europe + Russia America + North America + Latin America Africa Australia

units: per cent 1990

1991

1992

1993

1994

1995

1996

48.08

17.22

0.43 0.25 0.18 0.09 0.39

0.46 0.31 0.15 0.09 0.41

0.59 3.94 0.98 0.63 0.35 0.20 0.62

1.22 3.68 0.76 0.64 0.11 – 0.77

1.07 4.96 1.25 1.24 0.01 0.05 1.10

0.71 1.78 2.08 2.06 0.02 0.28 1.23

0.48 1.67 2.73 2.73 – 0.12 1.19

Source: GSO 1997, 1998.

109

110

Vietnam: Economic and Social Impact

Notes 1. Domestic saving (S) is calculated at the current prices as S = GDP – C (consumption). 2. Resolution of the CPV adopted by the Fourth Plenum, December 1997. 3. Investment Review. 2 October 1997. 4. Investment Review, 11 December 1997. 5. State Bank, Report on the implementation of the monetary policy in 1997: Direction, solutions to the monetary policy in 1998, No. 51/BC1998/NHNN1. 6. ‘Firms bear brunt of cash shortages’, Vietnam Investment Review, 11–17 May 1998, at page 5.

References Leung, S. and Le Dang Doanh (1998), ‘Vietnam’, in McLeod, R. H. and Garnaut, R., East Asia in Crisis: From Miracle to a Needing One?, London: Routledge. Socialist Republic of Vietnam (1995), Socio-Economic Developments and Investment Requirements for Five Year 1996–2000, Hanoi, October. Tran Van Hoa (1999), The Asia Crisis: The Cures, the Effectiveness and the Prospects After, London: Macmillan. World Bank (1999), ‘Social Impact of the Asia Crisis’, Internet, 20 August 1999.

7 Social Influences of the South East Asia Financial Crisis on China1 Zhao Yanyun and Zhang Xiaopu

1

Introduction

The financial crisis, originating from Thailand in July 1997, has imposed a number of negative influences on the economic and social developments of China. Nobody expected that the crisis could last so long and have such detrimental effects on the world economy. The influence of the Asia crisis on China was also beyond an average person’s expectations. It was mainly concentrated on China’s balance of payments, and, through this, the damaging effect was diffused to other economic and social aspects. Since the second half of 1997, especially in 1998, China’s balance of payments obviously deteriorated. The worry about the foreign exchange reserves growing too quickly was replaced by the worry about them declining. The pressure of currency appreciation faced by the foreign exchange of the RMB was replaced by a pressure of devaluation. The worry about foreign capital flowing too freely and about taking the measures to constrain its inflow was replaced by the worry about the net outflow, and so on. However, since the Chinese government has adopted many effective related measures timely and properly, the negative impact of the crisis was successfully controlled, and China’s growth rate was still maintained as high as 7.8 per cent.

111

112

2

China: Social Influences of the Crisis

Direct influence on trade

Influenced by the South East Asia financial crisis, China’s export volume showed a negative growth in May 1998 as compared with that of the same period in 1997. It was the first time that exports declined after a continuous vigorous growth for 46 consecutive months (see Figure 7.1). The impact on exports could be generalized in two ways. One was the wealth effect, namely, the decrease in South East Asian disposable incomes that was brought about by a decline in demand for Chinese goods. The other was the price effect: since the devaluation of the South East Asian currencies resulted in their relative lower prices in the world market, the competitiveness of China’s similar tradeable goods deteriorated. Before November 1998, the wealth effect was the dominant factor, which is correlated with the slowdown of China’s exports. During this period, the export volume from China to South East Asian countries decreased, but the export volume from China to Europe and North America still maintained a relatively high growth rate. After November 1998, the economic order began to recover in South East Asian countries, and their cheaper products exerted a heavy pressure on China’s export volume. The price effect began to dominate over the wealth effect, and, as a result, China’s exports to the European Union, North America and some other countries began to drop. Hence China’s exports in 1998 showed an obvious declining trend even on a monthly basis. Faced with the advent of the South East Asia financial crisis, the Chinese government adopted a series of effective measures. These included an increasing tax reimbursement ratio of exports (of course, this will increase the fiscal deficit), a quickening of the speed of tax reimbursement, and increasing loans to foreign trade companies, and so on. While there was a sharp reduction in exports to Asia, these companies strove to develop the European and American markets, and the total export volume reached US$183.76 billion, up 0.5 per cent, in 1998. But the price of general trade exports went down 10.4 per cent. A breakdown of total exports into the importing regions shows that, in 1998, exports to Asia went down 9.9 per cent in total (Japan posted a fall of 6.7 per cent, Hong Kong SAR 10.4 per cent, the ASEAN 13.6 per cent, and Korea 31.3 per cent) but exports to other regions went up (the EU and North America

Zhao Yanyun and Zhang Xiaopu

Figure 7.1

China: trend in exports

Figure 7.2

The export growth breakdown by regions

113

recorded a rise of 15.7 per cent; Africa and Latin America 20.1 per cent; and Oceania 11 per cent. (See Figure 7.2.) The decline in imports was mainly due to a weak domestic demand (see Figure 7.3). Moreover, the negative growth of exports, which was closely related to imports, also led to a fall in imports. For example, textile imports went down by about 7.3 per cent, due to a drop of clothing exports in 1998. Finally, the increasing volume of smuggling in the first half of 1998 also hindered the growth of legal imports. From January to July 1998, China’s general trade imports went down 2.5 per cent, but after the government took strong measures to fight smuggling, general trade imports went up

114

China: Social Influences of the Crisis

to 28 per cent from August to December 1998, as compared with the same period in 1997. The decline in exports directly influenced the development of foreign trade companies. They had to transfer their exporting products to the domestic market, thus worsening this market which was already experiencing a surplus supply over demand, especially for durable consuming goods such as TVs, and their prices were forced to come down continuously. On the other hand, the fall in exports also hampered the growth of production and investment directly or indirectly, and gave rise to a drop in family income. As a result, the demand for consumables was weakened. The interaction of the above factors finally pushed the Chinese economy into recession. So, the government had to take effective measures to develop the rural market, especially to strengthen the links between the urban and rural economies. These were to stimulate domestic demand and economic growth, residents’ income, and to restore the cycle of development strategies for the national economy. The policy was very beneficial to China. First, it made China’s economy shift to another cycle of development, based on its domestic conditions. This hopefully would develop further in the future because it was suitable to China’s economic conditions. Second, it would enhance the quality of life of the farmers, and help to develop rural resources. The positive effects were expected for both economic and social developments.

Figure 7.3

Trend in imports

Zhao Yanyun and Zhang Xiaopu

Figure 7.4

115

Change of interest rate

A consequence of the South East Asia financial crisis was that the contribution of China’s exports to economic growth fell, and a fall in external demand for China’s goods slowed down its economic growth. As a rough estimate, the South East Asia financial crisis brought about a 2 per cent drop in China’s economic growth rate. In order to stimulate economic growth, the government had to loosen its monetary policy. China’s central bank lowered the interest rates three times in 1998 (see Figure 7.4), and at the same time, it actively developed a housing credit scheme to promote the growth of the housing sector and to drive the economy up. But the effect of the monetary policy proved to be limited and not enough, hence the government has begun to adopt an active fiscal policy since August 1998. This included issuing 100 billion RMB (or US$12 billion, 1.4 per cent of GDP) treasury bills and increasing investment on infrastructure. When we took into account the corresponding investment by the local governments and banks and the multiplying effect of investment, an expansion of public investment exerted a great influence on domestic demand expansion. This helped China’s economic growth rate to reach up to 7.8 per cent at last.

3 Influence on foreign capital inflows and promotion of domestic capital restructuring In the first half of 1997, there still existed great concern about too much foreign capital inflows, and the government was prepared to

116

China: Social Influences of the Crisis

cancel its duty-free policy for foreign-funded enterprises’ equipment imports as investment. But the economic developments in 1998 were quite different, and the government had to resume this dutyfree policy. First, the inflow of external debts was slowed down, and the outflow went up. As a result of the South East Asia financial crisis, China’s financial institutions had to lower their Asian credit ratings and began to contract their loans to the Asian market (using such steps as stopping signing expansion contracts, asking for advance payments of interest and principal, and so on). The central bank closed the GITIC (Guangdong International Trust and Investment Company) in October 1998. Of course, this measure could help China to control its financial risks and to regulate its financial orders, and show to the world the government’s confidence and resolution in carrying out its financial reform. But this measure would also negatively influence foreign capital inflows to non-banking financial institutions. Second, investment from Asia to China was sharply reduced. As a result of the Asia crisis, most financial institutions and enterprises of the Asian countries suffered from a shortage of liquidity, and their investment abroad dropped or almost stopped. The real direct investment from ten Asian countries and regions, including Japan, Korea, the ASEAN, Hong Kong, Macao and Taiwan, went down by about 9.3 per cent in 1998. At the same time, it became more difficult for China to issue its stocks to the world capital market. This development slowed down capital inflows. The South East Asia financial crisis brought about some alarms to China, and pushed China to deepen its on-going economic reforms. Why are these reforms so important to China and what are they? First, China should reform its investment management system; especially it should get rid of repetition investment at the lower level, promote competition among the different regions, and pay more attention to improving the industrial structure. Second, the government should deepen its financial reform, reduce nonperforming loans, and enhance its ability to fight against financial risks. Finally, the government should activate the state-owned enterprises, accelerate the speed of restructuring corporate capital, and improve economic efficiency and product competition so as to better China’s economic growth measures.

Zhao Yanyun and Zhang Xiaopu

117

4 Influence on the RMB exchange rate and international reserves By the end of 1998, China’s foreign exchange reserves reached US$145 billion, US$5.1 billion more than at the end of 1997 (see Figure 7.5). The RMB exchange rate was maintained at 8.2789 RMB Yuan per US dollar, appreciating nine basic points more than in 1997. There was considerable discrepancy between the stability of the RMB and a sharp devaluation of other neighbouring countries’ currencies. Since the second half of 1997, the world expected that the RMB would depreciate. However, in order to maintain international economic order, to avoid the second financial turmoil and to help crisis countries recover their economies as soon as possible, the Chinese government promised to major countries that it would not devaluate its currency, and paid high costs for it. The stability of the RMB in the context of the Asian currencies’ devaluation showed that the Chinese government was responsible and took the interest of the whole world into account. The stability of the RMB and the proper growth rate of the Chinese economy have improved the international position of China, and the RMB has become wellknown in the world.

Figure 7.5

Change of RMB exchange rate and foreign exchange reserve

118

China: Social Influences of the Crisis

Generally speaking, when faced with the South East Asia financial crisis, the Chinese government’s promise not to devaluate its currency was right and reasonable. In theory, when faced with external shocks, whether a country should adjust its real exchange rate (or the nominal exchange rate/price index) or not depends on the nature of the shocks. If the shock is temporary, it is not necessary to adjust the real exchange rate. But if the shock is real and not temporary, the government needs to change its real exchange rate to maintain the internal and external economic equilibrium. In fact, the practice of China was opposite to the traditional theory. Under the context of strong external shocks, the exchange rate of the RMB actually acted as a kind of confidence index. If the RMB could remain stable, then domestic and foreign individuals and companies would be confident about China’s economic development and stability, and China could have an orderly development environment, at least better than its neighbouring countries. If, on the other hand, the Chinese government devaluated the RMB, the public would have lost confidence in the Chinese economy, and most probably this would have given rise to competitive devaluation, which would bring about the next new financial turmoil in the Asia region. Then, in this case, the Chinese economy might not be better than Thailand’s, Indonesia’s and Korea’s, and could not achieve its targeted economic growth objectives in 1998. As it turned out, the devaluation of the South East Asian currencies did not improve their international competitiveness. On the contrary, the devaluation led to turmoil and economic recession, because of the public lack of confidence in their country’s economic development. So, even if China had to face real and not temporary external shocks, the Chinese government also should not devaluate the RMB. That coincides with the trend in which most countries have paid more and more attention to the harmful effects of exchange rate misalignment on economic fundamentals. The Chinese government’s decision to maintain a stable RMB was in this case reasonable. The stability of the RMB and the devaluation of the South East Asian currencies also made tourism to South East Asia much cheaper for Chinese visitors and, as a result, Chinese visitors to the above countries increased rapidly in 1998. That would be beneficial to

Zhao Yanyun and Zhang Xiaopu

119

expand cultural communications between China and other Asian countries, and would help China to develop its open policy and improve its international competitiveness. Of course, the stability of the RMB exchange rate reduced the numbers of foreign visitors to China, especially visitors from the Asian crisis countries and regions. However, China’s tourism industry was still in the course of expanding and still had great potential, so, generally speaking, foreign visitors to China were still growing in number. The South East Asia financial crisis did negatively affect the number of foreign students studying in China, especially those from Japan and Korea.

5

Increase in underground economic activities

Because of the devaluation of the currencies of the South East Asian countries, their products and goods became much cheaper and the illegal profits increased. As a result, the amount of smuggling expanded, especially since the second half of 1997, and it brought about economic and social disorders. At the same time, smuggling imposed a heavy pressure on the sale of domestic products. From July 1998, the Chinese government has timely launched serious anti-smuggling actions all over the country. According to official statistics, 8381 cases of smuggled goods (or US$15.4 billion) were uncovered in 1998, and the amount was more than twice that in 1997 (US$6.74 billion). In 1998, China’s trade surplus reached a historical record, and foreign capital inflows were still at a high level, but China’s foreign exchange reserves grew only slowly. Most experts and scholars were puzzled by the above phenomenon. While there are a number of reasons to explain it, it has been argued that, because of increasing smuggling and an expectation of the RMB devaluation, capital flight and other illegal foreign exchange transactions were two important reasons. From the second half of 1998, the government began to launch foreign exchange check actions all over the country, and paid special attention to a genuine verification of current account transactions. At the same time, it further improved the effectiveness of capital management. These actions have proved to be beneficial to maintain the market economy order and to defend the security of the Chinese economy, and have been appreciated by most enterprises and commercial banks. The guiding principles of the above

120

China: Social Influences of the Crisis

actions were to continue a policy of current account convertibility, and to maintain China’s open-door policy, as capital account liberalization and a 100 per cent convertibility of the RMB are still the final objectives of China’s foreign exchange management. The lessons and experience of the crisis countries have also shown that maintaining the normal foreign exchange transaction order was not only necessary for defending the security of a country but also beneficial to the interest of foreign investors. Due to the government’s actions that have been taken to fight against smuggling and capital flight, the Chinese economy has continued to grow steadily, and foreign exchange reserves have begun to show a stable growth.

6

Influence on China’s economic reform

The South East Asia financial crisis has bought about challenges to the Chinese economic reform. As a result of the crisis, the development environment of enterprises deteriorated, their profits fell, and the reform of the state-owned- enterprises system was negatively affected. But on the other hand, the South East Asia financial crisis has strengthened China’s resolution to deepen its economic reform. The country has stepped up its financial reform, including the setting up of local central banks in the different economic zones, using a more detailed classification of loans, and imposing capital restrictions into the state-owned commercial banks, and so on. Meanwhile, China has also opened more markets to foreign financial institutions. In May 1998, the People’s Bank of China, the central bank of China, approved the entry of eight new foreign-funded banks to do business in the RMB to join in the Chinese inter-bank buying and selling market. In August 1998, the People’s Bank of China also approved Shenzhen to be the second test city after Shanghai to allow foreign-funded banks to do business in the RMB. About 178 operational financial institutions were founded in China by foreign financial institutions by the end of June 1998, and there are signs that China will further open its financial and insurance market to the world. Generally speaking, most reform plans put forward by the Chinese government have been completed, including state-owned-

Zhao Yanyun and Zhang Xiaopu

121

enterprises reform, financial reform, government reform, housing reform and medical reform, and so on.

7

Influence on employment and individual incomes

Since the South East Asia financial crisis has negatively affected Chinese foreign trade and the profits of enterprises and economic growth, the employment situation was also negatively affected. According to an article published in The Economist in 1998, if the growth rate of the world GDP is slowed down by one per cent, the unemployment population will increase by 500 million. But the World Bank also estimated that a one per cent loss of world GDP growth rate would bring about an unemployment population of 100 million people. In spite of this conflict of estimated unemployment, China’s employment pressure has in fact become serious and the unemployed population increased. The Chinese government has taken some measures to reduce the country’s unemployment problems, such as developing a service industry, and so on. According to official statistics, the registered unemployment rate was 3.1 per cent in 1998. This rate is very close to the level in 1997. Whether such measures will succeed in the near future or whether other actions and policies are necessary requires further serious investigation. Note 1. The views expressed are those of the authors and do not necessarily represent those of their organization.

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8 Australia: Has It Weathered the Crisis? David Johnson

1

What crisis?

From an Australian perspective, the tumult in some Asian economies over the period 1997 to 1999 has passed with little apparent effect. While both real and nominal output in five key Asian economies (Indonesia, Thailand, Malaysia, the Philippines and Korea, hereafter the crisis economies 1) has fallen appreciably with consequent effects on employment, consumption, confidence, household income and poverty in those countries, the Australian economy has been one of the best performing economies in the world. Given Australia’s proximity to, and interaction with the crisis Asian economies this may seem surprising and it is informative to ask the question why. The onset of the Asian financial crisis The Asian financial crisis is the name given to the sequence of events dating from the collapse of the exchange rate values of five Asian currencies, those of Indonesia, Thailand, Malaysia, the Philippines and Korea with respect to other countries from about the middle of 1997.2 The feature of the crisis is that the fall in the value of the currency in each of these countries was associated with the falls in other currencies, that is, there was contagion. The contagion was fuelled by speculative attack and by loss of investor confidence leading to withdrawal of short-term investment. Other features of the crisis were the consequent fall in the value of equities on stock markets in the affected countries, the build-up of external 123

124

Australia: Has It Weathered the Crisis?

debt, accompanied by larger current account deficits and export weakness. Governments were not able to defend their currencies against the fall in their value. The outcome of the crisis has been a dramatic fall in the output of the countries concerned and associated increased unemployment, inflation and poverty. In addition to the effects on the five main crisis economies, other currencies in the region – Hong Kong, Singapore and Taiwan – were also devalued. However these economies were able to survive the episode and significantly had low levels of foreign liabilities. This chapter examines the impact of the crisis on another significant economy in the region, Australia. In this chapter I explore the transmission mechanisms between Australia and the crisis countries of Asia. I examine the predicted effect of problems in the financial markets of the crisis countries on the Australian economy. Problems in the crisis economies can have an impact in Australia either by transfer to Australian financial markets and then to the Australian economy or the problems can be transferred via the real economy. There are three sets of linkages involved: between financial markets and the real economy in each country, between financial markets in different countries, and between the real economy in different countries. The evidence for the transmission is not based on rigorous econometric analysis since the data do not exist to support any such analysis. Rather the evidence rests on drawing connections from the performance of the Australian economy over the period and from introspection. Connections are made and implications are drawn for the impact on the main measures of economic performance in the first instance. Finally the more nebulous social impacts including equity and the distribution of income are considered.

2 Connections between Australia and the crisis economies of Asia Australia and the countries of Asia are linked in a number of important ways that bear both on their economies and on their societies. First, there is the problem that the contagion described above in relation to the crisis economies will also spread to Australia. Second,

David Johnson

125

there are economic linkages. These occur through trade, through capital inflow, through movement of labour (i.e. people), through skill transfer, through government protocols and through common institutional structures (principally through shared multinational companies). Third, from a social perspective there are links through sporting and cultural events, through permanent and temporary flows of people, through individual interactions between related and non-related persons, through communications and the media, through shared membership of forums (organizations of professionals) government interactions and so on. More than at any other time in its past Australia is linked to Asia and Asia is more important to Australia now than in any other time in its past. Thus the potential for problems starting in Asia having substantial impact on Australia is greater than ever before. On the surface it seems there is great potential for financial and economic problems in Asia to spread to Australia. Contagion Given the rapid spread of the financial problems through the crisis economies it seems likely that Australia too will have been subject to some contagion effects. Figure 8.3, below, suggests a depreciation of the Australian dollar with respect to both the trade weighted index and the US dollar of about 15 per cent but little change relative to the Japanese yen dollar from mid 1997 to the end of 1997. However there may be other explanations for the weakening of the currency. For instance the Australian currency is particularly sensitive to the price of commodities and these have been notably weak over this period. In any case the order of magnitude of the depreciation is small in comparison to the massive loss of value of the currencies of the crisis economies (Korea, 50 per cent; Indonesia, 75 per cent; Thailand, 50 per cent; Malaysia, 45 per cent; the Philippines, 50 per cent; with respect to the US dollar over the same period). The loss of confidence in the currencies flowed quickly into equities, and in the six months to the end of 1997 the five crisis economies had also lost in the order of half the value of stocks listed on their various stock markets. The same has not been true of the Australian stock market. At the middle of 1997 the Australian index based on the all ordinaries composite share price index with a value

126

Australia: Has It Weathered the Crisis?

of 100 at the end of January 1985 stood at 352.5 at the end of June 1997. It fell to 338.3 points by the end of 1997 but rose appreciably over 1998 to be 363.8 points at the end of 1998 and has risen further since. In summary the evidence suggests some contagion effect on the Australian exchange rate but this does not appear to have had any long-term effect on Australian equities. Trade The most obvious way in which events in Asia may have a real impact on the Australian economy is through trade . There are three means by which developments in trade can transmit bad or good fortune: by changing demand for Australian products directly effecting Australian exports; by increasing or decreasing the flow of Asian sourced products to Australia; and by affecting the price of Australian traded goods in third markets. Figures 8.1 and 8.2 report the shares of Australian exports to and imports from its main trading partners for a period spanning the crisis. Figure 8.3 reports movements in the volume of Australian exports and imports and the Australian terms of trade (here the relationship between the price of imports and the price of exports), all over the last five years.

Figure 8.1

Import shares by source country, 1996 to 1998, Australia

David Johnson

127

Figure 8.1 shows the shares of imports from the main provider countries or regions for the period from the first quarter in 1996 to the last quarter in 1998. There is some trend in the source of imports over the period. The share of imports from China, Hong Kong and Taiwan and from the ASEAN countries other than Singapore tended to rise while all other categories stayed much the same or fell marginally over the period. Figure 8.2 shows the shares of the destination of Australian exports between the first quarter of 1996 to the last quarter of 1998. There was greater quarter to quarter variation than with imports and more marked trends. As a destination Europe increased and ASEAN less Singapore decreased in importance. The figures provide some evidence that, as a response to the crisis, there was less demand for Australian goods and services in the crisis economies but other markets were found to take the place of these exports. The much weaker exchange rates in the crisis economies made their exports much cheaper to Australians and there was an increase in imports from the region. Figure 8.3 shows the movements in export and import prices and in exchange rates. The upper three lines are indexes of import prices, export prices and the terms of trade (the ratio of export

Figure 8.2 1998

Destinations of Australian exports, country and region, 1996 to

128

Australia: Has It Weathered the Crisis?

130.0 120.0 110.0

points/cents/yen

100.0 90.0 80.0 70.0 60.0 50.0

ec .1 99 6 M ar .1 99 7 Ju n. 19 97 Se p. 19 97 D ec .1 99 7 M ar .1 99 8 Ju n. 19 98 Se p. 19 98 D ec .1 99 8 M ar .1 99 9

D

6

96 19 p.

Se

Ju n

.1

99

6

5

99 M ar .1

95

99 ec .1

D

Se

p.

19

99 .1

Ju n

M ar .1

99

5

5

40.0

Quater Export price index, 1989-90=100 $A/$US, cents

Figure 8.3

Import price index, 1989-90=100 $A/TWI

Terms of trade, 1989-90=100 $A/Yen

Exchange rates and prices, Australia, 1995 to 1999

prices to import prices), all normalized to have a value of 100 over 1989–90. The export price is considerably lower than the import price indicating that the level of export prices has fallen relative to import prices since 1989–90. However over the four-year period of interest, from 1995 to 1998, both import and export prices followed much the same path, falling in the period to late 1996 then rising thereafter. Slightly weaker export prices have led to a fall in the terms of trade, continuing the long-term trend noted above. The small decline in the terms of trade over the period is more likely to reflect the long-term trend related to the heavy weighting of commodities in the export composition than any price reaction stemming from the financial crisis in South East Asia. Capital Table 8.1 shows overseas investment in Australia in the four years 1995 to 1998, spanning the period of the Asian financial crisis. The annual figures show no clear trend over the period. The financial account is the net result of overseas investment in Australia, Australian investment abroad and reserve bank activity. Overseas investment in Australia includes direct investment and portfolio

David Johnson

129

Table 8.1 Foreign investment in Australia and Australian investment abroad, 1995 to 1998 ($mill)

Financial account Direct investment abroad Direct investment in Australia Portfolio and other investment Reserve assets

1995

1996

1997

1998

26434 –5188 17180 14993 –491

18574 –7560 6520 22690 –3076

15434 –7966 11582 16564 –4746

27141 –4032 10456 17831 2886

Source: ABS (1999), Balance of Payments statistics available from PC Ausstats.

and other investment. Direct investment is where the investor has a significant influence, either potentially or actually, over the key policies of the enterprise. Portfolio and other investment includes all other situations and in particular includes purchase of Australian stocks and shares by foreigners. 3 The pattern of investment shows no clear relationship with the onset or progress of the financial problems in Asia. Much of the variation between 1997 and 1998 is due to activity of the Reserve Bank. The crisis economies of Asia have not been a source of capital for Australia and Australia has not been a large investor in these economies (either with respect to total Australian investment overseas or with respect to Australia’s share of total overseas investment in these countries). If anything, Australia has been a competitor for funds from the main sources (US, Europe and Japan). The financial and economic crisis is likely to have enhanced the desirability of Australia as a place to invest so Australia will have benefited from the crisis. Labour Another possible way problems in one country can influence another is through migration. Existing levels of migration in both directions may increase or decrease. Immigration between countries is usually under fairly strict controls so the opportunity to have large effect is circumscribed. While there has been an increase in migration from Asia, including from some of the crisis countries, in recent years the increase precedes the financial problems in Asia. In any case Australia does have strict controls on the type and

130

Australia: Has It Weathered the Crisis?

8000 7000 6000 5000 4000 3000 2000 1000

p. 19 9 D ec 5 .1 99 M ar 5 .1 9 Ju 96 n. 19 Se 96 p. 19 9 D ec 6 .1 99 M ar 6 .1 9 Ju 97 n. 19 Se 97 p. 19 9 D ec 7 .1 99 M ar 7 .1 9 Ju 98 n. 19 Se 98 p. 19 9 D ec 8 .1 99 M 8 ar .1 99 9

95

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99 ar .1

n.

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19

5

0

Europe and the Former USSR

Oceania and Antarctica

North Asia

South Asia

Figure 8.4

Africa and the Americas South east Asia

Permanent settlers to Australia, 1995 to 1998

number of people who can immigrate, severely limiting the opportunity for economic problems in the crisis economies to lead to changes in migration to Australia. Figure 8.4 shows recent migration flows to Australia from all source regions. The figure suggests that while there has been some variation in the source of permanent settlers over the period, the trends do not appear to be obviously related to the financial developments in the crisis countries. Apart from Korea the crisis countries are located in South-East Asia but there has been little change in the trend of migration from this region since early 1997. Knowledge Knowledge is transmitted through informal transfer and through education programmes. Informal transfer occurs by passage of knowledge through academic and scientific interchange, through mass media, by movement of people with skills, by transfer of knowledge within multi-national companies, and from passage through government to government interactions. Australia benefits from knowledge transfer from advances originating all over the world. Acquisition of knowledge in the crisis economies represents such a small proportion of world learning that its temporary depres-

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sion is unlikely to have any effect on Australian knowledge accretion. Australia has however been a major beneficiary of demand from crisis economies for formal education programmes. The export of education has become a very important source of revenue in Australia and it is useful to consider recent trends from the point of view of education as an export and from the perspective of the cultural and social linkages that are formed when students travel overseas. Table 8.2 reports the inflow of higher-education students undertaking formal degree courses in Australia over the last five years from Asian and other foreign countries. In addition to higher education there are also very longstanding and well-developed markets for secondary education and for technical and further education including non-degree courses. In 1996 it is estimated (West, 1997 p. 100) that while there were 53 200 foreign students in Australia undertaking higher education there were 143 000 foreign students in all manner of education and knowledge acquisition. Focusing on higher education, Table 8.2 shows the numbers of students from the main source countries in the four years 1995 to 1998. The figures show very strong growth in numbers from most

Table 8.2 Overseas student participation in higher education in Australia, 1995 to 1998 Country of birth

1995

1996

1997

1998

China Hong Kong Indonesia Korea Malaysia Singapore Thailand Other Asia Total Asia Other countries All overseas students Commencing overseas students

2008 7645 3781 993 9340 8040 1369 6154 39330 12614 51944 25734

2212 6924 4714 1103 11208 9672 1731 7520 45084 8104 53188 27886

2575 9052 5968 1460 13028 11339 2226 8901 54549 8425 62974 33409

3220 11229 6931 1644 13637 13269 2417 10342 62689 9494 72183 37292

Sources: DETYA selected higher education student statistics (various issues).

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Australia: Has It Weathered the Crisis?

Asian countries including the crisis countries. In addition to growth in all students in Australia in each year there has also been continuing growth in the number of commencing students. These trends imply no slow-down in the demand for higher education services in future years such as might have been expected if the financial crisis were a factor in Australian exports of higher education. Links through common institutions, cultural and social linkages and political considerations Institutions such as multinational companies with offices across Australia and the crisis economies have the opportunity of passing information, skills, and capital between their various subsidiaries. Undoubtedly, increased internationalization of economies including both Australia and the crisis economies provide increased opportunity for impacts in one country to be transmitted in some form to another. However it is not clear in what direction the transmission may occur. Individual companies will organize their affairs to minimize loss from a particular episode. Thus the mobility of factors of production may add to or mitigate instability. Accompanying a long-term shift in the economic orientation of Australia towards the countries of Asia there has also been a strong social orientation which has led to the development of strong ties between Australia and its near neighbours. The social ties have been emphasized by the sizeable population of people of Asian origin now living in Australia. In addition to flows of people from Asia to Australia there has been very strong growth in Australians visiting the countries of Asia for recreation and for business. An important danger to the well-being of Australians is the potential increased political instability which may be a consequence of the crisis. The uncertainty in Indonesia is particularly relevant. While the ousting of former President Suharto may be a necessary precursor to the development of sound and reformed institutions in Indonesia it has also created a power vacuum in the short term. Consequently there is increased uncertainty and matters in Indonesia may be regarded with some apprehension. As this article is being written the Indonesian elections have occurred without major incident though the outcome is not yet clear. The fact that there have not been major incidents is a positive sign.

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3

133

Growth and development in Australia 1995 to 1999

To evaluate the impact of the Asian financial crisis on Australia, I review the performance of the Australian economy and of Australian society over the period of the crisis. Macroeconomic performance In Figure 8.5, I report trends in major macroeconomic indicators over the four years, 1995 to 1998. Shown in the table are real per capita gross domestic product, the number of employed and the rate of unemployment. The vertical scale is used to measure the levels of all three variables and is interpreted as thousands of real (1996–97) dollars per head in the case of per capita real GDP, per cent of the labour force in the case of the unemployment rate, and millions of persons in the case of employment. These statistics provide a summary view of the performance of the economy. Consider first the measure of output, real GDP per capita. This rose strongly and fairly consistently over the whole period. Since climbing out of recession in the early 1990s the economy has

10.5 10 9.5 per cent/$th/millions

9 8.5 8 7.5 7 6.5

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99

n. 5 19 95 p. 19 9 D ec 5 .1 99 M ar 5 .1 9 Ju 96 n. 19 Se 96 p. 19 9 D ec 6 .1 99 M ar 6 .1 9 Ju 97 n. 19 Se 97 p. 19 9 D ec 7 .1 99 M ar 7 .1 9 Ju 98 n. 19 Se 98 p. 19 9 D ec 8 .1 99 M 8 ar .1 99 9

6

Quarters Real GDP per capita.$th Total employment, millions

Figure 8.5

Unemployment rate, per cent of labour force

Macroeconomic indicators, Australia, 1995 to 1999

134

Australia: Has It Weathered the Crisis?

enjoyed strong and consistent growth. The performance of employment has also been robust over the period and follows the same broad cycle as that of aggregate output. However while real GDP recovered lost ground relatively quickly the growth in employment has been much slower, taking 5 years to exceed the level of 1990. Apart from the seasonality evident in the quarterly measurements the trend is down over the period dropping from around 9 per cent to 8 per cent over the five years. None of these indicators of economic performance appear to reflect the events on the South East Asian financial markets, suggesting that they have had little impact. Distribution of income Not shown in the table are trends in the distribution of wellbeing. While the macro indicators may show robust performance it is possible that the aggregate data hide some areas of growth and some of contraction. Similarly it is feasible that the financial problems in Asia could cause difficulties to some household groups but not to others. Data on distribution of income is relatively infrequent and no data are yet available for the period of interest. In any case it would not be possible to attribute changes in distribution to the effects of contemporaneous instability in some Asian economies. The mechanisms by which the problems in the crisis economies of Asia translate into effects on the Australian distribution are likely to be indirect and with some lags. While it is not possible to trace connections between the Asian financial crisis and effects on distribution in Australia it is useful to reflect on the recent history of distribution of income in Australia. In this way it may be possible to speculate on likely impacts of the crisis. The Gini index is a widely used summary measure of distribution. In Table 8.3 the value of the Gini index is reported for four definitions of income for Australian households in the years 1981–2, 1988–9 and 1993–4. Values for the Gini index range from one where there is maximum inequality to zero where all incomes are equal. Income for Australian households has been equivalized to take account of varying sizes of household. The four income definitions are: private income which includes only incomes received by households from

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Table 8.3 Summary measures of inequality (Gini), Australian households, four definitions of equivalized income, 1981–2, 1988–9 and 1993–4 Private income Gross income Disposable income 1981–2 1988–9 1993–4

0.489 0.484 0.517

0.366 0.346 0.352

0.308 0.290 0.296

Social wage income 0.255 0.225 0.226

Source: Johnson, Manning and Hellwig (1998, p. 9).

market related sources (wages and salaries, rents, profits from business, interest from bank accounts and so on); gross income is private income plus transfer payments received from government (pensions and benefits, family allowances, student payments); disposable income is gross income less personal income tax; and social wage income is disposable income plus the imputed value of noncash benefits provided by government (primarily education and health). There are three ways in which government brings about redistribution: through personal income tax deductions, through transfer payments, and by provision of non-cash benefits. While returns from the market became more unequal over the period (the value of the Gini index for private income went up), this was mitigated by government activity in all three methods of intervention. Increased payments from government reduced inequality (the value of the Gini index for gross income fell), changes in payments of personal income tax also caused disposable incomes to be more equal in 1993–4 than they were in 1981–2, and finally the provision of noncash benefits produced further reductions in inequality. If the Asian economic crisis were to result in greater dispersion of income the most likely means would be through increases in the inequality of private income. This may occur through increased levels of unemployment or through failure of wage rates in weak industries to be maintained relative to other industries. As the discussion above has suggested, a feature of the internationalizing Australian economy appears to have been increases in the dispersion of private income; however the government has the means for mitigating this increased dispersion. Therefore I have confidence

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Australia: Has It Weathered the Crisis?

that if inequality is increased by the Asian economic crisis (and there is no evidence of this yet) the government will be able to take action to reduce any adverse impacts on income dispersion. Interpretation of economic trends The most compelling conclusion that might be drawn is that there has been general, consistent and strong increases in living standards over the period. However in a period of general plenty some groups have been left behind. This is indicated by the high, persistent and only slowly declining levels of unemployment and the widening dispersion of private income. The government has mitigated much of the disparity. The overall impression is that it is hard to see the crisis in the Asian financial markets as having had much effect on either the Australian macroeconomy or on average standards of living in Australia. Nevertheless there have been continuing reports from commentators and from groups representing particular interests that further effects of the loss of output in crisis countries and uncertainty in the crisis country financial markets may be expected. It may be that there have been impacts at a disaggregated level on particular industries or in particular regions. For instance the change in exchange rates in both crisis economies and Australia will have changed the competitiveness of particular products. Where Australia competes with the crisis countries, Australian exports or import replacement goods and services will be at a disadvantage. On the other hand the small reduction in the Australian exchange rate noted above will increase Australian competitiveness on third country markets. It may also be that improved competitiveness of crisis country secondary products may increase demand for Australian primary imports to manufacturing in the crisis country economies. Notes 1. Four of these countries are original ASEAN countries – Indonesia, Thailand, Malaysia and the Philippines. The fifth original ASEAN member is Singapore. More recently the ASEAN grouping has been expanded to include Vietnam, Myanmar, Brunei and Laos. 2. For an account of the development of the Asian crisis, see Lloyd and Sawyer (1997). 3. For more discussion about the classification of investment, see ABS (1990), Catalogue no 5331.0; for a discussion about forms of foreign investment in Australia, see Juttner (1998).

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References Australian Bureau of Statistics (1990), Balance of Payments, Australia, Concepts Sources and Methods, Catalogue No. 5331.0, Canberra. Australian Bureau of Statistics (1999), PC Ausstats Time Series Tables, obtained at gopher://gopher.statistics.gov.au. Department of Education Training and Youth Affairs (DETYA), Selected higher education student statistics (various issues), Canberra. Johnson, D. T., Manning, I. and Hellwig, O. (1998) ‘Trends in the Distribution of Income in Australia’, Australian Journal of Labour Economics, vol 2, no. 1 (March), 1–28. Juttner, D. J. (1998) INternational Finance and Global Investments, 4th edition, Melbourne: Addison Wesley Longman. Lloyd, P. J. and K. Sawyer (1997) ‘The Asian Economic and Financial Crisis: the Effects of Market Integration and Market Fragility’, Mercer-Melbourne Institute Quarterly Bulletin of Economic Trends, vol. 4. 40–67. West, R. (chairman) (1997) Learning for Life: Review of Higher Education Financing and Policy, Department of Employment, Training and Youth Affairs, Canberra.

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9 The Asian Crisis and Australia’s Export Sector Peter M. Summers

1

Introduction

Since the onset of the Asian crisis in the middle of 1997, people looking for signs of the impact of the crisis on Australia’s economy have focused their attention on its trade sector. The reasoning behind this focus goes something like this. The regional recession generated a sharp reduction in demand for exported goods and services to the affected countries. Falling demand plus a stronger Australian dollar vis-à-vis most of the affected currencies has put pressure on Australian exporters through both quantity and price effects. On the import side, the robustness of Australia’s domestic demand, again in conjunction with price effects caused by exchange rate appreciation, resulted in a sharp increase in imports from these countries. The current account deficit deteriorated markedly as a result, increasing financial market volatility and investor uncertainty to the point where many have argued that previously healthy domestic growth could be brought to a halt. This chapter examines the performance of Australia’s export sector, using information on the total exports from Australia to several countries and groups, as well as the composition of these exports. After presenting a brief historical overview of Australia’s exports to Asia, the United States and Europe over the past ten years, I take a closer look at the periods immediately before and after the beginning of the Asian crisis. Although the information presented here does not constitute a thorough statistical analysis (indeed, such an analysis is beyond the scope of this chapter), there 139

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Asia Crisis and Australia’s Export Sector

are indications that the drop in exports to the worst affected Asian countries was due mainly to the sharp depreciation of their currencies against the Australian dollar. On the other hand, the rise in exports to the United States and the United Kingdom is consistent with changes in relative prices of various types of goods.

2

Historical overview

It is important to place the effects of the Asian crisis in historical perspective. To do this, I will briefly describe Australia’s export patterns over the past ten years (that is, from January 1989). This is followed by a closer examination of the directly measurable changes that have occurred since the onset of the crisis. Throughout this chapter, I will use the term ‘crisis countries’ to refer to the group comprising Indonesia, Korea, Malaysia, the Philippines and Thailand. The importance of the crisis countries to Australia’s export performance is underscored graphically in the following figures. First, Figure 9.1 shows the export share of the individual countries in this group since December 1988.1 The rapid increase in exports to Korea between 1994 and 1997 is especially dramatic. In addition, note that Indonesia’s share of total exports increased by nearly a percentage point (from 3.3 to 4.2 per cent) between January 1996 and May 1997. The export shares of several other Asian countries (other than Japan) are shown in Figure 9.2 This group of countries actually has a somewhat larger total share than the crisis countries, but it has been more stable than that of the former group. In January 1989, the countries in Figure 9.2 accounted for a total of 14.1 per cent of Australian exports. This figure had grown to 16.7 by the end of 1998, for a total increase of 2.6 percentage points. In contrast, the crisis countries’ share went from 9.6 to 14.1 per cent over the same period, a gain of 4.5 percentage points. This group of countries has been relatively unaffected by the Asian crisis, so it is interesting to contrast them with the crisis countries in terms of their importance as markets for Australian exports. Figure 9.3 presents the export shares over the past ten years for the crisis countries, the ‘Other Asia’ group (those countries shown in Figure 9.2), Japan, Korea, the United States, and the European

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Figure 9.1

141

Exports to Asian ‘crisis countries’, 1989–98

Source: Author’s calculations based on raw data from Datastream.

Union. The increasing importance of the Asian region in general and Korea in particular, is readily apparent. Considered as a single export destination, the crisis countries had achieved as high an export share as Japan by early 1997; furthermore, this share was growing at the rate of 1.2 percentage points per year. The increase in exports to Asia over this period coincided with a drop in the shares of the United States and European Union. The surge in Korea’s export share from 1994 to 1997 occurred as Japan’s share fell from nearly 25 to just over 20 per cent. Finally, Figure 9.3 shows the rapid shifts in the shares of several of these export destinations since the Asian crisis began in mid1997. Most notable is the fall in the fraction of exports going to the crisis countries. Between December 1996 and December 1998, this share dropped from 20 per cent to 14 per cent, its lowest level since December 1992. The drop in the share of exports going to these countries resulted from a fall of almost 30 per cent in the total value of the merchandise imports they receive from Australia.

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Asia Crisis and Australia’s Export Sector

Figure 9.2

Exports to various Asian countries, 1989–98

Source: Author’s calculations based on raw data from Datastream.

Korea led the decline; its share of 6.8 per cent in September 1998 was the lowest since November 1993, and is 2.7 percentage points lower than its share in December 1996. Similarly, Indonesia’s export share fell from 4 per cent in December 1996 to 2.4 per cent two years later. Exports to Malaysia were 2.9 per cent of all exports in December 1996, but only 2.1 per cent by the end of 1998, while the corresponding figures for Thailand are 2.2 and 1.4 per cent. In contrast to these countries, the export shares of the other Asian countries (those listed in Figure 9.2) remained relatively stable. At the same time as exports to the Asian crisis countries were falling off sharply, the export shares of the United States and (especially) the European Union increased dramatically. The United States became Australia’s second-largest single export destination in February 1998, and has remained in that position since. Since reaching its low point of 6 per cent in July 1996, the share of Australian exports bound for the United States has grown to 9.5 per cent.

Peter M. Summers

Figure 9.3

143

Exports to various countries and country groups, 1989–98

Source: Author’s calculations based on raw data from Datastream

The rise in the fraction of exports bound for the European Union (EU) is even more spectacular. Between December 1996 and December 1998, this share increased from 10.9 to 13.8 per cent. In fact, nearly all of this increase occurred over the course of 1998 alone. In January of that year, 10 per cent of Australian exports went to the EU; by December this share was almost 14 per cent. Much of this increase is due to an increase in the UK export share, which climbed from 2.8 to 5.3 per cent over the course of 1998.

3

Exports before and after the crisis

Changes in shares and flows Table 9.1 presents the shares of total Australian exports accounted for by several countries and country groups, from January 1989 through December 1998. The figures in the table are the average share of exports from Australia to each country or group over the indicated time period, along with the volatility of this share, as

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Asia Crisis and Australia’s Export Sector

Table 9.1 Australian exports to various countries and country groups (per cent of total exports) Country or group

China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Crisis countriesb United States United Kingdom Germany European Union

Pre-crisis Pre-crisis July 1995– July 1997– January 1989– December 1996 December 1998 December 1998 Average Volatilitya Average Volatilitya Average Volatilitya 4.7 4.0 3.5 22.2 8.6 3.0 1.4 4.9 4.6 2.3 18.9 6.3 3.6 1.5 11.1

0.3 0.1 0.3 1.3 0.4 0.1 0.1 0.5 0.1 0.1 0.6 0.2 0.1 0.1 0.1

4.4 4.3 3.4 19.4 7.6 2.5 1.4 4.1 4.6 1.7 16.6 8.1 3.5 1.4 11.2

0.1 0.3 0.6 0.3 0.7 0.3 0.1 0.2 0.1 0.2 1.9 1.0 0.9 0.1 1.4

3.6 3.9 2.9 24.1 6.9 2.4 1.1 4.8 4.3 1.7 15.1 8.6 3.6 1.8 12.3

0.9 0.6 0.6 2.8 1.3 0.5 0.2 0.9 0.4 0.5 2.9 1.7 0.5 0.4 1.4

a

Standard deviation, percentage points. Indonesia, Korea, Malaysia, the Philippines, and Thailand. Source: Author’s calculations based on raw data from Datastream. b

measured by its standard deviation. The table also shows the average share and volatility for two eighteen-month periods: from July 1995 to December 1996, and from July 1997 to December 1998. These two periods provide a ‘before and after’ picture of how export patterns to these countries have changed as a result of the Asian crisis. This ‘before/after’ split is not perfect. In particular, it dates the onset of the crisis at July 1997 for all countries, which is probably misleading. Nevertheless, it is illustrative, and has the advantage of averaging over the same number of months and the same times of the year. In some of what follows, it will be useful to discuss the period from January to June 1996 as well. The importance of the Asian region as an export destination is readily apparent from this table. Japan has been Australia’s largest

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single export destination over the past ten years, by a wide margin. On average, nearly one-quarter of all Australian exports over the past ten years have been bound for Japan. As the table also indicates, Japan’s share of Australian exports has suffered since the onset of the crisis. The 19.4 per cent average since July 1997 is almost three percentage points lower than the average of the immediate pre-crisis period, and nearly five percentage points lower than the ten-year average. Although relatively fewer exports have been destined for Japan in the latest period, this share has been much more stable (i.e., less volatile) than it has in the past. Taken as a whole, the group of crisis countries has nearly as large an export share as Japan’s. As Table 9.1 shows, this group took just over 15 per cent of Australia’s exports in the ten years since January 1989. In the eighteen months prior to December 1996, this share had increased to nearly 19 per cent, and had also become more

Table 9.2 Australian exports to various countries and country groups (percentage change) Country or group

China Hong Kong Indonesia Japan Korea Malaysia Philippines Singapore Taiwan Thailand Crisis countriesa United States United Kingdom Germany European Union Total a

Pre-crisis July 1994– December 1996

Post-crisis July 1997– December 1998

January 1989– December 1998

66.8 11.0 71.9 –0.5 67.0 38.0 70.0 –2.0 24.0 33.7 59.0 –1.8 –3.8 11.3 12.3 22.9

3.0 13.8 –35.2 12.3 –16.6 –21.1 –10.3 –4.8 17.3 –25.6 –21.6 49.3 100.4 31.6 49.0 8.8

255.3 67.7 224.5 51.8 195.4 147.9 235.1 141.8 193.1 208.0 196.0 94.4 218.5 30.3 94.9 109.7

Indonesia, Korea, Malaysia, the Philippines, and Thailand Source: Author’s calculations based on raw data from Datastream.

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Asia Crisis and Australia’s Export Sector

stable (i.e., less volatile). Korea alone has accounted for roughly half of all the exports going to this group. As was the case with Japan, the immediate effect of the crisis is apparent from the table. From July 1997 to December 1998, the crisis countries’ export share fell by over two percentage points, to 16.6 per cent. The volatility of these exports also increased markedly, to just under 2 per cent. Table 9.2 presents the percentage change in the dollar value of exports to the same countries and country groups listed in Table 9.1. Note that the dollar values have not been adjusted for price effects (i.e., the data are in nominal, or current-price, terms). The information in Table 9.2 is important because there are two ways in which a country’s share of Australia’s exports can decline. First, exports can fall in absolute terms. That is, the dollar value of goods exported to a particular country can fall. Second, exports can fall in relative terms. The dollar value of exports to a country may increase, but at a slower rate than total exports. As Table 9.2 makes clear, the drop in Japan’s average export share from the pre-crisis to the post-crisis periods was due primarily to an absolute decline in the pre-crisis period, which continued through the first six months of 1997. Exports to Japan have increased by over 12 per cent since mid-1997. Since total Australian exports have increased only 8.8 per cent, Japan’s share of total exports has actually been increasing since the onset of the Asian Crisis. This is in marked contrast to the behaviour of exports to the Asian crisis countries. As Table 9.2 clearly shows, the value of Australian exports to each of these countries (Indonesia, Korea, Malaysia, the Philippines and Thailand) has experienced an absolute decline in the post-crisis period. Singapore is the only non-crisis country in the table to have had a drop in the value of exports it receives from Australia. The declines in Australia’s exports to the crisis countries have been substantial, ranging from a 10 per cent fall in exports to the Philippines, to a drop of over 35 per cent in exports bound for Indonesia. The drop in exports from Australia to the crisis countries can be traced to several related factors. First, these countries experienced severe depreciations of their currencies relative to the Australian dollar, which quickly and substantially increased the price of goods imported from Australia. They simply became unable to afford our

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products. Second, the rapid outflow of foreign financial capital and the subsequent credit crunch in several crisis countries resulted in declining levels of aggregate economic activity; in other words, they entered classical recessions. As a consequence of the drop in aggregate demand (investment demand in particular), the demand for imports was depressed further. Reduced demand for imported goods actually became a policy instrument in Korea, as citizens were encouraged to forgo spending on imports, both in order to conserve foreign exchange reserves and as a response to the perception that Korea’s recession originated in the global marketplace. Finally, restrictive fiscal and monetary policies, imposed by the International Monetary Fund as a condition of funding, served as a further brake on aggregate demand and caused a further fall in imports. Changes in the composition of exports The charts and tables presented so far have focused on the total amount of merchandise exports from Australia to each country or group of countries. This information has been useful in clarifying where Australia’s exports go, and how these patterns have changed over time. In this section, I will examine more closely the changes that have occurred in the types of goods being exported. This will help us in two ways. First, by clarifying what types of Australian goods each country imports, we can get an idea of how the Asian crisis has affected exporting firms in different sectors, and how they may benefit from recovery in the crisis countries. Second, we can go at least some way toward disentangling the effects of exchange rate fluctuations on exports from the effects of relative price changes. Although we do not have sufficient data to separate these effects completely, we can get a rough idea by examining how Australia’s exports of different types of goods have changed. For example, suppose that exporting firms in Australia and their importing counterparts in some other country all settle their orders and renegotiate any contracts at the same time, and suppose there is a depreciation of the foreign country’s currency relative to the Australian dollar. If the drop in Australian exports to this country were due solely to the depreciation, we would expect the exchange rate movement to reduce demand for all categories of Australian goods more or less equally. On the other hand, suppose

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Asia Crisis and Australia’s Export Sector

that Australian exporters in a particular sector were successful at increasing their market share in the foreign country through lower relative prices. In this case, exports of those goods would not fall as much as exports of other goods. Of course, in reality both effects are always at work, and relative prices will vary between firms within each export category as well as across categories. In addition, the fact that all contracts and orders are not settled simultaneously will complicate matters, because this will mean that exchange rate movements will affect firms and sectors at different times. In order to address these issues, this section makes use of data in International Merchandise Trade, Australia, published by the Australian Bureau of Statistics (catalogue number 5422.0). This publication documents Australia’s exports to several individual countries and country groups, as well as total exports, classified according to the Standard International Trade Classification (SITC) system. This system has ten major groups, numbered 0 through 9, at the broadest level of classification (the 1-digit level), which is the level of the data that I will discuss here. The ten groups are: 0: 1: 2: 3: 4: 5: 6: 7: 8: 9:

Food and live animals Beverages and tobacco Crude materials, except fuels Mineral fuels, lubricants, etc. Animal and vegetable oils, fats and waxes Chemical and related products Manufactured goods classified chiefly by material Machinery and transport equipment Miscellaneous manufactured goods Commodities and Transactions not elsewhere classified

The breakdown of Australia’s exports by country and commodity group is presented in Tables 9.3 and 9.4. In Table 9.3, Australian exports to Japan, Korea, the United States, the United Kingdom, the ASEAN countries, and the European Union are broken down in percentage terms according to the SITC classification. Unfortunately, the format of International Merchandise Trade, Australia does not permit such a breakdown for the crisis country group separately. We can get a rough indication of the composition of exports to these countries by considering Korea and the ASEAN countries together.2

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The table presents data for three twelve-month periods, ending June 1997, June 1998, and December 1998. For example, just over 17 per cent of all Australian exports to Japan in the twelve months to June 1997 were of food and live animals (category 0). Table 9.4 shows the percentage change in each category of exports, as well as total exports to each country or group, over the same periods. For example, exports of food and live animals to Japan fell by 14.2 per cent between July 1996 and June 1997. Over the same period, total exports to Japan fell by only 6.4 per cent. There are several interesting points to note about the disaggregated export data. First, the tables indicate that the composition of exports to Japan has remained fairly stable over the period 1997–98, even as the dollar value of those exports has fluctuated considerably. As shown in Table 9.3, the majority of Australian exports to Japan are in SITC groups 0, 2, 3 and 9. There has been a slight increase in group 6 exports, which has offset the fall in group 9. Total exports to Japan increased by over 14 per cent in the year to June 1998, but by only 3.5 per cent in calendar 1998. The fact that Japanese imports of Australian goods have increased even as the Japanese economy has been in recession suggests that most of these goods have been used in the Japanese export sector, rather than for the production of domestic goods. The major change in exports to Korea has been in SITC group 9. Between June 1997 and December 1998, this group’s share of exports fell from 46.2 per cent to 34.8 per cent. According to Table 9.4, the value of these exports fell by around 10 per cent per year in each of the last two periods shown. The shares of exports in groups 2 and 3 have increased as a result. In fact, these are the only two groups of exports to Korea that have registered any significant growth (in value terms) since the beginning of the crisis (see Table 9.4). In every other category, the value of Australian exports to Korea fell by more than 16 per cent over the course of 1998; half of the declines were in excess of 40 per cent. Total exports from Australia to the ASEAN countries fell by just over 6 per cent between July 1997 and June 1998, and by 22 per cent in calendar 1998. These figures imply that Australian firms exporting to these countries were particularly hard-hit in the last six months of 1998. The value of exports in most categories fell by 20 per cent or more. The composition of exports was relatively

Exports by commodity, various countries and country groups (per cent of exports to each destination)

SITC group Description 0 1 2 3 4 5 6 7 8 9

Food & Live Animals Beverages & Tobacco Crude Materials, Except Fuels Mineral Fuels, Lubricants, etc. Animal & Vegetable Oils, Fats & Waxes Chemical & Related Products Mfg’d Goods Class’d by Material Machinery & Transport Equipment Misc. Mfg’d Goods Commodities & Transactions n.e.c.

SITC group Description 0 1 2 3 4 5 6 7 8 9

Food & Live Animals Beverages & Tobacco Crude Materials, Except Fuels Mineral Fuels, Lubricants, etc. Animal & Vegetable Oils, Fats & Waxes Chemical & Related Products Mfg’d Goods Class’d by Material Machinery & Transport Equipment Misc. Mfg’d Goods Commodities & Transactions n.e.c.

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Table 9.3

Japan Korea ASEAN 12 months ended 12 months ended 12 months ended June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 17.1 0.2 21.5 27.8

17.0 0.3 21.3 27.7

17.2 0.3 22.0 27.6

3.4 0.0 14.4 16.7

3.8 0.0 17.9 22.2

3.0 0.0 21.6 23.4

19.1 0.3 7.8 6.8

15.4 0.3 8.6 7.7

15.9 0.4 10.5 6.3

0.1 1.3 7.3 2.6 0.9 21.3

0.1 1.1 9.7 2.7 0.9 19.2

0.1 1.1 9.1 2.3 0.9 19.3

0.2 1.5 10.2 5.7 1.6 46.2

0.2 1.6 9.5 6.4 1.6 36.7

0.2 1.5 10.0 4.3 1.1 34.8

0.1 5.4 17.7 16.9 3.4 22.6

0.2 5.2 16.0 15.6 3.9 27.1

0.3 5.1 15.4 15.9 3.7 26.5

United States United Kingdom European Union 12 months ended 12 months ended 12 months ended June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 13.7 2.2 4.2 7.1

13.6 2.6 4.1 7.3

14.6 2.7 3.6 6.2

8.0 11.2 12.7 10.4

6.5 13.0 10.6 10.6

4.5 9.5 6.6 7.8

5.2 4.3 29.4 12.1

5.2 4.8 27.7 12.3

4.7 4.6 21.0 12.1

0.1 3.3 8.6 31.0 6.0 23.8

0.1 3.1 10.2 24.6 5.6 28.7

0.1 3.4 11.5 22.8 6.2 29.1

0.1 6.1 10.1 21.7 5.5 14.2

0.1 5.0 11.8 14.2 4.2 24.0

0.1 3.6 6.9 9.3 3.5 48.2

0.0 4.4 8.0 14.2 4.0 18.4

0.1 3.8 10.6 12.8 3.3 19.3

0.1 3.5 9.1 11.4 3.3 30.2

Source: Author’s calculations based on data from International Merchandise Trade, Australia, ABS Catalogue no. 5422.0, various issues.

Table 9.4

Exports by commodity, various countries and country groups (annual percentage change)

SITC group Description 0 1 2 3 4 5 6 7 8 9

Food & Live Animals Beverages & Tobacco Crude Materials, Except Fuels Mineral Fuels, Lubricants, etc. Animal & Vegetable Oils, Fats & Waxes Chemical & Related Products Mfg’d Goods Class’d by Material Machinery & Transport Equipment Misc. Mfg’d Goods Commodities & Transactions n.e.c. Total exports to country

Japan Korea ASEAN Change in exports, 12 months to Change in exports, 12 months to Change in exports, 12 months to June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 –14.2 3.4 5.5 6.5

13.8 53.3 13.3 13.7

1.4 70.0 5.3 4.0

1.7 0.0 –4.5 8.4

0.8 –50.0 11.4 18.9

–45.9 –50.0 23.7 20.3

22.8 16.1 25.0 4.8

–24.5 0.0 3.5 7.2

–27.0 17.1 3.2 –41.1

63.6 5.9 –21.2 –16.7 –15.1 –16.9 –6.4

44.4 –1.5 52.5 18.8 17.8 3.4 14.4

13.6 4.2 7.1 –14.5 12.6 2.7 3.5

166.7 11.1 –2.5 0.7 8.8 16.0 7.8

–6.3 –4.5 –16.6 0.7 –9.0 –28.7 –10.3

–31.3 –28.8 –16.8 –47.5 –44.0 –20.4 –9.8

30.0 7.7 –2.7 3.9 11.8 –9.2 4.3

92.3 –8.9 –15.4 –13.4 8.2 12.2 –6.2

78.9 –24.6 –27.4 –20.9 –21.6 –17.9 –22.0

151

152

Table 9.4

Continued

SITC group Description 0 1 2 3 4 5 6 7 8 9

Food & Live Animals Beverages & Tobacco Crude Materials, Except Fuels Mineral Fuels, Lubricants, etc. Animal & Vegetable Oils, Fats & Waxes Chemical & Related Products Mfg’d Goods Class’d by Material Machinery & Transport Equipment Misc. Mfg’d Goods Commodities & Transactions n.e.c. Total exports to country

United States United Kingdom European Union Change in exports, 12 months to Change in exports, 12 months to Change in exports, 12 months to June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 June 1997 June 1998 Dec. 1998 18.9 47.0 –12.9 140.7

39.7 68.0 39.7 45.4

35.5 44.2 7.1 10.4

11.2 20.5 19.6 11.4

4.3 49.6 8.0 31.4

8.7 42.4 3.3 36.3

–6.2 23.0 11.5 5.0

25.5 42.2 18.0 27.0

30.6 42.1 –3.3 31.8

66.7 –2.1 5.3 45.7 7.8 –2.7 19.4

–20.0 31.1 66.2 11.4 31.5 69.9 40.6

50.0 39.0 91.6 –1.3 39.9 67.6 33.6

0.0 2.9 3.0 –16.1 14.2 –61.7 –16.7

100.0 4.9 50.8 –15.8 0.0 117.3 28.9

33.3 24.3 15.2 0.9 30.7 520.2 94.0

0.0 –11.1 –12.1 –14.3 5.8 –17.1 –3.4

133.3 8.9 65.3 13.4 3.4 31.2 25.1

33.3 26.1 43.1 35.0 22.4 142.1 41.7

Source: Author’s calculations based on data from International Merchandise Trade, Australia, ABS Catalogue no. 5422.0, various issues.

Peter M. Summers

153

stable, except for a slight shift from group 0 to group 9. These data are consistent with the view that the drop in exports is due mainly to the appreciation of the Australian dollar against the ASEAN currencies. Exports from Australia to the United States, the United Kingdom and Europe have grown strongly since June 1997, as Table 9.4 shows. Furthermore, these data and those in Table 9.3 indicate that this increase has not been uniform across SITC groups. Turning first to the United States, all but two categories of Australian exports registered strong growth in value terms between June 1997 and December 1998. Group 4 accounts for a very small fraction of exports to America. Exports in group 7, machinery and transport equipment, fell slightly in calendar 1998, lowering its share to around 23 per cent of Australian exports to the United States. This share is roughly the same as at the end of 1996, and follows an increase of almost 46 per cent (in value terms) in the year to June 1997. By contrast, total exports to the United States increased by 19 per cent over the same twelve-month period. The relative decline in exports of these goods has been offset by increases in SITC groups 6 (manufactured goods classified by material) and 9 (commodities and transactions not elsewhere classified). The value of goods in group 6 flowing from Australia to the United States nearly doubled in 1998, after increasing by around two-thirds between July 1997 and June 1998. Exports of group 9 goods have increased by between 67 and 70 per cent at the same time. As was pointed out previously, Australian exports to the United Kingdom underwent a particularly dramatic increase over the course of calendar 1998. Table 9.4 shows that the total value of these exports nearly doubled in this twelve-month period. As shown in the tables, this increase occurred mainly in category 9. The value of exports in this category rose by 117 per cent in the year to June 1998, and by over 520 per cent (a six-fold increase) in calendar 1998! This rapid increase in export value has resulted in a trebling of the share of these exports to the United Kingdom since July 1996. The rise in exports to the United Kingdom since July 1997 has underpinned increases of 25 and 42 per cent in exports to the European Union, most of which has been concentrated in SITC group 9. Exports in most of the other SITC groups grew between 22 and 43 per cent over the course of 1998. The exception was in group

154

Asia Crisis and Australia’s Export Sector

2 (crude materials except fuels), which dropped by 3 per cent in value terms, resulting in a drop of 6.7 per cent in this group’s share. Taken together, the data in this section suggest that relative price movements, possibly associated with increases in the market share of Australian exporting firms, have been more important than exchange rate fluctuations in explaining the changing patterns of exports from Australia to the United States and the United Kingdom since the start of the Asian crisis. On the other hand, the composition of Australia’s exports to Korea and ASEAN has changed only slightly during this time, which indicates that exchange rate movements have outweighed changing relative prices. I should emphasize, however, that both of these conclusions are subject to the caveats mentioned at the beginning of this section.

4

Concluding remarks

This chapter has examined the performance of Australia’s export sector, using information on the total exports from Australia to several countries and groups, as well as the composition of these exports. The onset of the Asian crisis has resulted in a sharp decline in Australian exports to the worst affected countries, namely Korea, Indonesia, Malaysia, the Philippines and Thailand. In the eighteen months prior to the crisis, these countries as a group were the destination for nearly 19 per cent of all Australian exports. At the same time as exports to these countries were declining, exports to the United States, the European Union, and especially the United Kingdom were increasing rapidly. Although the information presented here does not constitute a thorough statistical analysis, preliminary indications are that the drop in exports to the worst affected Asian countries was due mainly to the sharp depreciation of their currencies against the Australian dollar. On the other hand, the rise in exports to the United States and the United Kingdom is consistent with changes in relative prices of various types of goods. The net effect of this substitution in Australia’s exports is that the impact of the Asia crisis on Australia’s income and therefore employment in the exporting sector seems negligible in the short term. There is speculation that the long-term effects of the crisis on Australia may not be that benign, due mainly to the emergence of economic globalization and to the fact that some sectors of the

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155

Australian economy (e.g., unemployment and the current account) are still fundamentally weak and not internationally competitive. Notes 1. The data used in this paper are taken from Datastream. Raw monthly data begin in January 1988. These are converted to moving annual totals in order to smooth out seasonal fluctuations and month-to-month volatility. For example, a number labelled as ‘January 1997’ represents the total for the twelve-month period ending in January 1997. The data are denominated in Australian dollars, and are in nominal, or current dollar, terms (that is, no adjustment has been made for inflation or relative price movements). For the sake of simplicity, I will also refer to Hong Kong and Taiwan as ‘countries,’ and use the term ‘Korea’ to mean ‘Republic of Korea’. 2. The ASEAN group (Association of South-East Asian Nations) includes Indonesia, Malaysia, the Philippines, Singapore and Thailand, as well as countries such as Brunei and Burma (Myanmar) whose share of Australian exports is very small.

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10 Social Impact of the Asia Crisis: A Fundamental Prescription and Management Tran Van Hoa

In the preceding chapters, we have covered the major aspects of the human dimension in a number of countries in South East Asia, East Asia and the Oceania (Australia) that have been affected by the financial Asian crisis and its contagion. The crisis has been regarded by politicians, policy-makers and economic experts alike as the greatest event in our recent times and one that has had damaging consequences worldwide. It has turned the economic miracle countries into the needing ones. The major aspects we have dealt with include not only the four social sectors broadly defined by such international organizations as the World Bank (i.e., poverty, education, health and nutrition, and employment) but also other important issues such as women and child labour and, to a lesser extent, environment. Since the economic and human dimensions are interlinked both in a modern society and a global economy, our discussions above have also attempted to cover this linkage to provide a better understanding of the causality or contributing factors of the social issues. Once the causes are properly diagnosed, effective cures or policies for them would be easier to find or formulate. The findings and suggestions in the book should be able, in this context, to assist governments, policy-makers and policy advisers in their search and deliberation for appropriate national and international programmes to improve on social policy. The lessons we have learned from our research and analysis, as reported here or in our previous publications, indicate that the 157

158

The Asia Crisis: A Fundamental Prescription

causes of the crisis are many and varied. It is the volatility of the international financial market, a lack of adequate prudential control and supervision in it, a lack of transparency in management by some national financial and banking authorities in the countries in crisis, a lack of good governance, the prevalence of corruption, and the fragility of many sectors in the economies in turmoil. All these have contributed, to some degree, to the emergence of the crisis and brought about the severe damage to the crisis economies and hardships to its people. A proper cure to these social ills should, in the long term, come from an identification and rectification of their causal factors. A response from the governments or the international organizations to a social incidence, be it poverty, unemployment, woman exploitation, child labour or environmental damage, should be regarded in this context as a short-term solution to minimize the social effects of the Asia crisis. While it is necessary as a policy or a framework for action with useful outcomes, it is not a long-term solution. The extent and nature of the social impact of the Asia crisis are, as discussed in this book, wide-ranging covering national and international interest and responsibilities. It is difficult to envisage a global economy in which some countries are not equal either in human or natural resources, management skills, their modus operandi or in social security systems and welfare programmes. The requirements by such institutions as the International Standards Organizations (ISO) or the World Trade Organization (WTO) have come a long way towards achieving equality in resources, procurements and management for all of their member countries. In trade and commerce for example, this means that: the employees in the member countries should have similar schemes for employment insurance or safety nets, women and young children should be protected against commercial exploitation, children under say 12 should have a minimum standard of education and vocational training, and the environment should be protected for sustainable development. All these schemes or programmes are related closely to government revenue and disbursement in crisis countries which, in turn, are dependent on the country’s economic activities. An improvement in social welfare and safety nets managed by the government for example has to depend on an improvement in a country’s economic development and activities and a fair taxation

Tran Van Hoa

159

system. Official development assistance (ODA) is a short-term international facility to assist countries in need to achieve this improvement. For many developing and transition economies, an improvement in economic development means more trade, commerce and industry and their flow-on to increased employment and income, and this can be achieved mainly through good trade and industry policy, a robust financial and banking system, trust in governance, international competitiveness and subsequent capital inflows and technology transfer. These are the fundamental or longterm solutions to the Asia crisis and its contagion and to the social problems arising as a result in the countries in trouble.

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Index account deficit, 5, 124, 139 Aceh uprising, 9 Africa, 113 agricultural sector, 38 APEC, 102 ASEAN, 4, 85, 102, 116, 127, 136, 148, 153, 155 ASIALINK, 29 Asia turmoil, 11 Asian Development Bank, 1, 23, 29, 52, 60 Asian meltdown, 2 asking–giving mechanism, 98 bailout, 69 balance of payments, 35, 111 Balkans, 9 Bangkok International Banking Facilities (BIBF), 55 Bank Bali, 9 Bank of Thailand, 36 bankruptcy, 68 bans, 99 Bendita Development Corporation, 21 Big Deal, 68 BIS, 60 black markets, 101 bubble economy, 35 budget deficit, 10 budget revenue, 92 Camarines Sur, 28 capital dependency, 20 capital flight, 37 capital management, 119 cash advances, 24 cash-starved companies, 9 Centre for Assistance to Laid-Off Workers, 51

chaebols, 4, 59, 68 child health, 51 closure of plants, 22 Communist Party of Vietnam (CPV), 92, 110 community management, 47 community tension, 52 compadre or buddy systems, 17 competitiveness, 35, 58, 69, 91, 118, 136, 159 construction sector, 37 contagion, 36, 123, 125–6, 157 contraction, 19 contractionary policy, 57 corporate rehabilitation, 68 corporate sector reform, 68 corruption, 94, 98 cost of living, 26, 82 Council for Health and Development, 27 credit crunch, 37 credit risks, 37 credit shortages, 37 crisis economies, 123–4, 140–1, 146, 158 Datastream, 142, 144 Davao, 30 debt burden, 35 debt rescheduling, 60 debt restructuring, 36 debt-to-equity ratios, 36, 68 de facto devaluation, 36 democratization, 55, 69 Department of Labour and Employment (DOLE), 20 depreciation, 18, 36–7, 146–7 devaluation, 117, 124 distribution of income, 134 Doi Moi, 102 161

162

Index

domestic capital, 90 dry season, 39–40 duty free, 116 Eagle Mindanao Inc., 21 East Timor, 16 economic crisis, 88 economic cycle, 58 economic deprivation, 32 economic development, 111 economic globalization, 154 economic policy, 66 economic reform, 65, 86, 102, 116, 120 economic restructuring, 54 education, 10, 28, 130–2 El Nino, 14, 19, 86 emergency funds, 59 employment, 133, 154, 159 employment insurance, 158 employment outsourcing, 70 enrolment rates, 15 European Union, 7, 98, 112, 141, 143 exchange rate, 58, 61, 82, 100, 119, 123, 127–8, 136, 148 export of education, 130 export-oriented growth, 58 exports, 113, 127, 140, 147, 154 external shocks, 118 Fair Trade Commission, 69 financial institutions, 71 financial liberalization, 35 financial management, 36 financial market volatility, 139, 158 financial restructuring, 36 financial sector, 66 Financial Supervisory Commission (FSC), 66 fiscal deficit, 30 fiscal policy, 48 fiscal tightening, 30–1 fixed exchange rate, 35 foreign debt, 66 foreign investment, 8, 80, 86–8, 102–3, 116, 128 foreign reserves, 36, 117

free market, 4 gender differentials, 13 General Department of Taxation, 93 Gini coefficient, 78, 134 Global Human Development Report, 85 globalization, 4 government reform, 121 growth, 87, 102, 115, 134 Guangdong International Trust and Investment Co. (GITIC), 116 health, 10 health care, 13 health effects, 27 Health Intelligence Unit, 48 HIV–AIDS, 51 human capital, 10, 47 human development, 85 Human Development Report Education Index, 13 human dimension, 2, 4, 157 human resource, 47 immunization programmes, 27 imports, 113, 127, 141, 147 income distribution, 77, 81 Indonesian Bank Restructuring Agency (IBRA), 15 inequality, 134–6 inflation, 87 informal sector, 11, 45 infrastructure, 100, 115 interest rates, 63 International Labour Office, 50 International Monetary Fund, 1, 30, 36, 57, 60 International Standards Organization (ISO), 158 joint venture, 95–6 Korea Asset Management Corporation (KAMCO), 66–7 Korea Broadcasting System (KBS), 80 Korea Deposit Increase Corporation (KDIC), 66–7

Index

163

Korea Development Institute (KDI), 80 Korea Institute for Health as Social Affair (KIHSA), 81 Korea Labour Institute (KLI), 81

non-performing loans, 36, 59, 63, 67 non-tariff barriers, 95 North America, 7 nutrition, 10

Labour Force Survey, 40 labour market, 65, 69 Labour Standard Act, 69 Latin America, 7, 113 law of weighted averages, 3 lay-offs, 20, 69 legalized sector, 91 liberalization policy, 91, 95–7, 100 loans, 59

Oceania, 2, 157 official development assistance (ODA), 88, 159 off-shore loans, 35 open-trade policy, 90, 120 Organization of Economic Corporation and Development (OECD), 57 overseas contract workers, 29

macroeconomic policies, 36 mandatory budget savings, 30 market-oriented reforms, 14 mergers and acquisitions, 67 Metro Manila, 26 migration, 28, 45, 129–30 migrant workers, 23 minimum dietary requirements, 30 Ministry of Finance, 97 Ministry of Labour and Social Welfare, 51 Ministry of Trade, 94, 99 miracle economies, 7 misery index, 87 modernization, 102 money growth, 60 money-lenders, 24 money-politics, 54

pegged currency, 35 people power, 3, 17 political instability, 36, 132 political reforms, 54 portfolio investment, 129 poverty, 10, 77, 102, 158 private consumption, 65, 77 private incomes, 4 private sector, 50 project management, 52 property price inflation, 35 pro-poor programmes, 10 prudential control and supervision, 158 prudential regulation, 66 public costs, 36 public infrastructure, 50 public programmes, 37 public sector, 66, 70 purchasing power, 32

National Capital Region (NCR), 20 National Economic and Social Development Board (NESDB), 40–5 National Food Authority, 31 National Statistics Office (NSO), 25, 27, 53, 80 natural resource use, 47 newly industrializing countries, 58 non-bank financial institutions, 66 non-government organisations, 23

quotas, 98 real economy, 124 real estate and stock market, 35 recession, 147 reduced incomes, 23 regional inequality, 40 regressive movement, 29 Regulation Reform Committee, 70 rent seeking, 98

164

Index

Reserve Bank, 129 retrenchments, 20 returned migrants, 45 rising prices, 25 risk-aversion, 9 risk management, 30 RMB, 111, 117 Rosewood Manufacturing, 21 rural market, 114 safety-net, 3, 14, 30, 48, 50, 52, 158 severance pay, 50–1 share price index, 125 shut-downs, 20 small and medium enterprises, 40, 63, 86, 97–8, 100 smuggling, 94, 119 social assistance, 51 social capital, 52 social change, 3 social costs, 36, 82 social crisis surveys, 31 social development, 111, 114 social expenditure, 3, 48 social impact, 2, 102, 124 social infrastructure, 48 Social Investment Programme (SIP), 52 social issues, 3 Social Mastering Early Response Unit (SMERU), 15 social policy, 5, 157 social protection, 57, 82 social security, 31, 48, 50, 158 Social Security Office, 50 social wage income, 135 socialism, 4 socio-political reform, 18 Southeast Asia, 35, 112, 115, 118, 121, 134 spatial impact, 40 Standard Industrial Classification (SITC), 148–9, 153 Standard & Poors, 8–9

Stand-by Arrangement, 60 State Bank of Vietnam, 100 state-owned enterprises, 70, 102, 120 stroke hypothesis, 4, 58, 71, 82 structural reform, 59, 65 tariff barriers, 92 tax exemptions, 96 taxation system, 159 technology transfer, 159 temporary migrants, 40 total quality, 1 trade deficit, 89, 126 trade partners, 99 trade sector, 139 transnational corporations, 5, 125, 130, 132, 135 transparency, 70 transition economy, 85, 89, 102 Tripartite Commission, 69, 82 underemployment, 20, 40, 52, 77 underground economy, 4, 119 unemployment, 57, 71–5, 103, 133, 155, 158 unemployment insurance, 48–50, 81 United Nations Development Programme, 1, 85, 103 USSR, 7 VND, 100, 103 vocational education, 13 vocational training, 158 vulnerable the, 3, 11, 37 wellbeing, 134 welfare, 31 wet season, 39–40 World Bank, 1, 28, 52, 60, 86, 103, 121, 157 World Trade Organization, 4, 102, 158