East Asia - The Lesson Learnt?

All human beings have an insatiable need to continuously develop themselves, be it monetarily, spiritually or physically. The same applies to economies, just that they crave GDP, HDI, and other economic indices. Over time, humans have understood that there is no shortcut to success, except hard work. But the irony remains that economies, which are run by these same humans, tend to forget this. In order to accelerate their economic growth, some economies like Indonesia, South Korea, Thailand, and Malaysia had turned towards various short-cut methods. While these methods help an economy to boom in the short run, they have adverse effects in the long run.

The same happened with these East Asian economies. They witnessed exponential growth in the 1980’s and early 1990’s. But this quest for rapid growth and development lead to various cracks in the economy. Eventually, these cracks burst the growth bubble which led to severe impacts on the economy and dipping of growth rates. People, society, and the economy suffered. Therefore, what these economies needed now was ‘sustainable growth and development’. This was part 1 of the edition on East Asia. This part will focus on the question of whether the East Asian economies have learnt their lesson or not.

The aftermath of the 1997 Asian Financial Crisis saw the end of many ruling political parties and policymakers. In most of these economies, long-standing governments were removed and replaced with new ones, peacefully in most of them, and in some, with force. The new governments took the help of the International Monetary Fund (IMF) to overcome their external debt crisis. The IMF proposed a series of bailout packages for these economies in return of austere monetary and fiscal measures to curb the damage. These measures included higher interest rates on loans, reduced government expenditure, restructuring of financial and banking sector, and a period of curbed international borrowings to reduce the overall debt in the economy. All East Asian economies except Indonesia accepted the bailout package proposed by the IMF. Indonesia, who didn’t accept the terms and conditions of the IMF, unofficially implemented the same in its economy.

Austerity measures had a devastating impact on the economy in the short term. Reduced government expenditure led to cuts in many social benefits and services provided by the governments to their people. There was reduced spending on healthcare, education and other socio-economic overheads which directly impacted the lives of citizens. Reduced sanctioning of loans led to reduced investment in infrastructure development projects. Thus, thousands of jobs were lost in the informal sector due to the unavailability of work. The citizens found themselves wanting new jobs with no government support behind them in this acute crisis. Naturally, this led to constant civil unrests and uprisings in these economies which was followed by frequent government changes. However, nothing could be done about this as this was for the “greater good”, according to the leaders of these economies, and more importantly, the IMF.

These economies witnessed a major overhaul in the banking and financial sector as well. The banking sector was revamped with tighter regulations and policies in place. Several private banks, which had defaulted, were shut down, instead of being merged with other nationalized banks. This meant several thousand employees without a job, which furthered heightened the unemployment problem. New rules and regulations were also brought to keep a check on the amount of external debt being borrowed and ensured an adequate amount of liquidity and solvency in the economy.

These stringent measures were necessary to upgrade the economy and ensure its “sustainable growth and development”. However, a huge cost in terms of time, resources, and people had to be paid. These measures put the economy back by 5 years at least. While there was nominal growth in GDP in 1999, real growth in GDP was recorded only in 2002. This is when these East Asian economies regained the confidence of investors and the international community. A renewed flow of foreign capital finally provided the basis for long-term sustainable growth and development, which was slow and steady.

This time, the East Asian economies were careful not to commit the same mistake which dearly cost them during the 1997 Financial Crisis. They created and maintained huge amounts of International Reserves (IR). Basically, they stockpiled hard currency in order to ensure that there were no major fluctuations in their local currency in times of crisis. Such was the implementation of this policy that today these economies hold 19-20% of the world’s entire forex reserves.

Looks like a dramatic turnover, right? Not so fast, there is a slight problem.

85% of trade by these economies is carried out in US Dollars. Moreover, 80% of their IR is made up of US Dollars. This makes these economies highly vulnerable to the monetary and fiscal policies of the United States. Basically, these economies are unguarded from any action that the US takes or any action which affects the US Dollar. This is why their trade cycles closely match with that of the US. Booms and busts in the US trade cycle are exactly reproduced in these economies. This is because, in times of recession, the interest rates in the US shoot up, which leads to outflow and flight of capital from these economies to the US. However, the great stock of forex reserves helps these economies in maintaining their exchange rates and nominal values of their foreign debt, keeping the situation in control. This is precisely what happened in the aftermath of the 2008 Recession. Thanks to the forex reserves, the situation was in control and these economies passed 2008 off as a normal blip in the trade cycle.

However, with predictions of another worldwide recession in 2020, and with the rise of the Chinese Renminbi as the currency of global choice, it is very interesting to see what would happen to these economies. Will these East Asian economies manage to stay on their path of slow and steady “sustainable growth and development”? Or, will the shortcut which they took by pegging all their trade and reserves to the US Dollar cost them dearly in the near future?


Abhishek Sancheti

Young, Dumb and Curious. Currently pursuing B.A. (Hons) Economics from SRCC, Delhi University, he is fascinated by the subject matter of Economics. He wishes to be married to his first love, Economics by being an economist for the government.

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