DEVELOPMENT: ‘Thailand Effect’ Eclipses Rush for GDP Growth

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Nov 30 1997 (IPS) - Fast growth, investment flows that the economy is unable to absorb and a poorly-based upward trend in exports summarises a development model whose serious shortcomings have been highlighted by the crisis in southeast Asia, according to a new Latin American Economic System (SELA) report.

The Venezuela-based regional body, which groups 27 Latin American and Caribbean nations, released a report containing a series of lessons this week on the “Thailand effect” which has been shaking Asian economies since July and harassing other emerging countries, like Brazil.

Titled “The Markets Rumble and the Tigers Tremble: Lessons for Development,” the report concludes that solid economic structures are necessary, rather than “accelerated growth that outstrips the economy’s productive capacity and absorbency.”

According to SELA, the all-out rush towards high levels of Gross Domestic Product (GDP) growth, the leading indicator used to measure development within the model imposed by the multilateral lending system, could turn out to be difficult to control.

Another lesson, the report adds, is that the competitiveness of exports must not be based on momentary elements like exchange rates, but rather on structural elements such as diversification, high added value and internationally competitive costs.

In addition, domestic and foreign investment should be channeled into productive activities which support structural development.

The most volatile and highest risk investment flows are those concentrated in activities like real estate, the report explains.

An additional lesson is that a decline in banking is particularly dangerous when the sector starts to depend on a boom such as in real estate, and foreign debts which must be paid with a devalued currency are contracted.

SELA describes crises like the one that broke out with the financial crash in Thailand as “predictable shake-ups,” because they arise within an unstable macroeconomic framework and create a “domino effect” with serious global implications and characteristics peculiar to the developing South.

Furthermore, they have swift and uncontrollable repercussions on the global economic system, especially due to the increasing globalisation of financial markets.

While the current crisis differs in a number of significant aspects from the one that broke out in Mexico in 1994, they have in common a sharpening of the adverse effects of speculative capitals as well as the common lessons to be learned, says SELA.

The crash of the Mexican peso and resultant “tequila effect”, which gave a beating to several leading Latin American economies in 1994 and 1995, was a “crisis of recovery,” according to the report, fall-out from the debt crisis of the 1980s, when countries in the region underwent major adjustments in order to stabilise their economies.

The Asian crisis, on the other hand, is termed a “crisis of growth”, because it has hit economies which represent the most successful model of the 1990s, the “Asian tigers.”

The economies of southeast Asia were characterised by elevated GDP growth, the world’s highest investment rates and comfortable levels of foreign reserves, while they controlled a pivotal proportion of the world’s trade and capital flows.

But there are common and recurrent elements that increased vulnerability to financial turmoil in both cases.

SELA cites, for example, current accounts deficits and unfavourable trends in balance of trade, large fiscal deficits, trade deficits arising from the appreciation of exchange rates, loss of competitiveness in the export sector, and high growth rates and levels of debt.

Although the regional body did not venture to pronounce itself on whether or not one of the lessons arising from the crisis in the Asian markets is the need for controls on capital flows and the exchange system, it does indicate that that is a dilemma which emerging countries will soon have to define.