ECONOMY-ASIA: As Indonesia Burns, Neighbours Stabilise Somewhat

By IPS Correspondents Reprint | | Print |

Johanna Son

MANILA, May 8 1998 (IPS) - East Asia’s economies appear to be headed for some stability 10 months after a financial crisis first swept through the region, except for increasingly volatile Indonesia, economic experts say.

Bloody riots against price hikes imposed this week, which led to the deaths of at least six people in northern Sumatran capital of Medan, highlight Indonesia’s descent into more unrest.

The level of violence there escalated after Jakarta on May 5 hiked fuel and electricity prices by up to 71 percent, in keeping with Fund requirements to cut government subsidies.

But in countries like Thailand and South Korea, the wild fluctuations in currencies and stock markets have mostly eased, economists with the Asian Development Bank (AsDB) say. New jitters however rippled through Asian currencies in the wake of fresh unrest in Indonesia.

“The trend since end-January has been encouraging,” said Pradumna Rana, an economist with the Manila-based AsDB told a discussion here Thursday on Asia’s economic prospects. The wild swings in their currencies and stock markets have largely settled down, he noted.

“The question now is whether this is (the start of) a permanent recovery or a temporary phenomenon,” Rana explained.

Some foreign capital, which had fled the region months ago, is starting to trickle back in, experts say. Recently, South Korea and the Philippines had successful flotations of international bonds to raise funds, and Thailand plans a similar float.

But despite ground for some optimism, it would do well to remember that any recovery is taking place from very low levels. There remains no clear, quick end to the social and economic pain caused by the crisis.

“While there are encouraging signs that the affected countries, except Indonesia, may have turned the corner in stabilising, East Asia is not out of the woods yet,” Rana added.

In its ‘Asian Development Outlook’ 1998 report released last month, the Manila-based AsDB said developing Asia would grow by only 4 percent this year because the South Korean economy will contract by 1 percent and Thailand and Indonesia by 3 percent.

“The year 1998 we call the lost year,” remarked AsDB economist Reza Siregar. The Bank foresees the start of some recovery in 1999, with Asia’s GDP growth rising to 5.1 percent.

Felipe Medalla, dean of the University of the Philippines School of Economics, says Asia’s fate depends on what path to recovery it chooses out of its toughest crisis in decades.

“How can you have normal economic behaviour at this time?” he asked. He likened Asia’s collapse to “stopping a car that was running at 150 km per hour on a wet road, in two seconds”.

“Of course, the car will spin or turn turtle,” he pointed out, adding that East Asian economies are being forced to undergo contractions.

Left in the lurch by the outflow of foreign funds — which Bank economists say reached 10 to 12 percent of GDP in a matter of months — the region turned to the International Monetary Fund (IMF) for help that came with austerity measures.

But keeping within IMF parameters also meant sticking to fiscal targets, which critics say often deprive economies the chance of revival and push them further into recession.

Medalla said he found it ironic that contraction seems to be the proof that foreign capital wants to see to justify its return to Asia — when a large part of the turmoil was due precisely to wild capital swings.

He urged the AsDB to tell the IMF that contraction is the last thing East Asia needs. The AsDB has said the Fund is adapting to the needs of ailing economies.

But AsDB experts conceded the East Asian crisis did not fit the pattern of past downturns and traditional currency crises, not least because economies had good macroeconomic statistics.

“It was a structural crisis, not a macroeconomic crisis, and it was a private sector crisis,” Rana said. “This is a different crisis and requires a different solution.”

Thus, “traditional reforms needed to complemented with structural reforms,” he added, referring to the need for East Asian economies to strengthen financial systems so they are less prone to the damage caused by the sudden pullout of capital.

But structural reforms also take longer to carry out, Rana said. “They are difficult to design in mid-crisis and it is difficult to get political support during crisis,” he added.

Meantime, economies will continue to suffer the social and political costs of the crisis. South Korea’s jobless rate reached 6.5 percent in March, and Indonesia’s now stands at a high 10 percent.

So far, analysts say that compared with the ‘tequila crisis’ that hit Mexico and Latin America in 1994-95, Asia is recovering at a slower pace.

Mexico’s recovery had been aided by the formation of the North American Free Trade Agreement. “Mexico had the U.S. and we have Japan — and it can’t be a source (of recovery),” Medalla noted.

Last month, Japan unveiled a 121 billion U.S. dollar stimulus package aimed at jumpstarting weak domestic demand, and boosting imports from the region to help its Asian neighbours. Some 25 percent of Japan’s imports come from Asia.

But it is unclear if the package will work. Japan appears headed for recession and unemployment has reached a 45-year high of 3.9 percent. “Japan is a big question mark,” said AsDB senior economist Shiladitya Chatterjee.

Japan’s role — or lack of it — in East Asia’s recovery is one of several external “uncertainties” that AsDB economists say will help shape the region’s prospects in coming months.

Analysts are also watching if the U.S. keeps its market open to imports from Asia, and whether China can keep its promise of not depreciating its currency as its export growth tapers off.

So far, East Asia’s crisis has had three stages, starting with the spread of the contagion to South Korea in November 1997 to Indonesia in mid-November, and the emergence of decreased volatility in the region by end-January 1998.

Said Rana: “If China goes for devaluation, we would enter the fourth stage of the East Asian contagion.”