LESSONS FROM THE ASIAN FINANCIAL CRISIS

ESCAP

The ESCAP Survey 2000 contains valuable, timely analyses and reviews the progress made in the ESCAP region over the past year following the financial crisis and its contagious effects.  It also assesses the policy initiatives that have been taken at the country and international levels.

The Survey identifies that for the ESCAP developing countries, the aggregate growth rate was nearly 2 percentage points more - from 3.6 percent forecast to 5.5 per cent achieved, which represented a remarkable turnaround from virtually no growth experienced in 1998.  In fact, in 1998, among the 25 countries of the region for which data are available, eight countries had recorded negative growth, while in 1999, only two countries (Tonga and Turkey) recorded negative growth.

Even better, higher growth in the region has been achieved in an environment of lower inflation, enhanced business and consumer confidence, and an increasing flow in foreign investment in the region.  In fact, these factors, combined with the economic restructuring efforts supported by fiscal stimuli and buoyant exports, enabled remarkable turnaround of the region's economies, which, according to the Survey, should grow at around six per cent, on average, for the year 2000.

There are, of course, possible risks and pitfalls that the countries of the region will have to guard against.  They could range from a slowdown in the US economy, to a reversal in the slow revival of the Japanese economy, to higher prices for oil.  Or, it could even be a loss of business and consumer confidence.  But, here again, the continued economic and financial restructuring in Asia should prepare the countries better to face the downside risks.  Nevertheless, maintaining export competitiveness and reducing reliance on fiscal measures to sustain growth should remain priority, even though they raise difficult policy issues over the medium term.  The crisis vividly shows the inadequacies in providing social protection to the vulnerable groups of society.  The Survey 2000, therefore, devotes a chapter on social security and safety net issues.  The expansion of appropriately designed and financially viable social security/safety net schemes, involving both the state and the private sector, deserve urgent consideration of the region's policy makers.

ECLAC

The impact of the recent international economic crisis on Latin America and the Caribbean has been much more profound than analysts initially predicted. Most of the region's countries entered into a recession in the second half of last year, and remained there during the first six months of 1999. Due to that continued slump, the region will probably end the year with no growth, or even negative growth. 

However, there 'have been signs of normalization over the last few months, which will allow generalized recovery over the next few months. Positive indications associated with capital flows have facilitated exchange-rate  stability and a strong drop in internal interest rates in various countries. However, the fall in the current account deficit with the rest of the world has been achieved largely as a result of reduced economic activity and demand for imports rather than increased exports. The latter continue to be seriously affected by deteriorating raw material prices and contracting trade in the region's two large trading blocks, Mercosur and the Andean Community. The slowdown of trade in these two dynamic integration processes is, in fact, one of the greatest costs of the crisis.

This overall panorama, of course, obscures particular situations. Some of the small countries of Central America and the Caribbean will show positive growth as they did in 1998, aided by exports to the U.S. and lesser dependence on volatile capital flews. The most dynamic economies in the region are the Dominican Republic and Costa Rica, two small countries. Among the largest, Mexico will turn in a performance far superior to those in South America, where recession is most severe. Most South American economies will experience weak growth or even outright recession, except for Peru and Bolivia, which will enjoy moderate growth. The pleasant surprise is Brazil, whose performance will be better than was predicted by many analysts at the beginning of 1999.

What have we learned from this crisis?  That our economies continue to be extremely vulnerable to the effects of a highly volatile international capital market.

It is clear that insufficient resources were invested during the reform process in reducing the volatility triggered by external financial cycles, especially in dealing with excessive capital inflows and the unsustainable expansion of spending during periods of financial euphoria.

During periods of abundant capital, there is an often-irresistible temptation to anchor anti-inflation policies to exchange rates. Time and again the lessons learned point that this strategy may bear fruit for a while, but is costly over the long haul.