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... or. Japan is exporting about 20 per cent - is making about 20 per cent of its exports in these countries, and the collapse of the economies there is impacting its performance. These countries are making between 15 and 25 per cent of their trade with Japan, and the recession in Japan is a major blow for all of them and is a major reason for this low demand that they are met with. In order to get out of the crisis, World Bank addressed the issue of clarifying the environment. One has to have a dynamic Japanese economy since Japan is an engine of growth in the region.
The potential of the exports in Europe and in the US, provided these economies remain in an acceptable shape, or dynamic as is the case in the US, the potential for export cannot compensate in the short run for the decline in the markets in the regional and Japanese markets. Another issue is within the region itself within the countries. However, the question is how to move an entire region up at the same time, given the fact that there is no possibility of success for an isolated country in such a depressing regional environment. There is no alternative to more expansionary micro policies right now. Inflating the domestic demand is the only way in which we can break the vicious circle of transmission of contagion from one country to the other. Another important thing is that there is room for major social programs in the region.
These countries will not get through the crisis without a very strong, very dynamic, very well thought social agenda. These agenda may be worth two, three, or four points of GDP worth of public money. This is money, which is well invested and will pay off over the years especially as these countries have not right now social safety net they have developed. There is also a third use of the money, which is the recapitalization of the banking sector.
Recapitalization by public funds of the banking sector makes sense only if in order to have successful privatization process when the situation of the economy improves. IMF Bailout - Rescuing the Rich Oxfam International Briefing, April 1998 Oxfam International is concerned that IMF programs have been designed primarily with a view to bailing out reckless international investors, whose activities have contributed to the present crisis. The implication of the poor has been left unconsidered. There is clear evidence of increasing poverty and hardship among the vulnerable communities, which Oxfam works. There is now a real danger that a combination of deflationary policies and cuts in social sector funding will erode the significant advances made in poverty reduction over recent decades. In Indonesia, Oxfam estimates that the number of people living below the poverty line could quadruple over the next 6 months to affect 40 per cent of the population- the same incidence as in 1977.
The number of people living in poverty will rise from 23 million to 100 million this year, with devastating implications for human welfare and social stability. Long-standing development problems in Indonesia such as high maternal mortality rate, lack of access to safe water for 80 million people, widening disparities in income- are bound to worsen. Recent field visits from Oxfam staff already point to distressing expansion of poverty in Indonesia, because of economic crisis and a prolonged draught. There are huge number of people out of work, a sharp rise in the price of essential food and non-food items, the breakdown of the distribution of basic goods and services and the increasing violations of human rights.
In West Timor, 75 per cent of families are eating one meal a day that often includes Aputak, @ the bark of a tree normally used as cattle feed. Million of Indonesian households can no longer afford basic care, to send their children to school, or to buy enough food. Many are meeting immediate needs by selling assets, thus risking plunging further into poverty as the crisis continues. In Thailand, a recent World Bank report highlights the impact on the poor increased unemployment; price rises in basic foodstuffs and cuts in basic services. In particular, the report emphasizes the impact of the crises on children. As family incomes fall, growing numbers have been forced to work, beg or enter prostitution.
School drop out rates has risen and some families can no longer affords education or transport. In Thailand, unemployment is expected to rise to 1. 7 million in the coming year. IMF insufficient attention has been paid to the specific circumstance of East Asia. Conditions attached to the loans parallel those of the Latin America crises of the 1980 s, demands massive deflation, with cuts in public spending and high interest rates as the main policy instruments. The bias towards deflation and fiscal austerity is not only inappropriate, given the underlying economic conditions, but threatens to turn recession into a full blown depression, with its attendant problems in terms of mass unemployment and rising poverty.
Monetary and fiscal policy has been tightened to the point of strangulation, threatening to kill or disable the patient during the first phase of treatment. For instance in South Korea, the IMF wants to see interest rates doubled to more than 15 per cent. This will inevitable lead to the early collapse of many companies, resulting in a loss of production and employment opportunities. Intense fiscal pressure are also being applied to Thailand, where public spending is to be reduced by the equivalent of 3 per cent of GDP.
In Indonesia, public spending is scheduled to fall by around 10 per cent. According to Indonesian Government sources, as many as 1. 6 million primary and junior secondary school students may be forced to withdraw from school. In real terms, government budgets for health and education have fallen dramatically. Reduction in public spending could act as a further driving force for poverty, reducing basic services to the poor at precisely the time when the need for them is increasing. The immediate consequences will be registered in the form of reduced opportunities for education and health.
In the longer term, public spending cuts could sever the link, which has been establish between growth and equity, to the detriment of both. For instance, Thailand s economic problems are related to a deepening skill shortage in sectors vital for the transition to a more diverse and technologically sophisticated economy. Deteriorating educational performance will undermine prospects for such a transition. Conclusion Based on the analysis given by various sources that we gathered, we conclude that the root cause of the currency crisis in South East Asia is due to large inflows in the form of credits and portfolio investment as well as capital through multinational corporations, largely came from investors in the United States and Western Europe.
The unusual successful economic performance in the region attracted these inflows into the region. Most of our sources stated that, while these inflows had permitted faster growth, they had allowed domestic banks to expand lending rapidly, fueling imprudent investments and unrealistic increases in asset prices. According to Jeff Sachs, the Director of the Harvard Institute for International Development, Thailand, in 1997, overvaluation of the real exchange rate, coupled with booming bank lending, heavily directed at real estate. The overvaluation tended to push new investment towards non-tradable sectors-notably construction - away from the tradable sectors that are necessary to provide the wherewithal for future servicing of foreign debts. Several sources mentioned that most economies pegged their currencies to the dollar in recent years, even though their trade with the advance countries was roughly equally divided between the US, Europe and Japan. When the dollar appreciated sharply against the yen and the European currencies after 1995, emerging-markets currencies were pulled along in its wake made their exports less competitive.
Another source, IMF, stated that the key domestic factors that led to the economic crisis appeared to have been: First, the failure to dampen overheating pressure that had become increasingly evident in Thailand and many other countries in the region and were manifested in large external deficits and property and stock market bubbles; second, the maintenance of pegged exchange rate regimes for too long, which encourage external borrowing and led to excessive exposure to foreign risk in both the financial and corporate sectors; and third, according to them, lax prudential rules and financial oversight, which led to a sharp deterioration in the quality of banks loan portfolios. IMF further stated that political uncertainties and doubt about the authorities commitment and ability to implement the necessary adjustment and reforms exacerbated pressures on currencies and stock markets. They also blamed the emerging countries reluctance to tighten monetary conditions and to close insolvent financial institutions as an addition to the turbulence in the financial markets. Countries like Thailand and Indonesia turned to IMF, the World Bank and other countries for financial assistance but insufficient attention, especially by IMF has been paid to the specific circumstances of East Asia.
Their programs have been designed primarily with a view to bailing out reckless international investors and implication of the poor has been left unconsidered. The bias towards deflation and fiscal austerity is not only inappropriate, but also threatens to turn recession into full-blown depression. IMF applied intense fiscal pressure to those countries such as Thailand and Indonesia where public spending was to be reduced by the equivalent 3 per cent of GDP and 10 per cent of GDP consecutively. Reduction in public spending, for example, was in the form of reduced opportunities for education and health. In Indonesia, for example, according to Indonesia Government source, as many as 1. 6 million primary and junior secondary school students may be forced to withdraw from school.
George Soros, in his testimony to the U. S. House of Representatives on September 15, 1998, IMF imposed tough conditions on the country concerned but did not imposed tough penalties on the lenders and the treatment on on lenders and borrowers needed to to be corrected. Chairman Alan Greenspan, in his testimonies before the Committee on Banking and Financial Services, U.
S. House of Representatives on November 13, 1997, stated that the recent crises would arguably have been better contained if long-maturities properties loans had not accentuated the usual mismatch between maturities of assets and liabilities of domestic financial systems that were far from robust to begin with. Greenspan advised economic policy makers in Asia to fend off domestic pressure that seek disengagement from the world trading and financial system.
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