Whodunnit?
Financial crisis and the death
of the Asian developmental state
Jayati Ghosh
The “new” view on the Asian crisis
• Recent argument that the Asian financial crisis was not so
bad - even in general a good thing.
Why?
• It did not destroy the basic economic growth trajectory
of the region – “crisis” economies have since recovered.
• It forced these economies to intensify liberalising
reforms, especially in the financial sector.
• Thereby it reduced “crony capitalism”.
• Other positive by-products like the break up of the some
the large South Korean “chaebols” and the collapse of the
Suharto dictatorship in Indonesia.
• This view is now current even among policy makers in
India and other developing countries.
• This creates a complacency about crisis, so that
governments are less likely to take adequate
precautionary measures, such as controls on finance.
• So it is particularly important to evaluate the
subsequent performance of those economies that
were particularly affected by the 1997 financial
crisis.
• This analysis looks at the post-crisis experience of
Thailand, South Korea, Malaysia, Indonesia and the
Philippines.
Output per worker in constant prices (2000 US $ base)
Output per
worker
1995 2005
South
Korea
20633 35769
Malaysia
13434 21051
Indonesia 5945 8666
Philippines 6348 7180
Thailand
8291 13507
China
3258 8240
India
3484 5995
Per
change
annual
change
4
3.3
2.7
0.9
3.5
6.9
4
as per cent of
ICs average
1995 2005
43
28
12
13
17
7
7
64
38
16
13
24
15
11
Nature of recovery
• These economies have recovered from the most
intense effects of the crisis in terms of output and
employment declines.
• Export growth has been strong.
BUT
• Both aggregate GDP growth and industrial growth are
still substantially below the average rates achieved in
the period before the crisis.
• They have also been more volatile and fluctuating.
Malaysia: Value added in industry
20.0
600.0
15.0
500.0
10.0
400.0
5.0
300.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
200.0
-5.0
100.0
-10.0
-15.0
0.0
per cent change
in $ bn
Rep. Korea: Value added in industry
15.0
3000.0
2500.0
10.0
2000.0
5.0
1500.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1000.0
-5.0
500.0
-10.0
0.0
per cent change
in $ bn
Philippines: Value added in industry
10.0
290.0
8.0
270.0
6.0
250.0
4.0
230.0
2.0
210.0
0.0
190.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-2.0
170.0
-4.0
150.0
per cent change
in $ bn
Indonesia: Value added in industry
48
20.0
46
15.0
10.0
44
5.0
42
0.0
40
-5.0
38
-10.0
-15.0
34
-20.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
36
Industry, value added (% of GDP)
Industry, value added (annual % growth)
Thailand: Value added in industry
15.0
3000.0
2500.0
10.0
2000.0
5.0
1500.0
0.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 1000.0
-5.0
500.0
-10.0
0.0
per cent change
in $ bn
Employment
• Aggregate employment growth is much slower than
before
• The quality of employment has deteriorated: greater
proportion of insecure casual contracts, low-grade
self-employment and part-time work, especially for
women workers.
• Even in the sectors where export growth has been
buoyant, such as manufacturing, employment has not
picked up (and in South Korea and Malaysia it has
actually fallen in absolute numbers).
• Unemployment rates in the entire region have also
been at historically high levels.
Indonesia: Elasticity of employment
with respect to GDP
0.4
0.33
0.32
0.3
0.31
0.26
0.25
0.24
0.2
0.1
0
-0.1
All workers
Male workers
Female workers
-0.2
-0.3
-0.26
-0.29
-0.33
-0.4
1992-1996
1996-2000
2000-2004
Malaysia: Elasticity of employment
with respect to GDP
0.9
0.81
0.8
0.7
0.62
0.6
0.5
0.4
0.52
0.48
0.33
0.49
0.34
0.46
0.32
0.3
0.2
0.1
0
All workers
Male workers
1992-1996
1996-2000
Female workers
2000-2004
Philippines: Elasticity of employment
with respect to GDP
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0.93
0.81
0.75
0.75
0.64
0.62
0.57
0.46
0.37
All workers
Male workers
1992-1996
1996-2000
Female workers
2000-2004
Republic of Korea: Elasticity of employment with
respect to GDP
0.38
0.4
0.35
0.3
0.25
0.2
0.35
0.31
0.23
0.26
0.29
0.27
0.22
0.15
0.15
0.1
0.05
0
All workers
Male workers
1992-1996
1996-2000
Female workers
2000-2004
Thailand: Elasticity of employment
with respect to GDP
0.3
0.24
0.25
0.2
0.25
0.24
0.17
0.16
0.15 0.15
0.15
0.11
0.1
0.07
0.05
0
All workers
Male workers
1992-1996
1996-2000
Female workers
2000-2004
Divergence between savings and
investment rates
• The East and Southeast Asian region generally had
very high savings rates – between 30 and 45 per cent
in the different countries – for some time now.
• After the financial crisis, savings rates have
increased further and investment rates have
plummeted, especially in the “crisis” countries.
• 1997-98 marks a clear break in this. Before then
savings rates were higher than investment rates, as
expected in developing countries.
Malaysia: GDP growth, savings and investment rates
50.0
12.0
10.0
45.0
8.0
6.0
40.0
4.0
35.0
2.0
30.0
0.0
-2.0
25.0
-4.0
-6.0
20.0
-8.0
-10.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
15.0
Savings rate
Investment rate
GDP growth rate
Rep. Korea: GDP growth, savings and investment rates
60.0
12.0
10.0
50.0
8.0
6.0
40.0
4.0
2.0
30.0
0.0
20.0
-2.0
-4.0
10.0
-6.0
-8.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
0.0
Savings rate
Investment rate
GDP growth rate
Philippines: GDP growth,savings and investment rates
40.0
7.0
6.0
35.0
5.0
30.0
4.0
25.0
3.0
2.0
20.0
1.0
15.0
0.0
-1.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
10.0
Savings rate
Investment rate
GDP growth rate
Indonesia GDP growth, savings and investment rates
35.0
15.0
10.0
30.0
5.0
25.0
0.0
20.0
-5.0
15.0
-10.0
10.0
-15.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Savings rate
Investment rate
GDP growth rate
Indonesia: Savings and investment rates
(excluding 1998 and 1999)
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
20
00
20
01
20
02
20
03
20
04
20
05
33.0
31.0
29.0
27.0
25.0
23.0
21.0
19.0
17.0
15.0
Savings rate
Investment rate
Thailand: GDP growth, savings and
investment rates
15.0
40.0
10.0
35.0
5.0
30.0
0.0
25.0
-5.0
20.0
-10.0
15.0
-15.0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
45.0
Savings rate
Investment rate
GDP growth rate
Why has this happened?
• This growing “savings surplus” is not simply the result of
the decisions of private agents in these countries.
• A very large role is played by governments, who have
increased their savings and cut down on fiscal deficits or
increased fiscal surpluses across the region.
• The financial crises (which was brought on by private
profligacy in a financially liberalised environment) has led
to an excess of caution on the part of governments.
• So governments in these countries have not spent as much
as could be easily sustained by the economy, to ensure
better conditions for the people or to encourage more
sustainable growth and generate more employment.
Fiscal deficits as per cent of GDP
5
4
3
2
1
0
1997
1998
1999
2000
2001
2002
2003
2004
-1
-2
Asian NICs
Other Developing Countries
2005
Fiscal deficits as per cent of GDP
5
4
3
2
1
0
1997
1998
1999
2000
2001
2002
2003
2004
-1
-2
United States
Euro Area
Asian NICs
Other DCs
2005
The implications
• This is why growth rates are in general lower, why
employment generation has been inadequate and
unemployment rates are rising, and why conditions of a
large section of the poor do not improve in these
countries, despite the apparent aggregate economic
“recovery”.
• More critically, the project of the developmental state,
which was such an essential feature of economic progress
in the region in the past, has effectively been abandoned.
• So financial crises do more than simply create sharp and
painful economic shocks for the residents of the country –
they also alter longer-term economic trajectories in
unfortunate ways.