Wednesday, July 11, 2007

Q &A on East Asian economies

There's been a lot of coverage to mark the decade of the East Asian crisis. Commentators have regurgitated material about the "lessons of the crisis". Some of it obscures crucial questions. I address these.

1. Did the economies shrug off the crisis quickly?

Not really. The Economist (June 28) notes, "Income per head returned to pre-crisis levels in South Korea and Malaysia by 2000; in Thailand and Indonesia it took until 2003 and 2004 respectively." In other words, it took five to seven years for the economies to get back to square one.

2. Have the economies got back on a fast growth track?

No, growth since 2000 has averaged 5%, 2.5 percentage points below the rate in 1990-96.

3. Has governance improved in thse economies?

No. I quote the Economist again:

The ADB uses data compiled by the World Bank to rate Indonesia, Malaysia, the Philippines, South Korea and Thailand relative to the rest of the world on six measures of governance: accountability, political stability, government effectiveness, regulatory quality, the rule of law and control of corruption. Comparing 2005 with 1996, the scores for East Asia have got worse in 22 of the 30 comparisons (ie, six measures for five countries). If international rankings are compared, these countries have fallen in 28 of the 30 comparisons. Only in South Korea did governance scores improve on more than half of the measures.

Are these economies sold on reforms?

Well, we are seeing some signs of backsliding. Thailand imposed limits on equity investment briefly last year and has recently imposed curbs on foreign ownership, Taiwan slapped limits on mutual fund investment abroad, South Korea is thinking of ending restrictions on chaebols' investment in banks .... good times do tend render policy lax.

5. Are the economies headed for another crisis?

Not likely. They have abandoned fixed exchange rates, they have huge reserves, money supply growth is under control and their is no sign of an asset bubble. Like India and China, they do face problems of managing capital inflows but have not made big errors in this department.

The basic lesson of the crisis, I think, remains valid for these economies and for India: completely unregulated capital flows can pose serious problems given that regulatory capacity in
these economies is still underdeveloped.

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