The Asian Economy : Scenarios of Recovery

ABSTRACT

Since July 1997, Asian countries have been caught in the middle of a currency crisis that has pushed down the values of their currencies, disrupted financial systems, and triggered deep recessions in their real economies. The impact of the crisis varied from country to country, however, and can be divided into three levels: critical, serious, and moderate.

In order to recover from the currency crisis, Asian economies will need to go through a three-stage process. The first stage is a 12 to 18 month transition from crisis to stability by restoring stability to financial systems. The second stage, lasting between 18 to 24 months, will allow economies to transition from stagnation to recovery; export will play the main driving force of domestic demand. The third stage will take two more years following the end of the second stage, and will drive full-scale recovery by expanding domestic demand. In total, Asian economies are expected to resume growth tracks within five years of the crisis.

The first stage-restoring stability to financial systems-is the most important of all the stages. Normal economic activity, including production, exports, imports, and investment, will not return until financial systems are stabilized. Policy measures and conditions for this include: (1) accepting assistance and the tightening of fiscal policy by the IMF, (2) improving the current account balance, (3) rescheduling foreign debts, (4) normalizing an intermediary role for financial institutions, and (5) avoiding the devaluation of the Chinese yuan renminbi, as an external condition. Judging from exchange-rate trends, share prices and interest rates, the Asian economies are now moving toward stability. However, the full restoration of stability will take time.

Once the stability of their financial systems has been restored, the Asian countries are likely to move toward export-led recovery. Lower currency values will enhance export competitiveness, and dramatic export growth can be expected. The advanced industrialized countries within the Asian region will continue to function as demand absorbers, and export expansion will provide the initial stimulus for domestic demand, triggering a recovery in production, consumption, and investment.

The export boom provided by currency depreciation will be temporary, however, and it will be necessary to ignite a second engine-i.e. expand domestic demand. Factors that lead to increased domestic demand include expansionary macroeconomic policy and the recovery of capital investment and consumer spending. Increased domestic demand would restore the growth rate to pre-crisis levels, but a variety of structural reforms will be needed if those growth rates are to be maintained.

Introduction