Asian Development Outlook 1999: Report endorses greater openness as key to growth in Asian developing economies

• Pages: 223-224

Page 223

Asia's economies endured a tough year in 1998, as growth rates in many previously dynamic economies barely remained positive or became negative, according to the Asian Development Outlook 1999. Inflation rose in Southeast Asia, largely due to steep currency devaluations, and current account balances in Asia's developing economies improved as a result of reduced imports rather than increased exports. The Asian financial crisis hurt many of Asia's most dynamic economies and raised questions about the role of openness in promoting sustainable growth, the report continues. Nevertheless, it concludes, the Asian developing economies' best route for ensuring economic growth and prosperity is through economic openness and liberal economic policies.

Region in 1998

In 1998, the report states, the slowdown in Asian growth that began with the deceleration of exports in 1996 worsened with the currency crisis in 1997. It then turned into a widespread regional contraction, with growth in East and Southeast Asian developing economies being the lowest since World War II, averaging -6.9 percent in Southeast Asia and -1.4 percent in the newly industrializing economies. Nervous investors pulled capital out of supposedly risky emerging markets in Asia in 1998, and capital flows turned negative after reaching $105 billion in 1996.

The economies in the region generally considered more dynamic did the worst in 1998-Indonesia suffered a huge contraction, and Malaysia and Thailand had substantial declines, the report states. Among the newly industrializing economies, China fared the best, sustaining little damage, while Korea suffered a large contraction. Hong Kong SAR and Singapore, whose economies are based on trade and financial services, were also affected by the regional slowdown. Reduced export demand partially explained the contractions in Hong Kong SAR and Korea.

Across Asia, the average rate of consumer price inflation rose to 6.5 percent from 4.6 percent in 1997, according to the report. The sharp depreciation of the rupiah caused double-digit inflation in Indonesia. In the newly industrializing economies, inflation rose primarily because of price increases in Korea caused by the sharp depreciation of the won. Milder devaluations in Malaysia, the Philippines, and Thailand drove up inflation in those countries.

Throughout the region, the report points out, current accounts improved as capital flowed out, with Asia's aggregate current account moving to a surplus of 3.6 percent of GDP in 1998. The improvement came from import reductions, and overall exports did not increase as expected...