By Mohammed Jehan Khan –
South East Asia has come a long way since the financial crisis crippled the region nearly two decades ago. Even after the region has recovered from the crisis, post-crisis economies are still running at around 2-6% less than in the two decades before the crisis. The crisis affected economies are still confronting complex reform challenges.
During the last three decades certain Asian nations like South Korea, Thailand, Taiwan, Hong Kong, Singapore, Indonesia and Malaysia had made such rapid progress year after year, which earned them the moniker ‘The Tiger Economies’. These three decades of their tremendous growth averaging 8% a year had inspired pride at home and envy abroad. Never before had any economy sustained such growth for so long. Economists believed that in a century or two, these Asian giants would lead ahead of the USA’s and Europe’s economies. South Asian economic policies were presented as a model to the developing South American and African countries.
This miraculous economic progress achieved by these Asian countries was called ‘The Asian Miracle’. The sudden setback that befell them is the anti-climax of this miracle and it is therefore rightly called the ‘Asian Crisis’.
Taking the case of Thailand, a country that had all the audacity to called itself an economic tiger, it was indeed a big come down. With the GDP growth averaging 7.2%-8% a year in the early 1990’s, the country was doing very well. Exports from the country were also at a healthy level and it was fast acquiring an enviable economic status. Then what went wrong?
The only mistake that the country had committed was similar to the mistakes that countries often make when they are flush with foreign capital. Instead of investing into industry or productive assets, Thailand spent it into high profile buildings in and around metropolitan Bangkok.
The government encouraged investments in steel mills although the country had neither iron nor coal. Instead of improving the quality of goods to compete with China and Japan, the foreign capital was largely spent on buying luxury sports cars and limos while the country’s infrastructure and education system was starved without proper funds. To escape poverty young girls from rural areas to prostitution as a mean of sustenance, which paved the way for Thailand to become a world famous and thriving sex industry.
It was during this time that hell broke out on July 2, 1997, in Thailand, where the Baht came under a speculative attack and the attempts of the government to save the currency crashed to the ground. Since then the plunging currencies and stock markets have put the economic miracle in the deep freeze and now the focus is on survival.
At its worst the Indonesian rupiah was more than 80% down against the dollar and the currencies of Thailand, South Korea and The Philippines have all plummeted by 35% to 50%. Till June 1997, nobody could ever think that the East Asian bubble would burst so suddenly.
How did all this happen? Some western economists argue that since the East Asian economic miracle was simply based on high investment rates it is inevitably bound to come against its own limitations. Others argue that since the East Asian economy was based on free trade policies, they had to face the evil effects of unhindered capital flows. Years of breathtaking growth attracted vast inflows of foreign capital in the 1990’s which led to ‘over-borrowing’ and ‘over-investments’, and rapid growth had all along concealed this structural weakness.
It was indeed a big storm that swept across South East Asia and the biggest head that rolled was that of President Suharto of Indonesia, who, having been just elected for the record seventh term, had to bow out of office in ignominy.
As of today, the US dollar is becoming stronger by the day and the stability of the Japanese yen, Indonesian Rupiah and Thai Baht are threatened and China is on the verge of devaluing its currency. The Sri Lankan rupee has crossed the Rs. 130/= mark in relation to the dollar and it is feared that it may sink further deep.
The most important lessons learnt from the South East Asian economic crisis is to keep our current account deficit, low inflation rate and high forex reserves in shape. Sri Lanka should use loans not for ostentatious spending, but strictly for improving productivity.
Instead of going for wasteful displays of wealth, Sri Lanka should use foreign capital judiciously as an aid to development. If we take a closer look at our economy with that of Thailand in the 90s, in Sri Lanka too, the rural areas and crucial sectors like education have been neglected.
At the same time, from 2009-2015 Sri Lanka has spent lavishly on non-productive assets. Political instability following the presidential election has added $104 Million to the list of unproductive expenditure (e.g. Lotus tower project). If such profligate behavior is not curbed immediately, the time is not far away when the country will find itself trapped in an economic crisis.