The causes of the monetary and financial crisis in the countries of East and South-East Asia (BA and SE) seem to be well studied in the domestic and foreign literature. The factors of the sharp economic downturn in 1998 are less studied. Considering this aspect of the Asian crisis will allow us to better understand the characteristics of the economies of these countries and show the decisive role that investment played in their economic development.

The theory of the balance of payments crisis and the history of global currency crises do not suggest that a sharp decline in GDP and a large-scale economic crisis are one of the consequences of the currency crisis in open export-oriented economies (which many Western scientists consider to be the countries of the BA and SE). In our opinion, certain conditions are necessary for such an impact of the monetary and financial crisis: underdeveloped and rigid economic structure and market mechanisms, and / or highly dependent on the external environment (in the case of a small monocultural economy).

As numerous studies show, "a single external shock (in the form of a currency crisis) is basically not able to bring a normal economy out of balance" ¹ .

On the contrary, for an open market economy, the depreciation of the national currency in conditions of sufficiently high income elasticity of exports and imports (i.e., if the Marshall-Lerner condition is met) should be an incentive to increase exports, reduce imports, and thus increase GDP growth. This is exactly the scenario that should have been implemented in the countries of the BA and Southeast Asia, if economic growth in them occurred according to the theoretical scheme of export orientation (it would have been focused on external demand).

As the actual data show, there were some signs of such a process in the countries under review: the currency crisis, which gave rise to the financial crisis, caused a sharp decline in imports. However, exports also declined during 1998. As a result, import substitution increased (that is, the J-curve effect appeared, as indicated by the current account balance). This, however, would increase aggregate demand and increase GDP growth ² (assuming that the external relations sector was the determining factor).

However, the sharp decline in GDP observed in Asian countries indicates the existence of other factors that determined its dynamics. The reason for this behavior of the macroeconomic indicators of the countries under consideration, in our opinion, was precisely the dependence of their GDP and foreign trade on investment demand, which in 1997-1998 experienced a deep decline.

What caused such a sharp decline in investment? The answer to this question is related to the financial crisis: the decline in national investment as a result of problems in the financial sector is quite typical. The method of financing investments in all the countries under consideration during the 1990s gave rise to a high dependence of enterprises on loans, some of which were provided by foreign capital in a short-term form. The banking system acted as an intermediary in this process, taking on the main currency risk.

In such circumstances, the currency crisis caused a financial one, undermining the stability of the banking system and weakening its role as a source of credit and intermediary for foreign capital. The supply of credit resources has decreased. The high interest rates that governments resorted to during the currency crisis led to a decrease in the demand of enterprises for investment resources and a sharp reduction in gross investment. The associated drop in domestic demand (manifested through the investment multiplier) combined with sluggish export dynamics (or even its decline)

Oleg V. PETRUNIN, lecturer at the Far Eastern State University (Vladivostok).

^{Kaminsky G.} 1 Currency and Banking Crisis: The Early Warning of Distress // IMF Working Paper 99/178. Wash., 1999. P. 7.

² As noted in a number of studies, the external sector was a mitigating factor for all countries, increasing the GDP growth rate by several percentage points due to the import substitution effect (IMF, Country Studies, 1998-2000).

page 64

Table 1. Quarterly dynamics of macroeconomic indicators of five Asian countries, % compared to the corresponding quarter of the previous year

Source (tab. 1 и 2): IMF. Direction of World Trade. December 2001. N.Y. 2002.

led to a decline in production and stimulated the freezing of investment projects ³ .

And that is why short-term anti-crisis measures that have stabilized the economic situation (first of all, the exchange rate and interest rate) were sufficient to restore the investment demand of enterprises, increase the supply of credit resources from the financial system, and ensure a rapid recovery of investment dynamics4, and with them-the rate of economic growth.

From the point of view of the balance of payments crisis theory, the Asian crisis, while having certain features, is largely analogous to many that have periodically affected a number of developing and developed countries since the second half of the 1980s.

In our opinion, the most important difference between the Asian monetary and financial crisis and those that occurred in other open market economies was a deep (but short-term) decline in GDP, which was associated with a sharp collapse in investment. Despite the differences in GDP dynamics (the closest decline in GDP was observed in Mexico), the decline in investment was not a feature of the Asian monetary and financial crisis alone, although the four most affected Asian countries (the Republic of Korea, Indonesia, Malaysia, Thailand) experienced a sharper decline.

The monetary and financial crisis did not always cause a sharp decline in GDP. However, the overall slowdown in growth may have been prolonged. This is evidenced by the history of the crises of the last 30 years. Over a number of years, the cumulative decline in GDP in countries that have experienced a currency crisis averaged 4-7%, and those that have experienced a banking (financial) crisis-up to 12%. ⁵

In the case of "twin crises", i.e. the monetary and financial crisis, the cumulative reduction in GDP could reach 15% ^.6

The currency crisis itself is a form of macroeconomic adjustment of the economy, its adaptation to a sharply changed external situation or accumulated chronic imbalance. As a result, a sufficiently diversified and non-monopolized market economy only gains dynamism and growth potential, including due to the increased competitiveness of its export products and the activation of import substitution after the currency devaluation.

It is somewhat more difficult to determine the impact of a financial crisis (primarily in the banking system of a particular country). Deterioration of conditions for obtaining loans for enterprises

³ See: Pomerleano M. The East Asia Crisis and Corporate Finances: The Untold Microeconomic Story // Emerging Markets Quarterly, 1998. P. 14-27.

⁴ Anti-crisis monetary, fiscal, corporate and financial policies are described in detail in country studies by IMF experts (IMF, 1998-2000. Staff Country Reports: Republic of Korea, Malaysia, Thailand, Indonesia, and Philippines).

⁵ См.: IMF, 1998. World Economic Outlook. P. 79.

⁶ See: Kaminsky G. Leading Indicators of Currency Crises. IMF. Wash., 1997. P. 35.

page 65

2. Table Comparing the dynamics of GDP and investment in countries affected by monetary and financial crises,%, year of crisis = 100

and the emergence of a credit deficit is unlikely to have a direct stimulating effect, because it inevitably leads to a deterioration in the economic environment and expectations, an increase in instability, a likely reduction in consumption and, as a result, to a decrease in investment. It is obvious that the higher the dependence of economic growth on investment dynamics, the more significant the decline in GDP as a result of the financial (banking) crisis. This turned out to be a determining factor in the economic downturn in South Korea and the Southeast Asian countries.

Data on the level and dynamics of gross investment in the Asian countries under review show that it was the most important component of aggregate demand, the decline of which could not be compensated by exports (but the effect of which was largely smoothed out due to import substitution). That is why it seems quite correct to speak of the crisis in Asian countries as an investment one, which caused a sharp decline in GDP.

The decline in investment during the crisis period led to a drop in GDP in Asian countries, and cross-country differences in the rate of decline correspond to the difference between the rate of change in investment. Thailand's severe economic downturn was associated with a larger decline in investment compared to South Korea and Malaysia. The deeper downturn in Indonesia's economy than caused by investment can be explained by the less developed structure of its economy, which in the context of the currency crisis reduced import substitution opportunities and spurred inflation, while the growth of imports and the decline in real incomes of the population reduced consumption of domestic goods and services.

Numerous studies show that the decline in investment during the currency and financial crisis is associated with the emergence of a shortage of credit resources (that is, with a reduction in their supply from the financial system) and a decrease in demand for investment resources due to the deterioration of the financial condition of the corporate sector of the country. The investment downturn that caused a sharp decline in GDP in South Korea and Southeast Asian countries was reinforced by the peculiarities of the development strategy of these countries in the 80s and 90s, when the state stimulated private investment by gradually liberalizing the external, corporate and financial sectors. The mechanism that linked the instability of the financial sector and the economic downturn as a result of the investment crisis was the currency and financial (banking) crisis in the countries under consideration.

Many domestic and foreign works have been devoted to a detailed study of the immediate causes of the currency and financial crisis in Asian countries, so we do not touch on these problems. It is important, in our opinion, to note that the mistakes of economic policy in the countries under consideration were insignificant, and the very use of tactical instruments of economic policy (currency, monetary, interest rate, credit, etc.) even before the beginning of the monetary and financial crisis fully corresponded to traditional recipes for regulating the market economy and could not cause a deep economic downturn. ⁷

One thing was special - these instruments and the market mechanism as a whole are focused on development, one of the priorities of which was industrialization based on stimulating private investment. This policy direction was an expected evolutionary transformation of the previously (in the 70s) tightly regulated industrialization regime in South Korea, Indonesia, Malaysia, and Thailand.

⁷ On the sufficiently high level of professionalism and adequacy of economic policy measures in the countries under review, which nevertheless turned out to be insufficient to prevent it, see: works of IMF experts on Asian countries (IMF, 1998-2000).

page 66

The liberalization of the economies of these countries, which began in the late 1980s, was not an end in itself: the change in their state policy of industrialization was clearly marked by the middle of this decade after a series of crisis situations ^.8

The desire to develop and the need to ensure this development led the pragmatic governments of South Korea and Southeast Asian countries to the only correct decision: with a sufficiently diversified economy with significant industrial potential, liberalization was necessary, which increased the efficiency of the economy and allowed Asian countries to use literally all their competitive advantages.

That is why the development strategy chosen by Asian countries to stimulate an investment boom, which is considered by many researchers to be a "soap bubble" ⁹, in our opinion, is such only in the aspect of the currency crisis.

We are confident that the option of slow development is less preferable than the active investment strategy chosen by Asian countries, which has significantly improved the standard of living of the population and created an efficient economy in a short historical period. The experience of developing countries shows that currency and financial crises are more related to economic openness and rapid liberalization than to economic dynamics ^.10

⁸ См.: James W., Naya S., Meier G. Asian Development. Economic Success and Policy Lessons. International Center for Economic Growth. San Francisco, 1987. P. 129-131.

⁹ См., например: Corsetti G., Pesenti P., Roubini N. What Caused Asian Currency and Financial Crisis? Part 1 (A. Mac-roeconomic Overview) and Part 2 (The Policy Debate). NBER Working Paper N 6833, 6834. Cambridge (Mass.), NBER, 1998; Krugman P. Analytical Afterthoughts On the Asian Crisis. 09.12.1999; P. Krugmans web-site (http: //web.mit.edu/krugman/www/MINICRIS/htm).

^{Kaminsky G.} 10 Currency and Banking Crisis. P. 22- 27.

Permanent link to this publication: