Research Paper on "Severe Impact of 1997 Asian Crisis on Indonesia, Thailand, and South Korea"

Research Paper 14 pages (4312 words) Sources: 14

[EXCERPT] . . . .

There was a growth turnaround from a positive growth rate of 7.8% in 1996 to shrinking of the economy by 13% in 1998. In fact the level of economic decline was so drastic that according to Jean-Michel Severino, the World Bank Vice President at the time, no other country in the world had ever experienced such a dramatic reversal in economic growth in recent history (International Herald Tribune: Opinion, 8). The most evident social effects of the Asian crisis in Indonesia were unemployment and high inflation and eventually poverty (Ramesh).

The high rate of unemployment, lower income, and increased rate of poverty was at first thought to lead to long-term social damages because most families pulled children out of schools and did not seek any medical attention. The reality eventually was found out to be less harsh than initially thought, even though it was still significant. It is approximated that about 2.75 million children dropped out of primary and secondary schools and the severe effects of this are now being felt and this will continue for quite some time. The depreciation of Indonesia's currency, the rupiah caused the super inflation of medical drugs and other supplies. The government health policy of the 1990s that endorsed private healthcare backfired, as numerous private clinics shut down due to lack of people seeking medical care. However, the inflation of healthcare costs did not considerably affect the health or education status of the population. This was probably due to the diverse assistance programs that were put in place and the comparatively short period of the harsh recession (Ramesh).

The severe financial recession and the lack of a social protection fund to tackle it pushed the Indonesian government to start providing generalized subsidies. The cost of these subsidies ballooned to about 3% of the gross domestic product in 1998. Due to the ever increasing cost of generalized subsidies, in 1998 the government substituted the generalized rice subsidy with a lower quality rice subsidy (the OPK program). The government also attempted to remove fuel subsidies in the same year but had to shelve those plans due to public opposition. However the government eventually succeeded in 2000 but still catered for the lower income consumers through an arrangement of specific subsidies. Using indicators from a national survey the Indonesian government was able to assign an allocation of subsidized rice to each village and town (Ramesh).

By June 2000, the subsidy program was valued at 5 trillion rupiah and catered for approximately 13 million families, each of whom received up to 20 kilos of rice every month at the price of 1000 rupiah per kilo compared to the market price of 3,000 rupiah (Blomquist et al., as cited in Ramesh). However, the bulk of government subsidies went to the fuel subsidies. The Indonesian government also launched a massive public works project at the cost of 10 trillion rupiah. The government also went ahead to initiate another project referred to as Pemberdayaan Daerah dalam Mengatasi Dampak Krisis Ekonomi (PDM-DKE) meaning empowering regions to rise above the effects of the economic crisis. PDM-DKE entailed creation of jobs and funding of small scale initiatives. There were also projects that were funded by donors including the Kecamatan Development project (KDP), funded by World Bank. KDP gave funds to poor communities to carry out infrastructure projects (Ramesh).

To make sure that access to essential public services was not denied, the Indonesian government spent nearly 1 trillion rupiah to build schools, provide scholarships and maintain a school lunch program in the 1998 to 1999 financial year (Blomquist et al., 2001). There were media initiatives and community campaigns to motivate children to stay in schools. The poorest 40% of the primary and secondary schools were given funds to compensate for cost inflations; furthermore, the junior secondary schools students at the risk of dropping out were given a higher priority in a national scholarship program. Funds were also provided to rural clinics for provision of essential health services and the nutritional supplies for infants and their mothers (Ramesh).

2.2 Korea

Of all the Asian tigers, South Korea was the only economy that was affected by the crisis. Its gross domestic product dropped by 6.5% in 1998 in contrast to the outstanding growth it had recorded in the preceding year. Inflation also rose by 75% in 1998. During the same year the rate of unemployment more than doubled to 6.8%, while poverty also rose to 19.2% more than tripling the previous year's value. Unlike the other South East Asian economies affected, South Korea had a stronger social protection program, though it was not enough for the scale of the Asian crisis.

The government responded to the Asian crisis, by increasing unemployment insurance and initiating larger public works programs. It also strengthened public assistance. These short-term fiscal reforms were in conjunction with other long-term reforms the government initiated at that period in the pension schemes and the healthcare system (Ramesh).

South Korea's current account balance began deteriorating in 1990 due to the rising inflation, overvaluation of the local currency, and the global recession. In 1991, the current account registered a deficit of 8.7 billion dollars almost 4 times what it was in 1990. In order to compensate for the deficits the Korean government encouraged foreign direct investments. To achieve this, the government in 1991 partially liberalized the capital account by amending the Foreign Exchange Management Act. This resulted in huge capital inflows. However, strategists were more worried by how the capital inflow was going to affect the Korean export competitiveness via the appreciation of the local currency, that they failed to see the ensuing financial instability (Kihwan).

2.3 Thailand

Thailand was the second worst hit economy by the Asian crisis. The biggest social impact of the Asian crisis in this country was increased unemployment. The country had complete employment and an unemployment rate of 1.5% in 1996; this rose to 4.5% in 1998 coupled with much higher unemployment. The rate of inflation also rose significantly resulting in a 51% increase in the price of foreign pharmaceuticals and a 43% increase in local pharmaceuticals (Somchai, as cited in Ramesh).

In the face of this crisis the Thai government first sought to create new jobs for the unskilled and semi-skilled laborers. The government did this through the Tambon Development Program, a public infrastructure program targeting the rural areas. The pre-crisis Poverty Alleviation Program (PAP) was also expanded. This particular program entailed a small scale credit program that involved giving interest-free loans to low income households to start small businesses. The government also increased the maximum amount of severance pay and came up with a fund to pay severance monies to laborers whose firms had gone under. The Thai government launched a fiscal stimulus package in April 1999; this was equivalent to 1% of the GDP and funded by external donors. 50% of this money was to be spent on creation of jobs and the expansion of the social security net (Ramesh).

The government also provisionally cut the social security deductions from 1.5% to 1% for every employer and employee to ease the financial burdens on the citizens. Even though during the initial stages of the crisis the government response focused on job creation it later shifted to expansion of social safety nets. For example, though the total allocations for social services reduced in 1997, the allocations for the maternal and child health, school lunch program, teacher training and Health Card program were protected (Blomquist, as cited in Ramesh). The allocations for subsidized student loans were doubled to 400 million dollars during the same period. To ensure that citizens from poor households had access to health care the government boosted it Health Card program, whereby cardholders were entitled to receive selected basic health services at public health facilities at small charge (Ramesh).

3. Why Indonesia was affected the most?

The Indonesian crisis is said to have commenced on August 1997 when financial speculators began attacking the Rupiah. Although the effects of speculative trading were not that severe, the Indonesian government decided to broaden trading bands, increased its 3-month interest rate from 11-28% and heavily intervened in the country's foreign exchange market. It was also in the same year that the Finance ministry postponed over 16 billion dollars worth of investment projects. The local currency further depreciated as the local banks and other financial institutions rushed to shore up their foreign exchange reserves as it became clear that the capital inflow into the country had stopped. The signs of moral hazard and too much leveraging were much more obvious when the foreign reserves held by local banks suddenly disappeared resulting in more pressure on these banks yet they were already destabilized by non-performing loan books (Nematnejad).

Indonesia plunged into a severe recession in 1998 with the annual growth for that year being negative 13.7%. The worst performing sectors of the economy were the construction and financial which shrunk by 39.8% and 26.7%… READ MORE

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