Jun 5, 1998

 

FINANCE: ASIAN CRISIS WILL HAVE SIGNIFICANT IMPACTS

Geneva, 3 June (Chakravarthi Raghavan) -- The impact of the Asian crisis, and the substantial adjustments the countries have to undergo would have some "significant" impact on the industrialized countries, with their GDP growth expanding at a 2-1/2 percent rate in 1998 and 1999, but will have a "sharp slowdown" in world trade growth and a major change in the current account balances. 

In providing this assessment in the June 1998 Economic Outlook, the Paris-based secretariat of the 29-member Organization for Economic Cooperation and Development, has underscored the "fragility" of the situation in the Asian region, and the uncertainties in Japan relating to the "weaker" than earlier expected underlying momentum in the economy and response to the recovery package announced in April. 

The latest half-year publication, has introduced some changes inpresentation, aimed (as the foreword says) to make it a "more accessible layout and more user-friendly book... (but) with the usual identify and contents not affected."  

But the revamped publication may not be enough to get over the basic problem of the OECD -- with much of its 'turf' having been lost to other institutions, its country projections and surveys, effectively a 'negotiated' document between the secretariat and the governments, and its overall analysis, while that of the secretariat, still clouded by the ideological frameworks and need to project a 'positive' view of the system. This last has been held by competent observers outside as largely responsible for the constantly optimistic projections of the OECD and the IMF and WTO to show that the neo-liberal policies advocated by them are working and will benefit everyone.  

In assessing the Asian crisis, the OECD says that while it represents a shock for the world economy, its negative impact is likely to be limited for countries outside of the Asian region. Countries directly affected should gradually recover, provided policies currently being implemented proceed as effectively and rapidly as possible.  

"Stable macro-economic policies and sound financial structures, in particular as regards supervisory and regulatory frameworks, are essential to the proper functioning of globalised financial markets. 

"In order to overcome this crisis successfully, it is important that the foundations for liberalized financial markets be strengthened and that the adjustments in external positions that are taking place not be thwarted by a rise in protectionist pressures."  

But in assessing the Asian crisis, the OECD has slightly distanced itself from the orthodox IMF and neo-liberal explanations of the crisis being the outcome of 'crony capitalism' in Asia, and says that while these may have amplified the crisis, they cannot explain by themselves the sudden collapse the countries concerned experienced.  

The OECD now projects that the current accounts of the affected countries in Asia would have sharp turn around (mainly due to cut in imports), resulting in a cumulative surplus of $70 billion for 1998 and 1999 (all of which will have their counterpart deficits in the US and EC) and a sharp slowdown in world trade growth.  

The OECD expects world trade (arithmetic average of imports and exports) volume growth to slow down from a 9.8% in 1997 to 7.1% in 1998 and 7.0% in 1999. Within this overall picture, the world trade in manufactures is projected to slow down from 11.4% in 1997 to 7.7% and 7.4 percent.  

The OECD has revised downward the GDP growth projections of last December, both of the OECD region as a whole (by a 0.5 percentage point), and of Japan (by two percentage points, from +1.7 to -0.3).  

Since its projection in November 1996, the OECD has constantly revised downwards its projections and estimates for Japan -- in all by 4-1/2 percentage points.  

In a late insert (after the outlook was finalised) in an editorial, the Outlook makes a positive assessment of the latest (24 April) Japanese package of tax cuts and spending as responding in a "substantial manner" to the economy's immediate need for stimulus. However, the OECD says, there are uncertainties as to the overall effect. "Indeed much depends on the speed of implementation of planned public spending and on the extent to which the proposed tax cuts translate into higher household consumption rather than extra-saving."  

Depending on these two important conditions, the measures announced, would have the potential to head off the serious recession which would otherwise have occurred in Japan. But it would be important to ensure that the recovery is sustained and not withdrawn prematurely, and the expansionary impulse from the temporary tax cuts should be maintained as part of an overhaul of corporate and personal taxes.  

Among the negative elements for Japan, the OECD notes that it is most directly exposed of the industrial countries to the Asia crisis and will be the most affected. Export volumes to Asia already falling in 1997 point to further declines. Other negative factors include the continuing fiscal tightening which began in 1997 and the likelihood that a substantial part of the temporary tax cut will not be spent.  

"With rising concerns about job insecurity, private consumption may remain weak throughout the projection period. Moreover, business spending will hardly rise as long as enterprises continue to find bank credit difficult to obtain and inventory-sales ratios are high. Perhaps, most importantly, a number of bankruptcies among financial and non-financial firms and a series of financial scandals have caused households and businesses to lose confidence and investors to retrench their positions..."  

Some recent media reports suggest that the Japanese authorities have put a lid on the 'financial scandals' which were causing loss of consumer and business confidence, by in effect winding down the investigations.

The OECD expects growth to slow down in several countries. In the US where both growth and job creation continued to outpace expectations of many observers, the Outlook expects a number of forces at work would lead to a slowdown. The strength of the dollar and slower domestic demand in Asia and Latin america will weaken exports, business investment will eventually slow, and the recent build-up of inventories should unwind. But private consumption, buoyed by continuing real income gains of households and favourable wealth effects, should remain strong, while stable monetary conditions and low long-term growth rates should attenuate the slow-down of aggregate demand. 

Overall, US growth could slow to around 2.75% in 1998 and 2% in 1999. 

In the UK, following more than five years of expansion and strong performance in 1997, growth has recently shown signs of faltering.  

In continental Europe, where till recently recovery has been underpinned mainly by exports, the long-awaited revival of fixed capital formation appears to be materialising and business investment spending should remain buoyant. And if long-term interest rates rise only slightly from the low levels of early 1998, they will provide a partial offset to adverse impact of Asian crisis on exports. Real wage increases and importing household confidence may provide a moderate boost to private consumption which has been lagging the recovery in some countries, notably Germany and France. 

Following a decline in 1997, unemployment in the OECD is expected to stabilize, remaining somewhat over 35 million persons or around 7% of the labour force. There would be a substantial decline of one million in unemployed in the EU, but offset by rise elsewhere in the OECD.