SUNS  4306 Wednesday 21 October 1998


JAPAN: AID TO ASIANS WILL ACHIEVE MORE THAN FISCAL STIMULUS

Geneva, 20 Oct (Chakravarthi Raghavan) -- A 100 billion dollar aid package from Japan directed to the crisis-hit Asian countries will achieve more to global recovery than a fiscal stimulus package, the UN Conference on Trade and Development announced Tuesday.

In releasing the outcome of a simulation exercise of various scenarios, UNCTAD came out in support of recent moves in Japan, including the Miyazawa Plan, a domestic stimulus package and efforts to tackle structural deficiencies in the financial sector.

An UNCTAD press release issued Tuesday, along with a technical simulation paper, said that a $100 billion aid package over the 1998-2000 period to the five crisis hit countries of Asia could add as much as $380 billion to world output over the three years, and will have significant increase in activity levels not only in Asia and Japan, but also in the United States and Europe.

The impact of such a Japanese aid package, UNCTAD said, would be greater than an equivalent domestic fiscal stimulus package in Japan.

The UNCTAD paper, providing a preliminary analysis of the potential contribution to global recovery of a Japanese aid package is based on a simulation exercise carried out in conjunction with Prof. Akira Onushi of the Soka University, provided support for the $30 billion Miyazawa plan (unveiled by Japanese Finance Minister Kiichi Miyazawa on the eve of the recent Fund/Bank meetings in Washington).

The UNCTAD simulation showed that as a result of the Asian financial crisis, the developing world as a whole suffered a loss in output growth of 0.3 percent in 1997, of 2.7 percent in 1998, one percent in 1999, and a 1.6 percent in 2000.

For the countries directly hit, the loss in 1998 is significantly higher -- 18% for Indonesia, 8.1 percent for South Korea, 13.6 percent for Thailand. The impact of the crisis for these will remain sizeable
until 2000.

The Miyazawa plan, involving only Japanese funds to aid the countries, did not receive much support from the US and EU, who have been pressing Japan for direct domestic fiscal stimulus that would have created Japanese domestic demand for US and EU goods and services.

"If you give $100 to a Japanese consumer directly," Akyuz explained, "he will spend a smaller proportion of it in buying European and American goods, than when you give $100 to Indonesia and Malaysia. The rise in their consumption, and what they would import from Japan would provide greater stimulus and have more significant impacts on Japan, the US and EU."

But the aid package, said Yilmaz Akyuz, chief author the annual Trade and Development Reports and chief of UNCTAD's Macro-economic and Development Policies, should be provided to the crisis-hit countries of Asia (Indonesia, South Korea, Malaysia, the Philippines and Thailand).

To achieve the global stimulus effects, the aid package should be used to support the balance-of-payments of the countries and finance imports and investment -- and not for repaying any foreign creditors - as happened in the case of the IMF rescue packages, he added.

Such an aid package by restoring growth in the afflicted countries will result in increased demand for Japanese industry, and through recovery of Japanese activity have a beneficial effect on the US and EU.

The impact on the US and EU as a result of a Japanese aid package will be twice as large as a Japanese domestic fiscal stimulus package, and could reduce the burden of global adjustment on the US payments position, thus reducing protectionist pressures on the multilateral trading system, UNCTAD said.

Soon after the outbreak of the Asian financial crisis, a proposal was made for a $100 billion Asian fund, with contributions from Japan and other industrial countries, to help the crisis-hit countries. But this did not receive support from other industrial countries and the IMF (which subsequent reports in the US media indicate had initially supported the Japanese plan, but backed off under US Treasury
pressure).

As a result, Japan provided $40 billion of financing to the region, including $28 billion in long-term financing, and much of it went back to repay Japanese banks.
UNCTAD in its TDR 1998 released in September had already suggested that a Japanese aid package to the Asian countries would do more to increase global output and recovery than the various plans pushed on Japan (by the US and EU) for domestic fiscal stimulus.

While in the TDR, UNCTAD had warned of the threat of a recession that, the Russian crisis that began after the UNCTAD report was completed (in July) and the subsequent instability in the financial markets of both the major industrial countries and emerging markets suggest that while
still not a reality, a global recession seems more probable and the likelihood of a recovery slower.

As the world's second largest economy in terms of GDP and the largest creditor in terms of net foreign assets, Japan can make a crucial contribution to economic recovery in East Asia as well as to the world economy as a whole, the UNCTAD paper said.

The UNCTAD simulation exercise, undertaken before the Miyazawa plan was unveiled, compares the effect over 1998-2000 of a one-off domestic fiscal expansion in Japan with the effects associated with an increase in long-term support to the affected Asian economies along the lines of
the Okita plan of 1980s for recycling part of the Japanese surplus to the highly indebted countries to accelerate recovery.

The simulation has used what is described as a "global modelling system" reflecting the inter-dependence of countries in terms of trade and other linkages.

The baseline scenario of effect on the affected countries shows fall in output in 1998 of 12 percent in Indonesia, six percent in South Korea and eight percent in Thailand.

The simulation compares the effects of an assumed $100 billion domestic fiscal stimulus package in Japan -- by way of a permanent corporate and personal income-tax cut in the latter half of Japan's fiscal 1998, and compares it with a similar $100 billion additional aid package by Japan to the most seriously affected Asian countries to be made available over the 1998-2000 period -- $50 billion in 1998, $30 billion in 1999 and $20 billion in 2000.

A major slice of the aid package would go to Indonesia and Korea -- respectively 32% and 48% share in 1998, a 20 and 38 percent in 1999 and a 12 and 27 percent share in 2000. Malaysia, the Philippines and Thailand are simulated to get respectively 5, 4 and 11 percent of the $50 billion package in 1998, of 12, six and 24 percent of the $30 billion package in 1999, and 23, 8 and 30 percent of the $20 billion package in 2000.

The impact of additional Japanese aid on growth in the world economy is considerably stronger than that of a domestic fiscal stimulus of an equal magnitude, says UNCTAD reporting on the simulation.

In cumulative terms, the addition to global growth is greater by one-third in the aid package scenario than in the fiscal stimulus scenario.

The gains in growth for the affected crisis is considerably more. For Korea the cumulative impact of the aid on growth over 1998-2000 exceeds 10 percent. In the South-East Asian countries, the aid package adds more than 17 percent to cumulative growth -- with the impact strongest in India where the baseline shows a considerable decline in growth compared to its pre-crisis period.

The impact of the aid on growth in the recipient countries is far stronger than a fiscal stimulus in Japan.

As for the impact on other countries, says UNCTAD, the simulation shows that the aid package is much more favourable to growth in most other regions and countries than the fiscal stimulus package.

This is particularly true for the US and EU - whose growth would benefit more from a Japanese aid package to the crisis-hit East Asian countries than a Japanese domestic fiscal stimulus of equal amount.

According to UNCTAD, while the short-term impact of a fiscal stimulus in Japan will be greater than an aid package, the medium-impact is less clear.

A cyclical recovery brought about by a fiscal stimulus would bring additional revenues to government and help meet part of the initial deficits. But to avoid permanent increases in public sector debt and deficits, action would be needed in Japan to raise discretionary fiscal revenues or to cut spending or both. This could reverse much of the earlier growth in gains.

This appears to be borne out by the experience of the previous budget package in Japan.

The various government expenditure packages beginning 1995 eventually produced a sharp increase in growth in 1996, but when an attempt was made to restore fiscal balance through increased taxation in 1997, the level of activity declined.

The contractionary impact of the fiscal policy in 1997, according to the OECD fiscal indicator, was 1.7% of GDP. The attempt to restore the fiscal balance played a substantial role in the current weakening of the Japanese output growth. But maintaining the level of expenditure reached in 1996 was also unsustainable in the medium term.

However, says the UNCTAD paper, as pointed out in the TDR, the underlying cause of the decline in the trend growth rate in Japan has been its structural problems in the industrial, financial and service sectors, and Japan's continued reliance on exports for growth.

"While promoting a cyclical upturn, domestic demand stimulus packages are unlikely permanently to restore growth in Japan. Any sustained recovery must be accompanied by a resolution of Japan's structural problems."

Thus an appropriate Japanese strategy should combine a temporary fiscal stimulus, aid to Asian countries in crisis and structural reforms. Over the short term a fiscal stimulus aid to Asia would greatly help overcome difficulties in the region. But over the longer term, the positive impact of structural reforms would be felt more strongly -- allowing Japan to increase its reliance on domestic private spending for growth and for its contribution to global demand.