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The Social Impact of the Asian Crisis
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The Social Impact of the Asian Crisis



In the aftermath of the Asian crisis of 1997, a number of rapid assessments on the extent and nature of the social impact appeared. They brought out the human cost of the crisis in bolder relief. One ...

In the aftermath of the Asian crisis of 1997, a number of rapid assessments on the extent and nature of the social impact appeared. They brought out the human cost of the crisis in bolder relief. One such study, launched in the last quarter of 1998, was conducted by ADB. It was designed to assist in devising policy responses to the social crisis and identifying reforms that would strengthen social protection systems in the longer term. It covered Indonesia, the Republic of Korea, the Lao Peoples' Democratic Republic, Malaysia, Philippines, and Thailand. It sketched the transmission of social impacts from the crisis, analyzed the crisis effects on prices and employment, discussed the impact on inequality and poverty, looked at human development in terms of education, health, and family planning, touched on social capital, and looked at the environment.



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    The Social Impact of the Asian Crisis The Social Impact of the Asian Crisis Presentation Transcript

    • The Social Impactof the Asian CrisisThe views expressed in this presentation are the views of the author/s and do not necessarily reflect the views or policies of the AsianDevelopment Bank, or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data includedin this presentation and accepts no responsibility for any consequence of their use. The countries listed in this presentation do not imply anyview on ADBs part as to sovereignty or independent status or necessarily conform to ADBs terminology.Olivier Serrat2000
    • Section Overview• Introduction• The Course of the Asian Crisis
    • Introduction• The financial crisis in Asia is one of the most significant event ofthe 1990s.• It began modestly enough in May 1997 with speculative attackson the Thai baht, whose value plummeted on 2 July following thecountrys forced abandonment of its pegged exchange system.• The crisis spilled over and engulfed Indonesia, the Republic ofKorea, Malaysia, and the Philippines by the end of 1997. Thecurrencies of these countries depreciated sharply, exertingdownward pressures on other currencies perceived to bevulnerable, not just in Asia.• The crisis also impacted asset markets, namely stock and realestate markets, and affected the health of banks and nonbankfinancial institutions.
    • Introduction• The outcome was that many Asian economies experienceddrastic slowdowns in economic growth and a loss of confidenceby foreign investors.• The speed and the severity of the crisis took everyone bysurprise: Asias once vibrant economies, used to decades of rapideconomic growth, were plunged into recession; for manycountries, the economic hardship has been similar to thatsuffered during the great depression of the 1930s.• The crisis has forced a reappraisal of policies ranging fromcorporate governance to exchange rate management. It hasspawned wide-ranging discussion about the basic design oftodays international financial system, and suggestions forreform abound: there is debate on whether the policies of theInternational Monetary Fund helped or hindered the situation.• The social impact of the crisis has received far less attention.
    • The Course of the Asian Crisis• The crisis began in July 1997 following the years secondspeculative attack on the Thai baht.• After defending the currency as it had done in May 1997 andlosing reserves, the Bank of Thailand let it float on 2 July 1997.• The baht immediately depreciated by about 15 percent and, thefollowing week, the Indonesian rupiah, the Malaysian ringgit, andthe Philippine peso also depreciated.• The depreciation of the peso and the rupiah gathered momentumafter 11 July and 14 August, respectively, when the central banksof these countries adopted more flexible exchange rate policies.• The Korean won remained stable until mid-October 1997, afterwhich it depreciated rapidly: the Korean authorities widened theexchange rate band for the won to 10 percent in November1997, and let it float freely on 16 December.
    • The Course of the Asian Crisis• In December 1997, the Republic of Korea almost defaulted.• Between end-June 1997 and end-January 1998, the nominalexchange rate (the dollar price of the local currency) depreciatedsignificantly in all affected countries: the rupiah depreciated byabout 80 percent; the baht by about 53 percent; the won andthe ringgit by 42 percent; and the peso by about 36 percent.• After markets bounced back in February 1998, Indonesiaseconomic crisis worsened: mixed policy signals, gallopinginflation, and a vast debt overhang scared investors and sent therupiah plummeting.• The Suharto Government proposed establishing a currency boardbut abandoned the idea under strong pressure from variousquarters, compounded by political uncertainties and civil unrest.• The Suharto Government resigned on 27 May.
    • The Course of the Asian Crisis• Japans woes compounded the regions troubles: in earlyFebruary 1998, its government declared the economy stagnantand Moodys rating agency revised Japans sovereign debt ratingdownward: the Japanese yen declined to an eight-year low of¥145 to the US dollar; the tumbling yen triggered declines inother Asian currencies.• Japan and the United States turned to official intervention and,on 17 June, the United States spent about $2 billion to bolsterthe yen. By mid-august 1998, however, the yen had reached anew low of ¥147 to the dollar.• On 17 august, the Russian central bank devalued the ruble andthe Russian Government effectively defaulted on its internaldebt: investors fled all types of risks, from emerging marketbonds to noninvestment-grade corporate bonds in developedmarkets.
    • The Course of the Asian Crisis• By September 1998, financialmarkets were clamoring for acoordinated G7 interest ratecut to calm the panic.• Although no coordinated movetook place, the US FederalReserve cut interest ratesthree times, by a total of 0.75percent, between Septemberand December 1998;European central banks cuttheir benchmark rates.• Since September 1998,conditions in Asia haveimproved.
    • Section Overview• The Social Impact of the AsianCrisis– Prices and Assets– Employment and Income– Income Distribution– Human Development– Social Capital– Environment– Vulnerable Groups
    • The Social Impact of the Asian Crisis• There are signs that the worst of the crisis is over but the socialimpact of the crisis continues to unfold: it is likely to be deep andpersist long after the countries affected return to solid growth.• The social consequences of the crisis vary across countriesaccording to the extent of the downturn and dislocation; but theeffects are pervasive, hurting all social classes, particularly themiddle- and lower-middle-income classes.• However, the poor and vulnerable groups (such as women,children, and migrant workers) are invariably most at risk.• But, data is often anecdotal or only just becoming available.• Analytically, the social impact of the crisis can be gauged interms of changes in prices and assets, employment and income,income distribution, human development (including education,health, and family planning), social capital, and the environment.
    • Prices and Assets• The currency devaluations that signaled the onset of the crisisexerted an immediate upward pressure on the prices of importedgoods and services or goods with a high import content.• Inflation was moderated in some cases by government subsidies,price controls, and by additional imports of necessities, butconsumer price indexes generally increased: in Indonesia, forexample, the CPI jumped to nearly 58 percent in 1998 from 6.6percent in 1997; since food prices generally increased morerapidly than nonfood prices, the impact of inflation was harsheron the poor.• Inflation not only clipped purchasing power but, along with thecollapse of stock markets and banks, also drastically reduced thereal value of household savings.• Inflation and reduction in real incomes effectively spread the costof labor market adjustment beyond the unemployed workers.
    • Prices and AssetsINO KOR MAL PHI THAGDP growth rate (%)1998 -13.7 -5.5 -6.2 -0.5 -8.01997 4.9 5.5 7.7 5.2 -0.4CPI (% Change Per Annum)1998 57.9 7.5 5.3 9.7 8.11997 6.6 4.5 2.7 5.9 5.6Population, 1998 (mn) 204 46 22 75 61
    • Employment and Income• Unemployment rates increased in all the countries affected bythe crisis, with the largest increase in the Republic of Korea,where it shot from 2.0 percent in 1996 to 6.8 percent in 1998; inthe Philippines, unemployment rose from 7.4 to 9.6 percent; inMalaysia, it grew from 2.5 to 4.9 percent.• However, the unemployment rate can be misleading, particularlyduring a crisis, because it does not reflect dropouts from thelabor force (discouraged workers), underemployment, earlyretirement, or downsizing and subsequent rehire with cuts in realwages and benefits.• Incomes in the informal sector fell with weaker domestic demandan higher input prices.• Moreover, the informal labor force expanded with the entry of theunemployed from the formal sector, resulting in lower earningsper worker.
    • Employment and IncomeUNEMPLOYMENT RATE, %1993 1996 1998China, Peoples Rep. of 2.6 3.0 3.1Hong Kong, China 2.0 2.8 4.7Indonesia 2.8 4.9 5.5Korea, Rep. of 2.8 2.0 6.8Malaysia 3.0 2.5 4.9Philippines 8.9 7.4 9.6Singapore 1.9 2.0 3.2Thailand 1.5 1.1 5.3
    • Income Distribution• Not all income groups wereaffected proportionately.• The share of wage and salaryincomes in total incomedeclined, thereby alteringfunctional income distribution.• Rural families who grew theirown food and had a surplusfor sale benefited from priceincreases; urban householdsthat relied on the market forfood products were affected.• Increases in poverty weregreater in urban areas than inrural areas.
    • Human Development• The crisis had a negative impact on household investments inhuman development, particularly in education, health andnutrition, and family planning and reproductive health.– Education• The crisis induced a shift of childrens time from school to work,an effect that was strongest at levels of schooling that are lesssubsidized, such as the secondary level. (In Indonesia, about 6million students dropped out of education).– Health and Nutrition• The crisis influenced household demand for health care: manyshifted from modern medical care to traditional healers and self-treatment. (In Malaysia, private hospitals and clinics reported adrop of 15 to 50 percent in the number of patients seekingtreatment).
    • Human Development• Cuts in governmentbudgets affectedimmunization programs.– Family Planning andReproductive Health• The cost of contraceptivesincreased and manywomen dropped out offamily planning programs.(In Indonesia, the nationalfamily program requiredparticipants to pay the fullcost of services.)• There was in all likelihoodan increase in the numberof illegal abortions,perhaps even infanticides.
    • Social Capital• Social capital consists of informal norms and establishedrelationships that enable people to pursue objectives and act inconcert for common benefit.• An erosion of social capital is reflected in rising crime anddomestic violence and weakening community cooperation andparticipation.– Crime and Domestic Violence• The crisis led to increased criminality in communities, as well asstress and conflict within households. (In Jakarta, the number ofdivorce applications almost doubled between October 1997 andFebruary 1998; in Mindanao, curfews were imposed in responseto increased crime; in Bangkok, attacks against debtors by loansharks who had not been repaid were recorded).• The crisis also led to a rise in prostitution of women and children,drug peddling, and the number of street children.
    • Social Capital– Community Cooperation andParticipation• The crisis diminishedcommunity cooperationand trust, replacing it withintense competition. (InThailand, focus groupsreported hostility amongneighbors; in Indonesia,religious gatheringsbecame infrequent.)• But, community-basedinitiatives appear to haveflourished in the Republicof Korea, as farmers andwomens groups organizedto improve their situations.
    • Environment• While economic recession may provide some respite to theenvironment, household attempts to obtain additional income,along with efforts of unemployed urban workers to find ruraljobs, led to environmental destruction. (In Thailand, thedevaluation of the baht provided a strong stimulus to agriculturalexports, resulting in expansion and intensification of shrimpfarming; increases in illegal logging in Myanmar, Cambodia, andThailand were also noted.)• Government budgets for protection of the environment declined.(Reductions in budget allocations for environmental protectionwere recorded in the Republic of Korea and Malaysia, andprobably also took place in the other crisis countries.)• Improper management of natural resources and the environmentreduces further what stock is available to society.
    • Vulnerable Groups• The crisis affected vulnerable groups in particular.• Especially disadvantaged groups included women, children,youth, older persons, ethnic minorities, and migrant workers.– Women• Being largely secondary earners and not belonging to laborunions, female workers were more likely to lose their jobs thantheir male counterparts. (In Thailand, women accounted forslightly more than half of reported layoffs between January 1997and February 1998; in the Philippines, women accounted for ahigh proportion of returning overseas migrants in 1998 and1999.)• It is also likely that women received a smaller share of limitedhousehold food supplies.
    • Vulnerable Groups– Children• Children fared poorly in the competition for diminishinghousehold resources. (In Indonesia and the Philippines, teachersreported that children were eating less before coming to school.)• Children were also neglected by busy parents trying to makeends meet.– Youth• Youth unemployment rates rose faster than those of adults. (Inthe Republic of Korea, youth unemployment rates rose to 7.4percent and 11.8 percent in the 20–24 and 15–19 age groupsduring the last quarter of 1997 from 5.9 percent and 7.5 percent,respectively, in 1996; the corresponding increase in the nationalaverage unemployment rate was 2.0 to 2.6 percent.)
    • Vulnerable Groups– Older Persons• With incomes that tend to be fixed, older persons were especiallyvulnerable to the effects of inflation.• The additional demands placed on younger members ofhouseholds probably also deprived older persons of needed care.– Ethnic Minorities• Latent and deep animosities toward certain ethnic groupsresurfaced as a consequence of the crisis. (In Indonesia, themisfortune that befell the ethnic Chinese exemplifies thisimpact.)– Migrant Workers• Overseas migrants working in other Asian countries wereseriously affected by reductions in employment opportunities andby currency devaluation. (They included Indonesians in Malaysia,Burmese in Thailand, and Filipinos in the Republic of Korea andMalaysia.)
    • Vulnerable Groups– Some migrant workers wereforced to return to their homecountries; others weresubjected to attempts bycorrupt officials to extortpayments at border crossings.(This was the case forBurmese workers returningfrom Thailand.)
    • Section Overview• Responses to the Asian Crisis• Conclusions• Annex—ADBs Response to theAsian Crisis• Further Reading
    • Responses to the Asian Crisis• Responses to the crisis included household responses,community responses, labor-management responses,government responses, and international responses.– Household Responses• Responses at the household level typically included adjustmentsin consumption, saving, and adjustments in labor supplybehavior, besides utilization of social services.– Community Responses• Responses at the community level included cooperative solutions.(In Davao, Mindanao, a community savings scheme was set upso that everyone could contribute to a common fund to cover thecost of festivals; a community policing scheme was introduced inresponse to increased crime; and teachers formed a cooperativeto borrow money from the Government at lower rates.)
    • Responses to the Asian Crisis– Labor-Management Responses• Many businesses responded to falling market demand by layingoff workers.• But, responses at the corporate level included instances of laborand management working together to minimize the social impactof the crisis. (In the Republic of Korea, a survey of 400enterprises found that 45 percent of the firms imposed a freezeon new recruitment, that 17 percent used early retirement, andthat 14 percent resorted to a reduced number of work hours;but, the same survey revealed that 45 percent of unions werewilling to accept a wage freeze if employers guaranteed jobsecurity.)
    • Responses to the Asian Crisis– Government• The main government responses concerned budget reallocations,which entailed shifting funds away from infrastructureinvestments and national defense to meet immediate needs,such as the salaries of government personnel, basic socialservices and social safety nets, recapitalization of financialinstitutions, and repayment of foreign debt.• The social safety nets deployed included a varying mix ofseverance pay and restrictions on layoffs; unemploymentinsurance and other forms of assistance to the unemployed; jobretraining and job creation; pensions and provident funds;income maintenance programs, including public works; pricecontrols and subsidies on foods and other essential goods andservices; and measures designed to ensure continued access tosocial services for the poor and the unemployed.
    • Responses to the Asian Crisis– International Responses• The principal responsibility for dealing with the crisis at aninternational level was assumed by the IMF.• The IMF s goal was to quickly restore confidence in the threehardest hit economies, e.g., Indonesia, the Republic of Korea,and Thailand, through a combination of tough economicconditionalities and substantial financial support. In 1997, theIMF approved $35 billion of loans for these countries and, in1998, further loans worth $6.3 billion for Indonesia.• The strategy of the IMF had two key components– The first component of the strategy concentrated onmacroeconomic policy, the main aspect of which was to betighter monetary policy, e.g., higher interest rates.
    • Responses to the Asian Crisis– The second component of the strategy concentrated onsubstantial structural reform; this involved deep reform ofthe regions banking systems, the breakup of monopolies,the removal of barriers to trade, and substantialimprovements in corporate transparency.• Both components of the IMFs strategy have come under heavyfire, but evaluation is plagued by the problem of thecounterfactual , viz., knowing what would have happened if theIMF had adopted a different approach is impossible, and the factthat the IMFs targets and tactics changed over time.
    • Conclusions• It seems clear that the social impact of the crisis is both massiveand potentially long-lasting. There are good reasons to expectthat it has not yet peaked because negative social effects havelong gestation periods.• The crisis revealed that considerable effort needs to be directedto setting up or further developing social safety nets in Asia andthe Pacific, including crisis monitoring mechanisms and statisticalsystems; this is important because traditional family systems ofsupport are likely to weaken with economic progress.• Fortunately, because of the crisis, governments are now moreconscious of shortcomings and constraints.
    • Annex—ADBs Response to the AsianCrisis• The worldwide repercussions of the crisis required a coordinatedapproach: ADB acted in concert with other organizations andinstitutions.• In 1997 and 1998, ADBs assistance to the countries worst hit bythe crisis, e.g., Indonesia, the Republic of Korea, and Thailand,focused on governance.• In Indonesia, the centerpiece of ADB’s assistance is the FinancialGovernance Reforms: Sector Development Program loan of $1.5billion, which supports a major streamlining of the regulatoryframework and provides for transparency in the bankingsubsector and other reforms; fiscal decentralization is beingfurther encouraged through a Community and Local GovernmentSupport Sector Development Program loan of $300 million.
    • Annex—ADBs Response to the AsianCrisis• In the Republic of Korea, ADB provided a $4 billion FinancialSector Program loan to the IMF-led multilateral assistancepackage, which supports the restructuring of financialinstitutions, combined with strengthening regulation andsupervision, and with measures to liberalize the capital marketand develop it further.• In Thailand, two sizeable loans have major governancecomponents: the Financial Markets Reform Program loan of $300million underpins fundamental reforms for transparency andaccountability in the financial sector; and the Social SectorProgram loan of $500 million supports, among other things, theadministrative decentralization of health and education services.
    • Annex—ADBs Response to the AsianCrisis• From 1998, ADBs assistance began to focus on the socialinfrastructure sector to alleviate the social impact of the crisisand strengthen the policy and institutional frameworks.• In Indonesia, for instance, ADB provided a Social ProtectionSector Development Program loan worth $300 million in 1998,and a Health and Nutrition Sector Development Program loan of$300 million in 1999.• In Indonesia still, a School-Based Basic Education project worth$150 million and a Reproductive Health Care project of $50million are in the pipeline for 2000.• In Thailand, ADB approved a Social Sector Program loan worth$500 million in 1998 and an Agriculture Sector Program loan of$300 million in 1999.
    • Further Reading• ADB. 1998. Assessing the Social Impact of the Financial Crisis inAsia. Manila. Available: aric.adb.org/pdf/edrcbn/edrcbn06.pdf• ADB. 1999. Social Consequences of the Financial Crisis in Asia:The Deeper Crisis. Manila. Available:www.adb.org/publications/social-consequences-financial-crisis-asia-deeper-crisis• ADB. 1999. Social Consequences of the Financial Crisis in Asia.Manila. Available: www.adb.org/publications/social-consequences-financial-crisis-asia
    • European Representative OfficeOlivier SerratLiaison OfficerAsian Development Bankwww.adb.org/offices/europe/main