The Social Impact of the Asian Crisis


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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

  1. 1. •The views expressed in this presentation are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank, or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included in this presentation and accepts no responsibility for any consequence of their use. The countries listed in this presentation do not imply any view on ADB's part as to sovereignty or independent status or necessarily conform to ADB's terminology. The Social Impact of the Asian Crisis Olivier Serrat 2000
  2. 2. Section Overview Introduction The Course of the Asian Crisis
  3. 3. Introduction The financial crisis in Asia was one of the most significant events of the 1990s. It began modestly enough in May 1997 with speculative attacks on the Thai baht, whose value plummeted on 2 July 1997 following the country's forced abandonment of its pegged exchange system. The crisis spilled over and engulfed Indonesia, the Republic of Korea, Malaysia, and the Philippines by the end of 1997. The currencies of these countries depreciated sharply, exerting downward pressures on other currencies perceived to be vulnerable, not just in Asia. The crisis also impacted asset markets, namely stock and real estate markets, and affected the health of banks and nonbank financial institutions.
  4. 4. Introduction The outcome was that many Asian economies experienced drastic slowdowns in economic growth and a loss of confidence by foreign investors. The speed and the severity of the crisis took everyone by surprise: Asia's once vibrant economies, used to decades of rapid economic growth, were plunged into recession; for many countries, the economic hardship has been similar to that suffered during the great depression of the 1930s. The crisis has forced a reappraisal of policies ranging from corporate governance to exchange rate management. It has spawned wide-ranging discussion about the basic design of today's international financial system, and suggestions for reform abound: there is debate on whether the policies of the International Monetary Fund helped or hindered the situation. The social impact of the crisis has received far less attention.
  5. 5. The Course of the Asian Crisis The Asian Crisis began in July 1997 following the year's second speculative attack on the Thai baht. After defending the currency as it had done in May 1997 and losing reserves, the Bank of Thailand let it float on 2 July 1997. The baht immediately depreciated by about 15 percent and, the following week, the Indonesian rupiah, the Malaysian ringgit, and the Philippine peso also depreciated. The depreciation of the peso and the rupiah gathered momentum after 11 July and 14 August 1997, respectively, when the central banks of these countries adopted more flexible exchange rate policies. The Korean won remained stable until mid-October 1997, after which it depreciated rapidly: the Korean authorities widened the exchange rate band for the won to 10 percent in November 1997, and let it float freely on 16 December 1997.
  6. 6. The Course of the Asian Crisis In December 1997, the Republic of Korea almost defaulted. Between end-June 1997 and end-January 1998, the nominal exchange rate (the dollar price of the local currency) depreciated significantly in all affected countries: the rupiah depreciated by about 80 percent; the baht by about 53 percent; the won and the ringgit by 42 percent; and the peso by about 36 percent. After markets bounced back in February 1998, Indonesia's economic crisis worsened: mixed policy signals, galloping inflation, and a vast debt overhang scared investors and sent the rupiah plummeting. The Suharto Government proposed establishing a currency board but abandoned the idea under strong pressure from various quarters, compounded by political uncertainties and civil unrest. The Suharto Government resigned on 27 May 1998.
  7. 7. The Course of the Asian Crisis Japan's woes compounded the region's troubles: in early February 1998, its government declared the economy stagnant and Moody's rating agency revised Japan's sovereign debt rating downward: the Japanese yen declined to an eight-year low of ¥145 to the US dollar; the tumbling yen triggered declines in other Asian currencies. Japan and the United States turned to official intervention and, on 17 June 1998, the United States spent about $2 billion to bolster the yen. By mid- August 1998, however, the yen had reached a new low of ¥147 to the dollar. On 17 August 1998, the Russian central bank devalued the ruble and the Russian Government effectively defaulted on its internal debt: investors fled all types of risks, from emerging market bonds to noninvestment-grade corporate bonds in developed markets.
  8. 8. The Course of the Asian Crisis By September 1998, financial markets were clamoring for a coordinated G7 interest rate cut to calm the panic. Although no coordinated move took place, the US Federal Reserve cut interest rates three times, by a total of 0.75 percent, between September and December 1998; European central banks cut their benchmark rates. From September 1998, conditions in Asia improved.
  9. 9. Section Overview The Social Impact of the Asian Crisis Prices and Assets Employment and Income Income Distribution Human Development Social Capital Environment Vulnerable Groups
  10. 10. The Social Impact of the Asian Crisis There are signs that the worst of the crisis is over but the social impact of the crisis continues to unfold: it is likely to be deep and persist long after the countries affected return to solid growth. The social consequences of the crisis vary across countries according to the extent of the downturn and dislocation; but the effects are pervasive, hurting all social classes, particularly the middle- 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 in terms of changes in prices and assets, employment and income, income distribution, human development (including education, health, and family planning), social capital, and the environment.
  11. 11. Prices and Assets The currency devaluations that signaled the onset of the crisis exerted an immediate upward pressure on the prices of imported goods 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, but consumer price indexes generally increased: in Indonesia, for example, the CPI jumped to nearly 58 percent in 1998 from 6.6 percent in 1997; since food prices generally increased more rapidly than nonfood prices, the impact of inflation was harsher on the poor. Inflation not only clipped purchasing power but, along with the collapse of stock markets and banks, also drastically reduced the real value of household savings. Inflation and reduction in real incomes effectively spread the cost of labor market adjustment beyond the unemployed workers.
  12. 12. Prices and Assets INO KOR MAL PHI THA GDP growth rate (%) 1998 -13.7 -5.5 -6.2 -0.5 -8.0 1997 4.9 5.5 7.7 5.2 -0.4 CPI (% Change Per Annum) 1998 57.9 7.5 5.3 9.7 8.1 1997 6.6 4.5 2.7 5.9 5.6 Population, 1998 (mn) 204 46 22 75 61
  13. 13. Employment and Income Unemployment rates increased in all the countries affected by the 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; in the Philippines, unemployment rose from 7.4 to 9.6 percent; in Malaysia, it grew from 2.5 to 4.9 percent. However, the unemployment rate can be misleading, particularly during a crisis, because it does not reflect dropouts from the labor force (discouraged workers), underemployment, early retirement, or downsizing and subsequent rehire with cuts in real wages and benefits. Incomes in the informal sector fell with weaker domestic demand an higher input prices. Moreover, the informal labor force expanded with the entry of the unemployed from the formal sector, resulting in lower earnings per worker.
  14. 14. Employment and Income UNEMPLOYMENT RATE, % 1993 1996 1998 China, People's Rep. of 2.6 3.0 3.1 Hong Kong, China 2.0 2.8 4.7 Indonesia 2.8 4.9 5.5 Korea, Rep. of 2.8 2.0 6.8 Malaysia 3.0 2.5 4.9 Philippines 8.9 7.4 9.6 Singapore 1.9 2.0 3.2 Thailand 1.5 1.1 5.3
  15. 15. Income Distribution Not all income groups were affected proportionately. The share of wage and salary incomes in total income declined, thereby altering functional income distribution. Rural families who grew their own food and had a surplus for sale benefited from price increases; urban households that relied on the market for food products were affected. Increases in poverty were greater in urban areas than in rural areas.
  16. 16. Human Development The crisis had a negative impact on household investments in human development, particularly in education, health and nutrition, and family planning and reproductive health. • Education • The crisis induced a shift of children's time from school to work, an effect that was strongest at levels of schooling that are less subsidized, such as the secondary level. (In Indonesia, about 6 million students dropped out of education). • Health and Nutrition • The crisis influenced household demand for health care: many shifted from modern medical care to traditional healers and self-treatment. (In Malaysia, private hospitals and clinics reported a drop of 15 to 50 percent in the number of patients seeking treatment). • Cuts in government budgets affected immunization programs.
  17. 17. Human Development Cont'd • Family Planning and Reproductive Health • The cost of contraceptives increased and many women dropped out of family planning programs. (In Indonesia, the national family program required participants to pay the full cost of services.) • There was in all likelihood an increase in the number of illegal abortions, perhaps even infanticides.
  18. 18. Social Capital Social capital consists of informal norms and established relationships that enable people to pursue objectives and act in concert for common benefit. An erosion of social capital is reflected in rising crime and domestic violence and weakening community cooperation and participation. • Crime and Domestic Violence • The crisis led to increased criminality in communities, as well as stress and conflict within households. (In Jakarta, the number of divorce applications almost doubled between October 1997 and February 1998; in Mindanao, curfews were imposed in response to increased crime; in Bangkok, attacks against debtors by loan sharks 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.
  19. 19. Social Capital Cont'd • Community Cooperation and Participation • The crisis diminished cooperation and trust, replacing it with intense competition. (In Thailand, hostility grew against neighbors; in Indonesia, religious gatherings became infrequent.) • But, community-based initiatives appear to have flourished in the Republic of Korea, as farmers and women's groups organized to improve their situations.
  20. 20. Environment While economic recession may provide some respite to the environment, household attempts to obtain additional income, along with efforts of unemployed urban workers to find rural jobs, led to environmental destruction. (In Thailand, the devaluation of the baht provided a strong stimulus to agricultural exports, resulting in expansion and intensification of shrimp farming; increases in illegal logging in Cambodia, Myanmar, and Thailand were also noted.) Government budgets for protection of the environment declined. (Reductions in budget allocations for environmental protection were recorded in the Republic of Korea and Malaysia, and probably also took place in the other crisis countries.) Improper management of natural resources and the environment reduces further what stock is available to society.
  21. 21. 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 labor unions, female workers were more likely to lose their jobs than their male counterparts. (In Thailand, women accounted for slightly more than half of reported layoffs between January 1997 and February 1998; in the Philippines, women accounted for a high proportion of returning overseas migrants in 1998 and 1999.) • It is also likely that women received a smaller share of limited household food supplies.
  22. 22. Vulnerable Groups Cont'd • Children • Children fared poorly in the competition for diminishing household resources. (In Indonesia and the Philippines, teachers reported that children were eating less before coming to school.) • Children were also neglected by busy parents trying to make ends meet. • Youth • Youth unemployment rates rose faster than those of adults. (In the Republic of Korea, youth unemployment rates rose to 7.4 percent and 11.8 percent in the 20–24 and 15–19 age groups during the last quarter of 1997 from 5.9 percent and 7.5 percent, respectively, in 1996; the corresponding increase in the national average unemployment rate was 2.0 to 2.6 percent.)
  23. 23. Vulnerable Groups Cont'd • Older Persons • With incomes that tend to be fixed, older persons were especially vulnerable to the effects of inflation. • The additional demands placed on younger members of households probably also deprived older persons of needed care. • Ethnic Minorities • Latent and deep animosities toward certain ethnic groups resurfaced as a consequence of the crisis. (In Indonesia, the misfortune that befell the ethnic Chinese exemplifies this impact.) • Migrant Workers • Overseas migrants working in other Asian countries were seriously affected by reductions in employment opportunities and by currency devaluation. (They included Indonesians in Malaysia, Burmese in Thailand, and Filipinos in the Republic of Korea and Malaysia.)
  24. 24. Vulnerable Groups Cont'd • Migrant Workers • Some migrant workers were forced to return to their home countries; others were subjected to attempts by corrupt officials to extort payments at border crossings. (This was the case for Burmese workers returning from Thailand.)
  25. 25. Section Overview Responses to the Asian Crisis Conclusions Annex—ADB's Response to the Asian Crisis Further Reading
  26. 26. 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 adjustments in consumption, saving, and adjustments in labor supply behavior, besides utilization of social services. • Community Responses • Responses at the community level included cooperative solutions. (In Davao, Mindanao, a community savings scheme was set up so that everyone could contribute to a common fund to cover the cost of festivals; a community policing scheme was introduced in response to increased crime; and teachers formed a cooperative to borrow money from the Government at lower rates.)
  27. 27. Responses to the Asian Crisis Cont'd • Labor-Management Responses • Many businesses responded to falling market demand by laying off workers. • But, responses at the corporate level included instances of labor and management working together to minimize the social impact of the crisis. (In the Republic of Korea, a survey of 400 enterprises found that 45 percent of the firms imposed a freeze on new recruitment, that 17 percent used early retirement, and that 14 percent resorted to a reduced number of work hours; but, the same survey revealed that 45 percent of unions were willing to accept a wage freeze if employers guaranteed job security.)
  28. 28. Responses to the Asian Crisis Cont'd • Government • The main government responses concerned budget reallocations, which entailed shifting funds away from infrastructure investments and national defense to meet immediate needs, such as the salaries of government personnel, basic social services and social safety nets, recapitalization of financial institutions, and repayment of foreign debt. • The social safety nets deployed included a varying mix of severance pay and restrictions on layoffs; unemployment insurance and other forms of assistance to the unemployed; job retraining and job creation; pensions and provident funds; income maintenance programs, including public works; price controls and subsidies on foods and other essential goods and services; and measures designed to ensure continued access to social services for the poor and the unemployed.
  29. 29. Responses to the Asian Crisis Cont'd • International Responses • The principal responsibility for dealing with the crisis at an international level was assumed by the IMF. • The IMF 's goal was to quickly restore confidence in the three hardest hit economies, e.g., Indonesia, the Republic of Korea, and Thailand, through a combination of tough economic conditionalities and substantial financial support. In 1997, the IMF approved $35 billion of loans for these countries and, in 1998, further loans worth $6.3 billion for Indonesia. • The strategy of the IMF had two key components: • The first component of the strategy concentrated on macroeconomic policy, the main aspect of which was to be tighter monetary policy, e.g., higher interest rates.
  30. 30. Responses to the Asian Crisis Cont'd • International Responses • The second component of the strategy concentrated on substantial structural reform; this involved deep reform of the region's banking systems, the breakup of monopolies, the removal of barriers to trade, and substantial improvements in corporate transparency. • Both components of the IMF's strategy have come under heavy fire, but evaluation is plagued by the problem of the counterfactual , viz., knowing what would have happened if the IMF had adopted a different approach is impossible, and the fact that the IMF's targets and tactics changed over time.
  31. 31. Conclusions It seems clear that the social impact of the crisis is both massive and potentially long-lasting. There are good reasons to expect that it has not yet peaked because negative social effects have long gestation periods. The crisis revealed that considerable effort needs to be directed to setting up or further developing social safety nets in Asia and the Pacific, including crisis monitoring mechanisms and statistical systems; this is important because traditional family systems of support are likely to weaken with economic progress. Fortunately, because of the crisis, governments are now more conscious of shortcomings and constraints.
  32. 32. Annex—ADB's Response to the Asian Crisis The worldwide repercussions of the crisis required a coordinated approach: ADB acted in concert with other organizations and institutions. In 1997 and 1998, ADB's assistance to the countries worst hit by the crisis, e.g., Indonesia, the Republic of Korea, and Thailand, focused on governance. In Indonesia, the centerpiece of ADB's assistance is the Financial Governance Reforms: Sector Development Program loan of $1.5 billion, which supports a major streamlining of the regulatory framework and provides for transparency in the banking subsector and other reforms; fiscal decentralization is being further encouraged through a Community and Local Government Support Sector Development Program loan of $300 million.
  33. 33. Annex—ADB's Response to the Asian Crisis In the Republic of Korea, ADB provided a $4 billion Financial Sector Program loan to the IMF-led multilateral assistance package, which supports the restructuring of financial institutions, combined with strengthening regulation and supervision, and with measures to liberalize the capital market and develop it further. In Thailand, two sizeable loans have major governance components: the Financial Markets Reform Program loan of $300 million underpins fundamental reforms for transparency and accountability in the financial sector; and the Social Sector Program loan of $500 million supports, among other things, the administrative decentralization of health and education services.
  34. 34. Annex—ADB's Response to the Asian Crisis From 1998, ADB's assistance began to focus on the social infrastructure sector to alleviate the social impact of the crisis and strengthen the policy and institutional frameworks. In Indonesia, for instance, ADB provided a Social Protection Sector 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 $50 million 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.
  35. 35. Further Reading • ADB. 1998. Assessing the Social Impact of the Financial Crisis in Asia. Manila. • ——. 1999. Social Consequences of the Financial Crisis in Asia: The Deeper Crisis. Manila. consequences-financial-crisis-asia-deeper-crisis • ——. 1999. Social Consequences of the Financial Crisis in Asia. Manila. financial-crisis-asia
  36. 36. Quick Response Codes @ADB @ADB Sustainable Development Timeline @LinkedIn @ResearchGate @Scholar @SlideShare @Twitter