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Economic Crisis Ends Years of High Growth

Asian countries achieved outstanding economic

performance for several decades before the economic crisis occurred.

Asian developing countries attracted almost half of the world total capital inflows and their share in world exports has nearly doubled reaching almost one-fifth in the last decade. The developing and emerging market economies of Asia have been a major engine of growth in the world economy.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

The causes of the currency crisis that erupted in Thailand in the summer of 1997 and then spread to neighboring countries, are various and differ for each country.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

The Crisis Is Not Over

Various policy measures have been announced and executed in Thailand and Korea, both of which have strictly adhered to IMF-supported programs.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

While the Asian economy regained stability from impending economic collapse in the later part of last year, the possibility of devaluation of the Chinese yuan and the rapid depreciation of Japanese yen will be important variables affecting the recurrence of similar economic crises in Asia.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

The recent depreciation of the yen was brought about by the slump in the Japanese domestic market and the delay of financial and banking system reforms.

There is a possibility that a further drop in the value of the Asian currencies could lead to the yen’s sharp decline and this, in turn, would result in the recurrence of a currency crisis in the Asian countries.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Competitive Positions and Relations Among Asian Countries Likely to Change

The economic crisis in Asia and the fall in currency values have affected the competition among countries in the world markets through a change of competitive factors such as the exchange rate, interest rate, and real wages. Also, Asian countries’ economic fundamentals have changed.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

However, the continuous depreciation of the yen and the devaluation of the yuan could greatly influence the price competitiveness of the Asian countries involved in the currency crash. That is, Asian countries with a devalued currency will not enjoy any improvement of price competitiveness if a sharp depreciation of the Japanese or Chinese currencies occurs.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Difficulties in Increasing Export Earnings

The Asian countries’ deep recession, high interest rates, financing difficulties, and high inflationary pressure, prevent them from taking advantage of depreciation to increase export earnings. While these hardships have been difficult for all the nations and their peoples to deal with, they are simultaneously opportunities for the countries to enhance their competitiveness and, accordingly, increase export earnings.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Another reason why the sharp depreciation in Asian

currencies has not coincided with an increase in the region’s exports is related to the instability of the trading system which includes a decrease of export financing and the difficulty of opening L/Cs (letters of credit) to import raw materials for export processing.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

The sudden increase in exports in certain products from East Asian countries may spur trade disputes between Asian countries and their major export markets.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

How the improvement of Asian countries’ competitiveness can increase their exports to ensure a better balance of payment depends on the elasticity of import demand of Asian export goods in the world market. The elasticity of overseas demand for Asian exports is considered to be low due to the fact that Asian countries compete with one after another, rather than with developed countries in the international market.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

More Active International Cooperation Will Stabilize the Asian Economy

The crisis in Asia is expected to have a great impact on economic cooperation among Asian countries themselves. Japan and newly industrialized economies (NIEs), which lead foreign investment in Asia, may reduce domestic and overseas investment.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Despite the changing economic environment, most Asian countries will enjoy limited benefits of the strengthened price competitiveness because Asian countries, excluding Japan and NIEs, have a similar trade pattern. That is, the exchange between raw material and capital goods in intra-Asian trade and exchange between consumer goods and raw material and

capital goods.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Asian Economic Situation Largely Influenced by Changes in the Yen and Yuan

One of the most important factors for the stabilization and recovery of the Asian economy is the stabilization of the value of Japanese and Chinese currencies.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

Stabilization of the yen, and further devaluation in China depends on how the American authorities perceive the currency crisis in Asia.

It is still difficult to expect good prospects for the Asian economy in the near term.

Unit FiveAsia’s Economic Crisis and Changing Competitivenessin the World Market

In order to connect the improvement of price competitiveness brought about by the currency depreciation to increased export earnings, foreign debt repayment and rehabilitation of the economy, international cooperation is essential as are internal economic reforms in Asia.

(from KIET Economic Review)