World Bank Ch3 The East Asian Miracle 1993

Macroeconomic Stability  

and  Ex port Growth  

ACROECONOMIC  STABILlTY  AND  RAPID  EX- port growth ｷｲ＠ ｴｷｯｫｹ＠ ｬｭｮｴｳ＠ in starting 

ｴｨ＠ virtuous ｣ｩｲ｣ｬｳ＠ of high  rates  of accumula-

tLon, ｦｦｩ｣ｩ･ｮｴ＠ allocation, and strong ｰｲｯ､ｵｬｖﾭ

ity growth  that ｦｯｲｭ､＠ the basis  for  East Asii’s  success.  ｇｯｶ･ｲｮｭｮｴｳ＠ ｡｣ｨｩｶ･､＠ ｭ｡｣ｲｯ｣ｯﾭ

nomic stability by adhering to orthodox policy ｰｲｳ｣ｲｩｰｴｩｯｮｳＭｩｮ＠ partic-

c&Fh  _ular, by  holding  budget  defìcits  to  levels  that  could  be  prudently 

’

_li 

fìnanced.  They ｡｣ｨｩｶ､＠ rapid export growth through an export push 

rtLf  a combination of orthodox, ｭ｡ｲｫｴＭｯｲｩ･ｮｴ､ｭ｣ｨ｡ｮｩｳｭｳ ＠ many ｬｩｮｫ ､＠

to macroeconomic stability, and ｣ｯｭｰｬｭｮｴ｡ｲｹ＠ pro­export incentives. ¹ 

‘_rr!ru  Policy  initiatives  in ｴｨ･ｳ＠ two ｡ｲ｡ｳ＠ shared  two  features  that  further 

ｩｬｬｵｳｴｲ｡ｴ＠ the  framework ｯｵｴｬｩｮ､＠ in  chapter  2:  ｲ･ｳｰ｣ｴ＠ for  ｣ｲｴ｡ｩｮ＠

1 

ｦｵｮ､ ｮｮｴ｡ｬｳＭｦｯｲ＠ ｸ｡ｭｰｬ ＠ fìscal ｰｲｵ､ｮ｣＠ and ｡ｶｯｩ､｡ｮ｣＠ ofｸ｣ｨ｡ｮｧ＠  

rate  overvaluation;  and  quick  and ｦｬｸｩ｢ｬ･＠ responses  to  changing  eco-  nomic ｣ｩｲ｣ｵｭｳｴ｡ｮ｣ ｳＮ＠ Policies  to ｡｣ｨｩｶ＠ macroeconomic stability  and   rapid ｸｰｯｲｴ＠ growth differed ｯｶｲ＠ ｴｩｭ＠ and across  economies, partly ｢ ＠  

｣｡ｵｳ＠ ｧｯｶｲｮｭｮｴｳ＠ ｷ  ｲ･＠ ｲｳｰｯｮ､ｩｮｧ＠ to  a  changing  economic _{ｮｖｬｲｯｮﾭ}  

ment  and  partly  because ｴｨｹ＠ were  seeking ｦｦｩ｣ｩｮｴ＠ policy ｰ｡｣ｫ｡ｧｳ＠  

through trial and error.  

ｗ･､ｦ￬ｮ＠ ｭ｡｣ｲｯ｣ｯｮｯｭｩ｣＠ stability  to  mean  that inflation was  kept  

under  control, _{ｩｮｴｲｮ｡ｬ＠} and ｸｴｲｮ｡ｬ＠ debt ｲ･ｭ｡ｩｮ､＠ ｭ｡ｮ｡ｧ｡｢ｬ ＠ and  

ｭ｡｣ｲｯ｣ｯｮｯｭ ｬｃ＠ ｣ｮｳｳ＠ that ｭ･ｲｧ･､＠ ｷｲ＠ ｲｳｯｬｶ､＠ quickly, usually  

within a ｹ｡ｲ＠ or two.  Short recessions and policy ｡､ｪｵｳｴｭｮｴｳ＠ to macro-  economic ｳｴｲｳｳ＠ ｳｯｭｴｩｭｳ＠ ｳｱｵｺ､＠ ｴｨ＠ private ｳ｣ｴｯｲＮ＠ But ｴｨｳ＠ ｷｲ＠  

transitional ｰｲｩｯ､ｳ＠ to ｮｷ･ｰｩｳｯ､ｳ＠ of rapid  growth, ｱｵｩｴ＠ ｵｮｬｩｫ ＠ ｴｨ＠   

years of recession  and uncertainty that ｨ｡ｶ＠ plagued many other devel- 

Op1l1g ｣ｯｮｯｦｦｩｬｳ ＠ particularly in Sub­Saharan Mrica and Latin ａｭ ｮ｣｡Ｎ＠  

10₅ 

IRACLE 

f  

106  

Export push is a more ｣ｯｭｰｬｸｰｨｮｯｭＱＱＰｮ＠ than macroeconomic sta- bility  and  the variety  of policies  used  is  greater. _{ｍ｣ｨ｡ｮｩｳｭｳ＠ ｲ｡ｮｧＧ＠} from  broad, export­frìendly ｭ｡ｳｵｲ･ｳ＠ such as avoiding an appreciated ｸ｣ｨ｡ｮｧ･＠

rate, whìch are employed in all  the HPAEs, to ｧｯｶ･ｲｮｭｮｴＭｲｵ ｬＱ＠ expOrt con- tests

,

which have been _ｵｳ primarìly in Japan

, 

the Republìc ofKorea

,

and  ｔ ｷ｡ｮ ＠ ^China. ｕｮ￬ｶｲｳ｡ｬ＠ ^export ｩｮ｣･ｮｴｩｶｳ ＠ such as  tax  breaks and credit  guarantees  for  all _{ｸｰｯｲｴ･ｲｳ ＠} have _｢･ｮ＠ the  main  Înstruments  in  Hong  Kong

, 

lndonesìa

, 

Malaysia

, 

Singapore

, 

and Thailand.  Despite this diver- sity of approach, as a group the HPAEs are unique among ､ｶｬｯｰｩｮｧ＠ coun-

ｴｲｩｳ＠ in  the  attention ｴｨＺｹ＠ have ､ｶｯｴ･､＠ to  export  promotion  and  the 

success  they  have  achieved.  The ｳ｣ｯｮ､＠ half of this  chapter ｲ･ｶ￭ｷｳ＠ the  evolution of export­push policies in ｡｣ｨ＠ of ｴｨ＠ HPAEs. 

Pragmatic Ol1hodoxy in Macroeconomic 

Management 

T H E  HP  ES  WER MORE 

_{ｶｬｯｰｩｮｧ＠}

economîes in  keepîng publîc dencits within the lìmíts 

_ｓｃｃＨ

THAN 

_{ｍｏｓｔｏｔ}

the economy could absorb;  as  a  result

, 

ｴｨｹ＠ were  better able to  restraìn  Înflatìon  and manage  both  ìnternal  and ･ｸｴｭ｡ｬ､｢ｴＮ＠ Low in- flation  and  manag^C'dble  debt  ìn  turn facilitated  realìstÎc ｸ｣ｨ｡ｮｧ･＠ rates 

and _{ｴｨ＠ ｡ｶｯｩ､｡ｮ｣＠ ｯｦｴｨ＠} appreciatìon that _{･ｬｳ･ｷｨｲ･＠} undermined _{ｸｰｯｲｴ＠}

performance. Ｇｨ ･ｮ＠ the macroeconomy did go  awry, usually due to ex- ternal  shocks, ｧｯｶ･ｲｮｭｮｴｳ＠ quickly  implemented  orthodox  solutions, 

ｲ､ｵ｣ｩｮｧｴｨ＠ nscal dencìt and, when necessary, _{､･ ｵ｡ｴｩｮｧ＠} the currency. 

1n  contrast

, 

ｭ｡ｮ ｯｴｨｲ＠ ､･ｶｬｯｰ￬ｮｧ＠ ｣ｯｮｯｭｩｳ＠ ｨ｡ｶ＠ ^been Ｑｳｳ＠ ｳｵ｣ｳｳｦｵｬ＠

in  keeping ､ｮ｣ｩｴｳ＠ within bounds and have  therefore had more ｴｲｯｵ｢ｬ＠

managing inflatìon

, 

debt

, 

and ･ｸ｣ｨ｡ｮｧ＠ rates‘ As  a ｲｳｵｬｴ ＠ policymakers 

in _{ｴｨｳ･＠ ｣ｯｮｯｭ￬･ｳ＠ ｨ｡ｶ＠} often  had  less  room to maneuver when  con-

fronted  with  a  macroeconomic  shock;  perhaps  partly  because  of this,  theìr  response  has  ｯｦｴｮ＠ been  hesitant  and  ìneffectÎve.  The  HPAEs 

ｭ｡Ｚｲｯ･｣ｯｮｯｭ ｬｃ＠ ｭ｡ｮ｡ｧｭ･ｮｴ＠ superior Îs  reflected  in  less _{ｳ･ｖｩｲ･＠} imbal-

｡ｮ｣ｳ＠ and generally ｬｯｷｲ＠ ｶ｡ｮ｡ｮ｣＠ in  key ìndicators, indudìng real  ex-

change rates

, 

real  interest ｲ｡ｴｳ ＠ and inflarÎon. 

To  be sure, macroeconomic condítions vary ｷｩ､ｬｹ＠ among the HPAEs.  Malaysia  and  Singapore  have  long­run  ÎnflarÎon  rates  comparable  to 

ｓｷￌｴｺｲｬ｡ｮ､Ｇｳ ＠ at ｢ｬｯｷＴｰｲ｣･ｮｴ ＠ while inflation in 1ndonesia and ｋｯｲ｡＠

ta­ _{･ｸｃ､ｳｴｨ＠} South Asian ｡ｶｲ｡ｧ＠ of around 8 _{ｰ･ｲ･ｮｴＮ＠} Singapore has con- 1m  sistently  avoided  fìscal  defìcits

, 

while  Malaysía’s  fìscal  defìcit  peaked  at  1ge  _＠ 18 percent of GDP  in 1982. Hong Kong, Singapore, and Ｑ ｩｷ｡ｮ ＠ China, 

'n­_ｊ＠ do  not  borrow  abroad

, 

ｷｨｩｊ＠ Korea  was  the  world’'s  fourth  biggest  debtor  in  1980 and  lndonesiàs foreign  debt  tripled duríng  the  1980s. 

ｭ＠ ｅｸｨ｡ｮｧ＠ ｲ｡ｴ＠ regimes have ｶ｡ｲｩ､＠ from rìgìd!y ｦ￬ｸ､＠ to  managed f1 oats. 

m1  Amid the diversity, ｨｯｷｶ･ｲ ＠ ^are some  ｭｭｯｮ＠ ^themes. ｗｨ ￭ｬ＠ ｳｯｭ＠

wC 

governments ｨ｡ｶ＠ run substantìal deficits, none has ｦ￬ｮ｡ｮ｣､｡､ｦ￬｣￬ｴ＠ ín 

”_r 

｡ｭ｡ｮｮｲ＠ that ､ｳｴ｡｢ ￬Ｑｩ ｺ･､＠ ｴｨ＠ ｣ｯｮｯｭｹＮ＠ The Ｑｶ･ｬ＠ of ｴｨ＠ defici t that is 

Ｑ＠ _affordable, and hence not ､ｳｴ｡｢ｩｬｩｺｩｮｧ ＠ is specific to each ｣ｯｮｯｮｲ ｹＮ＠ It ìs 

ｬ＠ _general1y larger  the  faster _ｴｨ＠ rate of growth  and the _{ｬ｡ｲｧｲ＠ ｴｨ＠} pool  of   private savìngs (both at home and abroad)  relative to private ｩｮｶｳｴｭｮｴＮ＠   1n  both  these dìmensìons, ｴｨ＠ HPAEs  have ｰ･ｲｦｯｲｭ､＠ better than many  

ｯｦｴｨｩｲ＠ developìng­economy ｣ｯｵｮｴｲｰ｡ｲｴｳ＠ during  the past thirty years.  

Because  of this, while ｳｯｭ＠ ｣ｯｮｯｭｩｳ＠ have  had higher  inf1 ation  than   others, ｮｯｮ＠ has  had to ･ｮ､ｵｲ＠ the very high, debilitating inf1ation that   has  troubled other ､ｶｬｯｰｩｮｧ＠ economies.  

The HPAEs _{｣ｨｯＤ＠} a variety of macroeconomic policy paths because of 

’ ⁴  _{､ｩ ｲｮｴ＠} economic  conditìons  and  preferences.  All  lay  within  the  :s  bounds of prudent stability, and _{ｷｨ･ｮｶ･ｲ＠} the macroeconomy appeared  o  to  be  in  danger of movíng out of control, swifi: actÍon was _{ｴ｡ｫｮ＠} to _{ｲ ＠}   store  stability.  This was ｴｲｵ＠ ･ｶｮ＠ when  me source of macroeconomic  

S   instability was policìes ｩｮｴ･ｮ､､＠ to promote growth in the real economy. 

For ･ｸ｡ｭｰｬ ＠ ｴｨ＠ heavyand ｣ｨｭｩ｣｡ｬ＠ industrÍes drive in Korea, to which 

ｷ＠ shall return ｢ｬｯｷ ＠ was modifìed ｷｨｮ＠ its ｡､ｶｲｳ･＠ impact on ｴｨ＠ key  indicators of macroeconomic stability, inf1 ation, and _ｴｨ＠ real _{ｸｨ｡ｮｧ･＠}

ｲ｡ｴ＠ ｢｣｡ｭ･＠ ･ｸｯｓｓｬｖＮ＠

1n  the  following ｳ｣ｴｩｯｮ＠ we  discuss  how  low  defìcits ･ｮ｡｢ｬ､＠ ｴｨ＠  

ｳｵ｣｣ｳｳｦｵｬ＠ Asian economies to  keep  key ｭ｡｣ｲｯ｣ｯｮｯｭ ￌ｣＠ indicators rela- 

tively  stable, and  we  contrast  their  performance  with  the  macro- 

｣ｯｮｯｭｩ｣＠ instability  that  plagues  many ｯｴｨｲ＠ developing ･｣ｯｮｯｭｩｳＮ＠  

We ｴｨｮ＠ turn brief1y to  four  HPAE ｣｡ｳ＠ ｳｴｵ､ that il1ustrate the variery   of rapid and _{･ｦｦ｣｣ｴￍｶ･＠ ｲ･ｳｰｯｮｳｳ＠} to macroeconomic shocks.  

Adhering to Macroeconomic Fundamentals 

ln  contrast  wÎth  many  omer ､ｶ･ｬｯｰｩｮｧ＠ economies, ｷｨ･ｲ＠ boom-  and­bust cycles  have ｣｡ｵｳ､＠ wild swings  in macroeconomic indicators

,  

the  HPAEs  have  been  remarkably  successful  in  creating  and  sustaining  

10

₇ 

IRACLE 

ｭ｡｣ｲｯ｣ｯｮｯｭ￭｣＠ ^stabí\íty.  This has _｢･ｮ＠ a poten t ･ｮ｣ｯｵｲ｡ｧｭ･ｮｴ＠ _for 

vate  savíngs, ｩｮｶｳｴｭ･ｮｴ ＠ exports, and growth, since  the  private  sector  could  count  on  relatively  constant  prices  and ｩｮｴｲｳｲ＠ ｲ｡ｴｳ ＠ ｈｲ･＠ We  consider the HPAE's successful _{ｭ｡ｮ｡ｧｭ･ｮｴ＠} of four macroeconomic fun- damentals: budget ､ ｣ￎｴｳ ＠ inflation, external debt, and exchange rates. Keepìng Budget Deficits Manageab

_’

e. _ｔｨ＠ HPAEs’ blldget defìcits _｡ｲＡ＠ not

､ｲ｡ｭ｡ｴｩ｣｡ｬｬ＠ better as a grollp than other developing economies’. But

there are rwo distinctive things about the HPAEs‘ First, they almost

al-

ways kept the _{､ｦｩ｣ｩｴ＠} within the limits that could _{｢＠ｦｩｮ｡ｮ｣､＠} without macroeconomÎc destabilizatÎon^‘  ｓ｣ｯｮ､ ＠ ｴｨ･ｳ＠ ^\ímits ｷ･ｲ＠ ｨｩｧｨｲ＠ than in other developing economies becallse of the ｢ｮ･ｦｩ｣ｩ｡ｬ＠ ｦ･･､｢｣ｫｦｲｯｭ＠

other good policies.

Internationa1  ･ｸｰ･ｲｩ･ｮ｣＠ suggests that the ｭ｡｣ｲｯ｣ｯｮｯｭｬ｣＠ conse- quences of public sector ､ｦｩ｣ｩｴｳ＠ depend on how they are financed.² Ex-

｣ｳｳｩｶ･＠ monetary financing of deficits Ｑ｡､ｳ＠ to inflationj heavy

government domestÌc borrowing drives up ｩｮｴｲ･ｳｴ＠ rates and crowds our

ｰｲｩｶ｡ｴ＠ borrowing; large externa1 financing of ｴｨ＠ ､ｦ￬｣ｩｴ＠ Ｑ｡､ｳ＠ to debt

crises. The HPAEs ｫｰｴ＠ each ｴｹｰ＠ of financing within bounds, avoiding the corresponding macroeconomic disease^‘ 

ｔｨ･ｭ｡ｮｳ＠ for restraining ､ｦ￬｣ｩｴ＠ financing ｨ｡ｶ＠ varied ｷｩ､ｬｹＮ＠ Some

ｧｯｶ･ｲｮｭｮｴｳ＠ ｳｴ｡｢ｬｩｳｨ･､＠ institutiona1 watchdogs, such as the cllrrency

board in Singapore. Others took rule-based approaches, sllch as ln- donesia’'s _{｢ ｡Ｑ ｡ｮ｣､＠} blldget law and Thailand’s _{･ｸ｣ｨ｡ｮｧ＠} rate manage- ment framework, which llntil the early 1980s ｲ･ｳｭ｢ｬ･､＠ a gold standard^‘ Still others ｲｬｩ･､＠ on the discretion of economic policymakers

, 

as ･ｶｩ､･ｮ｣､＠ by the ｭ｡｣ｲｯ｣ｯｮｯｭｩ｣＠ adjustment ｰｲｯ｣ｳｳ＠ in Korea and

Ma1aysia.

Table 3.1 shows consolidated public sector ､ｦｩ｣ｩｴｳ＠ for the 1980s for three HPAEs for which there are good data compared with a sample of OECD and ､ｖｬｯｰｩｮｧ＠ ･｣ｯｮｯｭｩｳＮ＠ As a ｰ･･ｮｴ｡ｧ＠ of ｇｄｐ ｟ ￠ｳ＠ bud-

get Ｑ ･ｲ･ ･ｬｯｷ＠ even the Ｐ ,:"era.g e‘ Thîs helps ･ｸｰｬ｡￭ ＠

Korea was able to _{ｫ･･ｰￍｮｦｬ｡ ￍＺ ￭ｯｮ ｲｮ ｡ｉ＠} borrowíng, and ínterest rates within bounds‘ Malaysîa and Thai!and ｡ｲ＠ more ｣ｯｭｰｬｩ｣｡ｴ､Ｎ＠ Thai- land’'s budget ､ｦｩ｣￭ｴｳ＠ were about average for ､･ｶｬｯｰｩｮｧ＠ ｣ｯｮｯｭｬ･ｳ＠ m the 1980s, ｷｨｩｬ＠ Malaysia’'$ were substanrially bigger than average. Both ran bigger budget deftcíts than such troubled economÎes as i\rgentina

_, 

Brazìl

, 

Mexico

, 

and the ｐｨｩｬｩｰｰｩｮｳＮ＠ Unlik

108

Table 3.1 Consolidated Public Sector Deficits

,

Selected East Asian

rl­ _{and Ot}her Economies

or ａ ･ｲ｡ｧ･＠ publí^r: ｒ｡ ｮｫ｡ｾ ｯｮｧＴＰ

ｶ＠ ｴｫｦｩ｣ｩｩ ＠ percentage developíng countríes

ｅ ｣ｯ ｯｭｹｬｲ ｏ＠ ofGDP, 1980-88

_'"

_{highest ｦＺ ￭ｴＩ}

n­ 

S. _HPAEs

% 

:>t  ^{Korea, Rep. of 1.89} ₆ 

Malaysia 10.80

lt Thailand 5.80

Average, 40 ､･ｶ･ｬｯｰｩＮ ｧ＠ ＠

lt ･｣ｯｮｯｾ ｊ･ ｓ＠ _6.39

n 

Average, OECD economies 2.82 n 

Other economies

*

_-

^{Argentina 9‘ 62}

Brazil 4.02

ｍｸｩ｣ｯ＠ 6^‘ 73

Phílippines 4.30

Ａ｣ｲｰｴｦｲｲｫｃｅ･ｦｆｲｲｲｲｪｫｆｐｆｵｲｲｴｩｮ･Ｍ

E ^{• First}

^, 

rhere was fledback from high ｧｲｯ ｴｨＮ＠ ｓｩｮ｣＠ growth was higher in Malaysia and Thailand than in ＱＵＵ＠ ｓｕｃｃｳＵｦｵｬ＠ economies, a V 

higher ｢ｵ､ｧｴ､ｦｩ｣ｩｴ＠ could be financed. Because high growth in-

ｩ［ｲ creases  the  demand  for  financial  assets

, 

Malaysia  and  Thailand 

ｬｲ＿ｲｲｦ＠

1_‘­-

Ｍ＠＠

y 

tt  Source: Easterly, ｒ ｲｩｧｵ･ｺ ＠and Schmidt­Hebbel (forthcoming)‘  .t 

g 

were able to absorb higher levels of ｭｯｮｴ｡ｲｹ＠ ｦｩｮ｡ｮｩｮｧ＠ without a  rapid ｲｩｳ＠ in inflation. ｍｯｲｯｶ･ｲ ＠ their rapid GDP growth raised the  level of sustaÍnable ､ｯｭｳｴｩ＠ and ･ｸｴｲｮ｡ｬ＠ borrowing (an ｣ｯｮｯｭｹ＠

can borrow more for  a given debt to GDP  ratÌo when GDP  is  rising  rapidly)‘  1n  contrast, many Latin American _{｣ｯｮｯｭｩ･ｳ＠} fell  into a   viciollS ｣ｹ｣ｬ＠ of low growth and llnsustainable deficits ^‘ 

•   Second, there  was  fledback from hígh ｦｩ ｣ｩ｡ｬ＠ savings. Savings 

ｲ｡ｴｳ＠ were  high  in Malaysia and Thailand

, 

and much of this  sav-

mgs ｷ＼ ｮｴ＠ into the domestic financial Ｕｹｓｴｭ＠ (as opposed to real as-

sets  or capital  flight  as  in  LatÌn America) ､ｵ＠ to  the  pro­savings  financial ｰｯ￬ｩ｣ｩｳ､ｳ｣ｲｩ｢､＠ in chapter 

5

^‘ This further increased the  demand for  money  and  other _{､ｯｭｳｴｩ｣＠} financial _{｡ｳｳｴｳ ＠} making  increased  domestic  financing  of the ､ｦｩ｣ｩｴ＠ possible  without ｲﾭ sorting  to  inflationary  financing‘  1n  Malaysia

, 

ｴｨ＠ ^{government’s} 

Provident Fund ｭｯ｢ｩｬｩｺ､､ｯｭｳｴｩ｣＠ savings for ｴｨ＠ government’s  use  in _{ｮｯｮｩｮｦｬ｡ ｴￌ ｯｮ｡ｲ＠} financing of _{ｴｨ＠ ､ｦｩ｣ｩｴ ＠}

10

₉ 

MIRACLE

Table 3.2 Inf

_’

ation Rates Average

CPI, ECQnomylregion 1961-91

HPAli 7.5

Hong Kong^b  8.8 lndonesia^c 12.4 

Korea, Rep. of 12.2

Malaysia 3.4 

Sîngapore 3^‘ G  Taîwan, China 6.2

Thailand 5.6

All Ｑ Ｍ｡ ､ｭ￭ ＠ Ｇｬ･Ｍ

ｭ｣ｯ ｺ･＠ economles 61.8

ｓｯ ｴｨ＠ ａｳ ｩ｡＠ 8.0

ｓ｢Ｍｓ｡ｨ｡ｲ｡ｮａ Ｗ｣｡＠ 20.0

Latin America and

Caribbean 192.1

a. Averages are unweìghted.

b, 1972-91 only.‘  

＠ 1969-91 only.

ＵＰ ｲ｣･ｳＺ＠ World Bank data; World

Bank (1 992d); Taiwan, China (1992).

• Third

, 

ｴｨ･ｲ＠ ｷｲ＠ low initial debt ratios.‘ In Thailand

, 

ｴｨ＠ initìa1 

ｬｶｬｯｦｸｴｲｮ｡ｬ＠ ､｢ｴ＠ ⁽⁰ GDP was very low. whích meant that exter-

nal fìnancing was ｡ｶ｡ｩｬ｡｢ｬ＠ ｷｨｮ＠ needed. 

ｂ｣｡ｵｳ･＠ of this, the  HPAEs have ｡ｶｯｩ､､＠ the iní1ation­inducing bursts 

of money ｣ｲ｡ ｴￎ ｯｮ＠ that  affiict ｯｴｨｲ＠ deveIopíng  economies‘ Figure  3‘ l  shows money creation as a ratio to GDP  ín ｋｯｲ｡ ＠ Malaysia

, 

and Thaíland  and in ｴｨｲＮ･＠ unstable compara(Ors­Argentina, ｍｸｩ｣ｯ ＠ and ｚ｡ｩｲ Ｎ＠＠ The contrast  is  striking:  whìle  money  creation  has ｢･ｮ＠ ｲ ｬ｡ｴｩｶ･ｬｹ＠ constant  among ｴｨ＠ HPAEs, each of ｴｨ＠ comparators ｸｰｮｮ｣､＠ two ｰｩｳｯ､･ｳ＠ of  rapid  money ｣ｲ｡ｴｩｯｮ＠ when  nscal  balances ､･ｴｲｩｯｲ｡ｴ･､＠ or ｸｴ･ｲｮ｡ｬ＠ 6- nancing dried up. The impact on inflation  has ｢ｮ＠ equally dramatic. 

Maintaining  Moderate to Low ｉｮｦｬ｡ ｯｮＮ＠ Unlîke  many  Latin Arnerican  economies, ｴｨ＠ HPAEs ｫｰｴ＠ inflation from spinnÎng out of control. Table  3.2 shows ｴｨ＠ low inf1atìon in  Malaysia, Singapore, Thailand, and Tai- wan, China.  Indonesia  and  Korea ｨ｡ｶｩ＠ ｨｩｧｨｲ＠ inHatíon  but  still  far 

｢ｬｯｷ＠ Latin ａｭ ｲｩ｣｡Ｎ＠ International ｸｰ･ｮｮ｣＠ ｳｵｧｧｳｴｳ＠ inflatÍon  below 

20 ｐｲ｣ｮｴ ＠ a leve\ not ｢ｲ･｡｣ｨ､＠ by any of ｴｨ＠ HPAEs  during their rapid 

growth ｰｲｩｯ､ｳ ＠ can be  maintaíned for  long periods without ｧＮｮ･ｲ｡ｴｩｮｧ＠

macroeconomic _{ｩｮｳｴ｡｢ｩｬｩ＠} (Dornbusch  and _{ｆｩｳ｣ｨｲ＠} 1993).  Low  infla- tion Ís a corollary of fìscal ｰｲｵ､･ｮ｣Ｚ＠ East Asian governments never had  to ｲｬｹ＠ heavily on ｴｨ＠ ínflation  tax ｢･｣｡ｵｳ＠ their defìcits were within fì-

ｮ｡ｮ｣･｡｢ｬ＠ lìmits. 

Several East Asian governments have  made formal  commÎtments to  low  inf1 ation  that  constrained ｴｨｩｲ＠ oprions  for  acrivism.  Historically, 

ｴｨ＠ most  ímportant of ｴｨ･ｳ＠ was ｴｨ＠ ｣ｯｭｭｩｴｭｮｴ＠ to a ｦ ｬｘ ､＠ exchange 

ｲ｡ｴ［＠ ｨｯｷｶ･ｲ ＠ all  but Hong  Kong  have ｳ￭ｮ｣＠ ｡｢｡ｮ､ｯｮ､＠ this  mecha-

nÎsm.  Other self­imposed constraints on fìscal  policies  and  borrowing,  induding ｢｡ｬ｡ｮ｣､｢ｵ､ｧｴ＠ laws and various institutional checks. remain  in  place  and ｨ｡ｶ＠ generally contributed to  fìscal  discípline  and  low Ín- flation ^‘  ＨＧ｜ｻ＠ discuss ｴｨ･ｳ＠ in  chapter 4.)  1n  general, HPAE ｧｯｶ･ｲｮｲｮｮｴｳ

have  been  strong enough to alter  public spending and foreîgn  borrow- ing as  needed, although in Thailand this has ｢･ｮ＠ a continuous struggle  (Warr and Nadhiprabha 1993). 

Reasons  for ｴｨ＠ commitment  to  low  inf1atÍon  vary ｷｩ､ｬｹ＠ but  are  rooted in the recent economic history of each of the HPAEs. ln lndonesia  and Taiwan

, 

Chìna  (and  to  a  lesser  extent Korea) 

, 

aversion to inf1atÎon  grew  out of traumatic ｩｮｦｬ｡ｴ￬ｯｮ｡ｲ＠ ｳｰｬｲ ｳ＠ that  accompanied  economic  and political crises. In Malaysia and Singapore, the success of colonial­era  fìscal ｣ｯｮｳｮ ￎｳｭ＠ seems  to 

＠

Figure 3.1 Revenues from Money Creation as a Percentage of GDP: Ú'ampfes from Ea

st

Asia and Other Selected Economies

Ｈｰ･ ･ｮｴＩ＠

rS  14

12

_’

aysla

Il 

­­‘ 

^MaTha

_’

land

Rep. 01 Korea

10

8

FLl  6

4

2

o

­2  

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988

14

Zalre

12 Argentina Mex

_‘

co

10

g

6

4

2

o

-2

1970 .1972 1974 1976 1978 1980 1982 1984 1986

Note: Revenues from money crearion as a percenrage of GDP Ís defìned as ratÍo of nominal change irr ｨｩｧｬｰｯｷ･ｲ･､＠ money to nominal GDP

Soz‘’‘ce: \X1orld Bank ､｡ｴＧ＠

Thailand, _ｴｨ＠ traditioll of responsible fisca1 policies dates fì­orn ｴｨ＠ ^mne-‘  

ｴ･ｮｴｨ｣ｮｴ ｕＱ ｹ ＠ ｷｨｮ＠ a strong ｣ｵｲｲｮ｣ｹ＠ helped ｴｨ＠ kingdorn ｲｴ｡ｩｮ＠ its in^•  

､ｰ･ｮ､ｮ｣･Ｎ＠ 1n Hong Kong, colonìaJ ｲｵｬ＠ has insulated _ｴｨ＠ ｧｯｶ･ｲｮｲｮｮｴ＠

frorn ､ｭ｡ｮ､ｳ＠ for ｩｮｲ･｡ｳ､＠ government spending‘  

One result of low to moderate inflation rates particularly welcome to busìness ìs stable rea1 interest ｲ｡ｴｳＮ＠ ｆｩｧｵｲ＠ 3.2 shows rea1 interest rates in

III

AN M rR ACLE

Korea, Malaysia, and Thailand, compared with ａｲ ｧｮｴｩｮ｡ ＠ Ghana, and

ｍｸｩ｣ｯＮ＠ As wÎth money creation, the contrast ís ｲ･ｭ｡ｲｫ｡｢ｬＮ＠ 1n the East

Asian ｣｡ｳｳ ＠ low inf1 afÎon and fJ exible ｦｩｮ｡ｮｩ｡ｬ＠ polícies kept real ｩｮｴｲｳｴ＠ rates within a narrow range. For ｴｨ＠ comparators, the cornbination of nominal Înterest rate conrrols with hìgh and unstable inflation was ､｡､ｬｹＺ＠ wild gyrations in real interest rates created severe uncertaìnty for ￎｮｶｳｴｯｲｳ ＠

Figure 3.2 Reallnterest Rates: Examples from East Asia and Other Selected Economies

Rea

_’

Interest rate (peroent)

0 -10 -20

­40 -50

ＶＰ＠

Rep. of Korea Thailand

Ｐ＠ _Malaysla

-70

-90 20 10

­30

-100

＠Ｊ＠

1970 1972 1974 1976 1978 1980 1982 1984 1986

2 o 

i o  o  o

j_‘ 

o 

3 o 

4 o 

3 o  o 

7,o _Ghana

o  Argentina

Mexico -90

-100

1970 1972 1974 1976 1978 1980 1982 1984 1986

Note^‘ Real imerest ｲ｡ｴｳ＠ ｡ｲ＠ ､ｦ￬ｮ､＠ as the deposit rate def!ated by the consumer prìce ￍｮ､ｸ＠

ＵＰＱＱＧ ｲ \XTorld Bank data

II2

＠

Keeping Extemal Debt under Control. Of the seven developing HPAEs

, 

only Indonesia, Korea, Malaysia, and Thai1and have public or _{ｰｵ｢ｬｩｬｹ＠} guar- anteed foreign  deb^t. The governments of the others­Hong Kong, Sin- gapore, and  Taîwan, Chîna­have not  borrowed  abroad‘ None of the  four  wìth  foreign  debt  has  faced  a  crÌsîs, in  the  sense  of having  to  reschedule  debt;  but  sharp  increases  in  debt  have  led  to  rapid  adjust- ment.  In some economìes during some periods­for example

, 

Korea  in  1980­85, Malaysìa  in 1982­88, and lndonesia since _{ＱＹＸＷｾ} Ｍ､ ･｢ｴＭｇｎｐ＠

ratios  have  been  quite  high  compared  with  other ｩｮ､･｢ｴ､＠ ｣ｯｮｯｭｩ･ｳ＠

Ｈｳ･＠ table 3.3). As with fìscal  defìcits, however, favorable _{ｦ･･､｢｡ｫ＠} from  other policies  enabled the HPAE  debtors  to  sustaîn  hîgher external debt  to GDP than other economies‘  High levels ｯｦｸｰｯｲｴｳ＠ meant that foreign  exchange was readily _{｡ｶ｡￬ｬ｡｢ｬ＠} to service the foreign debt. Similarly, high  growth implied that returns on borrowed capital were sufficient to  pay  the interest. 

Korea’

_s 

successfUl  handling  of a  very  hìgh  foreign  debt ｩｬｬｵｳｴｲ｡ｴｳ＠

these trends‘ Beginning in the ear1y 1970s, Korea ｢ｯｲｲｯｷ､＠ heavily to fì- nance private sector investment and buí1d  up foreign ｸ｣ｨ｡ｮｧ･＠ ｲ･ｳ･ｲｶｳ ＠

By 1984 ｋｯｲ｡ Ｇｳ＠ ｦｯｲ￮ｧｮ＠ ､｢ｴ＠ was fourth largest in the world;  by 1985 it 

･ｱｵ｡ｬ､＠ more than half its GNP.  Yet because of its high export­GNP ratio 

and rapid overall growth, Korea never lost ｣ｲ､ｩｴｷｯｲｴｨｩｮ･ｳｳＮ＠ ^From 1986 

the ｧｯｶ･ｲｮｭｮｴ＠ ｰｵｲｳｵ､＠ an ｡｣ｴｩｶ＠ ､･｢ｴＭｲ､ｵ｣ｴｩｯｮ＠ policy, drawîng  on 

Table 3.3  Intemationallndebtedness 

Ratío 01 total Ratio oj‘ total debt to exported debtto GNP and services

// 

_·m

% ? r_” 

Peak year" 1991 ^Peakyeal'4 1991

­‘  _­“

＠

ｍＭ｀ ｡｀＠

­M 

＠

­i_} 

2 

‘

Ｍﾷ ＶＹＮ ＠ 66.4  263.5  225.6

K 

＠

142 4

52.5  15.0  45 2

,  ^ｆｩ＠ ‘  _‘

＠

‘‘  _{86.5  47.6  138.4  54}

‘ ₂  U m

^,

47.8  39‘ 0  171.7  94^‘ 8 

ｍ ｭＥ

a. 1987 for lndonesìa, a.nd 1985 or 1986 for the ûmer mree countrÌes.  Source: World Ba.nk data^‘ 

＠

%  Ｎｭﾷ %

m 

38.4  176.2 

29.6  293.3

＠

106.1  340‘ 8 

y  37‘ 4  268‘ 0 

II3  

…:… 

EAST AsrAN MIRACLE

＠t ＠ ^(or ￬ｮ｡､ﾭ

＠

Înternationa1  ｧＧｮ･ｲ｡ｴ､

burgeoning reserves by exports to make pay-

ｳｨ･､ｵｬ･［

ahead of by 1990 the debr-GNP ratío was down 14

ments to

ｰ･ｲ｣ｮｴＮ＠ (In contrast, ^{when Mexico}faced severe problems with its cred-

Îtors in 1982 ìt had a much ,  _{ｺ Ｇ･ｲ＠} debt toGNP ratio than Korea in 1984

ｨｩｧｨ･ｲ､ ｢ｴ

but much a to exportratio.)

Exchange Rate in Une. The HPAEs avoided the severe appreci-

･･ｰｩｮｧ ｬ･＠

.4 Am

ation that ｢ｳ･ｴ＠ Sub-Saharan Mrica and Latìn erica {see ｴ｡｢ｬ＠ 3 ).1n As such economies Bolivia and Ghana ｴｨ East ian

contrast to as

, 

c1 ｧｩｶＡｮ

economies did not ing to a nominal exchange _{ｲ｡ｴ ＠} f1 of nominal in the face of continuing in ation

ｲ｡ｴ＠ ､･ｰｲＡ｣ｩ｡ｴｩｯｮＩ

quate

､ｰｲ｣ￎ｡ｴ､＠ ｮ｣ｳｳ｡ｲｹ ｳｯｭ･ｴｩｭｳ

but when _＠ quite sharply. Fiscal pru-

dence _{ｰｲｶｮｴ･､＠} the excessive demand _{ｰｲｳｳｵｲ･ｳ＠} that ｡ｰｰｲＧ｣ｩ｡ｴ･､＠ ｴｨ＠ real

’

exchange rate in such economies as ｃｴ･ d Ivoire and Nigeria.

evolutÎon of in the HPAEs has been broadly

ｔｨ＠ ･ｸ｣ｨ｡ｮｧ＠ ｲ･ｧｬｭｳ^rate

similar. Hong Kong Malaysia and Singapore pegged their currencies to ,  , 

BritÎsh

the pound during the Bretton Woods period, ｴｨｮ＠ ｦＱ Ｐ｡ｴ､ them U. in 1973 or 1974. The Taiwan China dollar was ,  ,  _{ｰｧｧ･､＠} tothe S. dol-

.4

Table 3 Average Appreciatìon Index 1976-85

, 

Ecollomy

^＠

ｏｬ･｡ｳ

HongKong 64 14

ｉ＠ _% ^’ _a 

t%  Percentage rank

’_{m a“‘  m ra} 

(100 means most

m  ^ｊ＠

HPAEs

lndonesia 98 2₄ ^Ｑ

Korea, Rep. of 110

l 7 ll 

Malaysia 88 ^• 

l ^ll

Singapore 87 ₄

Taiwan, China ₁₁₆ 7/

Thailand 75 ^r1-

Other _{ｳ･ｬ･ ･､＠} economies

Argentina 113 45

Bolivia 181 89

ｃ￴ｴ＠ d'lvoire 185 90

Ghana 248 99

Nígeria 277 100

Zaire 201 95

a. DolIat‘s ìndex is based on Summers-Heston purchasing power patiry (ppp) compar isons. An index value of 100 signifies that the economy's ＱＺｶｪ｡ｴｩｯｮ＠ from PPP js where it shou1d be, given jts per capita income^‘

Source: Dollar (1 992).

lar from 1960 to 1973, then appreciated twÌce, and was f1 0ated ìn 1979‘

1^/ Thaìland had the _{ｬｯｮｧＧ ｳｴ＠ ｦ￬ｸ､＠} rate _{ｲｧ￬ｭ･Ｚ＠} the baht was fìxed to the dol- lar durìng  1954-84, with  a sìngle  small ､ｶ｡ｬｵ｡ｴ￬ｯｮ＠ in  1981.  In  1984  t^/  the baht was _{､ｶ｡ｬｵ･､＠} and f10ated as  part of an adjustment program.  ln-

donesìa _{ｦｩｸ､＠ ｴｨ＠} rupiah to the U.S.  dollar from  1971  to  1978. _{ｂ･｣｡ｵｳ＠} ìnflation was higher in  Indonesia than the United States

,

_ｴｨ＠ rupiah ap- preciated  vÎs­à­vÌs _ｴｨ＠ doUar, ｮ｣･ｳｳｩｴ｡ｴ￬ｮｧ＠ major devaluations  ìn  1978 

(51 _{ｰ･ｲ｣ｮｴＩ ＠} 1983 (38 percent), and  1986 (45  percent), after which  In-

donesìa shifted to a managed float.  Korea, too, ｴｲￌ､＠ ^to ｴｩ＠ Îts currency to  the dollar but resorted to four major devalllations ｢ｴｷ･ｮ＠ 1961  and ｴｨ＠ start of a _{ｭ｡ｮ｡ｧ､＠} f10at in  1980^‘

Most  moved  from  long­term  fixed  rate  _{ｲ･ｧｩｭｳ ＠} to  fìxed­but-

｡､ｪｬｬｳｴ｡｢ｬ＠ rate  regimes with  occasional  steep  devaluations, to  managed 

f10ating ｲ｡ｴ＠ ｲｧｩｭ･ｳＮ＠ Hong Kong, the ｳｩｮｧｬ＠ exception, reintroduced  a  fixed  (linked)  rate  regime  in  1983  in  the _ｦ｡｣＠ of fierce  speculation  against _ｴｨ＠ currency prompted _｢＠ politicalllncertainty. Under the man- aged  floating ｲｧｩｭ･ｳ＠ that  began  in  the ｡ｲｬｹ＠ 19805

,

polìcymakers  no  longer set rates  but attempt to ￎｮｦｬｵｮ｣＠ them  at  the  margin, ｧｮ･ｲ｡ｬｬｹ＠

to move in parallel to the U.S. dollar.‘ ｂ｣｡ｬｬｳ･＠ the United ｓｴ｡ｴｳ＠ has ｢･ｮ＠

the ｲｧ ｬｏ ｮ ｳ＠ major  export  market, maintaining  a ｳｴ｡｢ｬ＠ and  at  times 

slighdy  undervalued exchange  rate vis­à­vÎs  the  U.S.  dollar has  assisted  exporters. 

The HPAEs’ Sllccess at maintainÎng stable ･ｸｨ｡ｮｧ＠ rates is apparent ín  fìgure 3.3, whìch contrasts ｴｨ＠ remarkable stability of real exchange ｲ｡ｴｳ＠ ｳｭ｣＠ ^{1970  in} ｋｯｲ｡ ＠ Malaysia, and Thailand with  the _{ｳ･ｶｲ＠ ｸ｣ｨ｡ｮｧ＠} rate  instability in ａｲ ｧｮｴￌｮ｡ ＠ ｐ ｦｬｬ ＠ and SrÌ  Lanka. ａｲ ｧｮｴￌｮ｡＠ ｲ･ｰ｡ｴ･､ｬｹ＠

｡ｴｴｭｰｴ･､＠ to use  the exchange  rate as  a nominal anchor against high in-

flatÍon  (for ･ｸ｡ｭｰｬｬ＠ in  1973­74  and  1980­8 1)‘ Bllt  faÌlure  to ｫｰ＠ other macroeconomic fundamentals in line Ｑ､＠ to the ｯｬｬ｡ｰｳ･＠ of the real  exchange  rate  and  sharp  real  devaluations.  II1 contrast, the  East  Asian  economies’ pragmat1c ｭ｡｣ｲｯＺｯｮｯｭｩ｣＠ ｭ｡ｮ｡ｧｭ･ｮｴ＠ enabled ｴｨｭ＠ to  avoíd ｳｷｩｮ of the real exchange rate, even  in the  ･＠ of major ｸｴｲｮ｡ｬ＠

shocks  (see  box 3.1). 

Responding Quickly to Macroeconomic Shocks 

ｔｨ＠ ｈｐ ｓ ＠ ^rapid ｲ･ｳｰｯｮｳ＠ to macroeconomic shocks has been _{ｧｲ ｡ｴｬｹ＠}

ｦ｡ｩｬｩｴ｡ｴ･､＠ by  two ｣ｨ｡ｲ｡ｉｲｩｳｴｩ｣ｳＮ＠ First, ｢＠ lìmiting  distortions  and 

tightly supervising  banks, governments _{ｲ･､ｵ｣､＠} the  spillover from  the 

II5  

MIRACLE

Figure 3.3 Examples of Real Exchange Rate ｖ｡ ｡｢ｩｬｩｴｹ＠ in East Asia and Other Selected Economies

Real exchange rate (percentl 350

300 Rep. of Korea

Malaysla Thalland 250

200

150 100

50

o

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988

350

- - - Argentina

300 - - Mexico

•-

Peru

250

200

150

100

50

o

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 Note: Index of real exchange rate: 1980= 100

_,

real depreciation Ís down

ｓｯ ＠

‘

world Bank data.

ｲ｡ｬｳ｣ｴｯｲ＠ into ｴｨ＠ fìnancial ｳ｣ｴｯｲ＠ that in ｯｴｨｲ＠ ｣ｯｮｯｭｲ･ｳ＠ ｸ｡｣･ｲ｢｡ Ｚｴ ･､＠

fìscal woes. Second

,

ｦｬ･ｸｩ｢ｬ＠ labor and capital markets enabled the real sector to react quickly to government initiatives

,

ｳｴｴｩｮｧ＠ off new growth

｣ｹ｣ｬｳ＠ ^that ･｡ｳ､＠ ｴｨ＠ ｲ･｣･ｳｳ ｬｏ ｮ｡ｲ＠ impact of stabilization _{ｭ｡ｳｵｲ･ｳＮ＠} Thus

ｴｨ＠ HPAEs ｲ｣ｯｶ･ｲ･､＠ quíckly &om macroeconomic shocks‘ Box 3.2 de- scribes rwo more typical developìng ｣ｯｮｯｭｩ･ｳ ＠ ｃ￢ｴ＠ ､Ｇｬｶｯｩｲ＠ andMex-

n6 

8o x3.1 Ea st Asia Was _{ａ ｩ} Lucky

QNE ｐｊ［ａｎ ａｮｏｎ FOR THE HPAEs’ RELA11VELY RAPID REBOUND

fibtil.eitetna1 shÇlcks is that ｬ＠ shocks ｷ･ｲ＠ ｳｭ｡ ｬＱ･＠ ｲｩｲ ｮ＠ ａｳ ｩ ｑＮＮｴＺ＠ ｨ｡ ｮｩｮ＠

ｯ ｬｃ ｲ､￪ｶ､￳ｰ＠ ｩｮｧｴ･＠ Ｆ＠ ｾｯｮ ｬ ｳＮ＠ According tothîs view, adverse shóck$Jrom

Ｆ ｮｩｲｴｧ＠ terms óf ttade and risîng ｩｮｴ･ｲ ｳｴ＠ ｲ｡ｴＧＵ＠ ｗｲ･＠ less ｳ･ｶ･ｴ＠ ^foi

the HPAEs than for other developing economies^‘ Put si^ll1ply, the ^SUè,- . ce$sfuL

Ea.s

t

A!i

ian economies ｷ･ｲ ＠ ｬｵ￧ｫｹｲ｡ｴｨｲ＠ than agile.

Biit ･ｅ ｡ｳＮ ｴ＠ Asian ｮｯｭｩ ＠ have been butfeted ｢ ＠ ｓ ﾭ

ｴｲ Ｑ＠ ｳｨｯ｣ｫｳｴｾｴ＠ hît other ＯＺＱｧｩ￳ ｬＱｓＮ＠ As oíl importers,Kórea,Thallånd,

and, T Q.Íwan, Chlp.a, fucedsharp declines in their termsof trndedl.lring thepil ptic;e tisé shocks of 1974-75anq19S0-8 L Indqnesia atld

ｍ￡ｬ｡ｹｳｩ｡ ＠ ｢ｩｮｧ＠ oil exporters, bene6ted fÌom the oil priçe rÎses but

faced 5evere adverse shocks in 1986 due tosagging 011 and conìmodity prices and rising Înterest rates. Oil price hikes had litde direct impact on Hong Kcmg and Singapore,which depend primarily on manufa.c- tured exports, but both suffered fÌom the ensuing world recessions.

Available data indicate that while the 5hocks to East Asian

･ｯｮｯｭｩ･ｳ＠ were ｳｯｭ ｲｩｭｳ＠ smaller than shocks to other developing

economies, more often ｴｨ ｲｗｉｲ･＠ about ＠ same or larger.For ex-

｡ｭｰｬ ＠ a 1993 World Bank study of eighteen ･｣ｯｮｯｭｩｳ＠ rhat ｲ ｬｫ･､＠ external  shocks  as  a ｰｲｯｰｯｩｯｮ＠ of GDP  found  that  the  1974-75  shocks for Korea and Thailand (the two HPAEs it studied) were smaller  than those faced by Chìle, Costa Rìca, Pakistan, and three Sub­Saha- ran Mrican economíes;  abollt  the same  as  for  Brazil andSri Lmka;  and greater than those fuced  by ａｲ ｧｮｴｩｮ｡ ＠ Colombia, lndia, _{ｍ･ｬｃｏ ＠}

and ｔｵｲｫｹ ＠ For  1979-81 , the  study found  that  the ｡､ｶｲｳ＠ shock 

from terms of trade deterioration and rising ｩｮｴ･ｲｳｴ＠ rates was about 6 

ｰ･ｲｮｴ＠ of GDP  for ｋｯｲ｡＠ and Thailand. This was  less  than for ｃｨｩｬ ＠

Cðted’Ivoire, and Sri Lanka; a ｬｩｴｴｬ＠ more than for Brazil (5  percent); 

｡ｮ､ｭｵ｣ｨｭｯｲ than for all ｴｨ＠ ｯｴｨ･＠ norably Argentina (2 percent) 

and India ＨｬＵＵ＠ than 1 ｰｲ｣･ｮｴＩＮ＠

Source; ｌｩｵｬ＠ and others

,

forthcoming. 

1C_O‘ _{that ｦ｡ｩｬ､＠ to take ｴｩｭｬｹ＠} action in  response to such shocks and suf-

ｦｲ､＠ from  prolonged recessÍons and uncertainty as  a result^‘

Some  observers  have  argued  that  East  Asia  has ｢･ｮ＠ lucky  rather  than  agile. ｜＠ ･ｸ｡ｭｬｮ＠ this  argument  in  box  3.1  and  find  that  the 

ｴｲｭｳ＠ of^‘ ｲｲ｡､＠ for  the East Asian economies ｨ｡ｶ＠ been at Ｑ｡ｳｴ＠ as ｵｮｦ｡ｾ＠

ｶｯｲ｡｢ｬ＠ as  those facing  other ､ｶ･ｬｯｰｩｮｧ＠ economies‘ Below we  exam 

ＱＱＱ＠ four cases  in whìch the HPAEs ｲｳｰｯｮ､･､＠ ｳｵ｣｣ ｳｳｦｵｬｬｹ＠ to a variety of 

ｭ｡｣ｲｯ｣ｯｮｯｭｩ｣＠ shocks:  lndonesìa, _{ｋｯｲ｡ ＠} Singapore, and Thailand. 

U7  

ｬＱ ｒａｃｌｅ＠

Bo x3.2

ｬ･＠

High Co st of

ｄ･ ｹ＠

in Mexico and Côte

､ ｉｶ ｉＧ￨＠

WHAT IF THE SUCCE.SSFUL EAST ASIAN ECONOMIES ｡ ｯｦｦ･･＠ ｳｯ｡ｲ Ｚ､Ｎ＠ Some of the investment w‘as ofdii- had fuiled to

de

aI quickly with ｭ｡｣ｲｯ･ ｮｯｭｩ｣＠ dis1o- biöÍlS economic vaIue, like the expa^P$ion ofthé

show-

c:atiqns? The experiènce of nations that responded to case city of Yamassoukro. PubHc investmèrii: external shocks inadequately suggests that deiays can ｲ･ｭ｡ｩｮ､＠ high even ･ｲ＠ ｣ｯｦｦｩ･＠ and cocoa prices co1-

｢･ｶ･ｲ＠ coscly indeed. ’rhese problems have béen par- lapsed^‘ The resulting huge de6cits led to heavyextet-

tícular1y severe in Latin America and Sub-Saharan na1 borrowing, a full-blown debt crisis, rea1 exchange Africa, as the ｳ･ｳ＠ of MexÎco and CÔte d’Ivoire rate ｡ｰｰ￬｡ｴｩｯｮ ＠ and the ｣ｯｬｬ｡ｰｳ＠ of investmentand

i1lustrate. growth. CÔte d’Ivoìre,which had bêen a ｓｵ｢ｾｓ｡ｨ｡ｲ｡ｮ＠

Flush with cash from ｴｨ＠ 1979 oil boom, Mexico African success story, entered into a vicious tyclè of ìncreased public spending sharply, then fai\ed to cut unsustainable budget defìcits, fui1ed adjusrment at- back when oil revenues ｦｩＱＱＮ＠ By early'^‘ 1981 the need tempts, and shrinking per capira GDP from which Ìt for currency deva1 uation was obvious. While the gov- has yet to emerge.

ｲｮｭ･ｮｴ＠ hesitated, investors ｷｯｲｲｩ､＠ about the com- The contrast between the experiences of Mexico

ｩｮｧ､ｶ｡ｬｵ｡ｴｩｯｮ＠ and pulled $20 billion to $30 bìllion and CÔte d’Ivoire and that of the HPAEs shows how

out of the economy. l^• acking ｦｯｲｩｧｮ＠ exchange to valuable a reputation for macroeconomic stability is make regular payments on its foreign debt, ｍｘｉｃｏ＠ and how costly it is to lose it. Some HPAEs got away instituted capital controls and nationalized the banks with brief episodes of mismanagement because they

in ｬ｡ｴＧ＠ 1982, exacerbating the crisÌs. Fiscal adjust- had a well-earned ｲ･ｰｵｴ｡ ｯｮ＠ for prudence and be-

ment in the mid-1980s was strong but erratic and cause they ｣ｯｲｲ･｣ｴ､＠ the' mismanagement quìckly. failed to tame inf1 atÎon or restore busÎness con6- Mexico and CÔte d’Ivoire lastingly ､｡ｭ｡ｧ､＠ theìr dcnce. Only in the late 1980s and early 1990s did a repuration by not correcting ｴｨ＠ macroeconomìc im-

ｦｵｲｴｨｲ＠ stabilization program fìna1ly take hold and ba1ances in the late 19705 and early 19805 quickly

bring down inflatíon. ｮｯｵｧｨＮ＠ The differences between success and failure Problems have been similar in Côte d'Ivoire, can turn on a couple of years’ delay ìn adjustment; in

ｷｨｩｨ＠ embarked on a huge public investment pro- Mexico, two “ lost years" of adjustment resulted in a

gram in the mid-1970s when world prices of cocoa “lost decade" of growth.

Declining Oil ｐｉ ｣･ｳ＠ in Indonesia. From 1982 to 1986

,

lndonesia ｃ､＠

rapidly worsening terms of ｴｲ｡､＠ caused ｰｲｩｭ｡ｲｩｬ＠ by ､､￮ｮｩｮｧ＠ oil prices. Starting in 1983, _{ｴｨ＠ ｧｯｶ･ｲｮｭｮｴ＠} responded wìth a remarkably comprehensíve and successful adjustment program. lt ､･ｶ｡ｬｵ､＠ ｴｨ＠ ru- piah in 1983 and 1986 and cut expendìtures, mainly by ｲｳ｣ｨ･､ｵｬ￬ｮｧ＠

｣｡ｰｩｴ ｡Ｑ Ｍｩｮｴｮｓｉ･＠ ｰｲｯｊ｣ｴｳ ＠ The need to reduce a ｵｲｲ･ｮｴ＠ account ､ｦ￬｣ｩｴ＠

without creating a ｲ｣･ｳｳｩｯｮ＠ was straightforward; the orthodox solutions ｷ･ｲ＠ effectÎve.

ａｭ｡ｳｵｲ･＠ of the achievement ｯｭ＠ 1985 Îs illustrated by the follow-

ing calculation (from ｌｩｴ､＠ and others, fDrthcoming). The excess of imports of goods and nonfactor services over non-oil ｸｰｯｲｴｳ＠ fell from n8

15 percent of GDP in 1984 to 7 ｰｲ｣･ｮｴ＠ in 1988. This shift of 8 percent ofGDP measures the ｸｴ･ｮｴ＠ by whích absorption had to be ｲ･､ｵ｣･､Ｍｴｨ＠

ｲｳ＠ of ｩｮ｣ｮ Ｇｊｓｩ､＠

principal

ｦ ｰ｡ｹｭ･ｭｳ＠ of long-rerm debt

,

ｨｩｧｨｲ＠ m-

rerest  payments, and  reduced  income  from  oil  and  gas  imports.  This 

ｭ ｡Ｕ ｳ￬ｶ＠ reSOUfce  shìfr, also  associated  with ｴｲ｡､＠ liberalízation, was 

brought aboUt wìthout _{ｩｮ｣ｲ･｡ｳ､＠} ínflatÎon. 

Adjustment was  not ｰ｡￬ｮｬ ｳｳＮ＠ Growth  initially  fell  due to lower  ex- port  Íncomes  and  a  tÍght  1983  budget;  by  1985  the  economy  had  slípped  Ínto  a  recession, wÍth  only  1 percent  gwwth.  Even 50  the gov- ernment pushed ahead wÍth  the ｡ ｵｳｴｭｮｴ＠ process, which actually ac-

｣ｬｲ｡ｴ･､＠ ìn  1986. In the later half of _ｴｨ＠ 19805, ｐｲｳ･ｶ ｲ｡ｮ｣･＠ paid off Ín 

a boom of manufactured exports that pushed the export growth  rate to  25  percent  a  year  for _ｴｨ＠ períod  1985^• 9 L  Since  then  lndonesia  has  chalked up average annual growth of about 7.1  percent. 

Responding to Macroeconomic Crisis in ｯｲ･｡Ｎ＠ In 1979

,

Korea ･ｮ｣ｯｵｮｴｲ･､＠

a _{ｶ｡ｮｲｹ＠} of problems that _{ｴｨｲ｡ｴ･ｮ･､＠} to undercut _ｴｨ＠ 1970s’ _{ｬｭｰｲｓｓｬｶ･＠}

growth. Risìng oìl ｰｲｩ｣ Ｚｳ＠ ｢｡ｴｴ･ｲ､＠ Korea’S ｴｲｭｳ＠ of trade, the world  re- cession dampened export demand, and high _{ｩｮｴｲｳｴ＠} rates  boosted debt 

ｓｲｶｩ｣･＠ costs‘ _{ｋｯｲ｡＠} was  not ｵｮｩｱｵ＠ in  these  troubles, of course;  these 

were the same woes  that led to debt ｣ｲｩｳｳ＠ in many economies outside of  East Asìa^‘

ｋｯｲ｡＠ had plenry of specifìc problems _{｢･ｳ￬､ｳＮ＠ ｒ｡ｬ＠} appreciation dur-

Íng the 1974--79  _･､＠ exchange rate _{ｲｧ￬ｭ･＠} had _ｭ｡､＠ exports less com- petitive, the ｲｩ｣＠ crop had ｦ｡ｩｬ､ ＠ and  the assassinatÍon of^‘ ｐｲｳ￬､ｮｴ＠ Park 

ｃｨｵｮｧＭｈ･＠ had ｸ｡｣･ｲ｢｡ｴ･､＠ political  uncertaÍnty  (Collins  and  Park 

1989)^‘

ｋｯｲ｡＠ had  a  few  structural  advantages, however.  UnlÍke  economies 

that quìckly fell  ìnto debt crises, Korea was not running large and grow- ing budget defìcits‘ And while  private savings  had dropped due  to  de- dining  output  and  incomes

,

investment  remained  high.  More  important, ｋｯｲ｡＠ ｲｳｰｯｮ､､＠ quickly  to  its  troubles  with  an  aggressÍve  January  1980 stabìlÍzation  package ｢｡｣ｫ､＠ by IMF  standby credits. ｔｨ＠

government ･ｮ､､＠ ｴｨ＠ fìxed ｣ｨ｡ｮｧ･＠ rate ｲｧｩｭ･ ＠ devalued the won by 

17 ｐｲ｣ｮｴ ＠ and ｴｩｧｨｴ･ｮ､＠ monetary and fìscal  policy. 

ThÍngs got worse  before ｴｨｹ＠ got  better.‘ 1n  1980, output fell  5 ｰｲﾭ cent, inflation soared to more than 25 percem, and the current account  deficit ｡ｰｰｲｯ｡｣ｨ､Ｙｰｲ｣･ｮｴ＠ ofGDP^, ｔｨ strong ｭ･､ｩ｣ｩｮ＠ was partly re- sponsible  for  t 

II9  

RACLE

‘ i

the drop in output. Even so, and ､ｳｰｩｴ＠ polîrical ｯｵｲｲ￭･ｳ＠ over Korea’s rising foreign debt, ìt continued foreign borrowing throughouc the cri- sis, thus maintaining hìgh investment levels‘

Within rwo years, the medicine had begun to take the desired effect. 1n 1982 inf1ation dropped to 7 _{ｰｲｮｲ＠} and in 1983 (0 3.4 percent‘ The

｣ｵｲｲｮｴ＠ ^account ､･ｦ￬ｩｴ＠ fell to 2 percent of GDP in 1983. Overall

,

the

ｧｯｶ･ｲｮｭｮｴ Ｇｳ＠ prompt and effective response to a potential crisis

ｳｦｲ ｮｧｴｨ･ｮ･､＠ the economy, ｰｲｰ｡ｲｩｮｧ＠ it for rapid growth in the 1980s.

Adjusting to Oil Shocks in Thailand. Thailand only partially adjusted to the first oil shock and in the ｬ｡ｴ＠ 19705 ｮｧ｡ｧ･､＠ in a mild private and public spending boom^‘ Then came the second oìl ｳｨｯｫ＠ and ｴｨ＠ rise in world _{ｩｮｴｲｳｴ＠} rates‘ By 1980-8] , the ｣ｯｮｳｯｬｩ､｡ｴ､＠ public sector _{､ｦ￬｣ｩｴ＠} was 7 ｰ･ｲｮｴ＠ of GDP, ｮ｡ｲｬｹ＠ half of which was the defìcit of nonfìnan- cial public enterprises. The current account ､ｦ￬｣ｩｴ＠ was also about 7 per- cent. Because ｦｯｲ￬ｧｮ＠ borrowìng had been ｭｯ､ｲ｡ｴＭｴｨ･＠ ､｢ｴＭｇｄｐ＠

ratio was only 35 percenr in 1982-Thailand was not facìng a debt cri- sis and continued to borrow. Even so, ｴｨ＠ ｮｷ＠ government that took over in 1980 ｰｲ｣･ｩｶ･､＠ that ｭ｡ｲｯ･｣ｯｮｯｭｩ｣＠ adjustmenr was needed. Monetary policy optìons were limited by ｴｨ＠ frxed exchange rate and the relatively open capital ｭ｡ｲｫＮｴ ＠ The government therefore took ｴｨ＠ alter- native path, fìscal contraction, moving gradually but consistendy durìng the next several years to cut expenditures and boost revenues.

ｐｯｬ￬｣ｹｭ｡ｫｲｳ＠ steeply cut defìcìts of the nonfìnancial publíc enter-

prises, then gradually reduced the central government defìcit. As a re-

sult, the ｣ｯｮｳｯｬｩ､｡ｴ､＠ ｧｯｶ ｲｮｭｮｴ＠ defìcit declíned from 8 percent of

GDP in 1981 ｾＸＲ＠ to 1.6 percent in ＱＹＸＶｾＸＷ ＠ when ｡ ｵｳｴｭ･ｮｴ＠ was es- sentìally complete^, Meanwhile, steeper tax ｲ｡ｴｳ＠ and ｴｯｵｧｨｲ＠ collection

ｦｦｯｲｴｳ＠ boosted ｣ｮｴｲ｡ｬ＠ ｧｯｶ･ｲｮｭｮｴ＠ tax revenue from 13 ｰｲ｣ｮｴ＠ of GDP

in 1982 to 16 percent in 1988 The adjustment ^‘ ｰｲｯ･ｳｳ＠ was facílitated by a 1984 devaluation‘

Thai gradualism was possible because foreign borrowìng had ｢･ｮ＠

moderate and the economy did not _･ｴ＠ face a crisis. But gradualìsm was not hesitancy; conservatíve fìscal policies were consÎstent and were sus-

ｴ｡ｭ､＠ into the late 1980s amid an ｸｰｯｲｴ＠ and foreìgn investment boom.

ｓｩｮ｣＠ 1987^• 88 Thaìland has been accumulating foreìgn exchange ｲﾭ

serves, and the ｧｯｶ･ｲｮｭｮｴ＠