The Economist: 1997 Crisis Countries Still Suffering from their own Myopia

Asia's economies

Mar 29th 2007
From The Economist print edition

Countries on the front-line of financial crisis in 1997 are suffering still

THE grimmest forecasts proved mercifully misguided. After a devastating financial whirlwind ripped through Asian economies in 1997, some analysts thought it would take a generation to recover. In fact, it was just a matter of two or three years. The bleak IMF-imposed austerity packages hurt, but seemed to do the trick. The worst-affected economies were soon growing fast again. Last year, developing Asian economies as a whole grew at an astonishing 8.3%.

Recovery, however, is far from total. The annual Outlook published by the Asian Development Bank (ADB) this week looks at the growth record of the five worst-hit countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand. Comparing the period from 1990-96 with 2000-06 (ie, after the crisis had passed), it finds that “growth has settled on a lower trajectory.” It has slipped by an average of 2.5 percentage points a year (see chart).

The ADB finds the slowdown cannot be satisfactorily explained by demographic changes, by worsening “human capital”, ie, educational shortcomings, or by falling productivity. Rather the cause lies in falling investment rates. These plummeted in the wake of the crisis, and have never returned to pre-crisis levels.

This of course invites another question: why are businesses not investing? It seems odd, since one supposed consequence of the crisis in almost every country was radical reform of policies and institutions whose failures were blamed for the trouble. It should be safer to invest than it was. Yet studies of standards of “governance”—measuring, eg, the rule of law, corruption, the quality of regulation and political stability—actually show a worsening since the crisis. That seems unlikely. But it suggests that the crisis had a lasting impact on investors' perceptions. As the ADB puts it, the crisis taught them “hard lessons about the consequences of discounting risk”.


Asian Development Bank Link