Asia's crisis unravels years of 'development'

By Allen Myers

"We have worked for 30 or 40 years to develop our countries to this level, but along comes a man with a few billion dollars and who, in a period of just two weeks, has undone most of the work we have done", Malaysian Prime Minister Mohamad Mahathir said after the disastrous fall in the value of the country's currency in August.

Mahathir was wrong about a single speculator causing the fall, but his comments on the overall effect of the crisis come close to the mark. Between the beginning of 1997 and the beginning of this year, the Malaysian ringgit fell by nearly 45% against the US dollar.

The crash of the Malaysian, Indonesian, Thai, South Korean and Philippine currencies has already had profound effects in those countries and throughout the region. Most of the "tiger" economies have had their teeth pulled.

Above all, what the crash demonstrates is that the underdeveloped countries have no real prospect of overcoming the competitive lead enjoyed by the most developed economies. The "tigers" were the countries deemed most successful in pursuing capitalist development policies, examples to the rest of the Third World, which lagged well behind them. Now most of the success has been lost.

Through the 1980s and the first half of the '90s, at least some of the underdeveloped countries of Asia could point to impressive statistics. Gross domestic product per capita, measured in US dollars, the nearest thing that exists to an international currency, is a useful indicator of the relative strengths of economies.

From 1980 to 1995, Indonesia's GDP per capita increased 94.7% (better than Australia's 81.5%), Malaysia's by 143.9%, Thailand's 318%, Taiwan's (1984-95) more than 300% and South Korea's more than 500%. Even the Philippines, considered only as a potential "tiger", managed a 58.8% increase.

Measured in constant dollars rather than current ones (that is, discounting for US inflation), the figures are not quite as impressive: on this basis, the Philippines suffered a 6.6% decline in per capita GDP. Still, the five other countries' real per capita growth rate was higher than Australia's, and Malaysia, Thailand, Taiwan and South Korea were all higher than that of the USA (see Chart 1).

Misleading statistics

Blind optimism might have led some to conclude that the "tigers" were well and truly on the path of catching up with the most developed countries: all it would take is an extension of 1980-95 trends for a few more decades.

In fact, however, the statistics were always misleading. To varying but significant degrees, GDP figures were distorted by high interest rates, the influx of speculative foreign capital and an unrealistically high exchange rate of the countries' currencies.

We can look at the impact of the currency crashes by re-evaluating the 1995 GDP figures as they would be if exactly the same production took place, but after the 1997 devaluations. This is indicated in Chart 2; again, the USA and Australia are included for comparison.

It's important not to read too much into these figures. Per capita GDP in US dollars is not a direct measure of the real well-being of the population, for example, because real levels of production are only one of many factors influencing exchange rates. It would therefore be wrong to conclude from these figures that Australians are now on average 9% poorer than they were in 1980.

As well, the extent of the devaluation of the Asian currencies is not yet settled; rates are still fluctuating, particularly for Indonesia. Some of these currencies may regain some lost ground, which would boost their figure for dollar GDP. (The chart uses the figure for the year to January 23, 1998.)

But the figures do show the relative strengthening or weakening of the position of each country in the world division of labour. A decline in real US dollar GDP per capita means that the world market evaluates that country's performed labour at a lower rate; the country is slipping back in international competition.

On this basis, four of the six Asian countries examined have fallen further behind the United States over the last decade and a half. Only Taiwan and South Korea have narrowed the development gap with the US; Thailand has caught up some ground on Australia but fallen further behind the US.

Enormous gap

But despite such limited "catching up", the absolute gap remains enormous: The US per capita GDP is more than two and a half times as large as Taiwan's, five times South Korea's and about 20 times Thailand's.

All of the above calculations, moreover, concern only the immediate monetary effects of the collapse in exchange rates. They do not include any of the massive changes to the productive economies which will follow the currency crash. These include widespread bankruptcies, huge increases in unemployment, devaluation of assets measured in the local currency and spiralling inflation.

For example, Terry Lawless in International Viewpoint describes the impact on South Korea:

"The average income has been halved in a matter of months: from $US10,000 in August to $5,000 in late December. The stock market has collapsed. In 1996, the total market value of the listed stocks came to 117 trillion won ($139 billion), at an exchange rate of 844 won/dollar. On Christmas Eve 1997, it stood at 66 trillion won ($34 billion), at an exchange rate of 1,965 won/$. That meant that the total price of all listed companies was now less than that of the Dutch bank group ING, the world's seventieth largest corporation."

In Indonesia, some 90% of listed companies are technically bankrupt, meaning that their dollar-denominated debt exceeds their assets. The Far Eastern Economic Review reports that unemployment there has increased by at least 6 million people. Rapidly rising prices of basic necessities have already produced riots.

It is impossible at this early stage to foresee how badly the crisis will hurt the living standards of ordinary people in these countries. But the "tiger" model of development is badly wounded, even if Taiwan manages to avoid being drawn into the crisis. One or two partial "successes" every 15 years is not a credible recipe for overcoming Third World poverty.