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ЭКОНОМИКА И ФИНАНСОВАЯ ПОЛИТИКА
Вестник Омского университета. Серия «Экономика». 2016. № 1. С. 4-12. УДК 33.330.3
STRUCTURAL CHANGES AND CRISES IN SOUTH-EAST ASIAN COUNTRIES
E. Nedelka
Researches of economic crises had their renaissance after 2008-2009 but many economists are still studying the topic even today. Most of the researches focus on the analyses of crisis symptoms and subsequent economic processes, in many cases examining only one country at a time. Just a few of them undertake long-term time series analysis or the analysis of a region. This research I examines more regions dating back the 60s and problems are emphasized on the structure of economy. One of the stages of my investigation are the Southeast Asian countries, which have already experienced crisis in the 80s and 90s thus providing enough facilities to analyze certain relations between the transformations of economic structure and crises. In this short essay I present my results about the economy of Thailand, Malaysia, Indonesia and the Philippines.
Key words: South-East Asia, structural changes, crisis, economic development.
Introduction
Many theories were formed during the crisis of 2008-2009 in order to explain it. Some economists took the crisis as the attendant of the structural changes or as the earnest of the structural changes. While others are categorically aloof from this hypothesis and think that the word's "structural changes" are just a preferentially expressed excuse by European leaders, with which they protracted economic depression and restrictions are explained.
The prominent representative of the previously mentioned view is Joseph Stiglitz, who regards structural changes as an underlying factor of the crisis, which are concomitant of technological processes and globalization, but often these changes are not handled very well by the markets. He regards income inequality and supply which exceeds demand as one of the main exciting factors of the crisis. However, he takes the view that these changes could be handled by active governmental involvement (Stilgitz, 2012).
Krugman claims the opposite, according to him structural changes cannot be mentioned as a reason neither as the consequent of crisis. He sets out from labor market analysis and regards to it as cyclical. He debates with David Brooks and Ruth Marcus in his blog and he considers structural changes as a reason for high unemployment rate, just a "structural humbug". He draws attention to the fact that in Europe the need for structural reforms is asserted with predilection but these are actually only excuses for the prolonged economic crisis and economic troubles; and it is used as equipment for decreasing social wasting.
In my study I compare four South-East Asian economies during the previous crisis (emphasizing the Asian crisis) and global crisis in 20082009, and try to find differences among them in order to explain why there was no economic drop experienced in this region wasn't seven years ago.
I suppose that in 2008-2009 there was not crisis in Malaysia, Thailand, Indonesia and the Philippines because there were not any structural changes in these economies. I pay special attention to those indicators and processes which refers to the changes of economic and financial structures.
Connection between structural changes and crisis - theoretical overview
The first economist of the modern history who mentioned in his work that there is a relation between crisis and structural changes was Alfred Marshal (1920). In his theory structural change is influenced by the division of labor, which is a process that puts pressure on the continuous internal reorganization of production units and on the economic structure itself as well. If these changes happen too fast, institutions can not follow them, but as nature does not make any jumps, economy cannot do that either (natura non facit saltum) referring to a possible crisis. He was followed by Fisher (1966), who, unlike his contemporaries and he had already forecasted the rise of service sector in 1935. In his theory the labor force and adequate capital flows at first from agriculture to industry, then from industry to service sector. This occurs because the production of industry sector increases faster than the real demand for its products. According to his establishment, this
© E. Nedelka, 2016
process will not be trouble-free. In 1943, Schum-peter in the Capitalism, Socialism and Democracy described the structural changes of capitalism as a mutation. Similarly to Young (1928), he remarked that industry continuously changes the structure of economy and as repeating the old forms thus create new ones. This process is actually nothing but the creative destruction the essential element of which is innovation, which is an indispensable factor for the "operation" of capitalism (Schumpeter, 1943). Schumpeter's model was developed and expanded by Perroux who emphasizes inequality among economic operators. In his theory, changes, forced by innovation, have different effects on economic operators, therefore, their relations (interactions) are asymmetric and emerged balances of power are irreversible. Because of the "dominant effect" neoclassical balance cannot evolve. Instead, of it structural changes, unbalanced growth and polarization occur (Hospers, 2004). Kuznets, in his book entitled the Modern Economic Growth considers the occurring structural changes of economies and societies as essential processes of growth. These changes show a pattern which traced out a shift from agriculture to industry and to service sector, from smaller production units to bigger ones, from personal enterprises to impersonal large economic companies and from physical work to intellectual occupation. In his study he established that the distribution of incomes modify because of the impact of structural changes, middle and upper class become stronger whose "members" are white collar workers or highly educated physical workers. The changes are so fast that conflicts evolve in the economy and in the society that has caused civil war several times in the history (Kuznets, 1973). Structural changes and the concept of structure itself got a new interpretation when Dependency School appeared. This new context is the theory of centrum-periphery. According to Raul Pre-bisch, who was reckoned as the father of Dependency School, structural change means industrialization and the decrease of agricultural share; but at the same time this is a process in consequent of which peripheral countries realize their vulnerability and dependency from centrum countries. Under dependency he meant that neither political nor economic and social decisions are taken on periphery but in centrum countries which later influence domestic and foreign politics of the periphery. As Prebisch reported structural changes are not painless, but compared to his predecessors he interprets it differently. When society realizes its dependence, then it tries to give it an end but
centrum countries (often) react with punitive sanctions, in extreme cases with military intervention in order to stifle it (Prebisch, 1984). San-dor Lamfalussy has already called attention to the accelerated structural changes in his speech at the World Science Forum in 2005. He considered structural changes as the losing of comparative advantages of some industries which results the "releasing" of workforce in hope for better paid jobs. However, professor indicated that it would be folly to assume that this would be a quick and painless process. On the contrary, the acquirement of new knowledge, which is needed to new industry and geographical mobility involve difficulties, therefore there is a bigger need for an effective safety net in the European countries (Lam-falussy, 2006).
Stiglitz considers structural changes as reasons for crisis which are attendants of the technological processes and globalization and markets are often not able to handle them adequately. According to him, one of the main changes, which can cause crisis are income inequality and supply which exceeded demand. His opinion is that these changes would be controllable with active governmental participation (Stiglitz, 2012). Krugman identifies structural changes neither as a reason nor as a result of the crisis. He considers crisis cyclical, starting from the analyses of the labor market. In his blog he debates with two economists David Brooks and Ruth Marcus; he keeps structural changes for explanation of high unemployment rate only as a structural humbug. He calls attention for the fact that in Europe the need for structural changes are mentioned asserted with predilection but only as an excuse for the long years of economic depression, and it is used as an equipment for decreasing social expenses.
Options for measuring structural changes
Despite of several theoretical approaches and models about structural changes, there is only little relevant literature in which authors introduce not only a time series analysis about changes in the share of main economic sectors or work out input-output tables like Leontief-model which needs a lot of statistical data about subsec-tors, but they also use some kind of indices. According to the aim of my analysis I found two relevant indices which helped me to introduce the structural changes in the Southeast-Asian region. The first one is adaptable for time series analyses of the changes in the share of main economic sectors. This index is the Norm of Absolute Value, Michaely Index (it is called as Stoikov Index as well (Michaely, 1962; Stoikov, 1966)):
NAV t = 0,5 x Vn I.
>]
(1)
where xi represents the changes of the share of economic sectors between two period. The second index is the modified Lilien Index, which takes employment by sectors as a base and it tries to determine the "measure" of structural changes with the following method (Stamer, 1998): ( „ A2
MLI = ,
In
> 0,
x[t,] > 0
(2)
where x; now shows now the changes of the share of employment among the sectors. The result of the indices is between zero and one, if the result is closer to zero that means no significant changes happened in the structure, while a result closer to one means bigger changes in the share of economic sectors.
World Bank ensured data for the determination of Michaely or Stoikov Index and also for modified Lilien Index. In case of the first index, I was able to collect data about the share of economic sectors in GDP until the 1960s, while data to modified Lilien index have been on since the 1980s in the World Bank Database. I visited the webpages of national statistical and government offices, in order to complement data from their databases until 1960 but I could not find any adequate ones from the previous years. However, from the point of view of my analysis it was very important that years continue each other without bigger leaps, therefore I could not use data online since 1980 in the case of MLI. The graphical representation of results can be seen on the fig. 1 and 2.
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- PHI--MAL ......... IND---THA
Fig. 1. Mtchaely-Index/Stotkov-Index
Source: Own calculation based on World Bank Database.
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■MLI PHI--MLI MAL
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Fig. 2. Modified Ltlten-Index
x
Source: Own calculation based on World Bank Database.
Structural changes
After the states in the region had become independent the analyzed Southeast-Asian countries started to grow and develop greatly. The engine of growth was industry, because Malaysia, Indonesia and the Philippines after the reaching of independence promoted import substitution policy. Governments defended internal markets with customs and offered preferences for some industrial subsectors. In Indonesia leaders wanted to keep back the import of manufactured products therefore supported domestic manufacturing industry and strengthened those industrial subsec-tors which were related to oil production. In Malaysia the government provided preferential credit opportunities for industrial operators, established industrial zones, refused foreign direct investments in order to save domestic industrial operators from the competition with foreign companies. In the Philippines import substitution was associated with a kind of misunderstood export promotion. It was misunderstood because the government supported such subsectors (like electronics and cloth-
ing) to which import input was needed, while the state purchase price of the excellent export products of primer sector (sugar, cocoas) was reduced to such an extent, with the permission of government, that these plants were no worth it to produce by the farmers. Import substitution and export promotion were also present at the same time in Thailand, in the course of it state-owned companies became stronger as well as corruption, but their efficiency is continuously deteriorated in the absence of real competitions. In conclusion import substitution policy was failed in the 70s and 80s in each countries and it was replaced by export promotion. The changes of economic policy had effect on the structure of economy itself. Both of them (export promotion and import substitution) were accompanied by vigorous industrialization, which resulted the decrease of the share of agricultural output in the GDP. Therefore in the middle of the 70s the performance of industry not only exceeded agricultural output but it reached the level of service sector. Though, it avoided Thailand, which can be seen on the fig. 3 clearly.
Fig. 3. The contribution of economic sectors to the GDP
Source: World Bankd Database.
Changes coincided with the firs oil crisis, even if they did not cause real decline in economic performance but had their negative effect on each country. Malaysia, Thailand and the Philippines were oil importer countries therefore they have already had difficulties in 1973/1974 because of the increased oil prices, while Indonesia as an oil exporter country had to face with the declining revenues after world oil prices started to drop. In Malaysia and in Indonesia oil crises came together with a major structural change, which is shown on the first diagram. Data of both countries show extreme values in this period compared to the previous years, which is confirmed by the boxplot analysis of these two countries. In the case of the Philippines, the very same changes happened during the second oil crisis, when the share of agriculture significantly decreased compared to the industry and service sector. After structural change there were more and more signs of an impending crisis. In 1980, in the Philippines the economic growth rate decreased, foreign trade balance worsened, while inflation and foreign debt increased. Government had to conclude a standby credit agreement with the IMF to avoid a more serious crisis and structural adjustment had to be implemented. Measures involved actually liberalization moves and the aims of those were not only the avoidance of crisis but also the evolving of a more market-oriented economy. Quantitative and tariff restrictions which affected foreign trade were reduced or abolished, government investments in capital intensive industries also ended, exchange rate was liberalized and banking reforms were executed in terms of liberalization. However, reforms were belated thus causing panic, investors withdrew their capital1 in large scale and more commercial banks got into trouble because of it (Solon & Floro, 1993). Government had finally overcome the crisis with fiscal austerity, decreased government spending, increased taxes and they had the facility for reschedule loan repayment which was the positive outcome of negotiations with creditors. Economic regeneration was helped by falling oil prices and the increasing price of the main agricultural export product, the coconut as well.
In Malaysia, the crisis was a lot more moderate and government was able to handle it without external help - small and medium sized enterprises were supported; corporate tax was reduced from 40 % to 35 %; privatization program was announced which affected mainly the service sector; "the size and the role of government" was reduced in the business sector which helped the cuts of budgetary expenditures (Herbert, 1994).
In Indonesia due to the decaying oil crisis government had to postpone or even cancel 47 major industrial projects whose values were 14 billion US$ and it had to give up the import substitution economic policy and changed fully over to the export subsidies (Zanden & Marks, 2012).
In Thailand the political attendants of oil crisis were more serious than its economic impact. As a result of the crisis wealth reduced while inflation sharply increased. Therefore the position of government weakened and military coups followed each other. The election of Prem Tinsulanonda as prime minister meant the end of political instability, but by this time the public debt increased from 11.1 % (1970) to 36 % (1985) because of the rapid growth of government spending and budget deficit.
Structural distortions and the impact of the Asian crisis
After oil crises economies in the region started to develop fast. Governments gave up their import substitution economic policy, changed over to export promotion and at the same time they discovered the potential of cheap labor force and began to exploit their comparative advantages in the production of labor-intensive products, then they adapted themselves to the new demand of world market and the production of technology intensive products gained a bigger role. Except the Philippines, economies increased with 7 % per years between 1985 and 1997, welfare (based on GNI/capital) doubled.
In spite of stronger industry the structure of employment did not follow the changes and dual economic structure evolved, which meant that agriculture contributed to GDP in the smallest scale but it was still the largest "employers", while industry and service sector gave the 90 % of the GDP but its share from employment lagged far behind compared to the primary sector. It is also confirmed by the modified Lilien-index, that there was not extreme data among the analyzed countries not counting Malaysia. Although Thailand showed its outstanding value in 1980-1981, but it was not an extreme deviation, the reason for it was only the declining employment2 rate in agriculture and was not a real structural change.
Not only employment was unable to adapt to the new economic circumstances but governments also caused also distortions in the structure of financial systems with their false liberalization policy and they weakened their efficiency and defensive capabilities against a possible external shock, which actually occurs in 1997. As Ito mentions in his study, financial liberalization preceded trade liberalization and before the elimina-
tion of restrictions on foreign direct investments, portfolio investments were liberalized in Southeast Asian countries which led to the foreign indebtedness of domestic banks. The distortions of systems were strengthened by the fact that capital and financial markets were not yet ready for liberalization yet (Ito, 2001). Because of the inadequate financial control short-term foreign debt exceeded reserves in Thailand, the Philippines and Indonesia; ratio of nonperforming loans compared to the whole credit portfolio accumulated, because many loans were granted with inadequate prudence to such companies which were related to banks. In this context, when Japan and China devalued their currencies there were two choices before the South-East Asian countries: They also devalue their own currencies which makes foreign loans repayments more difficult or they allow to weaken their foreign trade competitiveness, due to the overvalued currency. Finally, the affected countries decided to keep currency strong until the Asian crisis occurred.
Malaysia was different from the surrounding countries. In the early 80s when the economy had to face with some difficulties, government took reform measures which affected financial monitoring, controlling system. As a result, according to Goldstein's data (Goldstein, 1998) just before the crisis in June 1997 in Malaysia the share of short term loans to national reserve was the lowest (0.6 %) among the analyzed countries. The ratio of nonperforming loans compared to the total portfolio was successfully reduced from 20 % (1990) to 5 % (before the crisis). The regulation and the conditions of borrowing from those banks which operated in Malaysia but had foreign owner were stricter, the state control was stronger, and therefore these banks were not indebted towards foreign countries like the banks of the surrounding states (Arthukorala, 2010). Besides the limitation of credits the stability of bank system was helped by the introduction of minimum capital adequacy ratio during the 80's. This ratio was 8.1 % before the crisis. Despite the steps which were taken by government the crisis of 1997 spread from Thailand to Malaysia as well - although it surprised even the IMF's experts. Many articles and opinions came out about the process of crisis therefore I put aside its introduction and give more emphasis on the clarification of structural distortions after it. Structural reforms focused on the financial and corporate sectors. In the case of former the most important measure was to give support viable banks and financial companies in order to strengthen their operation, while nonviable institutions were winded up (56
in Thailand and 16 in Indonesia), which helped the clarification and stabilization of the financial sector. Steps were taken by government to reduce the risk of further bank failures and to prevent future uncontrolled liquidity-expansion. At the same time they strengthened financial supervisory and control system as well. As a result, the number of short term loans which were taken from foreign banks halved.
The main change which affected corporate sector was the elimination of monopolies and cartels, which enjoyed the support of state, the strengthening of competition rules and of course the announcing of privatization program which meant additional revenues for governments. Other source of revenue was tax increase which affected both durable and non-durable consumer goods therefore those companies which did not have adequate reserves became insolvent. Consequently, in Indonesia 24 % of small and medium sized companies decided to give up their activities, which gave further help to the clarification of markets, but it had negative impact on society - increasing unemployment rate, decreasing welfare (Wee, 2002).
Beside of these two main sectors foreign trade was also affected. Those countries which concluded contract with the IMF had to take liberalization measures (elimination of quantitative barriers, reduction of customs tariffs) which steps were essential to correct the failed structural changes, when financial liberalization preceded foreign trade liberalization.
(Same processes happened in Malaysia and the Philippines, but because of the crisis of the 80s, some changes occurred before 1997. Therefore they were affected by Asian crisis more moderately and this was the reason why Malaysia did not need IMF loans and why 1 billion dollar was enough for the Philippines to cope with the crisis).
Due to the socially painful measures the regeneration of economies happened as fast as the crisis passed off. By 1999, the output of economies showed some increase, although forecasts predicted stagnation at least for 3-4 more years for crisis affected Asian countries. After the easing of financial panic interest rates were reduced, thus supporting the recovery and the prosperity of economic companies. Those enterprises which were engaged in foreign trade and survived the most difficult period were helped by weak currencies, because they revenues from export increased.
The effect of 2008-2009's global crisis on South-East Asia
Asian countries were in a much better economic position than the Western countries when
the crisis erupted. Because of the 1997's reforms in these countries governments established stable financial and monetary systems and provided tools for their operations which were able to cope with the negative effect of the crisis in 2008, moreover, there was not sub-prime crisis on their financial markets which meant further help. Their economic growth also exceeded the output of Western economies during the post-millennium years. The fast government response can also be mentioned as a factor of great performance which was surprising for Western countries as well. Governments without exception announced economic stimulus programs and welfare measures according to their facilities. Indonesia for example helped to maintain the level of consumption with a 6.1 billion US$ package which contained tax reduction, value added tax mitigation and taxfree income increase; government supported the retraining of skilled workers and the training of unskilled labor force who had become unemployed. Regulations which stunted and kept back investment were reduced (deregulation) and the increase of information sector was urged. Malaysia, similarly to Indonesia, supported primarily people in order to maintain economic growth. Instead of social assistance government put focus on the expansion of employment, therefore 30 billion ringgit was ensured to retrain/train labor force and to implement structural development in small and medium sized enterprises (like main employers) between 2008 and 2009 (Goh, Lim Mah-Hui, 2010). Government wanted to finance the jump of budget deficit from markets, in order to do so by low interest rates it had to strengthen investors' confidence; therefore it expanded the limit of state guarantees for deposits both in domestic and foreign currency3. Regulation about the ratio of Bumiputra4 owners was reduced in case of 27 services. At the same time for foreign companies it became possible to acquire full ownership in regional distributions and in international trade centers (Laundicina, Gott, Pobl, 2010). In Thailand the three packages of government, whose worth were 650 billion baht, contained tax reduction and favour grant not only to households but also to companies. For example those farmers who borrowed less than 100 baht from Agricultural and Cooperative Bank received three-year delay in repayment and State Saving Bank helped small businesses by cutting interest rates. Free running water (which effected 3 million households) or the support of electric price
(which were offered for 10 million consumers) were also the part of these packages. The most popular measure, however, was the free public transport (Chomthongdi, 2009). In the Philippines package also continued tax reduction and job creation (through infrastructural investments and PPP projects). Social measures were combined with health and educational conditions, which were anyway among the plans of the, anyways. Those families had children between 0 and 5 got 500 pesos per month if they took regularly their children to the doctor and have them gave in required vaccinations. In a similar way, families where there were elder children also got support (300 pesos) if the children went regularly to school.
These packages were really economic stimulus and not rescue packages and contained such measures which would have been introduced and taken in time. For that very reason my opinion is that behind the outstanding economic performance of analyzed countries were not only government decisions but also structural changes or rather the lack of them. After the Asian crisis, as I mentioned earlier, deformed structure which evolve during the 70s and 80s recovered, and as a consequence, they became more stable and faster growing economies of the region. Their development before the 2008-2009 crisis was linear, there were not any changes in the order of the ratio of the three main sectors of the GDP, and there was no significant technological upsurge in industry (of course export of technology intensive products increased from year to year compared to the export of manufactured products except Indonesia, but it has still not resulted in structural transformation within the industry). Starting from Stiglitz's theory I came to the conclusion that the lack of structural changes/structural problems had significant role in the "avoidance" of 2008-2009's crisis in the South-East Asian countries. This seem to be supported by ongoing processes in Thailand and Malaysia, namely both countries are going through a structural change again, in which the output of service sector exceeds the output of industry (fig. 4). Change is reinforced by Michaely/ Stoikov-Index, which shows not extreme but outstanding value from 2008 to 2009, and as a result of the development the level of wealth is getting closer to the World Banks's high income category based on GNI per capital, which refers to change. As for Stiglitz's theory, it seems to be verified also by the fact that in both countries economists warn with another crisis.
Fig. 4. The share of economic sectors in the GDP
Source: World Development Bank
In Malaysia government took welfare measures charged expenses to the budget, which brought about 6 % budget deficit in 2010 and which was still above 5 % in 2011. In order to finance this deficit public debt increased. Besides of these decreasing foreign exchange reserves and weakening ringgit against dollar is also a threat5. Over a year ringgit lost 20 % from its value against the US$ despite the fact that Central Bank spent on 13 % of its reserve to protect currency. Professor Datuk Dr. Mohamed Arif also pointed out that the result of the negative changes of the above mentioned indicators reduced government's scope for actions against a possible financial crisis (Anand, 2015). In Thailand, similar processes happened like in Malaysia - public debt and budget deficit increased, the value of currency decreased against the US$ and foreign exchange reserve also in parallel. (Although the weakening of baht is not as much economic as rather political reason, namely in 2013-2014 there was a political crisis which resulted in a 13 % decline in the foreign exchange reserve). Both in Malaysia and in Thailand from the rhetoric of governments appears that they want to stop unfavorable processes, namely they are aware of these risks, and they wanted to reduce public debt by using financial restrictions in order to avoid the emergence of a further financial crisis.
Summary
During my research I studied what kind of relation can be between crises and changes in the structure of economy. Besides of the overview of bibliographical references, I wanted to confirm my hypothesis with statistical-mathematical methods, that crises close structural changes. In
this paper my hypothesis was corroborated in the case of Southeast-Asian countries. Before the 80s and 1997's crisis economic structure had changed and it became deformed because of the state interventions, then the following of the emergence of economic problems distortions cleared and therefore they resulted more stable economy. The current processes of the economies could be warning signs for a new structural transformation (some economists call attention to this as I mentioned in my study), and if governments would like to take it over without crisis, then adequate, active but not distorting government interventions will be necessary (the key role of welfare and economic stimulus measures) to be taken.
In my analysis I concluded that not only my hypothesis based on Stiglitz's theory can be verified in the region but Schumpeter's creative destruction can be observed in the analyzed countries as well. I will extend my research to South-American countries in order to strengthen my hypothesis and I rely on the confirmation of my hypothesis again.
Notes
1 In 1980 134 million US$, in 1981 24 million US$, in 1982 116 million US$, in 1983 also 116 million US$ and in 1984 102 million US$ (Department of Economic Research, International, Central Bank).
2 In 1980 employment ratio in agriculture was 70.8 %, 10.3 % in industry and 18.9 % in service sector. This ratio in 1981 was 64.2 %-12.8 %-22.9 %.
3 Before October 2008 the limit of deposit protection was 60,000 ringgit. Since November 2008 it is 1,200,000 ringgit.
4 This is the naming of original inhabitant in Malaysia.
5 In 2009 debt to GDP ratio was only 41 %, in 2014 it was already 55 %.
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About the author:
Nedelka Erzsébet - assistant lecturer in University of West Hungary, Faculty of Economics (Sopron, Hungary) E-mail: [email protected]
Статья поступила в редакцию 9 ноября 2015 г.
