The social and demographic impact of the Southeast Asian crisis of 1997-99

Journal of Population Research, May, 2000 by Gavin W. Jones, Terence H. Hull, Dennis Ahlburg

When an unexpected financial crisis overtook Southeast Asia in 1997 planners and policymakers feared that the economic difficulties would unwind two decades of remarkable economic and social development. Newspaper headlines spoke of massive increases in poverty, unemployment and malnutrition, and it was speculated that family planning programs would collapse and fertility would rise dramatically. Infant and child mortality and maternal mortality were also expected to increase. This paper briefly reviews the onset of the financial crisis as a background for assessing whether speculations about the demographic and social effects tallied with reality. It is found that these effects were neither as dramatic nor as easy to monitor as some of the public debate implied. The general lesson is that the most serious social and demographic problems were not so much the products of crisis as embedded in chronic weaknesses that had become entrenched in times of economic growth. The crisis exposed these weaknesses.

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Until mid-1997 the economic and social progress of the non-socialist countries of Southeast Asia was being widely heralded as one of the great development success stories of the twentieth century. Almost three decades of stunning economic growth had been accompanied by substantial social-sector investments, particularly in health and education, which had begun to pay big dividends. Poverty had been greatly reduced. Infant mortality had fallen markedly, and universal basic education was close to being attained. These gains were particularly notable in Singapore, Malaysia, Thailand and Indonesia. The latter three countries, plus the Philippines, where growth had been more modest, are the focus of this paper. They were the victims of a major economic downturn.

Of course, there were significant differences between these four Southeast Asian countries in 1997, before the financial crisis struck. Per capita GNP in Malaysia was some four times higher than in Indonesia and the Philippines. Social-sector weaknesses persisted, as shown by the proportion of live births attended by trained health personnel, and in the low levels of secondary school enrolment (Table 1), but social-indicator trends overall were favourable. There were also issues of equity, both at individual and regional levels. For example, it was observed that Bangkok with its extended metropolitan region was like a developed-country 'island' located in a developing country. Per capita GNP levels in Bangkok were almost ten times those in Thailand's poorest region, the northeast.

A component of the socio-economic success story of these countries was the sharp reduction in fertility rates. Thailand had achieved below-replacement fertility by the late 1980s, and Indonesia, a much poorer country, had won international acclaim (offset in some quarters by criticism of coercive approaches) for its success in lowering fertility rates. Fertility rates had also fallen in both Malaysia and the Philippines, but (with the exception of the minority Chinese and Indian populations in Malaysia) less sharply than in the other two countries.

Origins and development of the financial and economic crisis

There was general agreement that the precipitating event in the Asian economic crisis was the devaluation in the Thai baht in July 1997, following unsuccessful attempts by the Thai government to defend its value. There was little agreement on other aspects of the crisis such as why it occurred, why it spread so quickly, why its effects were so severe, and how long it would last (McLeod and Garnaut 1998; Arndt and Hill 1999).

Most commentators in 1997 and 1998 attributed the economic decline to a currency crisis that undermined the confidence of investors who then pulled huge amounts of capital out of the economies. This had a 'domino effect' with further declines in currency value leading to further loss of confidence, and further loss of funds. There is, however, another view of the crisis that relegates the currency crisis to a secondary, though still important, role. This stresses the role of financial intermediaries and the impression that implicit guarantees were given by government that such companies would be protected from losses despite the spiralling prices of real assets such as land and capital. This view holds that the crisis resulted from a bubble in and subsequent collapse of asset values. The currency crisis was a symptom, not a cause, of the economic crisis (Krugman 1998:3). The importance of the link between structural problems in the financial sector, including corruption and cronyism, and effects in the real s ector cannot be underestimated. With implicit guarantees, often in the form of connections between politicians and banks and other private enterprises ('crony capitalism') there was little perceived downside risk and even projects with low economic rates of return were deemed to be profitable because financial returns could be arranged by people in power. An important lesson from the crisis was that a liberalization of international capital movements requires corresponding reform to the monitoring and regulation of the national banking and non-banking corporate sectors. Lending institutions and regulatory agencies in Asia were found to be incapable of correctly evaluating the true risks of their investments.