Financial flows to the major emerging markets in Asia - The Economy of the Pacific Basin

Business Economics, April, 1994 by Gregory B. Fager

The surge in capital flows between the major emerging markets of Asia and the rest of the world complements their rapid and ongoing economic and financial development. Structural reforms opening domestic capital markets further and relaxing restrictions on balance of payments transactions suggest that large two-way capital movements involving these countries will be a permanent feature of the international financial system. The expanding volume of cross-border financial transactions has broadened beyond the traditional participants such as commercial banks to include mutual and pension funds, insurance companies and individuals. The sharp increase in the volume of financial flows and the entry of new participants have heightened the need for timely and accurate economic information and analysis of the emerging markets.

DYNAMIC GROWTH throughout Asia that occurred in the 1980s moderated at the onset of the 1990s but has remained well above the world average. The growth trend was interrupted in part by the need for internal adjustment to correct for the strains and imbalances created by rapid economic development. The long period of sustained strong demand stimulated output growth above potential and pressed on already tight supply constraints, fueling inflationary pressures and eroding external competitiveness. At the same time, the slackening in external demand caused by slower growth in the principal industrial countries dampened the stellar export performances in several of these countries.

The strains brought on by rapid development became apparent first in the high-income, newly industrialized economies of Singapore, Taiwan and Korea. Rising wages and strong exchange rates in these economies contributed to a loss in external competitiveness that undermined export growth. The governments of these countries responded by tightening policies, which moderated growth but also helped curb excess demand and inflationary pressures.

Real GDP growth in Singapore slipped from close to 8 percent a year from 1986 to 1989 to less than 6 percent in 1992, although inflation fell below 2 percent. Tax cuts and low interest rates, coupled with renewed strong external demand for Singapore's electronic goods, helped propel growth to almost 10 percent in 1993. Renewed strong growth, however, has begun to revive inflation, boosting the year-on-year increase in consumer prices to 3 percent by the end of 1993. Import growth has also rebounded with economic activity, outpacing export growth to erode the current account surplus.

Taiwan's exceptionally strong export-led growth performance began diminishing in the late 1980s. Real GDP growth has stabilized at 6 to 7 percent in the three years to 1993, but progress made toward reducing inflation has proved difficult to sustain. Export growth during the past several years has been buoyed by a surge in shipments to China, while the government's ambitious public infrastructure development program aimed at expanding the domestic economy has boosted import growth and reduced the large current account surplus to about $6 billion in 1993 from a peak of $18 billion in 1987.

The slowing in economic activity that occurred in the early 1990s in Korea appears to have run its course, although real GDP growth of about 5 percent in 1993 is well below that of the late 1980s. Inflation is also well below the peak of 10 percent in early 1991 but edged up from 4.5 percent at the end of 1992 to 5.8 percent at the end of 1993. Sluggish growth in domestic demand, however, has helped limit import growth and a pickup in export growth principally to developing country markets has eliminated the large current account deficit.

Table 1
Real GDP of the Asian Economies

Percent Change from Previous Period

                  Average
                  1986-89    1990    1991    1992    1993e

Singapore            7.9      8.3     6.7     5.8      9.8
Taiwan               9.7      4.9     7.2     6.5      6.0
Korea               10.5      9.2     8.5     4.8      5.0
Malaysia             6.2      9.7     8.7     7.8      8.0
Thailand            10.2     11.6     8.1     7.4      8.1
Philippines          5.1      2.8    -0.7     0.1      2.3
Indonesia            6.0      7.2     6.9     6.3      7.5
China                8.9      5.6     7.5    12.9     12.5

e = estimate

Restrictive policies in Malaysia were effective in curbing excess demand pressures and restoring macroeconomic balance by limiting real GDP growth close to the long-run potential of 8 percent in each of the past two years. Inflation fell below 4 percent in 1993, while slower import growth and sustained strong growth in manufactured goods exports helped shift the current account balance to a surplus of about $1 billion from a deficit of $4.5 billion in 1991.

Thailand continues to have difficulty restoring macroeconomic balance, disrupted by the long expansionary cycle of the 1980s. Real GDP growth strengthened from close to 7 percent in 1992 to over 8 percent in 1993, but inflation rebounded to close to 5 percent. Growth in manufactured goods exports has remained strong, but a revival of private investment from the slowing in the early 1990s has stimulated import growth to push the current account deficit back above $7 billion in 1993.