Asian crisis adds to trade deficit
By Shelly Simonds An ANU economist said Australia's fall in exports was only partly responsible for the rising current account deficit. An influx of financial capital from Asian countries in crisis was also a factor. Professor Warwick McKibbin, head of Economics, RSPAS, said an influx of capital was a good reason to have a growing current account deficit, as the excess capital would keep interest rates down and consumption high. Prof McKibbin was among the few who predicted that the Asian crisis would not cause havoc for the industrialised economies. He recently presented a paper on the subject at a conference - "East Asia in Crisis: From Being a Miracle to Needing One?" which was co-convened by Prof Ross Garnaut, convenor of Economics, RSPAS, and Prof Ross McLeod, of the Indonesia Project, also in Economics, RSPAS. In October 1997 Prof McKibbin suggested that an increased perception of risk would lead to an exodus of international financial capital from Asia which would flow to lower-risk financial markets, for example in Australia and the US. This capital influx would lower interest rates and boost growth during 1997 and into 1998. This appears to have happened. Interest rates fell in Australia and the US in the first nine months of the crisis, while current account deficits grew. "I think people were wrong about the impact of the Asian crisis on economies outside Asia. And the reason they got it wrong is that all they did was look at the value of what we sold to the countries in crisis and they took that as a measure of the consequences and ignored the fact that capital was flowing out of Asia and into countries like Australia. This pushed interest rates down and stimulated the non-export part of the economy, like real-estate," said Prof McKibbin. Stock markets in Thailand and Korea began to falter in March 1997. Meanwhile the fall of those currencies against the US dollar caused business liabilities in US dollars to soar. International investors and lenders were quick to realise that these countries were not covered for their exposure to dollar-denominated liabilities in the event of devaluation. A re-evaluation of risk across Asia ensued. In Indonesia currency devaluations left 95 per cent of businesses listed on the Jakarta stock exchange technically bankrupt by January 1998, Prof McKibbin said. What surprised many economists as the crisis continued was that the upheaval in financial markets caused such a decline in real economic activity in Asia, he said. "An important lesson is that a financial shock can quickly become a real shock because of the interdependence of the real and financial economies. Too often policy makers and modellers ignore this interdependence," Prof McKibbin said. In Indonesia, the capital outflow brought an exchange-rate depreciation which should have stimulated exports, mitigating the crisis on the supply side. The rise in perceived risk and the exodus of international financing temporarily created scarcity in trade financing and the export boom which should have occurred in late 1997 and into 1998 has not materialised. Prof McKibbin suggested that to avoid another crisis, Indonesia, Korea and Thailand need to improve financial systems, make corporate accounting practices more transparent and replace antiquated laws governing ownership and bankruptcy. "For every country that experienced an economic crisis after the exchange rate crisis, there are other countries such as Taiwan, Singapore, Australia and New Zealand that were able to survive the turbulence because of relatively recent improvements in their domestic financial systems," he said.