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The Human Cost of Asia’s Crisis

by Tony Addison and Giovanni Andrea Cornia

Asia's crisis has halted social progress

The human development indicators of East Asia and South-East Asia have shown dramatic improvement over the last thirty years, a product of the much-discussed ‘Asian Miracle’. But, deep recession in Indonesia, Malaysia, South Korea and Thailand together with political turmoil now threaten these achievements.

The region has little in the way of formal unemployment insurance, but has instead relied on fast growth to avoid unemployment and its social effects. But now UNCTAD forecasts that growth in Asia will amount to only 1.8 per cent in 1998 (compared with 5.9 per cent in 1997). Consequently, unemployment is rising, and real wages are falling.

The cost of living has also increased substantially. Many Asian currencies have fallen sharply since mid-1997, resulting in higher food prices. Indonesia is in the worst situation; inflation is now above 50 per cent. Rioting in May also disrupted the food distribution system.

Asia’s educational achievements are under threat; children (especially girls) drop out of school during recession. By damaging the human capital of the poor, recession increases poverty. It also lowers future economic growth since investment in education has high returns. Every effort must be made to protect the human capital of the poor because, as in the case of Latin America’s crisis in the 1980s, damage to human capital is often irreversible.

Higher Mortality

Recent UNU-WIDER research shows that in countries with histories of low unemployment and weak social insurance systems, such as Eastern Europe and the Former Soviet Union (FSU), sudden job losses cause considerable psycho-social stress. This in turn increases the incidence of circulatory diseases and suicides. In crisis, households turn to desperate coping strategies (prostitution and crime both increase) leading to the spread of disease, family breakdown, increased violence, and ethnic hatred. These effects have contributed to the higher mortality seen in Eastern Europe and the FSU.

Asia’s countries have entered their crises with stronger community ties than those that exist in Eastern Europe and the FSU. But the depth of the crisis is severely testing these informal safety nets and Asia is now starting to experience rising mortality. In South Korea, for example, the suicide rate jumped by 36 per cent over 1997-98. Moreover, UNU-WIDER research on the causes of humanitarian emergencies shows that high inflation, rising inequality of income and wealth, and economic recession can ultimately lead to social breakdown and conflict.

Reducing the Social Costs

Asia needs to redress the lack of institutional investment in formal unemployment insurance. Public works programmes, child feeding programmes, and other forms of targeted assistance are also essential to provide income for the poor and to protect their nutrition and health status. Allowing the poor to cultivate unused farm land can help to alleviate hunger and could absorb some of the urban unemployed as well. It is also critical to avoid any reduction in school enrolment. Indonesia is trying to keep children in school by reducing and waiving school fees and providing more scholarships to poorer children.

Inevitably this assistance has large fiscal costs. Unlike Latin America’s debt crisis in the 1980s, most Asian governments entered the crisis in 1997 with low fiscal deficits (and in some cases fiscal surplus). Asia’s crisis did not originate in reckless public spending. Therefore, at first sight the deep cuts in public expenditures that characterized Latin America’s crisis in the 1980s might be avoided.

However, the IMF’s policy conditionality at the start of the crisis in 1997 has limited governments’ ability to protect basic social expenditures and increase spending on safety nets. The IMF’s treatment of the crisis on a nation-by-nation basis (instead of dealing with the more fundamental problem of financial contagion), its insistence on a sharp rise in interest rates, and its requirements of fiscal restraint, combined to produce deeper recessions than would be expected given Asia’s initial problems.

As a result, tax bases have contracted sharply along with the level of economic activity (dramatically in the case of Indonesia). This increases the revenue problem of governments precisely at the time that they need to be spending more on social safety nets. ​The IMF has belatedly realized that countries in deep recession need a less restrictive fiscal policy. But, the damage has been done.

A prolonged crisis will jeopardize Asia’s past success in developing institutions for poverty alleviation and the delivery of basic services. These institutions might be able to withstand a temporary loss of funding, but any sustained erosion in the real salaries of teachers, health operators, and other key personnel, will undermine service delivery (the outcome in much of Latin America in the 1980s).

Lessons

Asia’s past investments in human development provide a capacity to shelter the most vulnerable people from the worst effects of crisis, provided that swift action is taken and international support is forthcoming. At the start of 1998 it was therefore possible to hope that Asia’s crisis would not be as severe as those of Latin America in the 1980s or of Eastern Europe and FSU in the 1990s.

But now, the picture is much more uncertain. Asia was expected to stage an export-led recovery. Instead, high real interest rates and bank failure (both of which constrain the investment response necessary for export led recovery) have combined with a sharp rise in import costs (induced by devaluation) to cut domestic demand and employment.

The international community must give more support to Asian governments to ensure that their macro-economic strategies support an early return to growth. Otherwise, the region’s achievements in human development will be endangered.

Giovanni Andrea Cornia is the Director of UNU-WIDER and also the Director of the research project on ‘Rising Inequality and Poverty Reduction: Are they Compatible? Tony Addison from Warwick University, UK, is the Director of the research project on ‘Underdevelopment, Transition and Reconstruction (UTR) in Sub-Saharan Africa’.