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INSIGHT

Will the East Asian Blizzard Blow through Bangladesh?

If the underlying trends of inflation increases further to double-digit rate, government expenditure continues to grow unabated without corresponding increases ih the domestic revenues and the industrial growth rate remains dismal as it is now, only then one has to worry about a "debacle".

by Kabir U Ahmad
THE recent debacle tn the financial markets of the East and South East Asian countries is like a devastating blizzard inflicting heavy damages on these economies. It seems the extent of this damage has not only derailed these countries from their fastgrowth tracks but also has driven the IMF and some friendly governments to quickly mobilise an unprecedented rescue operation for them. Since it is not a one-country phenomenon like "Mexican Crisis" of 1994 which had considerable adverse effects on its giant neighbour. United States, the crisis this time in a whole region of fast-growing countries with its strong economic and financial ties with . the rest of the world has different forebodings.
It has the potentiality of destabilising trade, growth and investment flows over a large part of the world. Quite understandably. It has become a major worry to the leaders of the industrialised countries and the major international financial institutions. However, there are four immediate issues . that cjesprve special attention: .. (i) the, extent of damage In these "miracle or "tiger" economies, (ii) whether the extent of rescue operations initiated by the IMF and the friendly governments is sufficient to revive these economies in the earliest possible timeframe. (Hi) the effects of this debacle on the industrialised world, and (iv) the direct and indirect effects of this shock on a country like Bangladesh.
The Extent of Damage and Rescue Operations
It is still too early to accurately assess the real damage
done to these economies by the recent financial debacle because the findings of the governments themselves, of their own research institutes as well as of the international agencies are not complete and exhaustive From whatever little reports that have come out so far. It seems it is only the immediate impact of the damage, not the far-reaching effects on output, employment, trade, technological choices and income distributions etc. that are being taken account of for immediate attention. These are in terms of closure of banks, financial institutions. postponement of mega projects of infrastructure and large-scale industries etc that are mentioned.
In this list, one reads about Malaysia's postponement of $5 billion Bakun Dam project, purchase of 25 Boeing Aircraft, and import of heavy machinery; Thailand's $3.7 billion Rail and Road Project for Bangkok, large-scale cement industries and real estate projects, and South Korea's automobile and steel complex etc. How much of the medium- and small-sized industries have become victims of this debacle and the subsequent adjustments in terms of tight bank lending, higher interest rates, cut in government subsidies and tight foreign exchange availability are not thoroughly worked out yet. No doubt, these adjustments will be extremely painful and will last at least a few years before these economies can revive their former growth rates, if at all.
The extent of rescue operations arranged by IMF and
other friendly governments are: $57 billion for South Korea. $23 billion for Indonesia. $17.2 billion for Thailand and none for Malaysia since its Prime Minister didn’t want any IMF loan. No one is sure whether these amounts are sufficient to tide over the difficulties of these troubled countries in the immediate future. One has to keep one's eyes open and see the developments. There is. iiowever, a need for continuous monitoring and research on all these issues so that the observers can draw right lessons from the ex
, periences of these countries.
„The effects Of this debacle on the industrialised economies are important for a number of reasons. First of all, these economies were thriving markets for machinery, intermediate goods, industrial raw materials. human skills, and investible resources of the industrialised countries. It is reported that almost one-fourth of European exports went to these Asian countries. There will be a substantial reduction of exports of the European and North American exports to these countries with the result that the rates of growth of the European and North American
countries will decline somewhat. Some recent reports show that it will be of the order of about one per cent. Secondly, these economies were the recip ients of industrialised countries' short-, medium- and longterm capital flows. These capital flows, especially the shortterm ones, will face rough times, as it were.
A good number of branches of major western financial institutions which have been having profitable business in these Asian countries over the last decatfrnr s? will have to wind up and IncucjSsses. Thirdly, the industriaWjfeH'as well Af the third world-countries' are the buyers of goods and services from these Asian countries. Although there may be some temporary setbacks in their exports in the immediate future, their heavy emphasis on export-led Eowth will bring them right ck to where they were before the debacle. One doesn't foresee any major decline in this sector of their economies. However, where one foresees a decline is in the area of their outward investment flows for a considerable number of years until they fully recover from the adverse effects of this debacle.
Effects on Bangladesh
Will Bangladesh face a similar fate as these Asian economies? A fair answer to
this question should be dealt with at two levels: one Is the effects of what happened in these countries and the other is whether a similar debacle can happen in Bangladesh. As far as the first one is concerned, one feels somewhat confident that there will be some, but not very substantial, effects of the Aslan debacle on Bangladesh economy. It is through the channels of direct and Indirect trade as well as through the channel of Investments. Bangladesh’s direct trade with these countries Is not very substantial compared to that with European and North American countries. Therefore, a decline in the income and hence imports of these countries from Bangladesh will not be very substantial.
However, the indirect trade effects via the decline of Income in the European and North American countries, as has been explained above, will be fejt somewhat in the coming
-year®. But. what is morp-finpor-xtmt is the fact that these countries will emerge from their present depressed state as a major competitors of Bangladeshi goods in the European and North American countries for a number of reasons. In the first place, these countries will emerge as more efficient in their industrial sectors with lower wages and better quality products. The latter because they have high standard of work ethic and quality consciousness. In the second place, their exchange rates will be more competitive because they will have to swallow harsh IMF conditionalities on exchange rate adjustments. In the third place, the marketing strategies and skills of these countries are far superior to those of
Bangladesh. Bangladesh, therefore. will have strong competition from these countries in its European and North American markets. As far as direct investments from these countries are concerned, these is no doubt that In the near future Bangladesh will receive Jess than what It anticipated.
The above considerations cannot be the reasons for Bangladesh to be too much worried about a similar debacle. If any debacle takes place in Bangladesh. It will be due to its own domestic reasons and not In response to the Asian situation. Bangladesh economy has some sicknesses: Huge annual losses through state-owned enterprises (SOEs) which comes to about Tk 3 billion a year, huge bank loan defaults (which the present government has been desperately trying to recover), extremely fragile banking sector and a deeply depressed stock market. On top of these, the corruption is rampant like in the Asian "miracle" economies. However, what has made the financial situation worse is the heavy government borrowing from the banking sector and the public to finance its heavy expenditure programmes wfthfho effect that the underlying'rite of inflation is steadily increasing. Some recent reports show that It has now gone up to about 7.5% from a rate of only 3% a year ago. This is happening at a time when the Industrial sector is growing at a meagre 3%-4% a year. If the underlying trends of Inflation increases further to double-digit rate, government expenditure continues to grow unabated without corresponding increases in the domestic revenues and the industrial growth rate remains dismal as it is now. only then one has to worry about a "debacle". But the authorities has to monitor the situation and has to take corrective measures as the current situation tends to deteriorate further.