emerging economics of Asia

Answer

Emerging Economies of Asia

            During the 20th century Asia, like other parts of the world, experienced both steady economic expansion and devastating downturns with the significant financial crisis being the abrupt halt of the Asian economic miracle in 1997. This economic recession happened after three decades of constant growth raising the debate on whether that was the end of the economic miracle. However, years later, these economies resumed growth and are currently thriving. This paper discusses three questions relating to the role of the International Monetary Fund (IMF) in prolonging the economic damage in East Asia, economic conditions in Bangladesh and social welfare and working conditions in China.

Question 1: IMF’s Policies and How They Worsened the Economic Crisis in East Asia

            The 1997 East Asia financial crisis affected many nations including the ASEAN-5 (Indonesia, the Philippines, Malaysia, Thailand, and Singapore). However, the countries affected most included South Korea, Thailand, and Indonesia. Stock and property market bubbles; extended periods of exchange rate pegging; poor financial oversight; and openness to hot money - over-reliance on short-term foreign loans were the leading causes of the recession. In an effort to help overturn the economic situations of these countries, IMF established specific policies. Some of these policies are outlined below:     

IMF’s Policies Used in East Asia

            Tighter Monetary Policy

By the time IMF intervened in the East Asian economic meltdown, the Asian currency had depreciated excessively, and other nations like Thailand and South Korea had low levels of reserves. As a result, IMF sought to restore confidence in these currencies by making it more profitable to hold the local currency (Fischer 46). To achieve this, IMF directed the affected nations to implement a tighter monetary policy which involved increasing the interest to protect exchange rates and reverse capital outflow.

            Contractionary Fiscal Policy

IMF also imposed tighter fiscal policy to the affected economies to facilitate current account adjustments and avail funds for financial system restructuring (Asian Development Bank 2). According to IMF, the affected nations were to reduce their spending and allocate a portion of their budgets to future financial sector restructuring depending on their balance of payment. This was to offset the current account balances.

            Structural Policy

 IMF attributed the financial crisis in East Asia partially to insufficient banking supervision and regulation, lack of transparency in the relationship between banks, corporations and governments, and fragile financial institutions (Fischer 54). Therefore, this policy demanded financial sector restructuring removal of monopolies and improved transparency between banks, governments and other corporations.

How IMF’s Policies Worsened the Economic Crisis in East Asia

            According to the course reading the policies used by the IMF to tackle the crisis in Asia failed and instead, exacerbated the economic damage. Firstly, IMF recommended an increase in interest rates in the affected economies to reverse capital outflows, restore confidence and stabilize Asian currencies. This policy was not only ineffective, but it also deepened the economic slowdown in the region. At the time of the crisis, many corporations in East Asia were highly leveraged. Thus the increase in interest rates forced such companies into bankruptcy (Asian Development Bank 2). Extensive corporate bankruptcy further led to bank insolvencies since the corporate borrowers could not afford to repay their loans. This weakened the financial system by encouraging capital outflows leading to further deterioration of exchange rates.

            Secondly, due to the inadequacies in the financial sector in the region, IMF directed the restructuring of some financial institutions through mergers and closure to improve investor confidence (Asian Development Bank 5). Therefore, some of the financial institutions in the affected were suspended and other closed. This structural policy worsened the crisis by creating public panic leading to more disruption in the financial sector. The suspension and closure of insolvent banks in the affected economies caused panic affecting the healthy financial institutions. Panicked members of the public withdrew their money sound banks causing a breakdown in the system. For example, in Indonesia, the suspension of 16 banks nearly caused the collapse of the financial system as people transferred money from private financial institutions to state banks

            Again, IMF used contractionary fiscal policy to facilitate current account adjustments and avail funds for financial system restructuring (Asian Development Bank 4). This policy made the situation worse by deepening the economic downturn. Unlike other past scenarios, the Asian crisis was not caused by reckless government spending; thus fiscal adjustment was unnecessary. This policy increased the economic contraction that was already facing the countries by cutting government spending despite the budget surpluses. For example, in Thailand, the government had an excess budget surplus that could have been used for investment in infrastructure and education to facilitate economic growth.

Question 2: Economic Conditions in Bangladesh

            Bangladesh has experienced rapid export growth and industrial expansion in the garment industry yet wages, working conditions and industrial accidents remains among the worst in Asia. Bangladesh is one of the major exporters of garments. By establishing over ten times garments factories by number in the last three decades have seen its export grow from 3.9% to 82%. Key contributing factors to this growth include the availability of cheap labor and the ability to export the products under the Multi-Fibre Arrangement quota system (MFA) (Adnan 357). However, the growth continued even after the collapse of MFA in 2005. Currently, the productivity scale in the industry is declining, and the decrease is attributable to low wages, harsh working conditions and continuous workplace accidents within the industry. For example, by 2008, the wage in the sector was $0.22 per hour but was increased to $68 a month after the garment workers strike in 2013(Adnan 357). This is still massively low compared to other competing nations in the same market.

            The wages in the Bangladesh garment industry are among the worst in Asia because of the production and export model used. In this model, Garment owners sell their products to third-party sellers who in turn export to other countries. This model encourages the owners to use cheap labor to attract better margins in the market at the expense of worker. According to Ferdous, the garment industry is also faced by the extremely unsafe working environment because over 40% of the factories used for production are not built with garment factory purpose (44). These factories fail to follow the building codes rules. Generally, the low wages, rampant workplace accidents and poor working conditions in Bangladesh garment industry are necessitated by lack of labor unions and enforcement of labor laws. For instance, the Bangladesh labor Act was passed in 2006 and amended in 2013 to ensure the International Labor Organization standards. But, significant sections of the labor laws such as worker compensation for injury by accident are yet to be implemented (Ferdous 48). Furthermore, the American Federation of Labor and Congress of Industrial Organizations has indicated that garment factory owners in Bangladesh are establishing barriers and using intimidation to prevent the registration of labor unions in the sector.   

            Nevertheless, the social conditions in Bangladesh mostly exceed those in other South Asian nations. The high social development is attributable to the role of non-governmental organizations (NGOs). Through its NGO-led approach, Bangladesh is one of the world’s leader in using non-governmental organizations as a vehicle of social development. The NGOs in the country target disadvantaged groups such as goldsmiths, agricultural workers, day laborers, factory workers, and small farmers. Since these groups face difficulties in accessing the required skills and education to improve their quality of life and social well-being, NGOs step in to bridge the gap (Islam 170). For instance, Proshika, one of the largest NGOs in Bangladesh, uses its Practical Action Bangladesh (PAB) program to provide education, skills and human development training, housing and employment to the vulnerable groups across the country. Such initiatives improve disadvantaged communities’ ability and skills allowing them to use available resources to alleviate poverty.

Question 3: Social Welfare and Working Conditions in China

            During the early stages of industrial development in a developing country like Indonesia, indicators of social welfare exceed or rivals those of China while working conditions are comparable to those in far more developed nations. The open door policy incorporated in the late 1970s in China encouraged modernization, privatization, and decentralization (Song, Ronald, and Karel 12). These factors have contributed considerably to the disparities in economic and social developments in the country. Despite steady economic expansion in the past 15 years, social development in China is rivaled by other developing nations in regards to employment, poverty level, and income and gender equality. By joining the World Trade Organization in 2001, improved employment opportunities, better working conditions and wages to workers were the desired outcomes (Song, Ronald, and Karel 37). However, some of these are yet to be realized leading to lower social welfare indicators.

            Firstly, the rivalry regarding social welfare indicators between China and Indonesia is evident in the level of unemployment in the two economies. As of 2018, the unemployment rate in China decreased to 3.83% from 3.97% the previous year. The labor participation rate also fell to 68.5% in 2018 (Ceicdata 2). As shown in figure 1 below, the unemployment rate in China has been dropping steadily in the past few years.

Figure 1:  China’s Quarterly Unemployment Rate

Source: www.ceicdata.com

            China’s employment trend and the rate is closely rivaled by that of a weaker nation, Indonesia. Similar and close to China, the unemployment rate in Indonesia declined to 5.3% in 2018 from 5.5 in the previous year. However, the labor participation rate in Indonesia increased to 69.32% (Ceicdata 2). This implies that a higher proportion of the Indonesian labor population have jobs and are working to provide for their families.  Again the unemployment rate in Indonesia is also relatively declining as shown in figure 2 below.

Figure 2: Indonesia Annual Unemployment Rate

Source: www.ceicdata.com

            Another social welfare indicator rivalry between the two countries is the level of poverty among their population. China is one of the leading economies in fighting poverty. In the past 30 years, the nation has reduced poverty to over 75% of its population (Song, Ronald, and Karel 24).  China lifted over 12.8 million people from poverty in 2017 alone indicating a poverty rate of about 3.1% as opposed to 4.5% the previous year. A similar trend is evident in Indonesia with a relative poverty rate of about 9.8%. A drop from 10. 2% in 2017.

            Again, the working conditions in Indonesia are comparable to some to the developed economies. Unlike in China where employees in the toy industry have been subjected to long working hours, In Indonesia regulations relating to working hours, overtime and wages are monitored. According to Mateo and Evans, workers in toy factories in China work for 11 hours a day with extremely high overtime hours (50 overtime hours a month) and relatively low wages (par 4). Some workers reported up to 130 hours in overtime in some factories. In Indonesia, the labor laws enacted in 2003 directs that regular working hours should be about 40 hours a week. This is mentioned in the agreement signed between the employee/union and the employereffective learning and teaching of children in their early childhood.