Globalization's shadow.

As they had for several years, East Asia's developing economies were humming along in the first half of 1997. But that would soon end. The Thai baht had come under attack from currency speculators. In July, having depleted its foreign reserves in an unsuccessful effort to defend its currency, the Thai Government devalued the baht. The move called into question the assumption of exchange rule stability in the Phillippines, Malaysia, Indonesia and the Republic of Korea. The "herd instinct" to exit these markets became a self-fulfilling prophecy as banks and investors rushed to the door to avoid being the last.

Carmen Chan reports on the East Asian crisis and the United Nations response.

In Bangkok's scorching heat, an eight-year-old boy spent day after day last summer scouring construction sites for nails. It was a matter of survival. The 10 to 30 baht (US$0.25-0.75) a day he received from junk collectors for the nails helped put food on his family's table. Sua's story, told in a November 1998 field study by Save the Children Fund, is hardly an unusual one in the wake of the Asian financial crash (see page 32).

The havoc wreaked on the economies and populations of the region has pointedly and poignantly called for a reevaluation of the international financial system and, more importantly, the world's approach to development. It has refocused attention on the United Nations vision and standards for people-centered development, equity and social inclusion.

In return for loan commitments to Thailand, the Republic of Korea and Indonesia, the International Monetary Fund (1MF) proposed economic policies based on flexible exchange rates, tight monetary policy through high interest rates, reduction of budgetary deficits, financial reform through closure of non-viable institutions, recapitalization, supervision and improved governance through the severance of links between business and Government. But, as the economic crisis deepened, the high social and human costs of the IMF policy response became apparent. According to the UN Conference on Trade and Development (UNCTAD), the rash of bank closures imposed by the IMF, meant to shore up confidence in the affected economies, only served to undermine confidence throughout the region. The hike in interest rates to stop the downward spiral in exchange rates failed to restore confidence in the currencies and added to the woes of debtors, forcing them to slash their activity and liquidate assets, driving the economies into deeper recession.

The IMF rejected the idea of a standstill on debt, with a view toward rescheduling debt before committing external funds. Instead, it adhered to a strategy of convertibility and free capital flows, leaving the Asian currencies to sink while funds are used to bail out international creditors. Also, the austerity measures imposed by the initial IMF programmes necessitated cutbacks in basic social services at a time when they were most needed, with disproportionate effects on the poor and vulnerable groups.

The evolution of the economic and social crisis in East Asia has resulted in a very uneven distribution of costs. International creditors have come out on top, the debtor countries' corporations and people are staggering under the credit crunch and inflation, and the poor and vulnerable groups are bearing the highest costs and struggling to survive. The inequity of this situation is not lost on the victims of the crisis.

The international development community is confronted with the question posed by UNCTAD in its TDR98: "When a colossal global market failure and measures taken to bail out creditors are paid for at the expense of the living standards of ordinary people, and of stability and development in the debtor developing countries concerned, who is to say that justice has been served?" The social costs:

Poverty: Unemployment has soared across the region, turning back years of advances in eradicating poverty in the region.

Indonesia, the largest of the affected countries and the one with the lowest per capita income to begin with, suffered the deepest recession. Unemployment rose from 7.5 per cent in 1996 to 9.7 per cent the following year and an estimated 16 per cent, or 15.5 million workers, in the last year.

Without unemployment benefit schemes, laid-off workers have turned to informal sector livelihoods, thereby driving down the margins in the informal sector and making the poorest in society even poorer. The need to reabsorb hundreds of thousands of Indonesian workers expelled from Malaysia and Singapore has further increased strain on livelihoods and the social fabric. After 30 years of unrivalled gains in poverty reduction, Indonesia is expected to see an increase in its poverty rate from 10 to 15 per cent. In human terms, this jump means that 30 million Indonesians will live in poverty.

In Thailand, unemployment increased by 50 per cent to 1.5 million in the first six months of the crisis. The unemployment rate increased from 2 per cent in 1996 to 3.6 per cent in 1997, and is estimated at a whopping 9 per cent in 1998. The sector most affected to date has been construction, where 1.1 million workers were laid off in the first 12 months of the crisis. Roughly half of these were from Myanmar and have been expelled from Thailand, while most of the rest were Thais, who have mainly returned to their rural homes to eke out a living. UNCTAD estimates a 33 per cent rise in the proportion of the poor in Thailand's population in 1998 because of the effect of job losses in augmenting rural and urban unemployment and in reducing urban worker remittances to rural families. Even wealthier nations such as the Republic of Korea were not spared. Unemployment went from 2 per cent in 1996 to 9 per cent m 1998. Unlike Thailand, where the unemployment rate is expected to decline slightly to 8 per cent in 1999, the unemployment rate in the Republic of Korea is expected to reach 11 per cent, or 2.5 million, in 1999. According to TDR98, three categories of workers have in particular borne the brunt of the crisis: construction workers; unorganized workers in small- and medium-sized enterprises, which unlike the chaebols (conglomerates) have little access to credit and are fast going out of business; and female employees who have been disproportionately the first to be laid off.

Education and health care: Scarcity of essential goods. such as medicines, has had disproportionate effects on the poor and disadvantaged groups; important public and private infrastructure projects intended to address existing shortfalls in basic urban services are postponed UNCTAD warns of the spillover to the next adult generation if primary school enrolment declines and child malnutrition increases.

Of particular concern are the long-term and potentially irreversible effects of public expenditure cuts on investments in human resources. Public funds are needed to sustain investments in basic education, provide incentives and opportunities for poor children to remain in school, and prevent deterioration of quality education. In times of crisis, families tend to withdraw their children from school due to inability to pay school fees, and working-age children confront the immediate opportunity costs of education versus income-generating activities.

Public expenditure cuts in health magnify the financial risks of medical care for the poor, both through increasing costs and reduced services through public facilities. In the affected Asian countries, both public and private resources available for health care have declined as the gross national product has fallen. Compounding the effect of spending cuts is the contraction of the purchasing power of the health budget due to currency devaluation (increasing the costs of imported drugs and equipment) and price inflation. According to the World Bank, the budget constraints for public health expenditures have put some important health initiatives at risk. For example, support for information, education and communication on the rational use of drugs and control of communicable diseases may be neglected in the budget pressures in some countries. Likewise, expenditures on HIV/AIDS and tuberculosis programmes have been increasingly strained. In Thailand, despite planned maintenance of overall health expenditures i n 1999, changes in allocation within the health sector have important implications for gender, equity and health seeking behaviours. For example, condoms that had been provided by the provincial health departments to sex establishments are no longer free. The public health community, which has commended Thailand's 100 per cent condom-use brothel campaign, now fears that the cost of condoms will hinder HIV-prevention efforts.

Drug prices rose sharply; in Indonesia prices of antibiotics doubled between October 1997 and March 1998. There are reports of households postponing vaccinations or use of other drugs, and cancer patients checking out of treatment because of shortage of medicine or inability to pay for treatment.

Erosion of the social fabric and impact on women and children: Economic stresses at the household and community levels have caused the social fabric to unravel.

Communal and ethnic tensions have led to reports from Indonesia of rape of women and the destruction of property among families of Chinese origin, and murder of religious clergy. The regional crisis has also triggered increased delinquency and crime as people struggle to survive under pressure. Youth crime has increased, exacerbated by escalating school and college drop-out rates. Family ties are fractured as the poor send family members off to other parts of the country to seek employment. The increased time devoted to sheer survival has eroded the time poor people have to devote to community-based organizations.

According to the World Bank, women and girls may be disproportionately hurt by the financial crisis. Women lose their jobs first, and families pull their daughters out of school before sons. The particularly hard-pressed may sell daughters to brothels. Even before the crisis, girls in Indonesia were six times more likely than boys to drop out of school before the fourth grade, and once they are removed from school they rarely go back. During hard times, women and girls sometimes face disproportionate cuts in food intake, or they fall victim to domestic violence that results in economic stresses and the erosion of social capital.

In Indonesia and the Philippines, teachers reported that children were eating less before coming to school in the mornings and buying less from vendors, and that this was affecting students' ability to concentrate. In Thailand, non-governmental organization (NGOs) reported an increase in child labour, child prostitution and child beggars.

Inflation and public spending cuts: While wages have fallen and jobs disappeared, prices have risen because of exchange rate devaluations which hiked the cost of imported goods, and public sector price hikes.

In Indonesia, the exchange rate depredated by over 80 per cent between July 1997 and June 1998, before stabilizing at the current level of Rp8,700. The resulting 80-per cent-plus inflation in 1998 aggravated social conditions by slashing purchasing power and eroding the real value of savings and pensions. The consumer price index for food increased by more than 50 per cent between June 1997 and March 1998; the general consumer price index increased by 38 per cent.

Public spending in the crisis-affected Asian countries is being constrained by a fall in government revenue, by the effects of exchange rate changes on interest bills and by the need to finance the increasing liabilities of the Government in corporate and financial restructuring. A further squeeze on public spending resulted from the initial macroeconomic policy response of the IMF and the World Bank. While the fiscal target has since been relaxed in some countries, many Governments have found it necessary to cut back on social services and development budgets.

The United Nations Response

The United Nations has mounted an immediate response to the crisis in East Asia, mainly through its specialized agencies and regional commissions.

On the most basic level, the United Nations system has coordinated relief programmes through the UN Development Programme (UNDP) and the UN Children's Fund (UNICEF) to meet the basic needs of victims of the crisis. Another important task carried out by UNDP and UNICEF is the monitoring and analysis of the social and human impacts of the crisis, in order to ensure effective targeting of relief programmes in the short term, and to guide social policy and institutional reform in the long term.

The crisis has highlighted three major weaknesses in the Asian countries. The first is weak banking regulation, which encouraged irresponsible lending by foreign and domestic banks and excessive borrowing by local corporations. Reform in the financial sector and strengthening of the government' s regulatory capacity will be key components for economic recovery. The second weakness is the inadequate provision of social protection. Thirty years of increasing prosperity had lulled the Asian Governments into assuming that economic growth would of itself provide sufficient social protection by raising incomes, reducing unemployment and alleviating poverty. While the Republic of Korea had put in place unemployment benefit schemes that helped to mitigate the social impact of the crisis, Indonesia had only minimal safety net measures, and there were virtually no programmes for protecting the unemployed and underemployed in Thailand. The lack of a social safety net compounded the human misery that resulted from the e conomic crisis. The third weakness is the Governments' inadequate capacity to monitor the impacts of the crisis, and hence absorb external assistance.

With regard to these issues, UNDP, the International Labour Organization and ESCAP are assisting national Governments through the following activities:

* Policy dialogue with government officials, NGOs and civil strategies for sustainable equitable development;

* Technical assistance in the implementation of institutional and structural reform;

* Building local government capacity in social policy formulation and implementation;

* Workshops and seminars to encourage participation, knowledge sharing and local solutions by key stakeholders in the region with regard to economic reform, povety alleviation and social integration.

On the global level, the United Nations response to the crisis has included detailed analyses by the United Nations Department of Economic and Social Affairs (DESA) and UNCTAD of the causes of the crisis, associated policy mistakes and the far-reaching economic impacts of the crisis to alert Governments of the ramifications of the crisis and to guide global financial reform.

In January, the Task Force of the Executive Committee on Economic and Social Affairs called for a comprehensive reform of the international financial system in order to prevent costly crises and manage them better. In its report, Toward a New International Financial Architecture, the United Nations outlined six key areas for reform which it urged Governments and multilateral organizations to consider (see UN Chronicle, No. 2, 1999). Among these were the preservation of autonomy of developing and transition economies with regard to capital account issues and incorporation of internationally sanctioned standstill provisions into lending and adequate sharing of adjustment.

According to DESA's Under-Secretary-General Nitin Desai, the two major strengths of the United Nations are its focus on development and its ability to provide a universal and democratic forum for policy dialogue. "We must try to inject development thinking into the highly technical discussions about financial markets. Through the General Assembly and the Economic and Social Council, the UN can provide a platform where countries at different stages of development can come together and agree on priorities. The financial crisis is not just a technical thing...we need to get into the realm of higher policy-how Governments can reconcile liberalization and people-centered development."

John Langmore, Director of the Division for Social Policy and Development at DESA, draws attention to the different mandates of the United Nations and the Bretton Woods institutions, and emphasizes the need for professional consultation between them. "The World Bank's mandate only covers countries that need to borrow from it, and the IMF's responsibilities relate effectively to current account deficit countries, while the UN has a global mandate. The roles of the UN are the classical political functions of national parliaments translated to the global stage... those of the Bank and Fund are to apply agreed strategies and priorities with all their professional wisdom and skill," he says.

As in the case of States, strategies evolve through interactive debate between them and with Governments and public services."

Until recently, the United Nations, the World Bank and the IMF have operated on divergent priorities. The Fund focused on stabilizing and restoring current account balance and restoring confidence in financial markets; the Bank focused on poverty alleviation and maximizing prospects for economic development; and the UN focused on integrated economic and social development and balanced human development. Both the Fund and the Bank championed the neo-liberal paradigm of development, while the UN harboured reservations about the uneven risks and costs of globalization to developing countries. Recently, the Bank has called for increased collaboration with the United Nations, and emphasized its commitment to defending human rights and protecting vulnerable groups. This gives the United Nations an opportunity to engage constructively with the Bank in advocating for a more equitable, inclusive development model.

According to Mr. Langmore, the UN's international conferences provide a good framework for integrated economic and social development, and should carry more weight in the discussions about the new global architecture. For example, the World Summit for Social Development, attended by 117 Heads of State or Government in 1995, recognized that in the context of globalization, economic forces cannot be separated from social ones; Governments committed themselves to assessing the social impact of economic adjustment programmes and to putting poverty eradication at the centre of their strategies. The proposed conference on financing for development in 2001 would be another good forum for the discussion of a new development model and new international architecture.

In its paper, The Human Implications of the Financial Crisis in East Asia: the UN's Response, it states that "whereas resources have been rapidly mobilized to stabilize the financial situation in the countries in crisis, resources for people-centered development have been shrinking to an historic low in 1997. The UN should lead a renewed call for increased resources for development cooperation, especially for basic social services and for significant debt relief for the poorest countries. The UN should also take the opportunity to revisit innovative financing of development, including taxation on speculative financial flows."

The continuing economic crisis in East Asia was the single most significant economic event in 1998, according to the Trade and Development Report 1998 (TDR98) of UNCTAD. Economics that bad grown at a miraculous pace for 30 years suddenly crumbled, and 20 million people were plunged into poverty. The crisis wiped on about 1 per cent of global output in 1998, or some $260 billion, equivalent to the annual income of sub-Sabaran Africa.

The crisis is social as well as economic. Secretary-General Koli Annan noted in a message to a Seminar on Managing Capital Flows: National and International Dimensions, hosted by the Economic and Social Commission for Asia and the Pacific (ESCAP), the Asian Development Bank, the International Monetary Fund (IMF) and the World Bank and attended by over 100 representatives from 29 countries of the Asia Pacific region on 15 June 1998. "We must remember that beyond this is the threat of social strife, breakdown of law and order and loss of self.-eastern. Macro aggregates do not capture the trauma that individuals and families must undergo as a result of crises of this nature", Mr. Annan said. "We must look at the way in which risk and rewards are balanced in the operation of the current international financial system. The question to be addressed is whether we can find ways to preserve the benefits of open financial markets while reducing the risks of crises and designing tools to deal with them that will be les s costly in human terms."

The impact was accelerated by the capital market liberalization that these countries had carried out with the encouragement of the World Bank and the IMF. Without capital controls, the Asian economics and currencies were very vulnerable to excessive capital inflows during times of optimism on the part of leaders and investors and excessive outflows in situations of panic.

That's exactly what happened. According to the Institute of International Finance, the total flow of commercial bank-lending to Indonesia. Malaysia, the Philippines, the Republic of Korea and Thailand want from $55.5 billion to $21.3 billion (a reversal of $76.8 billion), while portfolio investment flows went from $12.1 billion to $11.6 billion (a reversal of $23.7 billion).

The depth of the resulting economic crisis was staggering. The Thai economy, which grew at a phenomenal 8 per cent in the second quarter of 1997, went into free fall, contracting 4 per cent in the third quarter, and 12 per cent in the final quarter of the year. In 1998, it shrank another 8 per cent and was expected to further contract by 1 per cent in 1999. Similar economic contractions occurred in Indonesia, Malaysia, the Republic of Korea and Hong Kong.

What is the Justice...?

"It was the rich who benefited from the boom ... but we, the poor, pay the price of the crisis. Even our limited access to schools and health is now beginning to disappear. We fear for our children's future." said Khun Bunjan, a community leader from the slums of Khun Kaen in northeast Thailand, and her husband, Khun Wichai.

Khun Wichai lost his job in the local factory and his wife is selling less at the local market. As a result, they took both their son and daughter out of school and put them to work. "What is the justice in having to send our children to the garbage site every day to support the family?" questions Khun Bunjan. But Khun Wichai thinks he is lucky. His neighbours are sending their children to beg, and some girls became prostitutes. Among the older male youths, drug dealing has become an increasingly attractive source of income. Increased competition for survival, frustration and psychological stress are all leading to heightened household and community tension. This tension has led to increased domestic violence, and with fewer jobs, neighbours who once cooperated are now competing. Stealing, crime and violence are on the rise. People are feeling unsafe and insecure. "This breakdown of our community's networks will affect stability". added Khun Bunjan.

Source: East Asia: The Road to Recovery, the World Bank, September 1998, p. 73.

Point of Fact: It is reported that the number of elementary school drop-outs in Thailand almost tripled in 1998 compared to 1997.

'Lowest Level in 1990s'

According to the latest UNCTAD figures released in August, foreign direct investment (FDI) by companies in developing Asia and the Pacific fell during 1998 by a quarter, to $36 billion, from the previous year. Although FDI from the region remained close to its annual average during the decade, its share in world FDI in 1998 dropped to its lowest level in the 1990s. This decrease was paralleled by the declining value of cross-border mergers and acquisitions undertaken by Asian transnational corporations (TNCs). Among the top 10 outward-investor countries, 6 experienced a sharp decline in their FDI outflows in 1998. The stock of FDI from developing Asia reached $317 billion, accounting for over four fifths of the total FDI stock from the developing. world. Over half of this stock is located in other economies in the region. China alone absorbed over half of the FDI outflows, mainly from Hong Kong (SAR of China) and Taiwan Province of China.

Surprisingly, FDI outflows from the Republic of Korea went against the trend and increased by 7 per cent in 1998, to a record level of $4.8 billion, with a sharp increase in financing of existing overseas operations and ongoing investment projects, including servicing their debts. As their foreign affiliates had difficulties in raising funds in the international financial market in light of their lowered credit ratings, Korean TNCs had little choice but to channel funds from parent companies to their overseas affiliates. While engaged in divestment both at home and broad, Korean TNGs have apparently tried to maintain some of their core international operations, out of longer-term strategic considerations.

Point of Fact: After a series of financial crisis between mid-1997 and early 1999, most economies affected have begun to recover. The first countries most directly affected--the Republic of Korea, Indonesia, Malaysia and Thailand--are all showing signs of recovery. By end of 1998, economic activity had picked up in the Republic of Korea and Malaysia, and in early 1999 in Indonesia and Thailand. In late April 1999, the IMP created the Contingent Credit Lines to shore up market confidence in countries pursuing strong economic policies vulnerable to balance-of-payments problems stemming from financial contagion. The Fund has also taken a number of initiatives relating to governance, transparency and crisis prevention to assist members that have experienced difficulties, and better meet the challenges arising from a globalized economy.