>On Fri, 20 Aug 1999, Seth Ackerman wrote:
>
> > So while Korea is restored to its ruddy pre-crisis economic health, China
> > sinks into depression. Doesn't this cast some doubt on the notion that
> > capital controls do anything more than delay the inevitable?
>
>Well, China has a lot more than capital controls. Malaysia would be
>better comparison, and there is still room to argue that they were
>effective in cushioning the blow without preventing recovery.
The Economist writes in this week's issue:
<quote> But there has certainly been a turnaround-even though economists will no doubt bicker for years about what caused it. The impressive resilience of America's economy, aided by interest-rate cuts late last year, has helped bolster the whole world. Fresh signs of growth from Western Europe and Japan have also helped. The IMF will no doubt want to credit its rescue packages for Indonesia, South Korea and Thailand, along with its insistence that those countries raise interest rates to bolster their currencies. Mahathir Mohamad, the prime minister of Malaysia, will be just as quick to denounce those policies-which he ditched in mid-stream-and give credit to his capital controls for stabilising his economy. (Some in his government have even suggested that Malaysia's controls saved the region.)
Tiger balm
Also crucial, however, was the decision to abandon the restrictive fiscal policies initially urged on many countries by the IMF. After at first tightening their belts, Indonesia and South Korea will be running deficits of more than 6% of GDP this year, with Thailand and Malaysia not far behind (see chart). Some will pay for rescuing banks. But most will go towards traditional fiscal-stimulus programmes, including everything from tax breaks to infrastructure projects.
The direct effects of those deficits are only now beginning to be felt. But the mere expectation of their arrival appears to have given the region a lift. One good example is Malaysia, where middle-class families are eagerly forking out for expensive items such as homes and cars. But elsewhere, too, consumers are beginning to spend again. In Thailand, consumer confidence has risen so sharply that the government has had to try to discourage well-off Thais from reverting to an old habit-the shopping holiday abroad. Firms are responding to the improved outlook by rebuilding their stocks. That in turn is playing a leading role in the upturn in the business cycle-especially in heavily industrialised South Korea.
As domestic demand revs up, so do exports within the region. Such trade, which accounts for around half of the total in the region, helped to accelerate its collapse. The severity of the downturn hammered exports: trade balances turned positive initially only because credit lines dried up and imports fell even faster.
Now, export volumes are beginning to lift off (see chart), especially within the region. The even more rapid recovery of imports is actually eating into some countries' current-account surpluses, but the process-confirming that a demand-driven recovery is under way-is a healthy one. In addition, Malaysia and the Philippines, which have big electronics sectors, have been helped by exports outside the region. And South Korean conglomerates, with well-honed marketing skills, have altered their export patterns. </quote>