WTO takes upbeat view on impact of Asian crisis

A WTO report has downplayed the impact of the Asian financial crisis on world trade, pointing to an increase in world trade growth in volume terms in 1997. However, the report has neglected to take note of the presence of some deflationary influences at work that have undermined world trade growth in value terms. Its underestimation of the affected economies' contribution to world trade suggests that the Asian crisis may have more serious ramifications than have been predicted.

by Chakravarthi Raghavan

GENEVA: If the Asian financial crisis can be contained within the five countries most affected (Korea, Malaysia, Thailand, Indonesia and the Philippines), there should be no more than a small dent in world economic growth, the WTO suggested on 23 March in a first report on trade developments in 1997.

But this somewhat upbeat and optimistic view is qualified with some caveats about its tentative character and the speculative nature of attempts to identify the trade effects of the crisis, that the WTO, like some others, chooses to call the "Asian financial crisis", thus making it sound like a regional or sub-regional affair, rather than a systemic one relating to the trade and financial systems.

The WTO report said that despite the turmoil in Asian financial markets, world merchandise trade growth accelerated in volume terms in 1997, with exports growing by 9.5%.

For 1998, with many assumptions (that have more than an even chance of downside risk), the WTO expects a two-or three- percentage-point decrease in world trade growth - but notes that this will still be above the rates recorded in the 1990- 1995 period.

The US Treasury - in trying to get Congress to vote funds for the IMF and in trying to justify to its own public that US contributions to the so-called "rescue package" for these economies are not a "bail-out" for foreign banks and investment funds that acted unwisely in lending or investing - the administration, as well as the IMF, have been talking of this being a "global crisis" with systemic implications and consequences.

But the WTO, in the report, attempts to present it in a regional or sub-regional context.

The volume trade growth (calculated by taking the trade values and dividing them by the unit value of exports) has been used to present an upbeat picture of accelerating trade growth.

Decline in value terms

But in value (US dollar) terms, there was a deceleration - with merchandise trade growth in 1997 of 3%, down from 4% in 1996 and 20% in 1995.

The strength of the dollar led to large measurement differences in the dollar value and volume of world trade flows in 1997, the WTO secretariat said in a press release, highlighting developments.

"The strength of the US dollar vis-a-vis currencies of many major traders, together with low inflation, led to the strongest annual decrease in dollar prices for world merchandise exports since 1950," the WTO said, adding that "declining dollar prices led to only modest increases in the value of world trade despite strong volume growth."

The emphasis in the text of the report is more cautious when it says "the appreciation of the US dollar vis-a-vis the currencies of major trading nations in Western Europe and Asia exerted a strong downward pressure on trade growth rates measured in dollar terms."

However, there are also other explanations for the differences when judging trade growth in volume and in value terms, and these appear to be more plausible, from anecdotal examples cited in media reports over the last few months.

The WTO economists concede that not enough data is available at the moment to make a detailed analysis of the reasons and the various elements.

But economists in other institutions, public and private, monitoring the market say that clearly, the strength of the dollar and the low inflation (in the OECD countries) do not really explain the decrease in dollar prices.

They note that there has been a general fall in prices of primary commodities. In the case of petroleum, copper and so on, the price falls have been attributed, in other reports and assessments, to a fall in demand, including in Asian demand following the crisis. In the case of oil, the mild winter (in North America and Europe), the fall in Asian demand, and over- production by some OPEC members have created a glut, pushing prices, in nominal terms, to the lows of the decade, and, in real terms, to historic lows. In the case of copper, steel and so on, the slowdown in demand in the export industries of the North and of some of the Asian countries has been thought to be responsible.

The price falls have not merely been in primary commodities.

In the case of 16 MB (megabyte) DRAM (dynamic random access memory) semi-conductor chips, the price falls appear to have nothing to with a strong dollar. Their prices are determined by the US and Japanese producers, who have been "dumping" these chips in anticipation of the introduction of the 64 MB DRAMs, some experts following the reporting in specialized media note.

Some initial analyses of the data, also suggest that there has been a fall in the terms of trade of developing countries exporting manufactures - and not merely in primary products.

South Korea's terms of trade last year, according to some reports, suggest a 10-12% fall.

Earlier developmental economists (such as Raul Prebisch and others) have shown that there is a built-in bias for such terms-of-trade losses in international trade involving primary commodity producers and manufactures. Even in this decade, the problems of African economies have been shown to be due to this element.

But very recently, the view has begun to emerge that there is a downward bias in terms of trade even in the North-South trade in manufactures.

A more detailed analysis of data needs to be done for clearer understanding of the causes and policies that developing countries need to pursue. But some economists are beginning to voice in private the view that such a terms-of- trade loss is more easily explainable in terms of the current pattern of "globalization" - with TNCs engaged in slicing production processes across countries through FDI or sub- contracting, and determining import and export prices to maximize profits within the TNC and its capital accumulation in tax-free havens.

Again, all the export goods of the Asian developing countries are priced in dollars which, according to a Bank for International Settlements (BIS) study (in the aftermath of the crisis), is still the dominant (80%) transaction currency in these economies - with even the yen not having such a role. This is also true of Latin American markets.

This means that in terms of the foreign currency, a dollar appreciation should really mean that export prices in domestic currencies have risen, and this should lead to lower volumes of trade, and not higher.

In the report, the WTO economists also try to play down the possible impact of the crisis on world trade, arguing that the affected countries account for relatively small shares of world output and trade.

As an effort by politicians to talk up or talk down the market (as is attempted sometimes over the currency markets), this may be useful, but it creates some credibility questions when presented as initial analysis.

Till last year, and the onset of the financial crisis (starting with the attack on the Thai baht in July and spreading through the region and elsewhere), the Asian economies affected (Korea, Thailand, Malaysia, Indonesia, the Philippines, Taiwan and Hong Kong) used to be described in panegyric terms as dynamic economies and traders, with their import demand giving a growth impulse to the world economy.

Now, says the WTO, the bulk of the trade of the countries most affected by the financial crisis takes place within the region and "this is where any trade effects will be most apparent... "

And, "... because the affected countries account for relatively small shares of world output and trade, the impact of the crisis on (world) trade will be limited."

But to present this view, the report uses 1996 data and trade data for that year without excluding intra-EC trade, and says the affected countries account only for 3.6% of world GDP, and around 7% of world trade.

But another table in the report, which gives 1997 trade data and excludes intra-EC trade (and thus gives a more correct picture), shows the affected countries account for about 8.5% (exports and imports).

A WTO economist Karl-Michael Finger, explained that the 1996 data which included intra-EC trade was used because other data about bank lending, investments and so on were only available on that basis.

But there is no footnote or explanation accompanying the table, and the unwary reader is easily misled.

Identifying the trade effects at this juncture, the WTO says, is bound to be "partly speculative" since not enough time has elapsed since the onset of the crisis last year for its full effect on trade flows to become apparent.

Also, the future evolution of the most affected economies is still uncertain, and hence, any discussion can only be somewhat tentative.

Citing 1996 data (and trade data without excluding intra-EC trade), the WTO economists say that the countries affected account for only a relatively modest share of global economic activity - accounting for 3.6% of world GDP, around 7% of world trade, 6% of FDI inflows and 4% of FDI stocks and less than 4% of gross international bank lending.

The effects may be severe for the countries concerned and can spill over in various ways into other countries and the world economy in general, "but while the effects of the crisis remain concentrated on this group of countries, its likely impact must be assessed in the light of the relative size factor."

As the affected countries move towards recovery, how far would their renewed activity be driven by exports, and what would be the effect on the importing countries?

Fears of low-priced (because of currency valuations) imports flooding the markets of the advanced countries are not warranted, the WTO says.

While currency depreciations should contribute to rapid economic growth, and there are those who feel that a flood of imports will damage some industries and lead to lower GDP growth and higher unemployment in the industrial world, "these fears seem to be largely unjustified, at least as far as countries outside the region are concerned."

No country outside Asia relied on the markets of the five for as much as 10% of total exports or received as much as 10% of imports from them. The US imported 8.6% from this region in 1996, all of West Europe less than 5%. The share of the five in the EC's imports and exports in 1996 was only 2.5%.

In contrast (to the US and Europe), Japan received 16.5% of its imports from the five.

"Thus, even a very substantial increase in exports of these countries, say, by 20%, would not cause a significant problem in relation to overall trade or current account for countries outside Asia. Particular industries with large spare capacity, on the other hand, could expand exports rapidly, thereby putting pressure on those industries in the importing countries."

But there is no explanation or discussion of why - with such a 'small' share of exports, investments and so on of the affected countries - major corporations in the US and Europe are reporting lowered earnings and attributing it to the Asian crisis. Or do WTO economists know something escaping the CEOs of such corporations?

Drawing on the experiences of large devaluations in Mexico and of the CFA-Franc in West Africa and the Swedish and Italian devaluations in the early to mid-1990s (the ERM crisis of Europe, when Soros and others speculated against these currencies) - when there was import contraction in the first year, but resumption of import growth thereafter - the WTO suggests there could be a similar scenario in the present case, and that there would be a reasonably strong export-led recovery in these five Asian economies.

To support this, it argues that excess capacity for use in export production will be available as a result of slack domestic demand. The countries have a strong track record as successful exporters. Over the last decade, the export and import growth rates of the five exceeded world trade growth by at least 50%. For many of them, the share of foreign TNCs in local trade is large: a significant segment of trade is partly sheltered from the turmoil of the financial crisis.

But there is also a contrary view, the WTO notes - with some questioning the scope for a substantial rise in exports from the affected countries: their financial-sector difficulties undermine trade expansion, at least in the short term. In this view, the severe liquidity crisis, along with steep devaluations, has brought such turmoil to the banking sector that financial intermediation for production and external transactions has weakened. Banks with no liquidity cannot provide new credits or roll over outstanding credits, leading to business closures in some cases. In others, the absence, or high costs, of trade finance undermines export prospects.

Also, imports are denominated largely in dollar terms, and this means higher production costs for exports that depend on imports. Along with inflationary pressures on domestic inputs and higher interest rates, this leads to a smaller real than nominal exchange rate depreciation.

The fact that affected countries are important trading partners for one another further mitigates any competitiveness gain that could be expected from the currency devaluation.

External factors may also limit increases in the exports of the five. North America's GDP growth will probably slow down in 1998, implying slower growth in import demand. Slow import growth in the rest of Asia is also likely to lessen export prospects, given that more than 50% of the exports of the five go to other Asian countries. There are also questions about the evolution of imports by China and Japan - with the latest data for December 1997 - January 1998 suggesting a continuation of weak import growth.

In summary, says the WTO, exports from the five will accelerate in 1998, but perhaps not as rapidly as might have been anticipated as a result of strong currency depreciation.

But if the exports do not expand fast, how will these countries overcome their crisis and resume their growth? In such a context, do the Swedish and Italian examples offer any guidance?

And the Mexican or the CFA-Franc zone experiences have yet to prove themselves to be sustained recoveries for a long-term growth path.

The WTO report does not touch on these questions.

The economists say the prospects for world trade in 1998 have been clouded by the Asian financial crisis - with the five affected countries expected to record average GDP growth of 3% or less in 1998. Intra-regional trade, which more than tripled since 1990, could even decrease.

There will also be repercussions for trade and output growth in other regions - with oil prices under downward pressure and affecting oil-exporting countries. Their enhanced export- competitiveness could also affect the export growth of countries having close value relationships to the dollar - including some Asian, Latin American and transition economies.

But there are signs that domestic demand, reflected in non- residential fixed investment, is picking up in continental Western Europe. Lower interest rates, and lower oil prices, should contribute to a strengthening of GDP growth in Western Europe. There will also be reduced capital outflows from Western Europe and this, together with lower public deficits, will tend to reduce interest rates and encourage both investment and consumption. This, in turn, should stimulate import demand and support trade and output growth in trading partners.

But US output growth, the WTO says, is expected to slow down, though its extent remains highly uncertain; Latin American growth is also expected to slacken from the record levels of 1997.

"If the financial crisis can be largely contained to the five countries that have been seriously affected, the repercussions should not result in more than a small dent in global economic growth."

"As world output is expected to slow moderately, and as slower growth in the Americas and Asia is expected to be offset partly by stronger growth in Europe, a decrease in global trade of 2 to 3 percentage points may be expected. But this would still leave the rate of global trade expansion above the rate recorded in the first half of the 1990s." (Third World Economics No. 183, 16-30 April 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.