Overcoming Economic Crisis

by Teresa Acklin
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Analysts at Canada's annual outlook conference discuss Southeast Asia's economic turmoil, its effects on global agriculture and the prospects for recovery.

   At the Grain World '98 conference that took place in early March in Winnipeg, Manitoba, Canada, the topic that received the greatest attention was the economic crisis in Southeast Asia.

   Several participants at the conference offered their views on why the crisis occurred, how long it can be expected to continue, what has resulted from the crisis and how the crisis will affect future economic growth and the demand for grains and meat. Researchers and agriculture specialists at the conference did not necessarily predict long-term doom and gloom for the region, but by the same token, they indicated that the recovery process would not be easy.

      Origins and Outlook

   A deflationary wave began with the mid-1997 devaluation of currencies in several countries. Inappropriate policies and structural problems combined with the devaluations to create a snowball effect, spiraling Southeast Asian economies out of control, according to Nariman Behravesh, chief international economist and research director, Standard and Poor's DRI, Lexington, Massachusetts, U.S.

   Dr. Behravesh cited concentration of debt-financed capacity expansion in several industries, as well as excessive dependence on capital imports, as some of the policies that contributed to the problems. Structurally, the affected countries also suffered from fragile banking systems, shortages of skilled workers and opaque legal systems, Dr. Behravesh noted.

   The impact on businesses has been mixed. Multinational companies exporting to Asia and companies producing in Asia for domestic markets have been hardest hit by the crisis, and the worst effects on sales and earnings are yet to come, according to Dr. Behravesh. On the other hand, companies producing in Asia for export have actually benefited from the crisis.

   To understand where the region's economy might be headed, Dr. Behravesh presented several scenarios. Under the “recession” scenario, countries would accept the restructuring programs developed by the International Monetary Fund. Insolvent banks and businesses would be closed, and more foreign ownership would be permitted.

   The outcome would be a deep recession followed by a strong export-led recovery, Dr. Behravesh said. The risk is that export-based growth would be difficult to foster because more than 50% of trade is inter-regional.

   A “stagnation” scenario would result from resistance to structural reforms, he said. This resistance would be accompanied by a steady stream of bankruptcies and attempts to engineer export growth through additional competitive currency devaluations. The region would experience a long period of zero growth, which could lead to more-closed economies.

   Under the “worst case” scenario, a 1930s-style global depression would occur. Indeed, several alarming parallels exist between the current situation and the 1930s, Dr. Behravesh said.

   These include excess capacity in numerous industries, competitive devaluations, banking crises, burst asset bubbles and policy paralysis. A devaluation in China's currency, a Japanese financial meltdown, debt default or a move toward protectionism by the U.S. or European Union are events that could trigger the worst case scenario, he said.

   By the same token, Asia still has the greatest growth potential in the world. To reach that potential, the region should continue to implement structural adjustments. Free market principles, which have become more defined in the region of late, should not be abandoned, Dr. Behravesh said.

      Impact On Agriculture Trade

   The effects of Southeast Asia's problems have been felt outside the region as well. Over the short term, global agricultural exports are expected to decline between 3% and 6% because of the sharp downturn in sales to the region.

   The region's difficulties have been especially critical for countries who rely on Southeast Asia as their main export market. In Australia, for example, Asia is the dominant outlet for Australian food exports, accounting for more than 60% of Australia's major food group exports.

   Speaking on behalf of the Australian Wheat Board, Peter Geary, vice-president of the A.W.B., North America, said cattle and beef exports would be most directly affected as demand is expected to drop sharply. Wheat sales to the affected countries also will decline, but not as much as live cattle sales.

   For wheat, the greatest effect will be in Indonesia, which in 1996-97 took 13% of Australia's wheat exports. Mr. Geary added that demand in Indonesia could fall even further if consumer subsidies on flour are reduced or ended, as has been discussed.

   Australia anticipates that quantities of wheat will be sold to other more distant markets. These sales will increase the A.W.B.'s transportation costs, reducing the profit margin in wheat exports, Mr. Geary said. Australia does hope to maintain some of its competitive advantage for wheat, thanks to a lower Australian dollar in relation to currencies of the other major wheat exporters, he said.

   U.S. agriculture officials expect to see a “significant but not large” effect on exports to the region. As in Australia, U.S. meat exports should feel the greatest impact.

   William Meyers of the U.S. Food and Agricultural Policy Research Institute (FAPRI) noted that U.S. maize exports would be affected more than wheat because as Southeast Asian producers reduced livestock inventories, feed demand for maize would slide. For instance, FAPRI estimates that 1999 maize exports to the region will be 4% lower than 1997 levels, while wheat exports in the same period will be down by only 2.5%. After 1999, U.S. exports should begin to recover, he said.

      A Brighter Future?

   In the near term, the prospects of a return to economic stability in Southeast Asia do not look promising. Currencies continue to remain highly fragile and subject to sudden speculative runs, while the leaders of several countries must cope with political problems related to their staggering economies. But the changes that took place in the region prior to the crisis, as well as reforms that are under way because of the crisis, continue to mold the region's structure so that longer term prospects are more favorable.

   The urbanization movement that has been accompanied by a diversified diet, rising incomes and changing lifestyles is expected to resume as economic stability returns. While rice remains the most significant grain in the region, consumption of wheat, coarse grains and oilseeds again should expand with prosperity.

   According to Leslie Zegalski, program director, Asia Pacific Foundation of Canada in Winnipeg, the prospects for a recovery are actually quite good. Her optimism is based on several key characteristics of the region.

   The savings rate among the region's population is the highest in the world, Ms. Zegalski noted.

   For example, in Singapore, the average person saves more than half his income, while in Indonesia and Thailand the savings rate is nearly 40%.

   At the same time, taxes generally are low, with capital gains and inheritance taxes a rarity. Ms. Zegalski said that the combination of high savings and low tax rates would provide a ready pool of investment capital after economic confidence was restored.

   Finally, many governments throughout the region generally remain financially sound in many respects, she said. Most had budget surpluses or only small deficits in recent years, and inflation was low before the crisis, she noted.

   Stability facilitated by the I.M.F. is taking hold in many of the most-affected countries, and the crisis may act as a catalyst to the further trade and tariff reforms. Nonetheless, an array of risks remain that could thwart the pace of recovery, Ms. Zegalski said.

   Among the risks is governmental resistance, for political reasons, to I.M.F. conditions and reluctance to implement required reforms. Currency volatility also could undermine recovery efforts. With the prospects of further bankruptcies, increased unemployment and mild social unrest looming on the horizon, conditions in Southeast Asia may get worse before they can get better.

   This article is based on proceedings of the Grain World '98 conference in Winnipeg, Manitoba, Canada, in March. The annual international outlook conference covers market prospects for grains, oilseeds, special crops and red meats.