Catalog

Has the crisis slowed growth?

To answer this question, GDP growth rates are compared before and after that watershed. Trend growth in any precrisis year is defined as the unweighted average of annual year-on-year growth for the current and past 4 years. A 5-year average is a rather basic indicator of a trend, but is readily interpretable and transparent.

Estimated precrisis trends are shown in the panels of Figure 1.4.2. The trends are bounded by intervals that are two standard deviations wide. The intervals around trend growth provide an indication of the volatility of growth in the sample period, with wide intervals signifying greater volatility.

For the period 1997-2005, the graphs show actual growth rates, not trend rates. The reason is that it is difficult to identify a postcrisis trend that filters out the violent changes in growth that occurred during the crisis. Nevertheless, the graphs allow an informal judgment about whether the postcrisis experience "fits" with observed trends prior to the crisis.

In Indonesia, growth in each year from 2000 to 2005 is uniformly lower than estimated trends dating back to 1987. If 1986 is excluded, observed postcrisis growth rates are lower than trend estimates dating back to the early 1970s. Growth rates from 2000 to 2005 are also two or more standard deviations below the estimated trends in each year from 1991 to 1996. These comparisons suggest that Indonesia's postcrisis growth experience does not readily fit with the precrisis pattern.

The evolution of Korea's growth rate is somewhat more complicated. Indeed, as a country whose per capita income is approaching that of rich countries in North America and Europe, and whose economic structure is maturing, Korea's potential growth rate would in any case be expected to moderate gradually. Perhaps there is some evidence of this in the data spanning the late 1980s and first part of the 1990s.

Also, unlike the other countries, Korea's growth bounced back quickly after the dislocation of the crisis, exceeding earlier norms. But since 2001, growth has drifted down. In 4 out of the 5 years from 2001 to 2005, annual growth was less than 5%. The last such episode of relatively slow growth was in the mid-1960s. On this metric, postcrisis growth does not fit the precrisis experience, but slowing most probably reflects lower potential at elevated income levels.

The data for Malaysia are similar to those for Indonesia. Even peak postcrisis growth in Malaysia is lower than estimated trends going back to 1992, and for most years it is far below trend. Much the same is true if the comparison is with the 1970s and the early 1980s. The apparent similarity with the mid-1980s is because the Malaysian economy contracted in 1985. So far, there is little evidence of postcrisis growth rates trending up.

Historically, growth in the Philippines has languished, buffeted by political and other shocks. Not only was there little evidence of "exuberance" in the Philippines prior to the crisis, the impact of the crisis on growth (if not the exchange rate) was delayed until 1998. And the resulting contraction was not in any sense unusual. The Philippine economy had shrunk in the mid-1980s and again in the early 1990s. Even in its more stable periods, per capita growth has only occasionally exceeded 3% a year. In recent times, the Philippines has, albeit with some undulations, reestablished growth rates comparable with the averages of the 1970s.

Two factors complicate an assessment of whether Thailand's postcrisis growth experience "fits" the precrisis pattern. First, trend growth was actually decelerating through the 1990s, after double-digit expansion in the late 1980s. Second, actual growth dipped in 1996, not in 1997 (or 1998) as in the other crisis countries. Thailand was first into the crisis, but not first out. If the growth acceleration of the late 1980s and the steady (though slowing) growth of the 1990s are seen as an aberration, then the postcrisis experience is similar to the 1970s, when Thailand expanded at a leisurely pace. But a reversion to 1970s' norms is probably not a relevant benchmark for gauging recovery. Judged against more contemporary experience, Thailand's postcrisis growth record has been ordinary.

The conclusions suggested by this simple descriptive approach are broadly supported by more sophisticated statistical methods. Using Bai-Perron tests, Jones and Olken (2005) identify growth decelerations for Thailand in 1995 and Indonesia in 1996, but no evidence of the subsequent accelerations that would be needed to restore precrisis trends. Berg et al. (2006), following a similar strategy, detect structural slowing in Korea in 1996 and in Thailand in 1995. In the case of Thailand, the slowdown is followed by an acceleration in 2000, but no acceleration is found for Korea. Finally, Cerra and Saxena (2005) conclude that there is evidence of permanent output losses in the crisis countries, which have not been compensated by higher than "normal" growth rates.

Ten years on, it would seem that the crisis has had a lasting impact on output levels and, possibly, on growth rates too. But it would be hazardous to extrapolate and suggest that these shifts are permanent. Future trajectories are likely to be shaped by a variety of institutional and policy factors. Also, as Korea's experience illustrates, there are other forces that pull growth and output levels. Indeed, had the crisis not occurred, investment and growth rates in Korea would probably have decelerated of their own volition.