INTRODUCTION

The Economic and Social Survey of Asia and the Pacific 1998 forecast that the world economy would grow by 3.0 per cent during 1998, only slightly lower than the rate of growth of 3.2 per cent attained in 1997.⁽¹⁾ In the event, the world economy slowed much more sharply, to 1.8 per cent. World trade growth tapered off even more precipitately, from a projected 7.0 to 3.7 per cent while the flow of private finance to developing countries fell during 1998 to about half its level of 1996. These developments were largely on account of the widespread fallout of the economic and financial crisis in South-East and East Asia, an event which dominated the global economic scene during much of 1998.

The crisis in Asia has turned out to be far deeper than was foreseen a year ago. Consistent with the analysis in the 1998 Survey⁽²⁾ of a number of factors which, it was anticipated, would have adverse implications for early recovery, the crisis has also lasted much longer than many analysts predicted. The ongoing impact of the crisis has manifested itself in deep recessions in the crisis countries, in reduced growth rates in many other countries within and outside the ESCAP region and in exaggerated swings in the foreign exchange and stock markets during much of 1998. Interest rates have declined in most developed countries, but this has not favoured capital inflows to developing countries because of higher risk perceptions. The overall quantum of international debt flows to developing countries has declined. Stock markets in developed countries rose to record highs only to fall back, almost to the levels prevailing at the beginning of 1998. For the world economy, the broad consensus is that the slowdown in both growth and trade will last well into 1999.

As this Survey is being written, there are some encouraging signs on the horizon for some of the countries affected by the crisis in the region. However, it is by no means certain that the worst is over for all of them. It is being recognized that structural weaknesses in some of these countries may be more serious than was previously thought and that these will take time to resolve.

This chapter traces the course of events during 1998 in both the developed and the developing countries against the background of the crisis. It shows the continuing impact of the crisis on the economic performance of both groups of countries, as well as on trade and capital flows, and outlines the likely consequences of the crisis for the ESCAP region during 1999 and beyond. The chapter also offers some proposals regarding the reform of the international financial system, the need for which has been brought to the fore by the recent events. It should be strongly emphasized that, as far as output and financial market trends are concerned, the near-term outlook remains clouded by profound uncertainty. Any forecasts for 1999 have a high margin of error. The principal economic indicators of global trends are given in table I.1.

Next

Table I.1. Selected indicators of global economic conditions, 1995-1999