Ten years after crisis: the facts about
investment and
growth Introduction:
The years have passed after the Asia’s twin currency and banking crisis, in many ways, am air of morality has returned:
1 per
capital incomes 2 social indicators 3 growth
But the effect of the crisis has not been completely erased, the growth has settled on a
lower trajectory.
Has the crisis slowed the growth?
1 comparisons suggest Indonesia’s
postcrisis growth experience does not readily fit with the precrisis pattern.
2 in Korea, postcrisis growth does not fit the precrisis experience, but slowing most reflects lower potential at elevated income level.
3 the situation in Malaysia is similar to Indonesia’s.
4 Philippines reestablished growth rates comparable with the average of the 1970’s, which is lower than it in the postcrisis.
5 judged against more contemporary experience, Thailand’s postcrisis growth record has been ordinary.
6 there are more sophisticated statistical methods showing the similar results.
Conclusion: the crisis slowed growth.
Reason:
The proximate causes of slower growth:
One way of dissecting growth is to identify how changes in the application of labor, human capital, and technology have influenced its path. changes in output growth can occur only if there has been a change in one or more these components.
1 employment: this cannot explain general trend of slowing growth.
2 human capitals: the impact is unlikely to have been big.
(1) The methods have a shortcoming and cannot linked to quality.
（2）the result is estimated, according to which, the growth change should be abrupt, and it didn’t happen.
3 productivity growth: technological progress is usually measured by growth in total factor productivity (TFP). Slower technological progress is an unlikely cause of the deceleration of growth.
4 fixed capital: this is an important reason.
Why investment has tumbled?
First, is investment too slow?
1 a fall in the real price of capital goods is not a cause.
2 a shift in the composition of output.
In fact, the investment is too slow. Now we need to know why.
A
1 public investment:
It is also useful to establish the extent to which the decline in fixed investment rates is caused by falling public sector investment. But there it is not likely to be the main reason.
2 constraint on private investment:
It is still not sure.
3 loanable funds:
There is now little evidence of credit constraints. It is also most unlikely that investment is being held back by low levels of retained earnings.
4 expected returns:
Expected returns can be influenced by many factors. Now that it is not the
financial problems, the low investment rates reflect the low level of expected returns.
5 capacity utilization:
Though it used to be reasonable, it is not now.
6 complementary factors:
They have possibly widened in some of the crisis countries over the past decade and have added to business costs. But this should not be pushed too far as an explanation.
7 investment diversion：
China and Vietnam are competitive export platform and lead to a diversion of FDI , but it would have emerged without the crisis. So it is not a reason.
B risk, uncertainty and investment behavior
Keynes’ “animal spirits”
An individual investor faces many potential sources of uncertainty and
risk and they influence investment. And the crisis also taught privates investors hard lessons about the consequence of discounting risk.
C macroeconomic forecasts: from the forecast since 1995, we see they move lower and the dispersion of these forecast widens and the risks to the outlook have increased.
1 equity values:
Equity prices are often used as a barometer of investor’s view of long term growth and market prospects. the trends suggest that beliefs about potential growth may have been downgraded or that the risk premium may have been raised.
2 corporate balance sheets：
The sharp declines in debt-equity ratios over the period suggest a sustained effort within the corporate sector to protect against risk and fortify financial defense by bringing debt exposure down.
D) governance indicators
1 the accuracy has improved.
2 comparing to other countries, the confidence interval is much higher。
Conclusion:
There appear to have been more dissonance about the macroeconomic outlook than before. But the crisis countries show significant differences in circumstances. They should take different measures. What needs to be done to encourage investment and celebrate growth on a sustainable basis?
Finally in all countries, although a pickup in investment may not be sufficient for faster growth, it will help government to accelerate if new investments raise aggregate productivity. Fundamental to this will be the ability of financial systems to direct resource to be the best projects.
More summaries about the ten years after crisis