The Social Consequences of the East Asian Financial Crisis

What began as a currency crisis in Thailand has evolved into a social crisis across the region and beyond. Within East Asia it was initially hoped that the crisis would involve a sharp contraction and sharp recovery—a "V"-shaped response to a shock, as occurred in Mexico after the 1994/95 currency crisis. That alone would have been an unusual severe shock to East Asian households, just as the tequila crisis was a major source of distress to many Mexican households. There are now fears that the crisis will at best be "U"-shaped, with a more prolonged period of contraction, and risks of lengthy period of working through of structural, social and institutional problems. This is a picturesque way of presenting the tough message that there are no magic bullets or easy solutions to what has become the most serious economic and social crisis in decades. The crisis has been correctly characterized as a regional crisis, but the development of policies and programs require a recognition that there are diverse issues due to country and localized differences. This aggregation of social impacts is vital for determining the types of responses to be funded, and how programs should adapt as local conditions change. This applies, of course, with even greater force to assessment of the social consequences of crises in other regions of the world. This requires that donors expand their relationships with civil society organizations both for policy dialogue and for research on social impacts. While it is important to design responses in the context of diverse local conditions, some general conclusions can be drawn. In the midst of the crisis, there are four domains where a combination of immediate action and exploration of alternatives is central:

• The distributional effects of both the shocks and economy-wide responses, between rich and poor, across different socio-economic groups (with particular attention to socially excluded groups), and between men, women and children. This remains both a powerful and ill-understood domain.
• The potential for direct public action, especially using public resources, to both reduce income losses due to employment declines and price increases—through various forms of safety nets—and reduce the risk of irreversible losses in human capability through lost education, malnutrition and foregone action in health. Here there is a relatively deep understanding of the policy options and their likely effects, but there are sometimes formidable barriers in their execution, in the context of aggregate fiscal retrenchment (and associated distributional struggles) and institutional weaknesses.
• The consequences for the social fabric of economic decline and cutbacks in social services, especially when this is in the context of societies in rapid and turbulent transition from traditional to "modern" social structures.
• Case-studies have provided increasing evidence of adverse social effects, from rising violence, to increased prostitution and intensifying pressures on women. But public action to offset these social consequences is rarely undertaken in a systematic fashion.

The monitoring and evaluation of the effects of the both economy-wide and local developments and various forms of public action on individual and community welfare, through both structured quantitative and participatory techniques. In previous crises involving the international community, including the World Bank, the primary focus has been on the second domain above, and even this is weakly understood and documented. Action in the other domains has typically been dismal. It is essential that the domestic and international community does better in this crisis. Confronting the immediate social fallout of the crisis is crucial, but it is of equal importance to shape responses in the context of longer-term development challenges. Some may see the crisis as providing the basis for a fundamental questioning of the model of economic and social development based on international engagement and reliance on markets. This would be mistake. East Asia’s success prior to the crisis was not a mirage, and a high proportion of the associated social gains will still be there after the crisis has resolved. However, the fact that East Asia was both a paradigm of success and then the epicenter of the current crisis illustrates a crucial point. The forces of globalization and technological advance provide the potential for an unprecedented pace of social advance. But these same forces also carry risks—of pressures for rising inequality between those groups equipped to participate in today’s global economy and those not so equipped (for lack of skills, lack of access to complementary domestic or foreign capital, or through exclusionary social forces); and of rising risks of income and social losses, at an individual, community, national and regional level. The key challenge for social and economic policy at the turn of millennium, is understanding and shaping the policies, institutions and social structures that will help realize the potential whilst managing the risks. Just as there are issues of international financial management to mediate these competing pressures, so there are questions of fostering structures that foster inclusive and equitable social and economic development and provide mechanisms for social protection consistent with societies that are both caring and competitive. A particular aspect of the lessons from the Latin American experience that has received little attention in many studies is the relationship between political structures and effective reforms. Some of the contributing factors to the crisis in terms of lack of transparency, corruption, cronyism, etc. point to the need for a fundamental opening of decision making in economic policies. It is in part in recognition of this, that the World Bank is encouraging engagement with civil society organizations needs to be deepened and expanded at the center of addressing the social and economic costs. This includes project implementation and research on social costs, but is wider and deeper in terms of finding new ways of bringing diverse parts of civil society into determining responses to the crisis. In order to better address the social questions, and acknowledging that all organizations involved in the crisis countries need to work together, the World Bank has set up a number of initiatives to support dialogues, information sharing and engagement with civil society. The bulk of this is occurring at a country level, but there are also regional initiatives to foster broader debate and exchange of information. These include a website, moderated dialogues that will be reported on the website, regular country consultations with civil society, various forms of regional consultations and new research partnerships. In the midst of the crisis, immediate action is required. In this paper we make a range of suggestions where public action can reduce—though almost certainly not fully offset—the severe human costs of an economic crisis that started in currency markets, stock exchanges and banks. However, the paper has also placed considerable emphasis on the inadaquacies of both past social responses to crises and of our present understanding of how to do better. This paper has focused on East Asia, but just as the financial crisis has spread to other regions, so all the issues presented here apply to other countries and regions as well. An open process of exploration and exchange is of central importance both for the effective design and implementation of any response, and for the continuing exploration of how to deepen our understanding of the personal and societal effects of crisis, of the options for action, and how to reduce the human toll of future shocks and ensure an inclusive pattern of longer-term development when East Asia emerges from the present