Two years after the onset of what has been the most devastating financial crisis since the Depression, there are signs of economic recovery in East Asia. Exchange rates are stabilizing and in some instances, even strengthening (See Figure 1). Growth in most countries in the region remains sluggish; while there has been an upward movement, growth still remains substantially  below the pre-crisis trend, and income levels have yet to return to where they were at the onset of the crisis. (See Figure 2). That the crisis would eventually end, I would argue, was inevitable; we know that economies always recover – we just can’t say when, or after how long of a recession.

Beyond what we do know about the crisis—that is, beyond the extended period of high unemployment, declining incomes and output, low investment levels, and increased poverty,  there remains much that we do not know. What remains uncertain and difficult to measure is the long-term impact on workers and households, impacts that such formal statistics cannot convey.  To what extent for example, has the recent crisis scaled back, if not eroded investment, in human capital? How extensive was the malnutrition that will leave life-long scars? How many children had their education interrupted, never to be fully resumed? While in Indonesia, World Bank sponsored programs enabled more than a million children to stay in school during the past two years, and in Thailand, it appears that school enrollments also seem to have withstood the crisis—though the pace at which those statistics had been improving has slowed--we know little about what has happened elsewhere in the region. We worry that there has been extensive erosion of social cohesion, evidenced by the political and social disruptions in Indonesia. Only time will reveal the true economic and social impact of the crisis.

Today, as we stand two years after the onset of the crisis, approaching (in Western calendars) a new millenium, we inevitably ask:  What are the prospects for the region?  What policies, what actions, will enhance the chances of sustained, equitable, and democratic development?  What kind of economy—what kind of society—should the countries in the region be striving to achieve, and how should they go about doing so?  In this talk, I propose to outline a set of answers to these questions.

I will argue that the East Asia Miracle was real, and that it was based on a set of sound fundamentals. Government policies contributed importantly to these successes.  At the same time, the crisis has exposed certain weaknesses in these economies. Going forward, the countries must build on the strengths of the past that led to the miracle, but at the same time address those weaknesses.  But even if the crisis had not occurred, economic circumstances today are markedly different from what they were two decades ago—and these changed circumstances would necessitate changed economic policies. One of the strengths of the East Asian economies has been how well they adapted to such changing circumstances in the past - for instance, how well they responded to the oil price shocks of two decades ago.  I will outline a few of the key categories in which changes will be needed—to promote stronger growth and greater equity.

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