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FEATURE STORY

Uncertainty in East Asia and the Pacific: Human stories of the financial crisis

December 10, 2008


STORY HIGHLIGHTS
  • East Asian countries are not spared from the impact of the current economic downturn
  • Next year, slower growth will mean that 5.6 million people who would have emerged from poverty in the East Asia region will remain poor
  • Declining food prices may mean harder times for those living in rural areas that grow food, while lower food and fuel costs help ease the financial strain on the urban poor

December 10, 2008  — In remote regions of Mongolia, thousands of nomadic herders are getting ready for an uncertain winter. With temperatures dipping as low as -30 degrees Celsius (-22 Fahrenheit) in some spots, the country is home to some of the harshest grazing climates in the world. This year, however, the far-reaching global economic crisis is causing much of the herders’ uncertainty.

Just months ago, in the first half of 2008, growth was strong in export-dependent East Asian countries like Mongolia. The growth was driven by high commodity prices, but those values peaked around June, the crisis accelerated in September, and people throughout the region are feeling the effects.

In rural Tsogt, nestled among mountains of the Gobi-Altai province 1,200 km southwest of Mongolian capital Ulaanbaatar, one herder says he is worried about getting an essential bank loan.

"[Life] is extremely difficult. Last year we used to take herder loans from commercial banks thanks to their active operation in provinces,” the herder said, standing with goats, camels and cattle. “Now there’s no lending, and also prices of [hides and furs] is very low at the market.”

Despite entering this crisis better prepared than in the past, countries throughout East Asia are not spared from the impact of the current economic downturn. Economic activity has slowed in 2008 and will continue to fall in 2009, according to the World Bank’s latest half-yearly economic health assessment of the East Asia & Pacific region.

Growth in the region, much of which is thanks to China, is still high compared to other places in the world, said World Bank lead economist Ivailo V. Izvorski, who led the preparation of the report titled “East Asia: Navigating the Perfect Storm”. Still, the slowdown is palpable, with real GDP growth in developing East Asia projected to slow to 6.7 percent in 2009 from 8.5 percent in 2008.

“Overall living standards will continue to improve and poverty to decline, but the pace will be slower compared with what we expected only six months earlier,” Izvorski said, adding that many in East Asia are facing an uncertain economic future.

Wide-ranging effect of the crisis

Next year, slower growth will mean that 5.6 million people who would have emerged from poverty in the East Asia region will remain poor. Many others also will face lower living standards caused by slowing wage growth and higher unemployment. Even the middle class and others who are above the poverty line will be affected, Izvorski said.

In Thailand, times are growing tougher for a taxi driver named M-One Kodkaew, who says his wage has fallen to a third of what it was in 2006. “It’s been really bad in the last six months,” he said. “I’m so scared. People said the economy will get worse next year.”

After paying rent and gas expenses for the taxi he drives, the 37-year-old father and husband takes home about 400 baht (just under $12) a day. Kodkaew’s shrinking wage has forced him to cut back on a lot of expenses, he says. He has considered to rural Thailand or opening a shop, but he doesn’t have the money. “I don’t know what to do. After nine years behind the wheel, taxi-driving has become my career.”

Looking ahead to an uncertain new year

On the island of Sumatra, Indonesia, oil palm farmers were living well earlier this year. By March 2008, the world average price of Crude Palm Oil (CPO) had doubled, and local farmers had a monthly salary that was six times higher than the province’s average salary of civil servants with college degrees.

Alex Sinaga, an oil palm farmer from Jambi province, found himself wealthier and so, accumulating debt. But with the price of fresh palm oil having dropped almost sevenfold in a few months, some buyers are canceling their purchase contracts in favor of a new contract at a lower price. Unavoidably, many farmers like Sinaga are finding it hard to repay their debt.

The World Bank’s Izvorski says that while declining food prices may mean harder times for those living in rural areas that grow food, lower food and fuel costs help ease the financial strain of East Asia’s urban poor. But countries that are commodity exporters, including Indonesia, Malaysia, Mongolia and Papua New Guinea, will be negatively affected.

In the Philippines, a widow named Luningning Vosotros says although feeding her four young children has been increasingly difficult, the recent decline in fuel and public transportation costs has helped. Still, she only makes about $3-$5 a day giving manicures and pedicures in Mandaluyong City, and the $2 she usually spends per meal to feed her family doesn’t go as far as it used to. “We cannot be sure about next year,” she said.

Having learned lessons of the 1997 Asian financial crisis, countries in the region have pursued prudent fiscal and structural policies, setting them up to ride out the worst of the storm so far. This resilience, however, is being tested, providing for an uncertain 2009.

 


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