Referring recently to the financial crisis that began with the devaluation of the Thai currency (baht) in June 1997 and soon became a crisis of the emerging economies, UNCTAD’s Secretary General, Ambassador Rubens Ricupero, listed some of its traits. First, the 1997-1998 financial crisis affected, with but very few exceptions, only developing economies and, among them, the most advanced and successful ones, precisely those economies that had deliberately adopted policies aimed at improving their countries’ insertion into the world economy. To some extent, the more industrialized economies profited from the fall in the prices of raw materials and manufactured goods. According to International Monetary Fund’s estimates, in 1998 all industrialized countries, with the exception of Japan, registered a positive growth rate, between 1.4% (Italy) and 3.9% (USA), compared with the previous year. On the other hand, the newly industrialized countries (NICs) of Asia registered a negative growth rate of -1.5% and a group of four countries (the Philippines, Indonesia, Malasia and Thailand) of – 9.4%.¹

In reality, as ECLAC has pointed out, the financial crisis demonstrated that a good international insertion and a solid economy are nor enough to withstand the devastating effects of external shocks.² What is more, the ensuing financial instability revealed that at the other side of opening up the economy is its potential vulnerability.³ The upheavals some countries experienced in their economy soon spread to other countries and regions through trade, monetary and financial channels.

In this paper we will analyze the trade channels through which the crisis spread. The spectacular contraction, beginning in the second half of 1997, of previously fast growing East Asian economies strongly affected several markets for goods and services due to those economies’ high level of integration to world trade and to the structural characteristics of international transactions in goods. During recent years, all regions of the world had increased their percentage of exports to Asia. Given their significant and growing demand for imports, financed by the inflow of private capitals, the dynamic Asian economies became not only important competitive suppliers of a vast array of products but also, and increasingly, an engine for the world economy.⁴ Therefore, those economies’ recession directly affected some Latin American countries, such as Chile and Peru, for whom the Asian markets had became an important market for their exports. Moreover, other economies that did not depend directly on those markets were affected by the direct impact the contraction of the Asian countries’aggregate demand had on the price of raw materials.

The strong impact of the financial crisis, its extent and scope, surprised even international financial organizations. Also, the vastness of the crisis underlined the systemic risks globalization entails. Systemic financial crises encompass a number of elements, agents, markets and interactions which make it difficult to adequately predict their intensity, vastness and duration, thus impeding timely market intervention. Moreover, market agents’ expectations play a fundamental role in the creation, duration and expansion of the crisis. Under such circumstances, the intervention by financial organizations which should spearhead the assistance efforts for countries experiencing a crisis may, in itself, end up aggravating the situation.

As the International Monetary Fund (IMF) has pointed out, the current decade has been characterized by a high level of instability. The present weakening of world economic growth is the fourth global recession in the last twenty five years.Two global crises occurred during the nineties, causing the world product to grow, on average, at a modest and progressively lower rate during the final three decades of the century. It is estimated that the world product’s average growth rate for the current decade will be of 3.1%, below the 3.4% and 4.4% rates achieved during the 1980’s and 1970’s.⁵ Even so, it was basically the newly industrialized countries that contributed to this rate as the industrialized economies only grew by 2.1% during the nineties and 2.3% during the eighties, while developing countries’ growth rate for those decades were of 5.4% and 4.2% respectively.⁶

Among the industrialized countries only the USA has registered a fully satisfactory growth rate during the nineties, in spite of the recession it experienced during the first years of the decade. The United States’uninterrupted economic growth since March 1991, with the lowest unemployment rate in the last 28 years and price stability, represents a milestone in that country’s economic history. In fact, the US economy has benefitted from the Asian crisis’ downward pressure on the price of raw materials –among them oil– and manufactured goods, which considerably lessened inflationary pressures.

On the other side of the spectrum we have the Japanese economy which during the 1990’s has registered a mere 1% growth rate, in spite of the significant recovery of 1996, as opposed to the 4% achieved during the eighties. The slow down in Japan’s economy, together with the recession other Asian countries were experiencing, caused a contraction in the demand for a great number of raw materials, including oil.

On the other hand, during the current decade, the European Union countries’growth rate remained below 2%, compared to the 2.4% achieved during the 1980’s. Nevertheless, their growth rate was not affected by the contraction in the Asian demand due to the role trade plays in the growth of those countries’ economic activity.

The economy’s low average growth rate was accompanied by a high increase in international transactions, which indicates a closer interdependence between nations and markets. According to the IMF, the average growth rate of world trade has been estimated at 6.1% for the nineties and 4.7% for the eighties, that is, between two and three times the world product’s growth rate, even though in 1998 and 1999 trade grew at a slower rate. During both decades, the expansion rate of developing countries’ manufacturing exports was two times greater than the aggregate average.⁷

The industrialized countries’ low average growth during the nineties did not impede an increase in trade for some developing countries. This demonstrates that the link between both groups of countries has weakened somewhat and that transactions between Asian and Latin American developing countries are playing a greater role.

It should be pointed out that according to Paul Krugman the structure of trade is characterized by what he defines as "a breaking down of the value chain" and other authors as "shared production". In this process, enterprises can divide production among different stages of value adding, which take place in different areas and cause economies based on production activities to be interdependent. According to Krugman (1995), until 1993, that is during the first globalization wave, each consumer good was exported only once. Today, the same good can be accounted for several times in statistical data since it may be produced in one country with inputs from other countries which, in turn, are assembled with sub products from still other countries. Trade statistics cannot clearly distinguish between all these operations⁸.

In December 1998, taking into account the effects on demand of the adjustment policies in Brazil and Chile; the fall in the prices of the region’s exports, particularly oil and cereals; the effects of El Niño in Ecuador, El Salvador and Peru and of hurricane Mitch in Central America (particularly Honduras and Nicaragua), ECLAC revised its previous estimates and calculated that Latin America would grow by close to 2.3%.⁹

In 1998 Latin American and Caribbean exports faced an unfavorable international context that had began to evolve during the second semester of 1997 as a result of the Asian financial crisis. This unfavorable international situation affected the region through three channels: the radical drop in short term international capital flows and the increase in the cost of external financing; sharp falls in the prices of raw materials and the slowing down of world trade’s growth rate. The fall in prices was only partially offset by a relative increase in export volumes and, according to ECLAC estimates, the value of the region’s exports compared to the previous year decreased for the first time in 12 years.

Ever since the eighties, Latin American governments have been adopting fiscal and monetary austerity measures to control the macroeconomic unbalances caused by the debt crisis. Also, they have implemented policies aimed at opening up and deregulating internal markets, as well as privatization programs, all in an attempt to restructure the system of incentives for the private sector, improve market functioning and contribute to increasing their enterprises’ international competitiveness. ECLAC has pointed out in a number of documents that such measures are necessary but insufficient to stimulate the region’s sustained economic growth. What is needed is for countries to improve their participation in trade’s more dynamic flows, as well as their access to technology, foreign direct investment and long term financing.

The modernization process that has taken place in Latin American countries has not succeeded in noticeably changing the region’s exports. On the contrary, the unilateral opening up of the region’s economies has strengthened exports based on abundant raw materials and cheap labor.

Most of the region’s economies depend on a few products or a few markets (or both) for their export revenues. With the exception of Mexico, all countries export mainly raw materials, while more advanced economies diversify their exports by producing more elaborate industrial goods derived, nonetheless, from those same raw materials. Mexico has succeeded in diversifying its exports by producing higher technology manufactured goods and it has based its export strategy on radically increasing the United States’ participation in its trade and investments.

As mentioned above, the spectacular contraction in the Asian demand for goods affected the price of both, mineral and agricultural raw materials. Moreover, oil and copper prices continued their downward tendency. Oil prices fell until the beginning of 1999 and copper prices until June 1999. Latin American countries’ great dependency on a still limited number of commodities increases considerably their export sectors’ vulnerability vis-à-vis a fall in those exports’prices.

In order for countries to counterbalance the fall in prices with an increase in export volumes, demand must increase. Nevertheless, as mentioned above, before the Asian crisis world exports depended for growth on the economic expansion of the USA, East Asia and, to a lesser extent, Latin America’s demand. The economic adjustment programs adopted in Asia and in some countries of the region have caused a sharp fall in those countries’demand, thus leaving the USA as the major factor determining the expansion or contraction of global demand.

Only a few Latin American countries export to Asia in any significant volume. Chile and Peru, which had succeeded in diversifying their export markets by targeting Asian countries, were the countries most affected by the fall in the Asian demand. The Asian markets’ participation in Chile’s exports had increased gradually from 26% in 1990 to 35% in 1995, retaining the same rate in 1997. These markets also received 19% of Peru’s exports in 1990, 27% in 1995 and close to 15% in 1997. In reality, within the region as a whole, the Asian markets’ average participation decreased from more than 10% in 1990 to a little over 8% in 1997, due mainly to a reduction in their oil imports from Venezuela and a decrease in Brazil’s exports (see Table 1).

However, the fall in the price of raw materials is what caused the strongest impact on the region. Even though the decrease in the price of exports did not cause a decrease in export volumes and, therefore, did not affect real product, measured in constant prices, it did cause a deterioration of the terms of trade, decreasing the real revenues of the region as a whole. Nevertheless, oil exporting countries were the ones to suffer the most from the deterioration of the terms of trade. For the other raw materials exporting countries the decrease in their export prices was relatively offset by a decrease in the price of oil. Therefore, their terms of trade deteriorated but moderately.

Ever since the beginning of the financial crisis, raw materials prices, with the exception of a reduced number of products, have decreased considerably.

In 1998, the average price of oil fell by 32%, the sharpest fall since 1986, while raw materials’index prices, with the exception of oil, fell by 16%, the sharpest fall since 1975. In Latin America, Venezuela has been the country most severely affected by the decrease in oil prices. Its oil revenues contracted by 30%, causing the 1997 current account surplus equal to 6.8% of GDP to become a 1.6% deficit. Ecuador is slightly less dependent on oil exports (close to 30% of the value of total exports) and Mexico much less so (less than 10%). Nevertheless, the fall in oil prices contributed to a deterioration of their external and fiscal accounts. Other countries, such as Chile and Peru, also had problems with their balance of trade, due to the fall in copper prices.¹⁰

Ever since the nineties, the consumption of primary goods in most Asian countries grew at a higher rate than in the rest of the world. For example, between 1992 and 1996, developing Asian countries’consumption accounted for close to 66% of the increase in the use of oil.¹¹ These countries also play an important role in the international demand for some basic metals and agricultural products (grain, oil and grease). An analysis of the markets for raw materials indicates that the crisis has had a direct impact on the demand for aluminum, tin, zinc, lead, refined copper, nickel, natural rubber, cotton, wool and furs. However, it affected to a less extent the prices of wood, steel, meet, corn and soy products. Oil consumption fell by 3% in Japan and 15% in the Republic of Korea, while that of other raw materials such as copper and aluminum decreased by two digits in both countries as well as in other Asian importing countries, due to a scaling down in their infrastructure investment plans.

Other factors also affected prices. During the last two years the production of some agricultural goods increased considerably: the production of grains, in particular, grew 9.5%, while consumption only increased 5.5%. During the same period, the production of vegetable oils increased almost 9%, reaching a peak in 1997-1998. Sugar production also grew to 7.2% in 1997, while the demand increased only 4.5% during that same year.¹²

According to IMF econometric studies on the relation between national production and the prices of raw materials, the 1997-1998 decrease in the economic activity of Asian countries affected by the crisis and Japan accounts for most of the fall in the price of raw materials, including oil, during those same years. Nevertheless, those prices are also subject to historical factors which reflect the gradual growth in global stocks and a less vigorous increase in demand, which, in turn, reflect the low growth rate of more advanced economies, a change in productive activities toward less natural resources intensive activities and the technological changes that allow enterprises to operate more efficiently.

Generally, raw materials prices should continue to remain low during 1999, as there should be no important changes in the factors that have determined their fall during the last years. Raw materials prices should rebound after 1999, albeit slowly and depending on the health of the economy. Even with the expected end of the Asian recession in 1999 and the recovery of Japan’s economy, historical factors should continue to curb raw materials prices.

During the current decade, Latin America’s external trade has been characterized by a net increase of imports compared to exports. This has caused a constant build up of trade and current account deficits. Imports have played an important role in the region’s industrial restructuring since imported products and capital goods allowed those countries to technologically update their industrial base. Trade liberalization and the new system of incentives and regulations spurred the restructuring of the industrial sector, particularly in countries’ production specialization and a greater use of imported goods in local production, they also affected many industrial sectors whose local enterprises were unable to compete with similar imported goods.

In general, the sharp fall in raw materials prices, together with an increase in the offer and a contraction in the demand, evidenced the vulnerability of Latin American countries’exports. During the last decade, several countries of the region made considerable efforts to diversify their exports, both in terms of products and markets. Nevertheless, as studies demonstrate, only few succeeded in doing so. Countries such as Bolivia, Ecuador, Paraguay and Venezuela continue to be highly vulnerable in their trade, given that their exports are concentrated in just a few products and markets.

However, ironically, the financial crisis affected particularly Latin America’s more open, integrated and diversified economies. The economies that are more dependent on the US market were less affected due to those countries’ "shared production" with US enterprises through maquila operations and to the growth of the US economy. In 1998 and mid 1999 some Central American and Caribbean economies registered high growth rates. In 1998, the Mexican economy grew by close to 5%, in spite of the fall in oil prices.

The United States is an important market for the region’s products, even though in varying degrees depending on the country. The USA receives more than 80% of Mexico’s exports, while only 10% of Argentina’s. Nevertheless, the leading role the US has played in the expansion of world trade and the unlikelihood that other industrialized countries may replace it in this role, in the medium term, are a cause of great concern since should a sudden decrease in its economic growth occur, it would have far reaching effects on Latin America’s and Asia’s economic recovery.

Table 1
Asia's Participation in Latin American and Caribbean Trade 1990-1997

1. IMF, 1999, World Economic Outlook, May, International Monetary Fund, Washington, D.C., Table 1.1., p.2.

2. ECLAC, 1999, Panorama de la Inserción de América Latina y el Caribe, 1998 Edition (LC/G.2038-P), Santiago, March. United Nations publication, sales No.: S.99.II.G.3, p.27.

3. United Nations, 1998, World Economic and Social Report (E/1998/50/ST/ESA/261), New York, United Nations publication, sales No.: S.98.II.C.1.

4. UNCTAD, 1998, Trade and Development Report, 1998, vol.1 (UNCTAD/TDR1998 (vol.1), Geneva, August 7, p.32.

5. IMF,1999, World Economic Outlook, May, International Monetary Fund, Washington, D.C.,p.27.

6. IMF,1999, table 2, p.140.

7. IMF,1999, tables 22-24, pp.167-170.

8. Krugman, 1995, Growing World Trade:Causes and Consequences, Brookings Papers on Economic Activity, no.1, p.334.

9. ECLAC,1998, Balance Preliminar de las Economias de America Latina y el Caribe,1998, (LC/G.2051-P), Santiago, December. United Nations publication, sales No.: S.98.II.G.15, p.2.

10. IMF, 1999, p.57.

11. Between 1992 and 1996 the oil consumption of the Republic of Korea, together with that of other Asian less developed countries (Philippines, Indonesia, Malaysia and Thailand) as a percentage of total world consumption increased from 5% to 6.5% (IMF,1999, Economic and Financial Reports. World Economic Outlook, Washington, D.C., p.125).

12. World Bank, 1998, Commodity Markets and the Developing Countries, World Bank Business Quarterly, Washington, D.C., August.

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