Growth and Investment in East Asia Before and After the Financial Crisis

Robert J. Barro ; Jong-Wha Lee

Professor, Department of Economics Littauer 218, Harward University, USA, Tel: +1-617-495-3203 rbarro@harvard.edu
Professor, Department of Politics and Ecomomics, Korea University, Seoul, Korea, Tel: +82-2-3290-2216 jongwha@korea.ac.kr

JEL Classification: O4, O1, F4

Abstract

In 1997-8, five East Asian countries-Indonesia, Malaysia, South Korea, the Philippines, and Thailand-experienced sharp currency and banking crises. The contraction of real GDP was severe in relation to the previous history and in comparison with five East Asian countries that were less affected by the financial crisis. Recoveries in the five countries were strong in some cases, but it is unclear whether the pre-crisis growth rates will be reattained. Indications for permanently depressed prospects come from the sharp reductions in investment ratios, which have recovered only slightly, and the lowered stock- market prices. A panel analysis for a broad group of economies shows that a combined currency and banking crisis typically reduces economic growth over a five-year period by 2% per year. The East Asian experience over the 1997-8 crisis is in general consistent with this stylized pattern. The broader analysis found no evidence that financial crises had effects on growth that persisted beyond a five-year period.

Keywords:

East Asia, Financial crisis, Growth, Panel regression

Acknowledgments

We are grateful to John Fernald, Keunkwan Ryu, and participants at the Eleventh Seoul Journal of Economics International Symposium for helpful comments.

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