impact of the asian crisis on trade flows: a focus on indonesia and agriculture rick barichello...

Impact of the Asian Crisis on Trade Flows: A Focus on Indonesia and

Agriculture

Rick BarichelloUniversity of British Columbia

March 4, 1999

Impact of Asian Crisis on Trade 2

Introduction• Asian crisis: large exchange rate adjustments• Indonesia: 80-85% decline in value of Rupiah

– traded goods prices rose by 3-4 times (Rp 2400-8800)

– abrupt depreciation: November 97 to February 98

– largely under conditions of prior macro balance

• Crisis involved other factors: recession in domestic economy and abroad in region, financial sector meltdown

• Objective: determine trade flow effects of this massive exchange rate change for Indonesian case– effects on aggregate trade and agricultural trade


Background Prior to Crisis across region

• Unusually high growth rates in 1980s, 1990s• high savings and investment rates• increasingly open trade and industrial policies• rapid expansion of labour-intensive manufactured

exports• balance between subsidy and tax in Agric sector• prudent macroeconomic policy: (non-inflationary

monetary policy, non-deficit fiscal policy, relatively appropriate exchange rates, opening up of capital markets)


Problem Areas• Some privileged sectors with high protection

– import restrictions, investment licensing, sector or firm-specific tax exemptions

• banking sector growth with – poor enforcement of prudential regulations

– weak financial supervision, capital base small

– pressures to lend to risky, dubious SOE ventures and privileged investors

– rapid increase in foreign debt by some banks

• banks with poor balance sheets, high leverage; vulnerable to currency depreciation, fall in growth


1997 Situation• Massive reversal of capital flows across 5 most

affected countries (Indonesia, Malaysia, Philippines, South Korea, and Thailand)

– 1996: $93.8 billion

– 1997: -$6.0 billion

– Decline of $99.8 billion, of which $17.6 B in equity investment, $82.1 B in private credit

– Partially offset by official capital flows of $33.5 billion

• Drop in incomes across all 5 countries, reducing export demand for all, hurting other countries throughout SE and East Asia. Cross country links!


Indonesian Differences• Extent of currency depreciation, loss of income

and export demand much greater• large build-up of foreign debt in non-bank private

sector (major debt restructuring problem still here)• rel. good prior macro policy: some overvaluation

of currency, no fiscal deficit, little inflation• high competitiveness in many sectors…low costs

and substantial know-how and labour skills• policy response to crisis was good, became mixed;

loss of credibility of govt commitment to reform


Expected effects of exchange rate change

• For traded goods: output price tripled, imported raw materials prices also up three-fold– on domestic value-added margin, profits increased to

increase production for export or competing w/ imports

• supply response with lag, important for tree crops with long gestation periods

• Exports: increase most where VA greatest (e.g., in farming), but with lags, longer than data period?

• Imports: with three-fold price rise, demand falling– quickest response on consumption side


Other factors additional to exchange rate

• Major contraction of financial sector in 1998– little trade finance available, any lending difficult to get

• debt restructuring for private firms with large foreign debt inhibiting production, export response

• Export demand down in region, particularly Japan• Reduced domestic demand due to -15% recession• Political and social unrest, raising direct costs and

reducing investor confidence, raising cost of capital to Indonesia (increased country risk)


Potential agricultural exports• Series of partial budgets done w/ Policy Analysis

Matrix approach on basis of 1994-98 field work• traded goods prices adjusted for currency

depreciation, other prices adjusted for inflation• commodities included: rice, corn, soybeans, sugar,

dairy, crude palm oil, cashew nuts

• ALL commodities became export competitive• no adjustment in land prices to reflect increased

competition for land from output expansion

• no allowance for time lags to determine logistics, introduction of new grading and quality standards


Aggregate Non-oil/gas Export Data

• Oil/gas removed to get clearer picture because they are largest single category and determined by long term contracts, OPEC constraints, etc.

• export pattern is erratic: since depreciation began, exports fell in Dec 97 to Feb 98 period, bounced up and down by ~20 percent to end of period

• no statistically significant upward trend• decline in each of last three month• no evidence of export boom after almost a year• some case studies of sectors with export booms


Aggregate Non-oil/gas Import Data

• Expectation that imports would decline more quickly than exports would rise

• evidence gives strong support to this expectation• Imports fell 40% from October 97 to February 98

– statistically significant trend, robust to time period

• data supports exchange rate sensitivity for imports– also would be predicted by domestic income decline

– also predicted by from banking sector collapse and from fall in investor confidence in export sector, reducing demand for imports


Agricultural Export Data• Not easy to detect effect of currency depreciation

on total agricultural exports, like aggregate exports• surprising; expectation that agriculture would show export

response due to few imported raw materials

• sharp drop in ag exports in November 97 to January 98 period, similar to aggregate export data

• gradual increase Jan/Feb 98 to Jul/Oct98 of 50%

• given chaos in exchange rate movements and financial markets in Dec97-Feb98 period, lagged response to expanding exports, 98 data consistent w/ export growth in response to depreciation


Agricultural Import Data

• Rice imports excluded to get clearer picture of imports; rice very large category that responds erratically to political circumstances more than economic situation

• from Aug 97 onward, agricultural imports clearly declining; statistically significant time trend explains 2/3 of variation in imports

• similar to aggregate import data: in both cases, imports appear to respond significantly and quite rapidly to exchange rate changes

• decline in ag imports more gradual and extended


Disaggregated Exports: Rubber, Palm Oil• Rubber:

– very large sub-component of agricultural exports

– steady export value decline, probably due to prices

– odd one-month doubling of exports

– pattern may not yet show supply response due to planting lags

• Palm Oil– also very large sub-component of ag exports

– strong pre-depreciation growth in exports

– major export decline in November 97-January 98

– erratic and moderate growth from January 98 to Oct 98


Fruit/Vegetable, “Other Ag Exports”• Fruit/Vegetables

– small category but large potential

– erratic export pattern; difficult to see trends

– increasing exports since July 98 but little basis for saying this is exchange rate-related

• Other Agricultural Products– large sub-category, like rubber in size

– does show exchange rate related pattern• exports rose in first half of 97, remained flat for next year, then

doubled from August to October 98

• delayed output expansion consistent with that of many farm products


Wheat Imports• By far Canada’s largest export commodity to Indonesia

• wheat imports to Indonesia quite erratic (irregular shipments?)

• statistically significant time trend, at 5% per month, explains 1/4 of variation in wheat imports

• more gradual and extended decline following depreciation, just like total agricultural imports and unlike more immediate and dramatic crash in imports in non-ag import data. Due to government loan guarantees instead of private financing?


Conclusions• Massive currency depreciation in Indonesia in

97/98, led to negative growth and financial sector collapse; so difficult to associate all trade data solely with depreciation

• Negative effect of depreciation on imports clear and dramatic, for aggregate and agricultural imports; more gradual decline for ag imports

• Currency depreciation effect on exports delayed, erratic and difficult to detect, particularly lagged– may be due to difficulties in getting inputs, economic

uncertainty, and supply response lags

impact of the asian crisis on trade flows: a focus on indonesia and agriculture rick barichello...

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