Macroeconomic Policy in East Asia

Relatively Small Government Budget Deficits

Note: Budget deficit is average figure for period 1960-92. Regional figures are unweighted average of country figures. Figure for East Asia includes Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Taiwan/China, and Thailand.

Data and source

The need to finance a large government budget deficit threats macroeconomic stability. Excessive monetary financing of government budget deficits causes inflation. Heavy government borrowing domestically drives up domestic interest rates and crowds out private borrowing, thus hurting economic growth and magnifying the interest component of the budget deficit. Heavy external financing of government budget deficits makes the macroeconomy more vulnerable to external shocks.

The high-performance East Asian economies have kept budget deficits within the limits of macroeconomic stability. Actual budget deficits have varied considerably. Singapore consistently avoided fiscal deficits while Indonesia enacted a balanced budget law that generated budget surpluses in the early 1990's. On the other hand, Malaysia's fiscal deficit peaked at 18% of GDP in 1982 and Thailand's public deficit averaged 5.8% between 1980 and 1988. These relatively high budget deficits were consistent with macroeconomic stability for several reasons. The high growth rate in these economies produced a growing demand for money, which in turn permitted a higher rate of non-inflationary monetary financing. High savings rates also limited the effects of government borrowing on interest rates and private investment. In some cases, such as Thailand, low initial debt ratios provided considerable room for sound financing. Most importantly, these countries were able to adjust fiscal policy quickly and decisively in response to macroeconomic warning signs.

Economic Growth in East Asia