The Body Economic
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Before the East Asian crisis, the IMF had become widely known as an economic driving force of US policy in the region. It offered loans directly to governments to help them balance their books. Like all international banks, the IMF placed conditions on its loans. Toward the mid-1980s, during the age of Ronald Reagan and Margaret Thatcher, these conditions began to include strict targets for privatizing state-owned enterprises, liberalizing markets to remove regulations on prices and trade, and cutting government spending on health and education. The rationale for these policies was to boost the role of private industries in poor countries, increase the influence of market forces over government intervention, reduce de pen den cy on foreign aid, and prevent inflation. Many policymakers and investors in high-income countries argued that these policies were good for development. Because these theories came from policy advisers in Washington, DC, they were referred to as the Washington Consensus.10
During the East Asian Crisis, the IMF found itself in a quandary. The countries it was now being asked to help had followed economic advice the IMF had given them during the boom years. Indeed, that advice was commonly believed to have fueled the economic boom and to have precipitated the subsequent financial crisis. Now the IMF was forced to argue that the very same Asian countries needed to make a dramatic change in policy. As with its approach to Russia’s crisis in the 1990s, for Asia the IMF advocated the Shock Therapists’ one-size-fits-all prescription: trade short-term pain for long-term gain.11
The IMF’s prescriptions may have found a consensus in Washington, but they worried health experts in East Asia. Rather than allowing countries to imitate the New Deal, the IMF called for extensive budget cuts, particularly to the health sector. The cuts were premised on the idea that countries should maintain a budget surplus during a recession rather than engage in deficit spending. According to the theory, running a budget surplus would inspire confidence in investors, ultimately bringing about a faster economic recovery and staving off a human catastrophe. However, significant data had refuted the theory that this was necessary or wise. The theory was based more on repeated assertion than on actual practical success—as seen in Russia, the consequences were disastrous, for both the economy and public health.12
Not all East Asian countries decided to take the same paths in response to the crisis. Some followed the advice of the IMF to cut budgets, but others chose to invest in social protection programs to support their people. So the crisis provided a kind of natural experiment, something scientists seldom observe across entire countries. Such an experiment happened in the US in the Great Depression when some states adopted the New Deal and others did not to the same extent. It again happened with the fall of the Soviet Union, as similar populations took different policy paths toward privatization and the resulting austerity.
The natural experiment in East Asia began with a common economic shock. All countries faced serious threats to health—a combination of unemployment, rising food prices, and debts. In response, on November 21, 1997, the South Korean government made an official request to the Fund for an emergency rescue loan. Indonesia and Thailand signed up next. Yet Malaysia did not. Amid mass demonstrations, the Malaysian prime minister, Mahathir Mohamad, refused IMF “assistance,” since it had so many strings attached that many felt would be harmful to Malaysians. So Malaysia served as the “control group” in this experiment. It implemented a fiscal stimulus of 7 billion ringgit, including a boost to social safety net measures to mitigate the impact of the crisis.13
Those countries that cut social protection programs had greater rises in poverty. Gross domestic product in 1998 fell by a dramatic 30 percent in South Korea, 27 percent in Thailand, 56 percent in Indonesia, and 34 percent in Malaysia. But these economic shocks tipped more people into poverty in South Korea, which had weaker social protection systems and also had implemented the harshest austerity. In 1997–1998, poverty in South Korea doubled from 11 percent in 1997 to 23 percent in 1998. Indonesia and Thailand also experienced significant increases. Malaysia, by contrast, had avoided the harsh austerities of IMF-borrowing countries, and experienced a much smaller rise in poverty, from 7 percent to 8 percent.14
As austerity worsened poverty during the recession, people’s mental health suffered. In South Korea, the IMF soon became known as “I Am Fired.” Men’s suicide rates, which had decreased during the previous decade, suddenly increased by 45 percent. In Thailand, the suicide rates rose by over 60 percent, against a background rise in death rates from all causes.15
Without a strong safety net, rising poverty and escalating food prices led to mass hunger in Thailand and Indonesia. In 1998, there was a 20 percent rise among mothers in the rate of “wasting,” a state of malnutrition where muscle and fat tissue are lost. Mothers were sacrificing their food in order to feed their children. In Thailand, the number of pregnant women who were anemic, lacking sufficient iron, vitamin B12, and folate, rose by 22 percent in 1998. Imported powdered milk had tripled in price since the start of the crisis, and some poor families fed infants sweetened green tea instead of milk. There was a subsequent drop in infant weights, increased risk of infant mortality, and a rise in underweight primary school children during the crisis, given the low nutritional value of these substitute infant formulas.16
Under the circumstances, the countries desperately needed an emergency food delivery program. President Roosevelt had introduced such a program in the United States in 1939, and it had helped 20 million people. It provided income and food support and an agriculture program to ensure a steady domestic supply of food during the Dust Bowl drought in America. Yet the IMF enacted the opposite strategy—cutting food subsidies during East Asia’s drought in 1998. It further advised opening up the countries even further to private trading markets. Such a move perversely left the currencies of Thailand and Indonesia more exposed to currency speculators, who quickly seized the opportunity to move their investment money out of the economy.
The currencies of Thailand and Indonesia continued to collapse, plunging people deeper into poverty and hunger. In January 1998, a few months before the May 1998 riots, protesters gathered in Jakarta’s central market. Dozens of women, enraged by the escalating price of food, shouted at Jakarta’s Governor Sutiyoso, a former military general. “The price of rice has soared to 4,000 rupiah per kilogram,” one woman said. “I cannot possibly afford to buy more than two kilograms. I don’t have that much money.” Another woman asked, “Where’s the sugar and flour, sir? There is not even any milk for our children.” The governor, who had been trying to keep public spending low to meet the IMF targets, capitulated to the women and ordered his troops to provide milk.17
Meanwhile, the IMF, in an effort to curb budget deficits, responded to the crisis by further taxing kerosene by 25 percent for Indonesians. Kerosene is the main fuel the poor use for cooking their food. The IMF’s chief economist, Stanley Fischer, tried to show regard for the working class by noting that the price of rice was kept unchanged. But given the increased price of fuel, the stable yet still high price of rice was little consolation—people were unable to cook raw rice without fuel.18
Malaysia took a dramatically different approach, and reined in rising food prices. In 1997 Prime Minister Mahathir claimed that the source of the currency crisis was “currency trading,” which he called “unnecessary, unproductive and immoral.” It should be stopped and made illegal, he said. Malaysia introduced controls on market speculation and fixed its exchange rate to the dollar. As a result, speculative investors had difficulty betting on the rises and falls of Malaysia’s currency. In addition, Malaysia expanded its food support programs for impoverished citizens. Unlike Indonesia and Thailand, Malaysia experienced no significant rise in malnutrition among mothers.19
In short, the East Asian Financial Crisis was a natural experiment that put to the test multiple theories about how to respond to a recession. The recession itself put millions of people at risk of poverty; but it was the policy decision to cut food and un
employment support that turned the crisis into a public health disaster. The alternative to austerity could be seen in Malaysia, where, under political pressure, politicians chose to control the money flowing out of the economy and increase investments in social protection programs. Those choices helped prevent Malaysians from suffering the fate of Thailand, Indonesia, and South Korea whose politicians chose to swallow the bitter pill of austerity.
Across East Asia, the collapsing currencies caused massive increases in the costs of importing painkillers, insulin, and other essential medicines. As drug prices increased, the cost of medical treatment at public healthcare centers in Indonesia shot up by 67 percent.20
As healthcare prices rose, people needed help from their governments to be able to afford care. But instead of increasing health spending, those countries borrowing from the IMF implemented steep budget cuts. On IMF advice, the Thai government in 1998 cut health expenditures by 15 percent. In Indonesia, total public-sector health spending fell by 9 percent in 1997 and another 13 percent in 1998. All in all, Indonesia saw a 20 percent reduction in per-person spending, and a 25 percent cut in government funding for primary healthcare services between 1996 and 2000.21
These spending cuts caused people to lose access to care. Women and children increasingly stopped attending clinics and hospitals as the cost of care became unaffordable. Healthcare use by Indonesian children aged ten to nineteen years dropped by a third. In several communities, the supply of medicines also evaporated as funds to government clinics were cut. About half of the health clinics in one large neighborhood of Jakarta closed because of rising prices. Throughout Indonesia, government health facilities experienced shortages of antibiotics, iron supplements, and contraceptive pills as government budgets were slashed. The 1998 Indonesia Family Life Survey found that 25 percent of public hospitals and clinics exhausted their stocks of penicillin, and that 40 percent of clinics ran out of the critical antibiotic ampicillin.22
Austerity also reversed progress in the fight against HIV by cutting some extremely effective public health programs. Before the crisis, in the early 1990s, Thailand had been the epicenter of Asia’s HIV epidemic. It reported some 100,000 new cases of HIV in 1990; three years later, the figure had jumped to over a million cases. Dr. Wiwat Rojanapithayakorn, head of the World Health Organization’s East Asian headquarters, watched aghast as the virus spread from Thailand’s cities to the countryside and back again. His investigations helped reveal that 97 percent of all cases were linked to transmission from sex workers, a third of whom were HIV positive in 1994. Yet his was an optimistic finding. It meant that a solution could be worked out. A key way to prevent new cases was to direct interventions at specific sites, by entering brothels and encouraging sex workers and their clients to use condoms.23
Such a campaign was beyond Dr. Rojanapithayakorn’s area of expertise. So he teamed up with a social activist, Meechai Viravaidya—who became known as Mr. Condom—to promote a “no condom, no sex” message. The duo traveled throughout the country, distributing free condoms to massage parlors and brothels, insisting that sex workers and their clients use them. If they refused, the operations would be closed down by police.24
The results were stunning. In less than two months, the “100% condom use” program cut new HIV infections from 13 percent among sex workers in Ratchaburi province to less than 1 percent.25
Armed with this evidence, Rojanapithayakorn approached the Thai government for help. It agreed to broadcast HIV prevention messages every hour on the country’s radio stations and television networks. Of course, all this required funding, and the annual HIV prevention budget increased from $2 million in 1992 to $88 million in 1996. Within three years, condom use among sex workers rose from 25 percent to more than 90 percent.26
But then the Asian financial crisis struck. To meet IMF austerity-driven budget targets, the Thai government made sweeping cuts to funding for condom distribution and related public health measures. Overall, the nation’s health promotion budget was slashed by 54 percent. Authorities tried to protect the budget for HIV treatment and prevention, but in 1998 it too was cut by 33 percent at the behest of the IMF. By the year 2000, domestic funding for HIV prevention was less than a quarter of what it had been before the crisis.27
When we looked at the Thai health system’s data, we found that condom distribution to brothels dropped from upwards of 60 million condoms in 1996 to 14.2 million in 1998. As a result, Thailand’s HIV prevention program began to falter. The rate of AIDS patients reported in Thailand increased from 40.9 per 100,000 in 1997 to 43.6 per 100,000 population in 1998. The pharmaceutical budget for preventing mother-to-child transmission could only meet 14 percent of the estimated total need after the cuts. The number of orphans with HIV rose from 15,400 in 1997 to 23,400 in 2001. Half of those infected children who received no medical treatment died by the age of five.29
FIGURE 3.1 Thailand’s Large Increase in Death Rates from Infectious Diseases28
Thailand’s progress in preventing infectious diseases such as HIV was all but erased, as shown in Figure 3.1. Between the 1950s and 1996, infectious disease deaths had been falling at a rate of 3.2 deaths per 100,000 population per year. This progress began to reverse in 1998, when infectious disease death rates started to rise at a rate of 7.6 deaths per 100,000 population each year. The main cause of the rise in deaths was untreated HIV, and its complications, pneumonia and tuberculosis.30
To fill the gaping holes in Thailand’s public health system left by austerity, medical volunteers like Sanjay had stepped in to help support Thailand’s HIV prevention and treatment programs. They were able to save some lives. But for others—like Kanya, the sixteen-year-old girl from Kanchanaburi—they were too late.
In contrast to Thailand, Malaysia chose to ignore IMF advice to cut budgets, and instead increased real healthcare spending by about 8 percent in 1998 and 1999. The boost to healthcare funding translated into a rise in patients who were treated in the public health system by about 18 percent. The increased HIV control budget enabled Malaysia to introduce a mother-to-child transmission prevention program, modeled on Thailand’s. In other words, just as Thailand’s flagship public health programs were being wiped out, Malaysia put identical ones into place. And during the crisis, there was no significant rise in HIV in Malaysia even as control of the disease began to falter in Indonesia and Thailand.31
Meanwhile, the IMF’s partner organization, the World Bank—which oversees social well-being and poverty relief—evaded questions from reporters and researchers about how health had been affected by the crisis and the IMF’s programs in the region. In South Korea, the Fund became known as the “Infant Mortality Fund,” because the infant mortality rate rose in association with the Fund’s austerity program. When asked, “Has health worsened in Indonesia?” Bank officials replied that it was “difficult to get a complete and consistent picture of the health impact of the crisis and the effectiveness of policy responses. Some standard barometers suggest catastrophic results were averted. For example, infant mortality rates seemed to have continued a ‘downward trend’.” Yet an analysis published in the prestigious British medical journal The Lancet by independent health researchers found that the Bank’s reports were “inaccurate” and “groundless.” The Bank, usually meticulous in citing data sources, failed to cite any for its assertion that infant mortality decreased. In reality, the Indonesian Central Statistics Bureau reported in the United Nations Human Development Report that infant mortality had increased, rising in twenty-two of its twenty-six provinces of Indonesia by an average of 14 percent.32
Despite these results, not all IMF programs were disastrous. A few IMF measures helped prevent disease, mostly by reducing alcohol use. In 1998, to meet the IMF demand for budget surpluses, Thailand’s government was forced to increase sales taxes on alcohol. According to the National Tax Administration data on alcoholic beverages, the reforms worked: consumption of alcoholic beverages fell by 14 percent over two years.
In the years following the crisis, an economic divide emerged between IMF borrowing-and non-borrowing countries. Malaysia, having rejected the IMF’s directives in pursuing its own path of state intervention, avoided mass misery and suffering, and accelerated its economic recovery. Malaysia was, in fact, the first country in the region to experience economic recovery. Although average incomes declined in 1998, Malaysia’s recovery began the following year. Food prices had risen 8.9 percent in 1998, but two years later back to a mere 1.9 percent above their pre-crisis levels. South Korea was an intermediate case; as a bigger economy than Malaysia’s, with greater government spending prior to the crisis, it had more “policy space” in which to maneuver and could better negotiate with the IMF to avoid the most painful budget cuts. It was the second nation to recover after Malaysia.33
In 2000 Joseph Stiglitz summed up the role of the IMF in the East Asian Financial Crisis: “All the IMF did was make East Asia’s recessions deeper, longer, and harder. Indeed, Thailand, which followed the IMF’s prescriptions the most closely, has performed worse than Malaysia and South Korea, which followed more independent courses.”34
Ironically, of the four countries examined here, only Malaysia was able to meet the IMF’s ultimate economic targets even though it didn’t participate in the IMF program. Malaysia ended up with a budget surplus in 1997, even though it was the only country that avoided cutting social protection spending.35