7 Seiji Nayu," a former Cliief Economist of ADB has made a quantitative estimate of the balance of payments effects of external shocks and the policy response of 12 Asian developing countries in making adjustment to these shocks. He estimated that the ten net oil importers had adverse effects averaging 17.5 percent of GNP between 1974 and 1982. The more open economies are more vulnerable to open shocks and thici the effet!r !z"2 ger in iiw **s*;en i'us** the more open countnes and smaller for larger or relatively closed economies. Indonesia and Malaysia had favorable effects.

The balance of payments effects can arise either due to terms of trade losses which reflect in part the large increases in oil prices and the export volume effects which reflect the impact of the various recessions. In this study, three-fourths to four-fifths of the effects was due to terms of trade losses.

Adjustments are usually analyzed in terms of expenditure reduction, expenditure switching or financing. Naya argues that adjustments to these external shocks can take place through four different mechanisms: (a) increase in export market share (b) import substitution (c) import savings via lower economic growth (d) net external borrowing. He uses this typology to analyze the outcome.

It was found that the newly industrialized ec.l-oiiies (NIEs) relied mainly on increased export market penetration and secondarily on import savings and import substitution. The Southeast Asian oil importers increased their export market shares but also relied on recourse to net external finance. The South Asian countries and the Philippines overwhelmingly opted for external borrowing while the South Asian countries took measures to reduce spending initially, but later expanded external borrowing.

The nature of thle policy responses has important implications for the problems of extemal debt, particularly in the Philippines. It may be useful to recount the experience of the Philippines here - one of the two severely indebted countries in Asia. 12 'The Philippine crisis resulted from both exttrnal and internal causes. External conditions created a difficult situation but inappropria:e government domestic and macroeconomic policies turned difficulty into crisis. After a decade of rapid growth, the Philippines faced problems of long-term structural adjustment and short-term stabilization. The long-tern problem was to shift the economy to a more open outward-looking stance. The old import substitution could no longer be paid for by taxing exports of primary products; the Philippines needed to promote exports of labor-intensive manufactured goods to achieve sustained economic development. This, in turn, required liberalization of foreign trade, including relaxation of trade restrictions and lessening of tariff rates and their dispersion. However, before structural changes could take place, the **external** environment 4Cuue wurbc. Tne government began relying more and more on capital market borrowings to cover the saving and foreign exchange gaps. Fiscal deficits mounted and the current account deficit rose in the late 1970s. Rather than cutting expenditures and thus sacrificing some growth in order to stabilize the economy, the government in the early 1980s gambled that export growth would pick up. Between 1980 and 1982, the budget deficit in the Philippines rose from 1.3% of GDP to 4.2%; the current account deficit rose from 5.8% to 8%. Expansionary fiscal policies were financed by extemal borrowing. The Philippine peso anpreciated in re-Al tprme _Qtvaint_ th currencies of major trading partners, lessening the competitiveness of exports and increasing the incentives to import. The government increased investment in poorly managed state enterprises. In the meantime, capital flight reachec alarming proportions; domestic savings was discouraged by low real interest rates and the overvalued peso.

11 S. Naya. 'Effects of Extemal Shocks on the Balance of Payments Policy responses and debt problens of Asian Developing Countries." (ADB Economics Office Repot No. 22, December 1983).

**12The** following account is reproduced from James et al (1987), Asian Development, (San Francisco, International Center for Econornic Growth).