ASIAN FINANCIALASIAN FINANCIALASIAN FINANCIALASIAN FINANCIALCRISIS CRISIS 19971997..

Prof. Kami RwegasiraProf. Kami RwegasiraMSMMSM

1.1. Nature of Asian economic Nature of Asian economic i li l ((19701970 19901990 ))miraclemiracle ((19701970s s ––19901990s)s)

--Accelerated socioAccelerated socio--economic economic transformation and transformation and transformation and transformation and development in shortest time development in shortest time so far recorded in economic so far recorded in economic so far recorded in economic so far recorded in economic historyhistory

19197755 19971997--Less than $Less than $11/day/day 66//1010 22//1010

--In Singapore, Korea, Thailand, In Singapore, Korea, Thailand, Malaysia absolute poverty outMalaysia absolute poverty outMalaysia absolute poverty outMalaysia absolute poverty out--Impact on poverty , health and Impact on poverty , health and

d tid tieducationeducation--Growth rate : average Growth rate : average 77..88% p.a.% p.a.gg

19197755 19971997M t f th th A i i M t f th th A i i --Most of the these Asian economic Most of the these Asian economic

“tigers” followed similar policies i.e“tigers” followed similar policies i.ei E ti E t i t d i th i t d i th i.Exporti.Export--oriented economic growth, oriented economic growth, withwithii Fi d/ d f t ( t US $)ii Fi d/ d f t ( t US $)ii. Fixed/pegged forex rate ( to US $)ii. Fixed/pegged forex rate ( to US $)iii. Growth fuelled by huge inflows of iii. Growth fuelled by huge inflows of f d i t d dit f d i t d dit forex denominated credit money : forex denominated credit money : domestic banks borrowing forex from domestic banks borrowing forex from overseas for onoverseas for on--lending to domestic lending to domestic overseas for onoverseas for on--lending to domestic lending to domestic firmsfirms

19197755 19971997A l th t A l th t --As long as growth prospects As long as growth prospects

remained high , international remained high , international investors confidence in the region investors confidence in the region investors confidence in the region investors confidence in the region surged and forex continued to flow surged and forex continued to flow abundantly into these economiesabundantly into these economiesabundantly into these economiesabundantly into these economies

--Some investors had their credit Some investors had their credit --Some investors had their credit Some investors had their credit money in several Asian economies at money in several Asian economies at the same timethe same timethe same timethe same time

22.Nature of economic crisis.Nature of economic crisis

--Sudden investors’ confidence Sudden investors’ confidence ithd l l di t ithd l l di t withdrawal … leading to withdrawal … leading to

collapse of local currenciescollapse of local currencies$ V l$ V l$ Values$ Values

19971997--midmid 19971997--end end now?now?Indon (Rp)Indon (Rp) 2000 102000 10,,000000Thai (Baht) Thai (Baht) 25 5025 50S/Kor (wong) S/Kor (wong) 820 2000820 2000

22.Nature of economic crisis.Nature of economic crisis

--abrupt international investorsabrupt international investors´́fid ll l d t fid ll l d t confidence collapse led to confidence collapse led to

subsequent capital flow reversal subsequent capital flow reversal from Asia sharp depreciation of from Asia sharp depreciation of from Asia , sharp depreciation of from Asia , sharp depreciation of LCs, high inflation and interest rates LCs, high inflation and interest rates as well as bank debt defaults , as well as bank debt defaults , as well as bank debt defaults , as well as bank debt defaults , banking/financial crisis, economic banking/financial crisis, economic unemployment and political turmoil.unemployment and political turmoil.p y pp y p

22.Nature of economic crisis.Nature of economic crisis

CountryCountry ∆∆ In forex ratesIn forex ratesJune June 19971997--9898

Anualized Anualized interest ratesinterest rates

Th il dTh il d 3838%%June June 97 97 June June 989811% 24%ThailandThailand

MalaysiaMalaysiaSingaporeSingaporeIndonesiaIndonesia

--3838%%--3737--1515--8484

11% 24%7 113 716 47IndonesiaIndonesia

PhilippinesPhilippinesTaiwanTaiwanS. KoreaS. Korea

8484--3737--2020--4141

16 4711 145 714 17

ChinaChinaHong KongHong Kong

OO??

8 86 10

.Differences with other LDC crises.Differences with other LDC crises

AsiaAsia Other LDCsOther LDCs.Govt budget .Govt budget SurplusSurplus DeficitDeficit.Inflation.Inflation LowLow HighHigh.Source.Source PrivatePrivate Public sectorPublic sector

sector sector decisionsdecisionsdecisionsdecisions

Countries hit: Thailand( midCountries hit: Thailand( mid--19971997) S) S--.Countries hit: Thailand( mid.Countries hit: Thailand( mid--19971997) , S) , S--Korea , Indonesia ( by end Korea , Indonesia ( by end 19971997) etc) etc

33.Causes of Asian crisis.Causes of Asian crisis

33..1 1 Which factors contributed to Which factors contributed to l bilit t ithd l f l bilit t ithd l f vulnerability to withdrawal of vulnerability to withdrawal of

confidence?confidence?Mi ll ti f b d Mi ll ti f b d f f .Misallocation of borrowed .Misallocation of borrowed forex forex

denominated denominated investment fundsinvestment fundsi t t d i t t d --overover--investment and investment and

oversupply in property sectoroversupply in property sectori tt ti t titi i tt ti t titi --inattention to competition inattention to competition

from China Vietnamfrom China Vietnam

-- ‘ white elephant’ ‘ white elephant’ unprofitable projects: cars unprofitable projects: cars unprofitable projects: cars , unprofitable projects: cars , airplanesairplanesdiversion to domestic diversion to domestic --diversion to domestic diversion to domestic

stock marketsstock marketsMaturity/currency mismatch of assets Maturity/currency mismatch of assets .Maturity/currency mismatch of assets .Maturity/currency mismatch of assets and liabilities leading to unand liabilities leading to un--hedged Shedged S--T debtT debtT debtT debt

.S.S--Korea : high debt/equity ratios Korea : high debt/equity ratios ( chaebols)( chaebols)( chaebols)( chaebols)

33..2 2 Other factors contributing to Other factors contributing to size/character of external financingsize/character of external financingsize/character of external financingsize/character of external financing

.Insufficient financial .Insufficient financial regulation regulation + Government guarantees + Government guarantees + Government guarantees + Government guarantees leading to oleading to overver--guaranteed guaranteed + + underunder-- regulated banksregulated banksunderunder regulated banksregulated banks.Misguided forex rate/ monetary .Misguided forex rate/ monetary policies : inflexible $policies : inflexible $--based based policies : inflexible $policies : inflexible $ based based pegged forex rates : OK in pegged forex rates : OK in 19801980s, s, but not after midbut not after mid--19901990s with $ s with $ appreciation + LC undervaluationappreciation + LC undervaluation

.Political inattention : Thai ( .Political inattention : Thai ( 5 5 govts) Indonesia ( Suharto) govts) Indonesia ( Suharto) govts), Indonesia ( Suharto), govts), Indonesia ( Suharto), Malaysia ?Malaysia ?

33..3 3 OutcomeOutcomeS dd fid ll S dd fid ll Sudden confidence collapse Sudden confidence collapse capital funds withdrawal capital funds withdrawal d i ti LC f lli d ti d i ti LC f lli d ti depreciating LCs falling domestic depreciating LCs falling domestic LCLC--denominated asset values denominated asset values f lli j t/b i fit bilit f lli j t/b i fit bilit falling project/business profitability falling project/business profitability rising inflation + interest rates rising inflation + interest rates

bank losses problems bank losses problems b k dit t WCb k dit t WC h t h t bank credit cut WCbank credit cut WC--shortages shortages falling production falling production

l t b k t il t b k t iunemployment bankruptciesunemployment bankruptciesfading economic miracle ?fading economic miracle ?

44. Attempted solutions . Attempted solutions 44..1 1 Debt restructuringDebt restructuring44..2 2 IMF medicine? IMF medicine? (incl.devaluation, closing banks, (incl.devaluation, closing banks, liberalization etc.) austerity liberalization etc.) austerity

leading to falling production, leading to falling production, unemployment etc ( Stiglitz: why not unemployment etc ( Stiglitz: why not unemployment etc. ( Stiglitz: why not unemployment etc. ( Stiglitz: why not rere--capitalization, recapitalization, re--organization ? $ organization ? $ 4343b for Indon. ;$b for Indon. ;$5757b for Sb for S--Korea . Korea . 4343b for Indon. ;$b for Indon. ;$5757b for Sb for S Korea . Korea . Flexible forex rates ? Currency Flexible forex rates ? Currency board? Political reforms?board? Political reforms?44..2 2 Ingredients of any solution Ingredients of any solution needed needed ––effective regulatory system effective regulatory system g y yg y y

for financial markets and for financial markets and banksbanks-- improved corporate improved corporate

governance ( transparency, governance ( transparency, corruption? )corruption? )corruption? )corruption? )--Better IMF interventionBetter IMF interventionST it l t ST it l t --ST capital movements ST capital movements

controlcontrol

55.LESSONS.LESSONS.Transparency of economic systems .Transparency of economic systems

not a panacea …similar past crises in not a panacea …similar past crises in N i t iN i t iNorwegian countriesNorwegian countries

. Dangers of globalization. Dangers of globalization

-- ST rapid capital movementsST rapid capital movementsWTO l ‘f ’ b t f i ?WTO l ‘f ’ b t f i ?--WTO rules: ‘free’ but fair ?WTO rules: ‘free’ but fair ?

--DCs force LDCs to open up DCs force LDCs to open up k t t f t t k t t f t t markets too fast too soonmarkets too fast too soon

--DCs close their markets DCs close their markets ( t t l b ( t t l b i t l i t l (pretext: labour or (pretext: labour or environmental environmental stds? )stds? )LDC l k f i f d LDC l k f i f d --LDCs lack of info. and LDCs lack of info. and

technology technology to take advantage to take advantage of WTOof WTOof WTOof WTO

.Liberalization ( needs regulatory .Liberalization ( needs regulatory framework) framework) competition lawcompetition lawframework) framework) –– competition lawcompetition law

--company lawcompany lawfi i l k t lfi i l k t l--financial markets lawfinancial markets law

--appropriate sequencingappropriate sequencing ? ? : budget…: budget…labour..goods..labour..goods.. BoP (curr ac) .... BoP (curr ac) .... fi /b kfi /b k fi llfi ll B P it l B P it l ??fin/banks….fin/banks…. finallyfinally BoP capital acc BoP capital acc ??.Prudent macro.Prudent macro--economic policies economic policies and political stabilityand political stabilityand political stabilityand political stability( Singapore vs others )( Singapore vs others )

.Social security system.Social security system

66.Are the Asia business and economic .Are the Asia business and economic d l t d l t d l till l t?d l till l t?development development models still relevant?models still relevant?

66..11.National level.National level.Governance ( Singapore ).Governance ( Singapore ).High savings.High savings.Prudent macro.Prudent macro--economic economic managementmanagement.Commitment to education.Commitment to education

.National competitiveness.National competitivenessI f t tI f t t.Infrastructure.Infrastructure

.Population growth management.Population growth management

66..2 2 Sectoral levelSectoral level.Industrial life cycle .Industrial life cycle managementmanagement.Competition rules.Competition rules

66..3 3 Enterprise levelEnterprise levelpp.Entrepreneurship.Entrepreneurship

St t i lliSt t i lli.Strategic alliances.Strategic alliances

.Technology commitment.Technology commitment

.managerial education and .managerial education and technical trainingtechnical training

. Competitiveness .. X. Competitiveness .. X--ppaggressiveness aggressiveness and global and global positioningpositioning

E N D E N D