The Asian Crisis: a Perspective After Ten

YearsW. Max Corden

Presented by Trace Hayles

The Asian Crisis: Prelude

• 1997: Thailand, Indonesia, Malaysia, and Korea in the midst of an investment boom• Comprised of local savings and FDI• Result of favorable macroeconomic policies

• 3 Forms of capital inflow that fueled boom• FDI• Inflow of portfolio capital into local stock markets• Short term borrowing by local banks

The Bubble Bursts

• Catalyst: Eventual slowdown of export growth in Thailand (20% to 0% year over year)• 1997: Exchange Rate crisis for baht

• This triggered crises in the other three Asian Tigers (contagion)• Free movement of capital policies – not in place in China

and India

GDP Growth

Country 1988-95 1996 1997 1998 1999 2000

Indonesia 7.9 7.8 4.7 -13.1 0.8 4.9

Malaysia 9.4 10 7.3 -7.4 6.4 8.9

South Korea 8.1 7 4.7 -6.9 9.5 8.5

Thailand 10 5.9 -1.4 -10.5 4.4 4.8

Currency Crisis

• Outside of Malaysia, other three countries held large amounts of $-denominated short term debt• With no hedging, this led to sharp depreciation• Domestic banks exposed to both currency risk

and credit risk

Unique Crises

• Thailand: FBAR• Indonesia: Suharto• Korea: faster recovery from larger IMF infusions• Malaysia: Capital outflow restrictions

Policy Response

• Domestic Interest Rates• Bank Rescues• Keynesian Expansion

Conclusion

• Key factor: run-up in investment, “hard landing” after• Recession was not inevitable, but events in

Thailand accelerated region-wide crisis