The East Asia Currency CrisisThe Malaysia’s Case

Presented by:

Pedro A. & Samen Son

AgendaA quick look at Malaysia's historyMalaysia's path before the crisisMalaysia's Economic Situation before the

CrisisMalaysia's Economic DeclineCauses to the Malaysia's Economic DeclineThe CrisisThe IMF InterventionMalaysia's Policy TakenConclusionQuestions & Comments (please leave them to the end)

A quick look at Malaysia’s history• 1957 independence (from Great Britain).

Malaysia’s path

•1955 The Import substitution industrialization (ISI) strategy

•1970 New Economic Plan (geographic integration/land reform)

▫ Poverty rate 49 % in 1970; 17% in 1990

•1971-1975 Second Malaysia Plan (export-oriented industrialization; FDI)

▫ Electronics/technical textile/apparel

•1981-1985 Fourth Malaysia Plan (public sector investment/Heavy Industries Corporation of Malaysia)

•1990 New Development Plan

Economic situation prior to the crisis•4 decades after Malaysia’ independence

▫Industrial oriented economy▫Manufactured exports more than 80% of

exports▫Foreign direct investment (Japanese firms)▫Malaysia’s performance caused by external

factors

Economic situation prior to the crisis Con’t

Economic Decline•A decline in export growth (caused by the East Asia

Crisis)

•High concentration on certain manufactured goods (as shown on next slide; risky in cyclical turndowns)

Economic Decline (con’t)

• High degree of ownership as FDI in Malaysia

• Industrial activity in final stage (relative t0 design, development, etc)

Economic Decline (con’t)

•Human resource (relatively small investment)

Causes to the economic decline•The sharp appreciation of the dollar•June 1995 – April 1997 from 85 yen/dollar

to 127 yen per dollar.•East Asian currencies were pegged to the

dollar•Malaysia’s competitiveness slowed

Causes to the economic decline•Other argue from another perspective

▫Devaluation of the Yuan against the US dollar (in 1994)

▫Tax rebates on exports▫Therefore, China was the first domino to fall

•Other arguments▫Slow down of demand for electronics

(1995-96)

The crisis

•“Asset price bubble and over inflated market”

•Investors predicted “untenable exchange rate and asset markets.”

•Capital disinvestment▫Currency devaluation▫Financial crisis!

High unemployment Deep recession

The IMF intervention (The Washington Consensus)

•1980’s & 1990’s Open capital markets•Exchange rate stability•Higher interest rate to attract investors

▫Bankers & investors poured money in real estate and equity shares

•Privatization

Malaysia’s policy taken

•Banking and Financial Institutions Acts of 1989▫Restrictions on foreign borrowing

•Malaysia’s external liabilities did not exceed its foreign exchange reserves

•Malaysia did not submit to IMF conditionalities

•The government played an important role in foreign borrowing

Conclusion

•Developing countries should monitor their economic policies independently from external organizations such as the IMF

•The government should play important roles when it’s necessary like the case of Malaysia’s government during its crisis

Questions?

•Comments

Thanks for keeping your questions and comments until here