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East Asian Crisis
The document summarizes the East Asian financial crisis of 1997-1998. It provides background on the economic growth and policies of East Asian countries prior to the crisis. It then discusses some of the key factors that contributed to the crisis, including faulty macroeconomic policies, excessive foreign borrowing and risk-taking, and poor lending practices. The crisis began in Thailand and then spread to other countries through financial contagion and loss of investor confidence. The IMF intervened to stabilize currencies and reform banking systems.
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East Asian Crisis
- 1. EAST ASIAN CRISISKartik Kataria Twitter.com/kartik_k
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- 5. East Asian CountriesSouth Korea Indonesia Philippines Thailand Hong Kong Singapore Malaysia Taiwan
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- 7. Was there amiracle? Per capita incomes in East Asia vs. Rest of World Human Development Indicators Post World War II growth of 6%
- 8. Initial Conditions HumanCapital, Infrastructure and natural resources East Asia vs. Sub Saharan Africa
- 9. The Dragonsā ModelDrift from Anglo-Saxon Capitalism Golden Age of Capitalism Basic capitalist framework with major implementation differences
- 10. Philosophy Export drivenmodel Focus on highly industrialized nations Discouraging consumption Education as a means of improving productivity
- 11. Favoring Factors Cheaplabor Educational reforms Policies of agriculture subsidies and tariffs
- 12. Growth of Outputper Person
- 13. Driving Forces Labor Capital Technology Policy & Institutions
- 14. Policy and InstitutionsLow Govt. Consumption as compared to Sub-Saharan Africa and South Asian countries Openness to World Economy Low average inflation rate
- 15. Investment Policy StabilityCapital Inflow and Outflow control Luxury consumption control Strategic Investment
- 16. Trade Policy Infantindustry plus export promotion Automobile and infrastructure industries Infant industries exported more while being protected in order to be able to reinvest earnings into newer technology
- 17. Industrial Policy Selectivepolicies Infant industries- discipline, scale, economy and exports Competition ā Oligopoly or Monopoly
- 18. Common Characteristics Focuson exports Trade surplus with industrialized countries Sustained rate of double digit growth Undervalued currencies High savings rate
- 19. Science & EducationIndicators
- 20. Was there acrisis? Over $100 billion was pulled out of the region in both 1997 and 1998, about 5 percent of the regionās GDP each year Unemployment nos. rose in Indonesia by 800,000, in Thailand by 1.5 million and in Korea by around 1.35 million Real wages dropped 12.5% in Korea and by 6% in Thailand
- 21. Why did thecookie crumble? Faulty macro-economic policies Demise of industrial policy: Govt. used to intervene and control inflow End to policy of govt. co-ordinated investment allowed duplicative investments in key industries leading to excessive foreign borrowing between 1993 and 1997 These countries did not need the money coming in! Excessive risk in govt. favoured industries Crony capitalism Deposit insurance : Too big to fail myth
- 22. Why did theCookie crumble? Poor lending and borrowing policies Oversupply of international finance Cheap credit Speculative ventures without effective demand fuelled by inadequacies of domestic financial markets and corruption in allocation of finance Key problems confronting East Asian economies: Stagnation of industries-formerly engines of growth Declining exports Reduced rate of growth Increasing current account and public finance sector deficits Financial instability
- 23. Categorization of CrisisMacroeconomic Policy Induced ā Balance of Payment crisis Financial Panic ā Sudden withdraw from Solvent Borrower by short term creditors Bubble Collapse ā Overvaluation of financial asset Disorderly Workout ā Impediments to efficient provision of Working Capital
- 24. Why didnāt theAlarm bells ring initially The countries maintained good budgetary positions
- 25. Healthy Forex Reserves- Thailand reached $38.6 billions in 1996 = 7 months of exports Interest rates were unusually low in Rest of the World Goldman Sachs prediction on export growth Why didnāt the Alarm bells ring initially
- 26. How did itBegin and Spread Jan 97- Hanbo Steel collapsed under $6 billion debts Sammi steel and Kia Motors have a similar fate Put Merchant Banks under Great Financial stress Thai Govt removes support from Finance One Accelerates withdrawal of foreign funds Prompts Thai baht depreciation on July 2 ,1997
- 27. Corporate Failure atKorea Bank Failure at Thailand Political Uncertainty at Korea ,Thailand, Philippines Policy Mismanagement at Thailand & Korea ā To defend their pegged exchange rates exhaust their Forex reserves Contagion Effect hit Malaysia , Philippines , Indonesia International intervention ā IMF & Moody The Chain of events
- 28. Events from Microeconomicpoint of view Exchange Rates depreciates Foreign lenders concerned with the repayment of loans, withdraw funds Domestic interest rates soar up Lack of bankruptcy laws and rising Non Performing Loans added to the stress of the banks Banks become illiquid and decapitalized The Fall of Korean Stock Exchange
- 29. IMF Intervenes withthe Goal of.. Prevent outright default on foreign obligation Limit the currency depreciation Limit inflation Rebuild foreign exchange reserves Reform the Banking Sector
- 30. Ends up with..Bank Closure 58 out of 91 Banks of Thailand 14 out of 30 Merchant Banks of Korea 16 Commercial Banks of Indonesia Remaining Banks given an unreasonable time frame to Recapitalize Monetary Policy ā led to harsh economic conditions Central Banks are instructed not to provide domestic credits Insistence of further rise in already high interest rates
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- 32. Why India wonātgo the East Asian Crisis way Full capital convertibility is not allowed Lock in period for Foreign Investment in real estate Floating exchange rate with some influence by the RBI during periods of crisis Strong fundamental growth with services sector being the prime reason External Debt to GDP has been declining for the past few years
- 33. Capital Account Convertibilityin India Introduced current account convertibility in 1994 Just months before the crisis, India were planning to go for full capital account convertibility It was based on the proposition that it would help improve global allocation of financial resources In the aftermath of the Asian and other developing country crises, however, there has been some rethink and recognition that financial deregulation canāt run ahead of prudence (Stiglitz, 2002)
- 34. Capital Account ConvertibilityInstead of complete lifting of controls, the way forward was to adopt differential treatment based on levels of development and the adoption of a more orderly and sequenced approach to liberalization in accordance with the levels of developments in financial markets and supervisory system of member countries India introduced full capital account convertibility first for NRIs in early 2002 but there are still doubts being raised over it
- 35. Indiaās External Debtto GDP has been declining
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