East Asia

East Asia

Who Are The Asian Tigers? In the mid-1990s we spoke of the “Asian Tigers” with awe. Heavy savings and investment, rapid development.

Before 1997… The

East Asian Economic Miracle

Until 1997 the countries of East Asia were having very high growth rates. The ingredients for the success of the East Asian Miracle High

saving and investment rates Strong emphasis on education Stable macroeconomic environment Free from high inflation or major economic slumps High share of trade in GDP

Financial Crisis Financial Crisis – Banking crisis, exchange rate crisis, or a combination of the two Banking

crisis – banking system’s becoming unable to perform its normal lending functions Exchange

rate crisis – sudden and unexpected collapse in the value of a nation’s currency

Financial Crisis Continues… Banking

crisis – banks fail as result of bad lending policies, and bank lending dries up Exchange

rate crisis – banks often have borrowed dollars abroad, converted to local currency to invest – then when local currency collapses, can’t pay back dollar loans – banks fail and bank lending dries up -- also, foreign investment dries up

Two Causes of Financial Crises 

Crises caused by macroeconomic imbalances, such as large budget deficits caused by overly expansionary fiscal policies 

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Example: Argentina financial crisis in 2001

Crises caused by volatile capital flows Example: the East Asian financial crisis of 1997–1998

Asian Crisis, 1997-98 

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Five countries: South Korea, Thailand, Malaysia, the Philippines, Indonesia Indonesia is world’s fifth largest country by population (200 million people back then) South Korea is now considered an “industrialized” country

Asian Crisis, 1997-98 

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1967-97, these five countries averaged real GDP growth of 6-10 percent per year They were called “the Asian tigers” Their performance was called “the Asian miracle” 1997-98, they went from “Asian miracle” to “Asian meltdown”

East Asian Financial Crisis 

The Asian Financial Crisis

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It stared on July 2, 1997 with the devaluation of the Thai baht. 

The sharp drop in the Thai currency was followed by speculation against the currencies of: Malaysia, Indonesia, and South Korea.All of the afflicted countries except Malaysia turned to the IMF for assistance.

Asian Crisis, 1997-98 

From July 1, 1997 to January 24, 1998     

Thai baht fell by 55% against dollar Malaysian ringgit fell by 45% Korean won fell by 49% Philippine peso fell by 39% Indonesian rupiah fell by 84%

Huge

Causes

Currant Account Deficit Most of the Southeast Asian economies had large current account deficits. These deficits were financed by attracting inflows of capital from abroad, often short-term capital. Over-Dependence

on Short-Term Foreign Funds •Excessive borrowing and high proportion of short-term (less then 1 year) borrowing •In June 1997, the ratio of SR borrowing of Thailand was 66%, Korea was 68%, Indonesia was 59% and Malaysia was 56%

Causes Poor

Regulation of the Economy Absence of an adequate regulatory framework for business, especially the banks. Over-Inflated

Asset Prices

Unrealistically high asset values in most of Southeast Asian economies due to too fast inflow of money, excess credit used to fuel speculative booms in real estate, factories and the stock market. Fixed

Exchange Rate

Fixing the value of currencies to the dollar, except for Korea.

Lessons For The Developing Countries Need

for Great Caution About Financial Liberalisation and Globalisation Manage

External Debt Well and Avoid Large Debts

Manage

and Build Up Foreign Reserves

The

Need for Capital Controls and a Global Debt Workout System

The

Market Can Make Big Mistakes and Needs Regulation