East Asian Economic Crisis

HUL 214International Economics

Made by:Ankit Kumar (2010ME20765)Vatsal Dusad (2010TT10971)

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• Countries Affected• Before the Crisis• Causes• Speculative Attacks• Thailand• Effects• Asian Weaknesses• IMF’s role

AGENDA

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COUNTRIES AFFECTED

Thailand. Hong Kong Taiwan Singapore South Korea. Malaysia Indonesia.

BEFORE THE CRISIS

In 1993 the World Bank had coined the term the East Asian Miracle to describe the vilified economies of the South East.

From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's currency, the Baht.

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CAUSESDomestic:

1.) Weak and ineffective govt policies2.) Ill judgment of the banks and financial institutions3.) Over-speculation in real estate and the share

market 4.) Collusion between governments and businesses5.) The bad policy of having fixed exchange rates6.) High current account deficits

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CAUSES

Global financial system:

1.) Liberalisation across the world (as the legal basis)

2.) The increasing interconnection of markets and speed of transactions through computer technology (as the technological basis)

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CAUSES

Currency depreciation and debt crisis

Malaysia: retained a key control in its financial liberalisation

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CAPITAL FLOW ACROSS BORDERS

Foreign exchange transactions

Short-term investments

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SPECULATIVE ATTACKS

Latin American countries 1980sMexico 1994and Norway early 1990s

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In the past also, countries had faced a similar fate - sudden currency depreciations due to speculative attacks or large outflows of funds.

Depriciation - as a result of un-predicted inflow and outflow on capital

SPECULATIVE ATTACKS

1994-95 1996 1997 (first half)

1997 (second half)

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In U

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Capital flow in developing Asian countries

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• Started with Thailand• Thailand was suffering from huge current

account deficit which was financed by short-term capital inflows

• Baht was pegged to the USD• Thai government was forced to float the baht -

due to lack of foreign currency to support its fixed exchange rate

THAILAND

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EFFECTSSharp reductions in values of • currencies, • stock markets, • asset prices of several Asian countries.

The nominal U.S. dollar GDP of ASEAN (Association of South East Asian Nations) fell by US$9.2 billion in 1997 and $218.2 billion (31.7%) in 1998.

(In Asia)

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• Thailand declined from $8,800 to $8,300 between 1997 and 2005;

• Malaysia it declined from $11,100 to $10,400.

EFFECTSPer capita income in

EFFECTS (In Asia)

The unemployment rate in Korea increased to 6.8 per cent in 1998 and then to 8.4 per cent in the first quarter of 1999.

The crisis also led to a dramatic rise in lending rates within the region, especially in Indonesia and the Philippines.

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EFFECTS (Outside Asia)

After the crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world.

Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea.

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Weaknesses that became apparent after the crisis:1. Productivity: economic expansion before crisis

later explained by the rapid growth of production inputs (capital and labor) – but relatively little increase in productivity

2. Banking Regulation: Ineffective government supervision

3. Exchange rate regimes- Mostly pegged exchange rate system.

4. Legal Framework: lack of structured legal framework to deal with bankruptcy

ASIAN WEAKNESSES

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IMF’s Role

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• IMF treated the Asian financial crisis like other situations where countries could not meet their balance of payment obligations with a condition to adopt structural adjustment policies.

• But the Asian crisis differed from the normal situation of countries with difficulties paying off foreign loans. The Asian governments were generally not running budget deficits. Yet the Fund instructed them to cut spending -- a recessionary policy that deepened the economic slowdown.

• The Fund also failed to manage an orderly roll over of short-term loans to long-term loans, which was most needed; and it forced governments, including in South Korea and Indonesia to guarantee private debts owed to foreign creditors.

IMF’s Role

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• Malaysia stood out as a country that refused IMF assistance and advice. Instead of further opening its economy, Malaysia imposed capital controls, in an effort to eliminate speculative trading in its currency. Malaysia generally suffered less severe economic problems than the other countries embroiled in the Asian financial crisis.

IMF’s Role

Capital-account liberalization• In terms of govt. strategy, the more important

decision is not to become more open to capital flows, but in the how those governments chose to become more open.

• Focusing on those measures that will enable an economy to be more flexible and to adapt more quickly to change ultimately will be a more effective policy strategy.

CONCLUSIONS

• Recovery in the Asian crisis countries took time, but it was stronger and more rapid than had been typical in other emerging market financial crises. Barely 18 months after the crisis, for example, Korean GDP had returned to pre-crisis levels

• The countries directly affected by the crises a decade ago are fundamentally stronger. The balance sheet weaknesses have been transformed into strength.

• Stronger legal and institutional frameworks have helped create an environment in which enterprise is thriving.

AFTERMATH

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Thank You