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East Asian Crisis

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An overview of East Asian Crisis.

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East Asian Crisis

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

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