Economic Development in Asia

Chapter 3 | The Asian Crisis and Recent Developments

Start of the Asian Crisis 3. Capital flight and investor panic spread
→ June 1997, after a sustained attack on across the region through a contagion
the currency led by currency hedge mechanism as a result of globalization.
funds, the Thai baht sustained a large Explanation 1
devaluation.
The Bubble Economy
→ Currency devaluations in Malaysia,
→ Bubble economy was the result of
Indonesia and the Philippines followed
interaction between lenders (mostly
in July.
banks) that borrowed offshore at high
→ The currency weakness extended to
interest rates and relend at higher rates
Australia, Hong Kong and Korea
to domestic investors.
currencies in October.
→ The domestic investors borrowed
The Asian Crisis extensively to finance speculative
→ Asian currencies in early 1998: Korea,
investments in the housing and equity
Philippines, Malaysia, Thailand down
markets.
35-55%; Singapore, Taiwan down >15%;
→ A speculative bubble formed, relying on
Indonesia plummeted 80%.
stable exchange rates and big profits.
→ Equity prices also fell as a result of
→ Banking weakness was reinforced by a
investor uncertainty and currency
lack of competition and unsound
volatility
lending practices
→ Thin and restricted equity markets
→ These included risky long term lending in
exaggerated the decline.
local currency using short term dollar
→ Lack of hedging facilities forced
loans from overseas lenders.
investors to reduce holdings
→ When these borrowers defaulted it
dramatically.
resulted in the inability of the banks to
→ Interest rates were raised to help
repay these short term dollar
stabilize currencies and liquidity was
obligations.
reduced.
→ This banking crisis was also influenced
→ The result was a sharp decline in
by moral hazard (when someone takes
aggregate economic activity in late 1997
bigger risks because they know they
and in 1998.
won't have to deal with the bad results.)
→ In the case of the Asian financial crisis
Asian Crisis: Explanation banks thoughts that governments would
1. A speculative bubble in the housing and insure a stable exchange rate.
equity markets arose which was funded → They also might have thought that the
and sustained by excessive lending by government would bail them out if they
the banking system. found themselves in financial trouble
2. External sector difficulties emerged
including slow export growth, loss of
external competitiveness and rapid
growth in current account deficits.

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 Economic Development in Asia
Chapter 3 | The Asian Crisis and Recent Developments

Explanation 2 Post Crisis Experience

External Sector Difficulties Non-Performing Loan (NPL)
→ As the bubble of the early 1990s → A loan not repaid as agreed due to
progressed, current account deficits also financial problems or missed
grew as offshore borrowing increased. payments, posing a risk to banks.
→ While exports were growing rapidly, this → To deal with NPLs, countries created
was viewed as a sign of strong separate agencies to deal with them.
investment and growth enhancing Asset Management Companies
capital expansion. (AMCs) have taken many of the bad
→ However, when export growth began to loans and negotiated their liquidation.
sag in 1996 this large current account → Korea and Malaysia successful in
deficits became a growing liability and reducing NPLs, enabling the banking
worry for international investors. system to begin to extend new loans.
→ Exchange rates were tied to the dollar → Thailand and Indonesia have been
and exports were hurt in international only moderately successful while in
markets as the dollar appreciated in the the Philippines, the level of NPLs,
mid 1990s. though small during the crisis, has
crept up in recent years.
Explanation 3
Contagion Effects
→ There was a strong contagion effect as Social Impact of the Crisis
the financial crisis spread across the
region. → The fall in output and employment
→ From a $97 billion inflow in 1996 to a $12 created hardships for many segments
billion outflow in 1997. of the society in the affected
→ The $109 billion reversal was about 10% countries.
of the GDP of the five most affected → There was significant reverse
economies – Indonesia, Korea, Malaysia, migration to rural from urban areas
Philippines, and Thailand. as job opportunities dried up.
→ Indonesia, was hardest hit by the crisis → Poverty levels increased between
as its exchange rate fell by over 50 1997 and 1998.
percent → Disadvantaged groups such as the
→ This contagion effect was the result of poor, women, children and the elderly
investors pulling out of many economies were the worse hit by the crisis.
simultaneously. → Some adverse affects on school
→ Currencies faced pressure due to enrollment and on health indicators
contagion effect and competitive were observed.
devaluations. (Countries lower currency
values to boost exports in international
trade.)

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 Economic Development in Asia
Chapter 3 | The Asian Crisis and Recent Developments

Recovery Part 1 Recovery Part 2

→ Between 2002 and 2007 economic
growth in the Asian region accelerated,
led by India and China. Living
standards increased and poverty fell.
→ Domestic demand and foreign trade
were both important factors in the
resumption of growth.
→ As the recover progressed financial
restructuring proceeded and the
financial systems strengthened.
→ China has emerged as a regional
economic powerhouse.
→ Half the GDP of the region and one
third of exports originates in China
→ Economic recovery in the late 1990s → China is now the largest trader in Asia
and early 2000s in the affected Asian overtaking Japan.
economies was driven by factors such → China joined WTO several years ago.
as strong export growth, improved → Import GDP ratio is 34% in China
financial market conditions, fiscal versus 9% for Japan.
stimulus, and stock market recoveries, → Shows Japan is still somewhat
particularly in the IT and protectionist.
communications sectors. → Middle income countries are being
→ Recovery pace differed: with rapid squeezed by China.
growth in economies with sound → In Southeast Asia in particular.
financial sectors (e.g., Hong Kong SAR, → China competes in many different
Singapore), strong progress in financial international markets from labor
and corporate sector restructuring intensive to skill intensive.
(e.g., Malaysia, Korea), and relatively → Innovation and new products are
large electronics manufacturing drivers of trade in Asia now.
sectors (e.g., Singapore, Malaysia, → 60% of export growth in Asia is in new
Taiwan, Korea). varieties and products not more of the
same products.
Fiscal stimulus - when the government → Geography and outsourcing are
spends more money or cuts taxes to boost important and locational advantages
the economy during challenging times. It's are shaped by various factors.
like giving a financial push to help the → History, availability of manpower,
country's businesses and people when the availability of capital, cost of shipping
economy is not doing well. and agglomeration economies all play
a role.

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 Economic Development in Asia
Chapter 3 | The Asian Crisis and Recent Developments

Recovery Part 3 Recession – When the economy is not doing

well, there are fewer jobs, businesses
→ Global economic crisis in 2009
struggle, and people spend less money.
adversely affects Asia, leading to
Stimulus - It's like the government giving the
anticipated slower growth.
economy a boost by spending money on
→ Anticipated slowdown in export
projects or cutting taxes to encourage
demand from Europe, Japan, and the
spending.
United States, but Asia can counter
Market Volatility - Prices of things like
with monetary and fiscal stimulus.
stocks go up and down very quickly, which
→ Many countries reduced interest rates
can make investing money riskier and cause
in late 2008; falling energy and food
uncertainty.
prices can ease inflation concerns.
→ India may face challenges due to a Agenda for Reform
sizable fiscal deficit limiting fiscal → Restructuring debts with assistance
stimulus and reluctance of overseas from AMCs.
lenders to invest. → Creating credit agreements with private
→ Singapore, Hong Kong, and Malaysia companies.
are highly reliant on foreign trade, and → Changing exchange rate systems to
they were negatively impacted during prevent sudden currency devaluation.
the 1997 Asian crisis. → Discouraged or made illegal the
→ Deeper global recession leads to more movement of hot money exploiting
job cuts and reduced exports in Asia, interest differences.
potentially causing social tensions and → Minimum international standards of
increased poverty through reverse financial practice were implemented.
migration. → Accountability and transparency of
→ Thailand's future is uncertain due to business practices strengthened.
political instability. → Increased international surveillance to
→ Taiwan is in a recession. detect possible future financial crises
→ Korea has lots of household debt that have been considered but not
might slow the economy, but they have implemented.
a big stimulus and currency → Look into ways of restraining FDI
depreciation to help exports. concessions that distort incentives and
→ Market volatility affects investment, distort the flow of investment.
balance of payments, and government → Enhance the flow of technical expertise,
budgets. innovation and human capital flows and
→ Economic recovery in 2009 benefited exchanges.
both industrial and Asian developing → Maintain open trading environments in
countries. keeping with WTO and regional trading
→ Many countries used stimulus arrangements.
packages with fiscal and monetary
measures.

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 Economic Development in Asia
Chapter 3 | The Asian Crisis and Recent Developments

FDI concessions - refers to special deals or → Factors of rapid growth:

benefits offered to foreign investors to
attract their investments into a country. • Investment
• TFP (a)
Growth Projections • Labor force growth (ls)
→ Explore prospect for future growth • Education and health (h)
and structural change.
y = (ls) h + (1- ls) k + a
y = growth income
h = rate of exchange in education
adjusted labor input
k = rate of growth in capital
ls = labors share in income
(1-ls) = capita’s share in income
a = total factor productivity (TFP)

→ If we assume that the capital to

output ratio is fixed in the short run
then we can substitute y for k on the
right hand side of this equation and
rearrange
y = h + a/ ls
y = growth income
h = workforce skill growth.
ls = the share of labor in total income
a = total factor productivity (TFP)

→ The rest of the section looks at various

assumptions about these factors and
projects growth into the future.
→ The main conclusion is that estimates
for TFP (a) in South Asia using the past
tend to underestimate the rate of
growth.
→ We have also oversimplified because
we haven’t looked at saving potential.
→ Governance, corruption, foreign
investment also important as indirect
determinants of TFP

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 Economic Development in Asia
Chapter 3 | The Asian Crisis and Recent Developments

Random Notes

➢ Asian Crisis start from Thai because of ➢ Internationalization: Expanding into

its Peg System foreign markets, local adaptation.
➢ Market System is their new system ➢ Globalization: Increasing global
➢ Taiwan ($800B) and Hongkong didn’t interconnectedness, interdependence.
affected that much because they has a
lot of foreign reserves ➢ Speculative Investment
➢ 50 -> lowest thai bath to dollar $ - Stock Market
45 -> lowest peso value to dollar - Reduce price to attract investors

➢ International Monetary Fund (IMF)

gives the interest rate Depreciation Devaluation
➢ 2 Measurement of Economic Activity
- GDP Market Govt.
- GNI

➢ Portfolio Equity – Investment in stock Currency

market
➢ Private Creditors – Lend loan like ➢ Depreciation: natural decline in the
CellPhone value of a currency over time due to
various economic factors, such as
➢ Foreign Direct Investment (FDI) inflation and market forces.
-> Funds from other country ➢ Devaluation: deliberate and official
reduction in the value of a country's
currency by its government or central
Deficit Surplus bank in relation to other currencies
Current Account

Exportation G/S
- Impotation G/S
= Net Export
Increase
Price
Loan
Loan
Local
B Deposit
Deposit Bank
Offshored
Bank

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