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The East Asia Crisis

The East Asia Crisis. Prior to the Crisis. “The Asian Miracle” $94.1 billion dollars flowed into East Asia between 1991 and 1997 Growth was fueled by export promotion, industrial policy, lowered trade barriers, and the rapid accumulation of physical and human capital

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The East Asia Crisis

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  1. The East Asia Crisis

  2. Prior to the Crisis • “The Asian Miracle” • $94.1 billion dollars flowed into East Asia between 1991 and 1997 • Growth was fueled by export promotion, industrial policy, lowered trade barriers, and the rapid accumulation of physical and human capital • By 1992, income per capita averaged $11,100

  3. The Collapse of the Thai Baht • July 1996: Bangkok Bank of Commerce fails and the Bank of Thailand expands the money supply to support the financial systems, putting pressure on the baht. • May 14, 1997: The stock market declines 7 percent amid political instability • June 19, 1997: Finance Minister Virava resigns sending the stock market tumbling 11 percent • July 2, 1997: The fixed exchange rate is abandoned and the Thai is floated freely, devaluing 25 percent

  4. What Caused The Crisis? • Factors contributing to the crisis: • Speculative attacks • Deficits in balance of payments • Inefficient financial systems • Lack of capital controls • Exchange Rate regimes • External debt

  5. Speculative Attacks • Korea:Widespread corporate bankruptcy from large firms that borrowed heavily caused foreign banks to become weary that their loans would not be repayed. • Indonesia: Large scale borrowing from off-shore banks with loose regulation made the extent of the firms’ debt understated. • Malaysia: The real estate bubble burst lead to foreign investors selling to sell their stocks causing the stock market to crash and Malaysian banks were left with bad loans. • Other countries: Contagion effect – the crisis spread because of investors worrying that others countries in the region would face similar problems

  6. Balance of Payment Deficits • In Indonesia and Thailand, the current account deficit was above 5% of GDP. • ASEAN countries and Korea had a combined deficit of $33 billion from 1995-1996 that jumped to $87 billion in 1998-1999. • Mostly driven by overvalued currency and over lending to moral hazard borrowers.

  7. Inefficient Financial Systems • Financial institutions were not especially concerned with over lending due to explicit and implicit government guarantees • Mismatch of the maturities of financial institutions' assets and liabilities • Deterioration in the quality of banks' portfolios • Lack of ability to assess credit risk

  8. Capital Flows • The majority of the East Asian economies engaged in capital market liberalization. • “Hot money” flowed out of the countries quickly when negative speculation of occurred leaving financial institutions liquidity strapped. • Portfolio equity investment went from $12.4 billion in 1996 to an outflow of $4.3 billion in 1997 in Korea, Indonesia, Malaysia, Philippines and Thailand. • Capital inflows of $73 billion turned into outflows of $30 billion in 1997.

  9. Exchange Rate Regimes • Pre-Crisis: Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand pegged their currencies to the US dollar. • Depreciation of the local currencies on the foreign-exchange market means an increased burden of external debt. • Pegged exchange rates forced Asian banks to keep interest rates comparable to US rates and compete with US trade.

  10. Exchange Rate Regimes

  11. Debt • Thailand: Foreign lending expanded from $20 billion to $98 billion between 1990 and 1996. • Nearly 86% went to Thai institutions • 70% of loans were short term • Corporations borrowed in dollars and loans became two or three times more expensive.

  12. East Asia Crisis • 1997 - 1998 economies hit by banking and exchange rate crises • Greatest economic crisis since Great Depression • Most literature focuses on: • Japan, Hong Kong, South Korea, Singapore, Taiwan, Indonesia, Malaysia, & Thailand • Most affected • Indonesia, South Korea, Thailand, Philippines, & Malaysia

  13. East Asia Crisis • 1996 – investors poured $100 billion into East Asian countries & 20 million workers benefited • The crisis affected other parts of the world and caused a global financial crisis • Russia & Brazil affected • Economies experienced reductions in poverty, income inequality, & increase in life expectancy

  14. Policies • Policies implemented by domestic governments varied across economies • Taiwan and Singapore basically escaped the crisis • South Korea recovered fastest • Malaysia and China did not accept IMF policies • Prime Minister Mahathir kept interest rates low • Recession shorter than other countries • Who adopted IMF policies? • Thailand, Korea, Philippines & Indonesia

  15. International Monetary Fund • Provided huge amounts of money • Bailout packages amounted to $95 billion • Bailout money used to repay loans of Western bankers • IMF imposed: • High interest rates, decrease in government spending, increase in taxes, devaluation of currency • Political and economic changes • Major restructuring • Increased transparency • Other minor reforms

  16. GDP & Unemployment Rates • GDP Dropped significantly and led to: • High rates of unemployment, under utilization of capital, severe economic hardship • In 1998 GDP fell by 13.1% in Indonesia, 6.7% in Korea, and 10.8% in Thailand • Unemployment Rates • Malaysia’s unemployment rose to 405,000 • Hong Kong’s unemployment rose to 152,000 • Thailand’s unemployment rose to 1.1 million • Indonesia’s unemployment rose to 13.7 million • In South Korea, urban poverty tripled • In Indonesia, poverty doubled

  17. Thai authorities decided to float the Baht in July 1997 Crisis spread across the region Thailand, Korea, and Indonesia devalued their currency Exchange rate movements had consequences East Asian financial institutions were bankrupt Foreign lenders were uncertain of repayment Insolvency spread across the economies Devaluation

  18. Deteriorating Financial Conditions • Fuelled further withdrawal of capital • Firms who borrowed prudently were having trouble obtaining credit • Financial sector problems spilled into economic activity • In Thailand lenders reduced exposure • Creditors fled region

  19. Who were the victims? • Children were the victims of the East Asia crisis • Gains in child mortality • Less vaccinations • Reduced malnutrition • Maternal mortality, approximately 40,000 women • Sanitation and education threatened • 33 Million children suffered from malnutrition • Thailand’s UNICEF Ambassador Anand Panyarachun speaks about East Asian crisis

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