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 By 1992, income per capita averaged $11,100

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

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

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

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 that jumped to $87 billion in Mostly driven by overvalued currency and over lending to moral hazard borrowers.

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

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.

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.

Exchange Rate Regimes

Debt Thailand: Foreign lending expanded from $20 billion to $98 billion between 1990 and 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.

East Asia Crisis 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

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

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

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

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

Devaluation 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

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

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