The Asian crisis: Some lessons for developing countries

Study from report by Park, Jong H.

Prof. Michel Hery Bouchet

CFVG April 2005 Group 7 1. Vo Viet Tuan 2. Tran Anh Thu 3. Pham Thi Truc Ly 4. Tran Thi Thanh Huong
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Contents
Introduction The Asian financial crisis: From miracle to meltdown Some implications of the Asian crisis for developing countries Concluding remarks
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Introduction
Asian countries in good macroeconomic performance until 1996
Changes in GDP
10,0% 8,0% 6,0% 4,0% 2,0% 0,0% -2,0% 1992 1993 1994 1995 1996 1997
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Korea Malaysia Thailand

Indonesia Philippines

Introduction
In 1996, there was a record capital inflow of $93 billion into ASEAN 5 ( Thailand, Malaysia, Indonesia, Philippines & Korea) In 1997 : net outflow of $12 billion A reversal of $105 billion (11% GDP of ASEAN 5) : the greatest reversal of private capital flows in the world economy. Pushing NICs from miracle economies into the countries with serious economic, social & political consequences.
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Introduction
Historical happening
Abrupt Crisis end-1997
Currency devaluations Stock market collapses

Spill-over Effect
From Thailand to Asian countries From Asian to World - wide stock markets From Asia to other EMCs in Latin America and eastern Europe
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Introduction
Asian Crisis stemmed from:
Over investment Unhealthy corporate financial structure Inefficient financial system However, the IMF austerity programs imposed on these countries to exchange for financial support make crisis effect deeply.
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The Asian financial crisis: From miracle to meltdown

The Thai Meltdown and Contagion
- Beginning date : Feb 5th 1997 - Fall of a Thai property developer with a $3.1 million interest payment on it enormous Eurodollar loan. - July 2nd 1997, Thai government allowed the bath to float

=> Catastrophic Asian contagion began

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The Asian financial crisis: From miracle to meltdown

Depreciations of currencies of the Asian 5
- Indonesia rupiah : 75% - Malaysia ringgit : 40% - Philippines peso : 40% - Thai bath and Korea won : 50%

Dramatic fall of stock market also in Hong Kong and Singapore Asian miracle => Asian meltdown
- Bankrupt of thousands firms went bankrupt - Unemployment soaring
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The Asian financial crisis: From miracle to meltdown

The East Asian Meltdown
Common elements contributing to the crisis : - Credit-fueled investment boom - Weak and unsound banking sector and financial system - Pegged exchange rate regime - Current account deficit - Loss in investor confidence.
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Some implications of the Asian crisis for developing countries What did the IMF do?
The same old medicine: macroeconomic policy of higher taxes, reduced spending, high interest rates. It should be to restructure short-term debts, lengthen their maturity and provide temporary credits.
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Some implications of the Asian crisis for developing countries

The Intl Financial Architecture
The present structure was designed to discipline intl borrowers rather than intl lenders. No effective surveillance mechanism in interest & exchange rate regime. Need for rules & bankruptcy procedures for intl debtors & creditors & capital control. Need a governance on intl financial transaction.
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Some implications of the Asian crisis for developing countries

Alternative Foreign Exchange Regimes
In the Asian financial crisis, the intermediary regimes were not sustainable with large scale capital flows. Free-floating regime do not reflect the true value of currency when financial crisis happen. In the era of globalization of financial markets, the fixed exchange rates is prefer for:
Imposing & maintaining capital controls to directly limit the vulnerability to speculative attack. Establishing a currency board to enable to weathers successfully the storms of financial crisis.
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Some implications of the Asian crisis for developing countries

Financial Liberalization lessons form Asian Crisis
Opening up the financial market before nurturing a sound financial system & institutions is very risky. Financial liberalization requires strict bank regulation & supervision to prevent a easily reversal in capital flows. Financial markets require reliable information & transparency to function efficiently.
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Concluding remarks
The rapidly increasing globalization without fully appreciate the new challenges and risk was the root cause the Asian crisis. Globalization, if properly managed, may help push some developing countries into modernity and affluence. The Asian crisis has shown how important it is to have effective state institutions. Developing countries must have to develop their own defense mechanism by establishing a system of capital controls and exchange rate regime. 14