- 1997 Asian Financial Crisis
The Asian Financial Crisis was a period of
financial crisisthat gripped much of Asiabeginning in July 1997, and raised fears of a worldwide economic meltdown ( financial contagion). It is also commonly referred to as the IMF crisis.
The crisis started in
Thailandwith the financial collapse of the Thai bahtcaused by the decision of the Thai government to float the baht, cutting its peg to the USD, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estatedriven. At the time, Thailand had acquired a burden of foreign debtthat made the country effectively bankrupteven before the collapse of its currency. As the crisis spread, most of Southeast Asiaand Japansaw slumping currencies, devalued stock markets and other assetprices, and a precipitous rise in private debt. [Kaufman: pp. 195-6]
Though there has been general agreement on the existence of a crisis and its consequences, what is less clear were the causes of the crisis, as well as its scope and resolution.
Indonesia, South Koreaand Thailandwere the countries most affected by the crisis. Hong Kong, Malaysia, Laosand the Philippineswere also hurt by the slump. The People's Republic of China, India, Taiwan, Singapore, Bruneiand Vietnamwere less affected, although all suffered from a loss of demand and confidence throughout the region.
Foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 1993-96, then shot up beyond 180% during the worst of the crisis. In Korea, the ratios rose from 13-21% and then as high as 40%, while the other Northern NICs (Newly Industrialized Countries) fared much better. Only in Thailand and Korea did debt service-to-exports ratios rise. [http://www.adb.org/Documents/Books/Key_Indicators/2003/pdf/rt29.pdf]
Although most of the governments of Asia had seemingly sound
fiscal policies, the International Monetary Fund(IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After 30 years in power, President Suhartowas forced to step down in May 1998 in the wake of widespread riotingthat followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998. In the Philippines growth dropped to virtually zero in 1998. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs that the economies of Asia were beginning to recover. [Pempel: pp 118-143]
Until 1997, Asia attracted almost half of the total
capitalinflow from developing countries. The economies of Southeast Asiain particular maintained high interest ratesattractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of moneyand experienced a dramatic run-up in assetprices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Koreaexperienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including the IMFand World Bank, and was known as part of the "Asian economic miracle".
In 1994, noted economist
Paul Krugmanpublished an article attacking the idea of an "Asian economic miracle". [ [http://web.mit.edu/krugman/www/myth.html The Myth of Asia's Miracle] A Cautionary Fable by Paul Krugman.] He argued that East Asia's economic growth had historically been the result of capital investment, leading to growth in productivity. However, total factor productivityhad increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman's views would be seen by many as prescient after the financial crisis had become full-blown POV-statement|date=March 2008, though he himself stated that he had not predicted the crisis nor foreseen its depth.
The causes of the debacle are many and disputed. Thailand's economy developed into a bubble fueled by "hot money". More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, although Malaysia had better political leadershipFact|date=August 2008, and Indonesia, which had the added complication of what was called "
crony capitalism". [Hughes, Helen. [http://www.cis.org.au/POLICY/Spr99/polspr99-1.htm Crony Capitalism and the East Asian Currency Financial 'Crises'] . "Policy". Spring 1999.] The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power. [Blustein: p. 73]
At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private
current accountdeficits and the maintenance of fixed exchange rates encouraged external borrowingand led to excessive exposure to foreign exchangerisk in both the financial and corporate sectors. In the mid-1990s, two factors began to change their economic environment. As the U.S. economyrecovered from a recession in the early 1990s, the U.S. Federal Reserve Bankunder Alan Greenspanbegan to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia, which had attracted hot money flows through high short-term interest rates, and raised the value of the U.S. dollar, to which many Southeast Asian nations' currencies were pegged, thus making their exports less competitive. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position.
Some economists have advanced the impact of
Chinaon the real economyas a contributing factor to ASEANnations' export growth slowdown, though these economists maintain the main cause of the crises was excessive real estate speculation. [ [http://www.newschool.edu/cepa/publications/workingpapers/archive/cepa0318.pdf The Three Routes to Financial Crises: The Need for Capital Controls] . Gabriel Palma (Cambridge University). Center for Economic Policy Analysis. November 2000.] China had begun to compete effectively with other Asian exporters particularly in the 1990s after the implementation of a number of export-oriented reforms. Most importantly, the Thai and Indonesian currencies were closely tied to the dollar, which was appreciating in the 1990s. Western importers sought cheaper manufacturers and found them, indeed, in China whose currency was depreciated relative to the dollar. Other economists dispute this claim noting that both ASEAN and China experienced simultaneous rapid export growth in the early 1990s. [cite book |title=The Asia-Pacific Profile |author=Bernard Eccleston, Michael Dawson, Deborah J. McNamara |year=1998 |publisher=Routledge (UK) |url=http://books.google.com/books?vid=ISBN0415172799&id=l07ak-yd6DAC&pg=RA1-PA311&lpg=RA1-PA311&ots=XgqmmGV3CC&dq=%22Bangkok+Declaration%22+ASEAN&ie=ISO-8859-1&output=html&sig=u2ddDhzn-yVhEn5Fwu3d8iih0OA|id=ISBN 0415172799 ]
Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the
lender- borrowerrelationship. The resulting large quantities of credit that became available generated a highly-leveraged economic climate, and pushed up asset prices to an unsustainable level. [ [http://web.mit.edu/krugman/www/FIRESALE.htm FIRE-SALE FDI] by Paul Krugman.] These asset prices eventually began to collapse, causing individuals and companies to default on debt obligations. The resulting panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunchand further bankruptcies. In addition, as investors attempted to withdraw their money, the exchange market was flooded with the currencies of the crisis countries, putting depreciative pressure on their exchange rates. In order to prevent a collapse of the currency values, these countries' governments were forced to raise domestic interest rates to exceedingly high levels (to help diminish the flight of capital by making lending to that country relatively more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the fixed exchange ratewith foreign reserves. Neither of these policy responses could be sustained for long. Very high interest rates, which can be extremely damaging to an economy that is relatively healthy, wreaked further havoc on economies in an already fragile state, while the central banks were hemorrhaging foreign reserves, of which they had finite amounts. When it became clear that the tide of capital fleeing these countries was not to be stopped, the authorities ceased defending their fixed exchange rates and allowed their currencies to float. The resulting depreciated value of those currencies meant that foreign currency-denominated liabilitiesgrew substantially in domestic currency terms, causing more bankruptcies and further deepening the crisis.
Other economists, including
Joseph Stiglitzand Jeffrey Sachs, have downplayed the role of the real economyin the crisis compared to the financial markets due to the speed of the crisis. The rapidity with which the crisis happened has prompted Sachs and others to compare it to a classic bank runprompted by a sudden risk shock. Sachs pointed to strict monetary and contractory fiscal policiesimplemented by the governments on the advice of the IMF in the wake of the crisis, while Frederic Mishkinpoints to the role of asymmetric informationin the financial markets that led to a " herd mentality" among investors that magnified a relatively small risk in the real economy. The crisis had thus attracted interest from behavioral economists interested in market psychology. Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on July 1, 1997. During the 1990s, hot money flew into the Southeast Asia region but investors were often ignorant of the actual fundamentals or risk profiles of the respective economies. The uncertainty regarding the future of Hong Kong led investors to shrink even further away from Asia, exacerbating economic conditions in the area (subsequently leading to the devaluation of the Thai bahton July 2, 1997). [Stiglitz: pp. 12-16]
The foreign ministers of the 10
ASEANcountries believed that the well co-ordinated manipulation of currencies was a deliberate attempt to destabilize the ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamadaccused George Sorosof ruining Malaysia's economy with "massive currency speculation." (Soros appeared to have had his bets in against the Asian currency devaluations, incurring a loss when the crisis hit.) At the 30th ASEAN Ministerial Meeting held in Subang Jaya, Malaysia, they issued a joint declaration on 25 July 1997expressing serious concern and called for further intensification of ASEAN's cooperation to safeguard and promote ASEAN's interest in this regard. [ [http://www.aseansec.org/4010.htm Joint Comminuque The 30th ASEAN Ministerial Meeting (AMM)] The Thirtieth ASEAN Ministerial Meeting was held in Subang Jaya, Malaysia from 24 - 25 July 1997.] Coincidentally, on that same day, the central bankers of most of the affected countries were at the EMEAP (Executive Meeting of East Asia Pacific) meeting in Shanghai, and they failed to make the 'New Arrangement to Borrow' operational. A year earlier, the finance ministers of these same countries had attended the 3rd APECfinance ministers meeting in Kyoto, Japanon 17 March 1996, and according to that joint declaration, they had been unable to double the amounts available under the 'General Agreement to Borrow' and the 'Emergency Finance Mechanism'. As such, the crisis could be seen as the failure to adequately build capacity in time to prevent currency manipulation. This hypothesis enjoyed little support among economists, however, who argue that no single investor could have had enough impact on the market to successfully manipulate the currencies' values. In addition, the level of organization necessary to coordinate a massive exodus of investors from Southeast Asian currencies in order to manipulate their values rendered this possibility remote.
Such was the scope and the severity of the collapses involved that outside intervention, considered by many as a new kind of
colonialism, [Halloran, Richard. [http://www.bu.edu/globalbeat/pubs/ib24.html China's Decisive Role in the Asian Financial Crisis] . Global Beat Issue Brief No. 24. January 27, 1998.] became urgently needed. Since the countries melting down were among not only the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to the crisis had to be cooperative and international, in this case through the International Monetary Fund(IMF). The IMF created a series of bailouts ("rescue") packages for the most affected economies to enable affected nations to avoid default, tying the packages to reforms that were intended to make the restored Asian currency, banking, and financial systems as much like those of the United States and Europe as possible. In other words, the IMF's support was conditional on a series of drastic economic reforms influenced by neoliberaleconomic principles called a " structural adjustmentpackage" (SAP). The SAPs called on crisis-struck nations to cut back on government spending to reduce deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favored parties receiving funds by preference. There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvencyitself had to be clearly defined. In short, exactly the same kinds of financial institutions found in the United States and Europe had to be created in Asia, as a condition for IMF support. In addition, financial systems had to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions. [Noland: pp. 98-103]
However, the greatest criticism of the IMF's role in the crisis was targeted towards its response. As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their
creditors. The dynamics of the situation were closely similar to that of the Latin American debt crisis. The effects of the SAPs were mixed and their impact controversial. Critics, however, noted the contractionary nature of these policies, arguing that in a recession, the traditional Keynesianresponse was to increase government spending, prop up major companies, and lower interest rates. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic pain. They pointed out that the U.S. governmenthad pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States itself entered a recession in 2001.
Although such reforms were, in most cases, long needed, the countries most involved ended up undergoing an almost complete political and financial restructuring. They suffered permanent currency devaluations, massive numbers of bankruptcies, collapses of whole sectors of once-booming economies,
real estate busts, high unemployment, and social unrest. For most of the countries involved, IMF intervention has been roundly criticized. The role of the International Monetary Fundwas so controversial during the crisis that many locals called the financial crisis the "IMF crisis". [ [http://www.imfsite.org/recentfin/crisis.html The IMF Crisis] Editorial. Wall Street Journal. 15 April 1998.] To begin with, many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (elimination of restrictions on capital flows); maintenance of high domestic interest rates in order to suck in portfolio investment and bank capital; and pegging of the national currency to the dollar to reassure foreign investors against currency risk. [http://www.ifg.org/imf_asia.html IMF's Role in the Asian Financial Crisis] by Walden Bello.] In other words, that the IMF itself was the cause.
From 1985 to 1996,
Thailand's economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. In 1996, an American hedge fundsold US$400 million of the Thai currency. From 1978 until 2 July 1997, the baht was pegged at 25 to the dollar.
14 Mayand 15 May 1997, the Thai bahtwas hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudhsaid that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai governmentfailed to defend the baht, which was pegged to the U.S. dollar, against international speculators. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and constructionthat resulted in huge numbers of workers returning to their villages in the countryside and 600'000 foreign workers being sent back to their home countries. [Kaufman: pp. 193-8] The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed. [Liebhold, David. [http://www.time.com/time/asia/magazine/99/1227/thailand.finance.html Thailand's Scapegoat?] Battling extradition over charges of embezzlement, a financier says he's the fall guy for the 1997 financial crash. TIME.com. December 27, 1999.]
The Thai government was eventually forced to float the Baht, on 2 July 1997. On 11 August 1997, the
IMFunveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring) procedures and establishing strong regulation frameworks for banks and other financial institutions. The IMF approved on 20 August, 1997, another bailout package of $3.9 billion.
Thai opposition parties claimed that former Prime Minister
Thaksin Shinawatrahad profited from the devaluation, [ [http://www.pathfinder.com/asiaweek/97/1010/nat2.html Pressure from below: Supporters of the new, improved Constitution now have to help turn words into action] October 10, 1997] although subsequently the opposition parties did not investigate the issue. [Pasuk Phongpaichit & Chris Baker, "Thaksin: The Business of Politics in Thailand" (Chiang Mai, Thailand: Silkworm Books, 2004), pp. 57-59.]
By 2001, Thailand's economy had recovered. The increasing
tax revenues allowed the country to balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai baht continued to appreciate to 34 Baht to the Dollar in July 2008.
In June 1997,
Indonesiaseemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade surplusof more than $900 million, huge foreign exchange reserves of more than $20 billion, and a good banking sector. But a large number of Indonesian corporations had been borrowing in U.S. dollars. During the preceding years, as the rupiahhad strengthened respective to the dollar, this practice had worked well for these corporations; their effective levels of debt and financing costs had decreased as the local currency's value rose.
In July 1997, when Thailand floated the
baht, Indonesia's monetary authorities widened the rupiah trading bandfrom 8% to 12%. The rupiah suddenly came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, and strong demand for dollars. The rupiah and the Jakarta Stock Exchangetouched a historic low in September. Moody'seventually downgraded Indonesia's long-term debt to ' junk bond'.
Although the rupiah crisis began in July and August 1997, it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars through selling rupiah, undermining the value of the latter further. The inflation of the rupiah and the resulting steep hikes in the prices of food staples led to rioting throughout the country in which more than 500 people died in
Jakartaalone. In February 1998, President Suhartosacked the governor of Bank Indonesia, but this had proved insufficient. Suharto was forced to resign in mid-1998 and B. J. Habibiebecame President. Before the crisis, the exchange rate between the rupiahand the dollar was roughly 2000 rupiah to 1 USD. The rate had plunged to over 18000 rupiah to 1 USD at various points during the crisis. Indonesia lost 13.5% of its GDP that year.
Macroeconomic fundamentals in
South Koreawere good but the banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. During that time, there was a haste to build great conglomerates to compete on the world stage. Many businesses ultimately failed to ensure returns and profitability. The Korean conglomerates, more or less completely controlled by the government, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers. For example, in July 1997, South Korea's third-largest car maker, Kia Motors, asked for emergency loans. In the wake of the Asian market downturn, Moody'slowered the credit ratingof South Korea from A1 to A3, on November 28, 1997, and downgraded again to B2 on December 11. That contributed to a further decline in Korean shares since stock markets were already bearish in November. The Seoul stock exchange fell by 4% on 7 November 1997. On November 8, it plunged by 7%, its biggest one-day drop to that date. And on November 24, stocks fell a further 7.2% on fears that the IMF would demand tough reforms. In 1998, Hyundai Motortook over Kia Motors. SamsungMotors' $5 billion dollar venture was dissolved due to the crisis, and eventually DaewooMotors was sold to the American company General Motors(GM).
Korean won, meanwhile, weakened to more than 1,700 per dollar from around 800. Despite an initial sharp economic slowdown and numerous corporate bankruptcies, Korea has managed to triple its per capita GDPin dollar terms since 1997. Indeed, it resumed its role as the world's fastest-growing economy -- since 1960, per capita GDP has grown from $80 in nominal terms to more than $21,000 as of 2007. However, like the chaebol, South Korea's government did not escape unscathed. Its national debt-to- GDPratio more than doubled (app. 13% to 30%) as a result of the crisis.
The Philippine central bank raised
interest rates by 1.75 percentage points in May 1997 and again by 2 points on 19 June. Thailand triggered the crisis on 2 Julyand on 3 July, the Philippine Central Bank was forced to intervene heavily to defend the peso, raising the overnight rate from 15% to 24%. The peso fell significantly, from 26 pesos per dollar at the start of the crisis, to 38 pesos in 2000, and to 40 pesos by the end of the crisis.
The Philippine economy recovered from a contraction of 0.6% in GDP during the worst part of the crisis to GDP growth of some 3% by 2001, despite scandals of the administration of
Joseph Estradain 2001, most notably the "jueteng" scandal, causing the PSE Composite Index, the main index of the Philippine Stock Exchange, to fall to some 1000 points from a high of some 3000 points in 1997. The peso fell even further, trading at levels of about 55 pesos to the US dollar. Later that year, Estrada was on the verge of impeachment but his allies in the senate voted against the proceedings to continue further. This led to popular protests culminating in the " EDSA II Revolution", which finally forced his resignation and elevated Gloria Macapagal-Arroyoto the presidency. Arroyo managed to lessen the crisis in the country, which led to the recovery of the Philippine peso to about 50 pesos by the year's end and is now trading at around 41 pesos to a dollar by end 2007. The stock market also reached an all time high in 2007 and the economy is growing by at least more than 7 percent, its highest in nearly 2 decades.
Although the two events were unrelated, the collapse of the
Thai bahton July 2, 1997, came only 24 hours after the United Kingdomhanded over sovereignty of Hong Kong to the People's Republic of China. In October 1997, the Hong Kong dollar, which had been pegged at 7.8 to the U.S. dollarsince 1983, came under speculative pressure because Hong Kong's inflation rate had been significantly higher than the U.S.'s for years. Monetary authorities spent more than US$1 billion to defend the local currency. Since Hong Kong had more than US$80 billion in foreign reserves, which is equivalent to 700% of its M1 money supply and 45% of its M3 money supply, the Hong Kong Monetary Authority (effectively the city's central bank) managed to maintain the peg.
Stock markets became more and more volatile; between
20 Octoberand 23 Octoberthe Hang Seng Indexdropped 23%. The Hong Kong Monetary Authoritythen promised to protect the currency. On 15 August 1998, it raised overnight interest rates from 8% to 23%, and at one point to 500%. The HKMA had recognized that speculators were taking advantage of the city's unique currency-board system, in which overnight rates automatically increase in proportion to large net sales of the local currency. The rate hike, however, increased downward pressure on the stock market, allowing speculators to profit by short sellingshares. The HKMA started buying component shares of the Hang Seng Index in mid-August.
The HKMA and
Donald Tsang, then the Financial Secretary, declared war on speculators. The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies, [Bayani Cruz, [http://www.thestandard.com.hk/news_detail.asp?pp_cat=&art_id=48383&sid=&con_type=1&d_str=19980829&sear_year=1998 We will hold on to blue-chip shares: Tsang] , The Standard, August 29, 1998.] and became the largest shareholder of some of those companies (e.g. the government owned 10% of HSBC) at the end of August, when hostilities ended with the closing of the August Hang Seng Index futures contract. The Government started selling those shares in 2001, making a profit of about HK$30 billion (US$4 billion).
Before the crisis,
Malaysiahad a large current account deficitof 5% of its GDP. At the time, Malaysia was a popular investment destination, and this was reflected in KLSE activity which was regularly the most active stock exchange in the world (with turnover exceeding even markets with far higher capitalizationlike the NYSE). Expectations at the time were that the growth rate would continue, propelling Malaysia to developed status by 2020, a government policy articulated in Wawasan 2020. At the start of 1997, the KLSE Compositeindex was above 1,200, the ringgit was trading above 2.50 to the dollar, and the overnightrate was below 7%.
In July 1997, within days of the
Thai bahtdevaluation, the Malaysian ringgitwas "attacked" by speculators. The overnight rate jumped from under 8% to over 40%. This led to rating downgrades and a general sell off on the stock and currency markets. By end of 1997, ratings had fallen many notches from investment grade to junk, the KLSE had lost more than 50% from above 1,200 to under 600, and the ringgit had lost 50% of its value, falling from above 2.50 to under 3.80 to the dollar.
In 1998, the output of the real economy declined plunging the country into its first
recessionfor many years. The constructionsector contracted 23.5%, manufacturingshrunk 9% and the agriculturesector 5.9%. Overall, the country's gross domestic product plunged 6.2% in 1998. During that year, the ringgit plunged below 4.7 and the KLSE fell below 270 points. In September that year, various defensive measures were announced in order to overcome the crisis. The principal measure taken were to move the ringgit from a free float to a fixed exchange rateregime. Bank Negarafixed the ringgit at 3.8 to the dollar. Capital controls were imposed while aid offered from the IMF was refused. Various task force agencies were formed. The Corporate Debt Restructuring Committee dealt with corporate loans. Danahartadiscounted and bought bad loans from banks to facilitate orderly asset realization. Danamodalrecapitalized banks.
Growth then settled at a slower but more sustainable pace. The massive current account deficit became a fairly substantial surplus. Banks were better capitalized and NPLs were realised in an orderly way. Small banks were bought out by strong ones. (Unfortunately, this was an excuse for the government-linked banks, which were actually in a weak financial position to force the smaller banks out of the market. Ironically, it was the smaller banks, managed in a sound financial manner, that were dissolved, instead of the larger politically-favored banks.) A large number of PLCs were unable to regulate their financial affairs and were delisted. Compared to the 1997 current account, by 2005, Malaysia was estimated to have a US$14.06 billion surplus. [ [https://www.cia.gov/library/publications/the-world-factbook/print/my.html The CIA World Factbook - Malaysia] ] Asset values however, have not returned to their pre-crisis highs. In 2005 the last of the crisis measures were removed as the ringgit was taken off the fixed exchange system. But unlike the pre-crisis days, it did not appear to be a free float, but a managed float, like the
As the financial crisis spread the economy of Singapore dipped into a short recession. The relatively short duration and milder effect on its economy was credited to the active management by the government. For example, the
Monetary Authority of Singaporeallowed for a gradual 20% depreciation of the Singapore dollarto cushion and guide the economy to a soft landing. The timing of government programs such as the Interim Upgrading Program and other construction related projects were brought forward. Instead of allowing the labor markets to work, the National Wage Council pre-emptively agreed to Central Provident Fundcuts to lower labor costs, with limited impact on disposable incomeand local demand. Unlike in Hong Kong, no attempt was made to directly intervene in the capital markets and the Straits Times Indexwas allowed to drop 60%. In less than a year, the Singaporean economy fully recovered and continued on its growth trajectory. [Ngian Kee Jin: p. 12]
The Chinese currency, the
renminbi(RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994. Having largely kept itself above the fray throughout 1997-1998 there was heavy speculation in the Western press that China would soon be forced to devalueits currency to protect the competitivenessof its exports vis-a-vis those of the ASEANnations, whose exports became cheaper relative to China's. However, the RMB's non- convertibilityprotected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia. The currency peg was partly scrapped in July 2005 rising 2.3% against the dollar, reflecting pressure from the United States.
Unlike investments of many of the
Southeast Asiannations, almost all of China's foreign investmenttook the form of factorieson the ground rather than securities, which insulated the country from rapid capital flight. While China was relatively unaffected by the crisis compared to Southeast Asia and South Korea, GDP growth slowed sharply in 1998 and 1999, calling attention to structural problems within its economy. In particular, the Asian financial crisis convinced the Chinese governmentof the need to resolve the issues of its enormous financial weaknesses, such as having too many non-performing loanswithin its primitive and inefficient banking system, and relying heavily on trade with the United States.
United States and Japan
The "Asian flu" had also put pressure on the
United Statesand Japan. Their markets did not collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock Exchangebriefly suspended trading. The crisis led to a drop in consumer and spending confidence(see October 27, 1997mini-crash). Japanwas affected because its economy is prominent in the region. Asian countries usually run a trade deficitwith Japan because the latter's economy was more than twice the size of the rest of Asia together; about 40% of Japan's exports go to Asia. The Japanese yenfell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. GDP real growth rate slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition from cheapened rivals. The Asian financial crisis also led to more bankruptcies in Japan. In addition, with South Korea's devalued currency, and China's steady gains, many companies complained outright that they could not compete. [Pettis: pp. 55-60]
Another longer-term result was the changing relationship between the U.S. and Japan, with the U.S. no longer openly supporting the highly artificial trade environment and exchange rates that governed economic relations between the two countries for almost five decades after
World War II. [Pettis: p. 79]
The crisis had significant macro-level effects, including sharp reductions in values of currencies,
stock markets, and other assetprices of several Asian countries. [Tiwari: pp. 1-3] The nominal US dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion (31.7%) in 1998. In Korea, the $170.9 billion fall in 1998 was equal to 33.1% of the 1997 GDP.http://www.adb.org/Documents/Books/Key_Indicators/2001/rt11_ki2001.xls] Many businesses collapsed, and as a consequence, millions of people fell below the poverty linein 1997-1998. Indonesia, South Koreaand Thailandwere the countries most affected by the crisis.
The economic crisis also led to political upheaval, most notably culminating in the resignations of President
Suhartoin Indonesia and Prime Minister General Chavalit Yongchaiyudhin Thailand. There was a general rise in anti-Western sentiment, with George Sorosand the IMFin particular singled out as targets of criticisms. Heavy U.S. investment in Thailand ended, replaced by mostly European investment, though Japanese investment was sustained. Fact|date=August 2008 Islamic and other separatist movements intensified in Southeast Asiaas central authorities weakened. [Radelet: pp. 5-6]
More long-term consequences included reversal of the relative gains made in the boom years just preceding the crisis. Nominal US dollar GDP per capital fell 42.3% in Indonesia in 1997, 21.2% in Thailand, 19% in Malaysia, 18.5% in Korea and 12.5% in the Philippines. The
CIA World Factbookreported that the per capita income(measured by purchasing power parity) in Thailand declined from $8,800 to $8,300 between 1997 and 2005; in Indonesia it declined from $4,600 to $3,700; in Malaysia it declined from $11,100 to $10,400. Over the same period, world per capita income rose from $6,500 to $9,300. [ [http://ideas.repec.org/a/fip/fedfsp/y2007ifeb6.html The Asian financial crisis ten years later: assessing the past and looking to the future] . Janet L. Yellen. Speech to the Asia Society of Southern California, Los Angeles, California, February 6, 2007] Indeed, the CIA's analysis asserted that the economy of Indonesiawas still smaller in 2005 than it had been in 1997, suggesting an impact on that country similar to that of the Great Depression. Within East Asia, the bulk of investment and a significant amount of economic weight shifted from Japanand ASEANto Chinaand India. [Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the Asian crisis?]
The crisis has been intensively analyzed by
economists for its breadth, speed, and dynamism; it affected dozens of countries, had a direct impact on the livelihood of millions, happened within the course of a mere few months, and at each stage of the crisis leading economists, in particular the international institutions, seemed a step behind. Perhaps more interesting to economists was the speed with which it ended, leaving most of the developed economiesunharmed. These curiosities have prompted an explosion of literature about financial economicsand a litany of explanations why the crisis occurred. A number of critiques have been leveled against the conduct of the IMFin the crisis, including one by former World Bankeconomist Joseph Stiglitz. Politically there were some benefits. In several countries, particularly South Koreaand Indonesia, there was renewed push for improved corporate governance. Rampaging inflationweakened the authority of the Suhartoregime and led to its toppling in 1998, as well as accelerating East Timor's independence. [Weisbrot: p. 6]
After the Asian crisis, international investors were reluctant to lend to
developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of $8 per barreltowards the end of 1998, causing a financial pinch in OPECnations and other oil exporters. This reduction in oil revenue contributed to the Russian financial crisisin 1998, which in turn caused Long-Term Capital Managementin the United States to collapse after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspanand the Federal Reserve Bank of New Yorkorganized a $3.625 billion bail-out. Major emerging economies Braziland Argentinaalso fell into crisis in the late 1990s (see Argentine debt crisis). ["The Crash" transcript. PBS Frontline.]
The crisis in general was part of a global backlash against the
Washington Consensusand institutions such as the IMFand World Bank, which simultaneously became unpopular in developed countries following the rise of the anti-globalization movementin 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancún, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasingly turning toward regional or bilateral FTAs (Free Trade Agreements) as an alternative to global institutions. Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asiancurrency swaps were introduced in the event of another crisis. However, interestingly enough, such nations as Brazil, Russia, and India as well as most of East Asia began copying the Japanese model of weakening their currencies, restructuring their economies so as to create a current accountsurplus to build large foreign currency reserves. This has led to an ever increasing funding for US treasury bonds, allowing or aiding housing (in 2001-2005) and stock asset bubbles (in 1996-2000) to develop in the United States.
List of finance topics
*Kaufman, GG., Krueger, TH., Hunter, WC. (1999) "The Asian Financial Crisis: Origins, Implications and Solutions". Springer. ISBN 0792384725
last =Pettis | first =Michael | authorlink = | coauthors = | title =The Volatility Machine: Emerging Economies and the Threat of Financial Collapse | publisher =
Oxford University Press
year=2001 | location = | pages = | url = | doi = | id = | isbn =0-19-514330-2
last =Blustein | first =Paul | authorlink = | coauthors = | title =The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF | publisher =
year=2001 | location = | pages = | url = | doi = | id = | isbn =1-891620-81-9
*Noland, Markus, Li-gang Liu, Sherman Robinson, and Zhi Wang. (1998) "Global Economic Effects of the Asian Currency Devaluations". Policy Analyses in International Economics, no. 56. Washington, DC: Institute for International Economics.
*Pempel, T. J. (1999) "The Politics of the Asian Economic Crisis". Ithaca, NY: Cornell University Press.
*Ries, Philippe. (2000) "The Asian Storm: Asia's Economic Crisis Examined".
*Muchhala, Bhumika, ed. (2007) "Ten Years After: Revisiting the Asian Financial Crisis [http://www.cepr.net/documents/publications/tenyearsafter_2007_11.pdf] ". Washington, DC:
Woodrow Wilson International Center for ScholarsAsia Program.
*Ngian Kee Jin (March 2000). [http://www.iseas.edu.sg/vr82000.pdf "Coping with the Asian Financial Crisis: The Singapore Experience"] . Institute of Southeast Asian Studies. ISSN 0219-3582
*Tiwari, Rajnish (2003). [http://www.rrz.uni-hamburg.de/RRZ/R.Tiwari/papers/exchange-rate.pdf "Post-crisis Exchange Rate Regimes in Southeast Asia"] , Seminar Paper, University of Hamburg.
*Kilgour, Andrea (1999). [http://www.geogr.uni-goettingen.de/kus/apsa/pn/pn12/vietnam.html "The changing economic situation in Vietnam: A product of the Asian crisis?"]
*S. Radelet, J.D. Sachs, R.N. Cooper, B.P. Bosworth (1998). [http://www.jstor.org/view/00072303/di009478/00p0029t/0/ "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects"] . Brookings Papers on Economic Activity.
*Stiglitz, Joseph (1996). [http://wbro.oxfordjournals.org/cgi/content/abstract/11/2/151/ "Some Lessons From The East Asian Miracle"] . The World Bank Research Observer.
*Weisbrot, Mark (August 2007). [http://www.cepr.net/documents/publications/asia_crisis_2007_08.pdf "Ten Years After: The Lasting Impact of the Asian Financial Crisis"] .
Center for Economic and Policy Research.
* [http://photojourn.wordpress.com/1999/03/01/ Is Thailand on the road to recovery] , article by Australian photo-journalist John Le Fevre that looks at the effects of the Asian Economic Crisis on Thailand's construction industry
* [http://photojourn.wordpress.com/category/1999-posts/ Women bear brunt of crisis] , article by Australian photo-journalist John Le Fevre examining the effects of the Asian Economic Crisis on Asia's female workforce
* [http://www.pbs.org/wgbh/pages/frontline/shows/crash/ The Crash] (transcript only), from the PBS series Frontline
* [http://www.fas.org/man/crs/crs-asia2.htm Congressional Research Service report for US Congress]
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