East Asia

Who Are The Asian Tigers?

In the mid-1990s we spoke of
the “Asian Tigers” with awe.
Heavy savings and
investment, rapid
development.
 Before 1997…
The East Asian Economic Miracle
Until 1997 the countries of East Asia were
having very high growth rates.
The ingredients for the success of the East
Asian Miracle
High saving and investment rates
Strong emphasis on education

Stable macroeconomic environment

Free from high inflation or major economic

slumps
High share of trade in GDP
 Financial Crisis
Financial Crisis – Banking crisis,
exchange rate crisis, or a combination of
the two

Banking crisis – banking system’s becoming

unable to perform its normal lending
functions

Exchange rate crisis – sudden and

unexpected collapse in the value of a nation’s
currency
 Financial Crisis Continues…
Banking crisis – banks fail as result of
bad lending policies, and bank lending
dries up

Exchange rate crisis – banks often have

borrowed dollars abroad, converted to
local currency to invest – then when local
currency collapses, can’t pay back dollar
loans – banks fail and bank lending dries
up -- also, foreign investment dries up
Two Causes of Financial Crises

 Crises caused by macroeconomic

imbalances, such as large budget deficits
caused by overly expansionary fiscal
policies
 Example: Argentina financial crisis in 2001
 Crises caused by volatile capital flows
Example: the East Asian financial crisis of
1997–1998
Asian Crisis, 1997-98

 Five countries: South Korea, Thailand,

Malaysia, the Philippines, Indonesia
 Indonesia is world’s fifth largest country by
population (200 million people back then)
 South Korea is now considered an
“industrialized” country
Asian Crisis, 1997-98

 1967-97, these five countries averaged

real GDP growth of 6-10 percent per year
 They were called “the Asian tigers”
 Their performance was called “the Asian
miracle”
 1997-98, they went from “Asian miracle” to
“Asian meltdown”
East Asian Financial Crisis
 The Asian Financial Crisis
 It stared on July 2, 1997 with the devaluation of
the Thai baht.

 The sharp drop in the Thai currency was

followed by speculation against the currencies
of: Malaysia, Indonesia, and South Korea.All
of the afflicted countries except Malaysia
turned to the IMF for assistance.
Asian Crisis, 1997-98

 From July 1, 1997 to January 24, 1998

 Thai baht fell by 55% against dollar
 Malaysian ringgit fell by 45%
 Korean won fell by 49%
 Philippine peso fell by 39%
 Indonesian rupiah fell by 84%
 Causes
Huge Currant Account Deficit
Most of the Southeast Asian economies had large current
account deficits. These deficits were financed by attracting
inflows of capital from abroad, often short-term capital.

Over-Dependence on Short-Term Foreign Funds

•Excessive borrowing and high proportion of short-term
(less then 1 year) borrowing
•In June 1997, the ratio of SR borrowing of Thailand was
66%, Korea was 68%, Indonesia was 59% and Malaysia
was 56%
 Causes
Poor Regulation of the Economy
Absence of an adequate regulatory framework for
business, especially the banks.

Over-Inflated Asset Prices

Unrealistically high asset values in most of Southeast Asian
economies due to too fast inflow of money, excess credit used to
fuel speculative booms in real estate, factories and the stock
market.

Fixed Exchange Rate

Fixing the value of currencies to the dollar, except for Korea.
 Lessons For The Developing
Countries
Need for Great Caution About Financial Liberalisation and
Globalisation

Manage External Debt Well and Avoid Large Debts

Manage and Build Up Foreign Reserves

The Need for Capital Controls and a Global Debt Workout System

The Market Can Make Big Mistakes and Needs Regulation