CHAPTER 4: ASIAN CRISIS AND RECENT DEVELOPMENT

Thai-baht collapse in 1997:

Currency Hedge Funds - Hedge is protection
- Attempts to reduce effects of currency fluctuations
Sequencing of Devaluations: Thai baht declined (June 1997) - Malaysian ringgit -
Indonesian rupiah - Philippine peso (July)

Causes of Asian Financial Crisis:

1. Economic Bubble
- securities are traded at prices considerably higher than their intrinsic value, followed
by a ‘burst’ or ‘crash’, when prices tumble.
- inflation, real estate prices, wages, short-term debt, all increases

Causes of Bubble Economy

A. Inadequate Fund Management System
- financial sectors were unable to efficiently handle and disburse the massive inflows
of foreign fund

B. Ineffective Sterilization of Capital Inflows

- sterilization mechanism that could have been used to choke off some of excess
demand was constrained by thin markets for government securities and a fixed
exchange rates.
- greater the sterilization, greater the tendency for the spread between domestic and
offshore interest rates to increase.

C. Restriction on Foreign Banks’ Entry

- east asian countries do not encourage the entry of foreign firms
- financial sectors were less “internationalized”
*Off-shore banking - banking transactions in foreign currencies; receipt of funds from
external sources
*Moral Hazard - agents take more risk because they are insured against negative
consequences of their actions
D. Non-Performing Loans
- financial systems were inadequate(insufficient)
- unsound/unhedged projects were made risky

E. High-costs of Financial Services

- limited internalization of the financial sector also led to higher costs of financial
services(higher interest margins and lending rates)

F. Balance Sheets
- difficult to measure without careful country-by-country analysis

2. External Difficulties
- imports are higher then exports

A. Rapid Growth in Current Account Deficits

- while exports were growing rapidly, current-account deficits were viewed as positive
sign (growth enhancing and capacity expanding investments)

B. Overvalued Exchange Rates

- prior to crisis, exchange rates for most asian currencies were loosely tied to U.S
dollars
- evidence suggest that there were some over-evaluation of the currencies in the
region of the time of the crisis, compared with historical averages

C. Collapse in Exports
1996 - export growth performance fell, particularly from 1995, when exports had been
performing spectacularly
- china played an important role
- rising wages and decline of activity in the computer chip market are also factors.

Contagion
- The contagion effect explains the possibility of spread of economic crisis or boom
across countries or regions. This phenomenon may occur both at a domestic
level(The failure of Lehman Brothers in the United States) as well as at an
international level.
- Economies of nearby countries or regions may affect the economies of other
countries or regions.

Globalization
- World trends that influenced events as the crisis sets in.
- linked the East Asian markets for goods and assets much more closely to the
markets of other countries such as trade liberalization in goods and capital in the
Asian countries.

Financial Integration
- Financial markets of East Asian economies were less integrated into the world
economy due to restrictions of entry of foreign financial institutions.
- contributed to crisis

Post-Crisis Experience of Asia:

-Economic growth was not seen until 5 years after the financial crash.
- led by India and China.
- Increase in domestic demand and foreign trade were significant contributory factors
- exchange rate strengthened, equity prices increased, restructuring of financial
system.

Social Impact of Econ Crisis

Banks reluctant to lend money Firms lacked working capital Currency
Depreciation High Inflation Purchasing Power Fell Poor Public Service
High Unemployment Rate Increased Reverse Migration (OFW will come back
home, cuz no work)

Reform Agenda:
Debt Restructuring
- Close scrutiny and evaluation of borrowers to avoid the Occurrence of bad debts.
- ensure borrowers have the capacity to pay; colaterals and stuff
Private-Sector Credit Lines
- Government has to establish credit lines with the private sector given the difficulties
of borrowing from the international lending institutions.
- government support private

Reformation of Exchange Rate Regimes

- Prudent borrowings (careful on steps of loans and borrowings) of the business
sector in foreign currency.
-borrowings have to be hedged for protection against sudden devaluation of
exchange rates.
- ensure that despite losses, it will not be painful

Capital Account Reform

- regulation should be visited to pump-prime under developed domestic capital
markets
- incentive to motivate, not to drive away

International Portfolio Controls

- Monitoring and supervision of international financial firms such Banks, insurance
companies, and financial Conglomerates.
-Ceilings on loans have to be established.
- operate according to international standards

Minimum International Standards of Financial Practices

- Auditing and accounting practices must adhere to international Standards, and
practices in corporate governance.

Information and Transparency

Accounting and financial reporting must reflect accurate information based on
international standards.

Global Surveillance
- listen to the advice of independent financial institutions like the IMF.
- IMF has to put emphasis on external policies of key industrial countries
rather on domestic policies.
Reformation of Financial Markets
- Revisiting the financial market regulation of the individual countries

Greater Competition
-Relax regulation of foreign financial institutions to enter the domestic financial
market.
- leads to more strategies

Consolidation
- Fold-up non performing banks and allow mergers (if may chance to survive)

Stock Markets
-Introduce derivatives markets especially those that implement Better hedging of
equities exposures.
- buy and sell securities

Trade Policies
-Review and relaxation of tarriff policies to motivate exports.
- support fdi

Foreign Direct Investment (FDI)

- Multilateral agreement among countries must be pursued to obviate skeptiscm
- they may have selfish motives but make sure they are still advantageous to many

Human Capital
- Upgrade productivity via the development of skills and knowledge Of workforce

Better Understanding of the Crisis Process

-Anticipation and forecasting of economic trends to influence Intelligent economic
and financial decisions.
- “Maging I am Ready” - ka tunying

CHAPTER 5: AGRICULTURE

Core-Periphery Characteristics
Core - developed countries, powerful, technologically advanced
- US, Europe, Japan, Australia
Periphery - less developed countries
- dependent on core countries

Advantage to Periphery - Spread Effect

Disadvantage to Periphery - Backwash Effect

Role of Agriculture in Econ Growth

-Provides food for rural and urban population.
-Source of factor inputs:
70% or more of workforce is agri-based employment
Input capital.
Factor of foreign exchange.
-Rich market for output from urban sector.

Productivity in Agriculture
-Southeast Asia and East Asia had higher agricultural and GDP Growth.
- South Asia had lower agricultural and GDP growth
-Surplus from the increase in profitability of agriculture fueled the beginning of
industrialization.

Agriculture in the 70s

Annual Labor Productivity Growth Rates 1960-1980

Traditional Agri
- treating the soil and plants with products that are more likely than not noxious, and
more likely than not synthetically produced in a laboratory.
-These products are used to prevent disease or pests from blighting the plant.

Refined methods of cultivation

Crop rotation
Water use
Farm animals in soil fertility
Varieties in weather factor
Availability and quality of traditional seeds and others

Why Do Farmers Resist Innovation and Modernization?

 Cultural Value - if it is passed down generation to generation
- Subsistence farming.
 Uncertainties of change - Objective is to Maximize family’s Chances of survival,
Not to maximize profit.
 Inadequate insurance and credit to serve as fall back mechanism in the event of
crop failure.

Disincentives to Increasing Productivity:

 Landlords secured all the gains
 Lenders captured all the profits
 Gov’t. guaranteed price was not paid
 Complementary inputs were not made available

What worked:
Green Revolution - Phenomenon created by the Development of higher-yielding
Variety of rice at the Int’l Research Institute in Los Banos.

Fertilizer - most profitable if used with new varieties and appropriate levels of
irrigation
- effects is not uniform

Irrigation
- allowing farmers to increase their productivity through regulating the flow of water
and reducing the risk of flooding
What did not:
Farm Size - There is an inverse relationship between farm size and overall farm
productivity. (hindi porket the bigger, the better na)
- Inverse relationship disappears with the use of farming Intensity, land quality, use
of irrigation and technology.

Changes in Land Tenure

Land distribution is an issue so that programs on land redistribution is advocated on
equity grounds.

Macroeconomic Aspects of Agriculture:

Agriculture in Asia is an intensive sector
√ Adopt a labor and capital-intensive technology.
√ Keep undervalued exchange to maintain
appropriate trading terms and promote appropriate
labor-intensive production technology.

Modernizing Agriculture
√ Mechanization and demand for labor. - agri is highly labor-intensive

√ Technological transfer, growth, and equity. - major factor contributing to increased

productivity in agriculture

√ Genetic Engineering. - a process that uses laboratory-based technologies to alter

the DNA makeup of an organism.

- Genetically Modified Organisms (GMO) are produced by transferring a gene

or set of genes conveying specific desirable traits within or across species

√ Zero tillage. - minimizes or eliminates tilling of land and retains crop residues as
ground cover
- reduces greenhouse gas, conserves soil and saves labor

√ Research and development. - innovation, additional knowledge

√ Food prices and linkages to energy. - depends on demand, and prices of gas and
oil

√ International trade and resource transfer. - agri is prevalent at first, but agri
exports diminishes as Asia became more specialized in industrial exports.

√ Shifts out of primary grain production. - gradual shift of primary foods such as rice
to secondary crops like livestock and tree crops.
- shifts are in line with changes in comparative advantage

CHAPTER 6: INDUSTRIALIZATION AND STRUCTURAL CHANGE

Industrialization
- Rapid industrial development is the key element of structural transformation from an
agrarian based rural economy to a modern state.
-In the Lewis-Fei-Ranis (LFR) model, capital accumulation fuels the development of
the industrial sector.
-Labor removed from agriculture does not affect output much since there is a surplus
of labor in the rural sector.
-As labor moves from the traditional sector to industry, overall labor productivity
increases.
-Once the stock of surplus labor is exhausted, wages are driven up in both sectors.

Backward linkages - backward linkages with suppliers in the rural sector help both
sectors to grow as industry flourishes.
- industry grows, its supplier also grows
- strong in industries such as leather, clothing, textiles, food and beverages and
paper products.

Forward linkages -help countries to upgrade their industrial bases

- strong in industries such as petroleum and chemical and some heavy industries and
also in some labor intensive electronics.

Choice of Technology
- determined, under competitive conditions, by the relative costs of capital and labor.
- poor countries = labor intensive technologies ; capital intensive, if may pera(cuz it
costs some money)
Economies of Scale
-important in enabling industries to move to the lowest point on the cost curve.
- Exporting to foreign markets is one way to achieve economies of scale, particularly
if the domestic economy is limited.
- depends on a number of other factors including management, marketing and
distribution. Technology is also important.

Infant Industry Protection

- used to erect tariff barriers and import restrictions in a number of countries.
-suggests that such protection increases inefficiency rather than reduce it.
-There are some exceptions in Asia, including Korea and Taiwan.

Small Scale Industrial Development

- labor intensive.
- Given a good policy environment, SMEs can thrive, particularly where large scale
economies are not necessary.
- Taiwan is a good example

Foreign Trade
-can be an important source of capital and expertise, particularly for export oriented
industries in the early stages of development.

Asian Experience with Industrialization

-Unprecedented in economic history.
-Per capita income increased by about 7% per year in the NIEs for 30 years.
-Industry’s share of income increased dramatically.
-Some countries had high savings rates and medium to rapid labor force growth
(Russia and Spain) but they didn’t grow as fast.
-The share of manufactured goods increased as did the share of exports
-Exports shifted quickly to light and heavy industry from primary industry
-Growth followed an ‘S’ shape, accelerating rapidly in the 1970s and 1980s.
Technological Transfer

Patterns of different countries:

- Korea and Taiwan followed a pattern
of producing locally for foreign firms to
the foreign firms’ specifications or a
combination of local and foreign
designs and specification. They did not
form joint venture or encourage foreign
firms to set up independent operations.

-Singapore and Hong Kong welcomed

foreign direct investment. Singapore had a more hands on industrial policy by training
and provision of infrastructure.

Four factors were common:

 Low inflation and interest rates and high saving rates.
 Outward looking trade policies.
 Forward looking human resources strategy.
 Appropriate (for local conditions) government industrial strategy.

Comparative Advantage
-The share of manufactured goods in total exports increased dramatically.
-The export push began in labor intensive goods and moved to electronics and other
science based exports.
-Because of this shift, Asian countries were able to gain market share of world
exports over a twenty year period

Role of Innovation
If we break down the composition of output growth in the NIEs and SE Asia:
- About 20% is due to labor force growth.
- As much as 25% or more is attributed to educational improvements of the
labor force.
Innovation
-requires a destruction of old ways of doing things and creation of new methods and
processes.
-Entry and exit of firms have to be facilitated
-Costs of entry and exit are high for larger firms and are particularly high when large
firms have a special relationship with the government.
-One method of facilitating entry into new business and of attracting overseas FDI is
through the set up of Special Economic Zones (SEZs).
- innovation in Southeast Asia has been the result of spending by MNCs (Multi
National Companies)
-Innovation and technology transfer takes place most often when capital equipment
and components are imported by export oriented manufacturing firms
-State owner enterprises are notoriously slow to innovate

Special Economic Zones (SEZs).

-can be extended to the notion of an industrial cluster.
3 main kinds of industrial clusters are:
 large metropolitan agglomerations
 small groups of firms with similar interests
 clusters with a few main producers and their suppliers.

Innovation, Education and Growth Convergence

-There was growth convergence between Asian NIEs and industrial countries.
-Appropriate technology is more important than state of the art technology.

Employment Growth and Industrialization

-Flexible wages and appropriate technology are needed to absorb labor into industry
quickly and effectively.
-Most East and Southeast Asian economies were fully or nearly fully employed for
most of their growth spurt.
-South Asia was not as fortunate as income growth was not sufficient to reduce
unemployment dramatically.

Rural to Urban migration

-Harris-Todaro model predicts that unemployment can coexist with rapid labor
movement to the city.
-workers were willing to wait in low paid and not fully employed positions in the city
waiting to get a job in the higher paid occupations.
-Lured by the stories told by their relatives
-Workers also migrate in order to provide remittance income for their families at
home.

Migration in Asian Countries

-Migration within/between Asian economies has been primarily a function of wage
differentials
-International migration from the poorest to the richest – Indochina, Philippines,
South Asia to industrial countries and the NIEs.
-Lots of restrictions in migration because of fears of social disruption and tension.
-Rich countries are willing to take temporary migrants for short term employment in
low-skilled occupations. Permanent migration is more likely for the skilled and
professional.

Government Policy
-efficiency and welfare were traded off in the early stages in favor of the former.
-Only recently are social safety nets being constructed in the Asian region.

CHAPTER 7 INTERNATIONAL TRADE AND INVESTMENT

International Trade
-When introduced into an autarkic economy(self-sufficient like Japan), gains are
made in both consumption and production.
-Gains from trade can also be broken down into gains from exchange and gains from
specialization.

Consumer Gains -With trade, it is possible to move to a higher indifference curve

Production gains- realized by a country specializing in the production of commodities
that it can produce at relatively low costs.

The Ricardian Theory of Trade

-differences in technology determine comparative advantage.
-Tastes, technology and supply of resources don’t change in this model.
-Trade is a positive-sum game so there are no losers across or within countries.
Hecksher-Olin-Samuelson Model
-extended the Ricardian framework focusing on the fact that countries will trade in
goods where it has relatively abundant factors.
-Poorer countries will export labor intensive products and rich countries will export
capital intensive products.
-Trade will be greater between countries with different economic structures.

Rybcznski theorem - an increase in the supply of a factor will cause an expansion in

the production of goods intensive in the use of that factor.

Samuelson-Stopler theorem - an increase in the price of a good raises the real return
to the factor intensive in the production of that good and lowers the return to the other
factor.

Imperfect Competition
- There are many assumptions underlying both the Ricardo and HOS models .
-When these assumptions are relaxed, conclusions change to some extent.
-For instance, the theory says that countries with similar relative endowments of
factors should not trade much.Yet look at trade in Europe and in North America.
- arises because of product differentiation and differences in consumer preferences.
-If trade results in a decrease (increase) in market power, then there may be welfare
gains (losses).
-tells us that intra-industry trade will be larger (as a proportion of the total) when
countries are alike in terms of relative factor endowments.

Empirical Support
-There is broad empirical support for the theoretical implications of the monopolistic
competition model of international trade.
-Large oligopolies’ power to distort prices and distort supply may have been reduced
by the forces of international competition.
-There is a positive relationship between intra-industry trade and per capita income
since tastes are positively correlated with per capita income.
-As a result, countries that are more alike as measured by per capita income would
trade with each other in products in the same industry – cars and white goods for
example.
Trade Experience of Asia and the World
-Volume of international trade has grown faster world-wide and in Asia than has the
growth in income
-The role of primary products in trade has declined as has its terms of trade.
-Exports as a share of GDP has correspondingly risen.
-The factor price equalization theorem (that returns to labor and capital will tend to
equalize across countries over time) has worked only slowly.
-Wage differentials are still large as are returns on capital.

Import Substitution
-In almost all developing countries, certain industries are granted trade protection so
that they may develop without the fear of international competition. (infant industry
protection)
-Inefficient domestic industry is subsidized for a time, while the government gets to
spend the taxes it raises from import levies.
-Import substitution builds up an industrial base and technological abilities.

Export Promotion
-Started with labor intensive products with strong backward linkages
-Moved later into skill and capital intensive industries.
-Computers, electronics and pharmaceuticals were industries where income elasticity
of demand in industrial countries is high.

Flying Geese Development Paradigm

-A popular set of stylized facts to describe Asian development.
1.Product introduced through importation
2.Import substitution
3.Export orientation
4. Maturing industry as production slows
5. Declining industry relocates or perishes

-the following groups of countries started in stage one and followed successively
through the other four - Japan, followed by the NIEs(SoKor, Singapore, Taiwan,
Hong Kong) and the ASEAN-4 (Malaysia, Indonesia, Thailand and Philippines).
-China is developing so rapidly that it is overtaking ASEAN.
-predicts regional integration and growing interdependence.
-stresses inter-industry trade as labor intensive products are produced by the late
comers while the advanced countries specialized in capital and skill intensive
products.
- there is the hollowing out problem at stage five – witness Japan and more recently
Taiwan.

Issues of Trade in Asia

 Trade protection is an issue and can be measured by the “effective rate” of
protection.
 The effective rate is higher than the nominal tariff, since it is computed using
value added as a base.
 Free trade is a goal for many integrated regions and has been achieved in
Europe and North America to a significant extent.
 Taxes on trade distort the workings of the free market and work to nullify
comparative advantage.
 When trade is freed up, exports can be more effective in lifting productivity and
stimulating growth.

-There is evidence from cross-country analysis that exports and outward orientation
are important determinants of rates of growth.
-The Asian economies are the most open to FDI among all developing regions.

 Subsidiaries of TNCs have higher productivity than local firms.

 Evidence of positive spillovers from TNCs to local firms is more tenuous.

- Partnerships with TNCs bring access to marketing, industrial organization and new
technology that domestic firms would otherwise not have access to.
-The share of East Asia and Southeast Asia in world exports is now over 20% up
from 12 % in 1990
-Exports have shifted from light manufacturing include textiles, wood and paper
products and furniture to machinery, particularly electronics and telecommunications
equipment. This shift was particularly rapid in ASEAN countries
-Intra-regional trade has expanded at a more rapid pace than trade with the rest of
the world. It now accounts for more than half of trade volume in East Asia (including
Southeast Asia)
Pattern of FDI Flows
-China, Singapore and Hong Kong have attracted the lion share of FDI into Asia.
-Since savings rates were high and because of government policy, the NIEs did not
have much FDI with exception of Japanese investment in Korea.
-In Southeast Asia, industrialization began later and they had to rely on export
earnings from primary products to begin the industrialization process.
-They relied more on FDI from the US and Japan to bring new technology.
-These options were not available to the NIEs, who relied on their own resources to
“bootstrap” their way to industrialization.

Institutional Factors Facilitating Trade

-The exchange rate is the most important target variable since it has a direct impact
on the profitability of firms.
-Other things equal, exchange rate depreciation brings greater international
competitiveness.
-In the build up to the Asian crisis, the current account deficit, international
competitiveness and absorptive capacity of the economy were other important
factors.

Asia’s Experience in Intra-regional Trade

-There has been an increase in intra-regional trade within Asia (including Japan) in
the last 2 to 3 decades to over 50 percent of exports and imports.
-Growth in income and geographic proximity has stimulated trade.
-Developments in technology and transportation have stimulated intraregional trade..
-Intellectual property is becoming an important factor in the flow of FDI.
Compared with other regions, there are fewer formal mechanisms to facilitate
regional cooperation in Asia. (ASEAN and SAARC )
-There has been more emphasis on unilateral agreements.
-China is now the 5th largest economy in the world and the third largest in trade
behind the US and Germany.
-Its exports have grown at more than 20 % per year and its incomes at around 10
percent over the last decade or so
-Intense competition for export markets within Asia has resulted in specialization in
high technology exports
-This has generally raised the level of comparative advantage and economic
efficiency.
-It has also created increasing returns to scale as measured by revealed comparative
advantage

CHAPTER 8:SAVINGS AND THE FINANCIAL SYSTEM

Savings
-key variable in determining economic growth.
-Total savings are the sum of government, business, and private savings.
-In developing countries, most savings are accumulated by private households and
the business sector.

Saving Models:
Keynesian Model
Income - Spending/Consumption = Savings/Investment
(priority is consumption)
- short term

Income Smoothing Models: The Permanent Income/Lifecycle Hypothesis

Permanent Income Hypothesis (PIH) - infinite lifetime horizon
- safe to save
- permanent income (YP) is consumed
- transitory income or YT (extra income like gifts chuchu) is saved
C = a + b YP. Where YP + YT = Y
 Borrow when income is low, save when income is high
 Borrow something and then pay when income is high

Determinants of Savings
Level of interest rates
- high interest rates = more income for creditors
- financial liberalization may also remove constraints to saving by allowing for more
borrowing opportunities

Role of government
- gov’t increases taxes = incomes will decline and savings can be diminished
- effects will depend if change will be through change in tax rate or rate of
government spending.
Growth in income
- there is strong relationship between income growth and savings

Terms of trade
- works through an unanticipated and transitory increase in income by an improved
trade balance.
- terms of trade can be substantial if the shift is large

Population age structure

-savings rate is expected to decrease as population ages
- country with low dependency rate = higher savings rate

Level of income
- precautionary saving motives are stronger than life-cycle effects in the developing
countries.

Degree of financial liberalization and stability

- increased volatility could lead to a greater precautionary motive for savings

Level of Savings
-Developing countries such as South Asia and Latin America currently save up to
approximately 20 –25% of GDP.
-Savings in East Asia are the highest, and register around 35% in 2000 (Figure 7.1).
Higgins (1998) predicts after 2010, savings in East Asia would fall because of greying
population structure.

Banking and Financial System

-Banking systems in Asia evolved from mainly British or Japanese colonial models.
-Financial systems are dominated by commercial banks.
-For most of the postwar period, financial systems were characterized by substantial
financial repression.

Financial Repression
 High reserve requirements.
 Interest rate controls.
 Compulsory credit allocations to different sectors.
 Lack of loan scrutiny.
 High profit and low efficiency as a result of lack of competition.

-This kind of banking system evolved when governments played a strong role in
mobilization and allocation of credit.
-Specialized banks were often used to further allocate credit to key sectors.
-Real interest rates were often very low to help out key sectors and as a result, levels
of overall saving/investment were discouraged.
-The miracle economies were able to grow rapidly despite financial repression
because the rest of the economy was more open and export oriented.

Financial Liberalization
-removes all of the restrictions to the workings of markets created by repression.
-The resulting financial system functions efficiently.

Experience in Asia (before)

-In the 1960s and 1970s, commercial banks were tightly controlled by governments.
-Banks and development finance institutions were the main financial intermediaries.
-Private equity and bond markets were very thin.
-Government controlled interest rates and banks were required to hold government
securities.
-Loan allocations were made and administered through banks and development
financial institutions (DFIs).

Experience in Asia (after)

-In the 1980s and 1990s, some financial liberalization took place in East and
Southeast Asia.
-Greater competition were allowed as foreign banks granted licenses and banks were
privatized.
-Interest rates were deregulated to some extent.
-Some prudential regulations introduced including auditing and oversight functions.
-Competition increased but government role in approving entry was still strong.
Measures of Financial Repression
-The ratio of money supply to GDP is a good indication of financial repression.
-Malaysia and Thailand are noteworthy examples.
-Slower progress in some other economies.
-Hong Kong and Singapore liberalized earlier. The financial system in Korea and
Taiwan remained somewhat more closed.
-In the Philippines, banks liberalized in 1980s and in Indonesia the ratio increased
from a low level in the early period as significant banking reform took place.

Comparison with Other Regions

-Liberalization is generally costly to the government.
-It loses revenue from having to pay low interest rates on debt and by taxing banks
through high reserve requirements when there is financial repression.

Risks of Liberalizing in Asia

-When there is a boom, capital inflows make it difficult to control inflation and the
pace of economic growth.
-This is because it is hard to sterilize inflows and to maintain exchange rate at
competitive levels.
-Loan supervision was also generally weak in Asia prior to the financial crisis.
-Institutional practices that were in force before liberalization did not change. i.e.
- lack of competition,
- directed lending,
- the presence of moral hazard,
- poor loan approval system still prevailed after “liberalization”.
Financial Crisis of 1997
-As the crisis unfolded, weaknesses in the 5 crisis affected countries was
exacerbated by currency depreciation, reduced lending opportunities and build up of
Non-Performing Loans (NPLs).
-Large short term external debt.
-Needed to introduce better process to identify worthy borrowers;
-Further deregulate financial transactions and introduce more competition;
-Introduce better prudential regulations;
-Continue to privatize state banks;
-There was also a need to develop markets for new financial assets including
hedging and to reduce restrictions on entry into banking system both domestically
and for foreign banks.

Mechanisms for dealing with the Aftermath of the Financial Crisis

-Formation of Asset Management Companies (AMCs) in crisis affected countries.
-Closing, merging and recapitalization of bankrupt banks and other financial
institutions.

Progress in Financial Restructuring

-NPLs have fallen since 1998.
-Banks are now stronger and in a better financial position.
-Korea and Malaysia have made the best progress – less so in Indonesia, Thailand
and the Philippines.
-Generally less progress in corporate restructuring has been made than in banking.
-Bank credit has expanded in Korea and Malaysia but it was still below pre-crisis
levels in other countries at end of 2002.

Informal Finance
-Informal financial institutions serve the financial needs of these people.
-Inability to borrow from banks in the formal sector because:
Access is limited for squatters and in some rural areas.
Banks lend for investment and not for consumption.
Transactions costs to assess loans to the poor are high.
Banks lack information about credit worthiness of poor borrowers.
-Poor have no assets to serve as collateral.
-To address this shortfall in borrowing options, a number of different institutions and
schemes have been developed:
Group finance – Rotating saving and credit associations (Roscas) are found in many
countries and have a long history.

Forms of Informal Finance - Roscas

- deal with the problems mentioned above by organizing people who pool resources.
-Most Roscas exclude women.
-Default is discouraged by pressure from other members of the group.

Forms of Informal Finance - Others

-In these forms of lending, there is one lender (better off) and many (poorer)
borrowers.
-Rates of interest are higher than the formal market

Forms of Informal Finance – Others (Money Lender)

- the rates of interest charged are usurious and money lenders are blood sucking
scoundrels preying on the poor.
- there is some competition among lenders and rates charged by money lenders are
not unusually high given the risks and the costs of administration of a number of
small loans.

Forms of Informal Finance – Others (Landlords)

-Landlords often make loans to tenants to buy seeds and fertilizer or tide them over
when the harvest is bad.
-Sometimes the tenant gets so much in debt that he is never able to save.
-This situation accentuates the problems of agriculture where risks are high since
harvest yields depend to a considerable extent on the vagaries of the weather.

Forms of Informal Finance – Others (NGOs)

-Non-government organizations (NGOs) are informal financial institutions sponsored
by outside interests that mobilize resources.
-Some NGOs, like the Grameen Bank, may later be incorporated into the formal
sector.
-Risk is shared within the groups that are formed within the NGO.
-NGOs like the Grameen Bank have many characteristics in common with Roscas.
Informal Finance
-The experience of the Grameen Bank, NGOs and Roscas demonstrates that access
to credit is the major problem for the poor and not the lack of ability or incentive to
repay.
-How large is the informal sector? It is shrinking as financial liberalization takes place
but it is still extensive.
-Household borrowing in the rural sector is still largely from the informal sector – over
50% in most countries (see Table 7.6).
-The proportion of household debt owed to the informal sector is similarly high,
although not as high in the urban sector.

Informal Finance & Monetary Policy

-The main impact of monetary policy on informal finance and on the poor in general
is through the inflation tax.
-Assets of the poor are in goods and cash, and they depreciate rapidly with inflation.
-Therefore, to help the poor who have to make use of money lenders and other
informal financial markets, a stable price level should be the major aim of monetary
policy.

Global Crisis of 2008 and 2009

-Many reforms that were suggested following the 1997 Asian financial crisis had
been adopted and bank balance sheets were in better shape.
-The size and incidence of nonperforming loans (NPLs) had also been reduced.
-The practice of short term overseas borrowing to refinance longer term local projects
at higher rates was also curtailed.
-Exchange rates, while still loosely tied to the US dollar were also more flexible than
before the 1997 financial crisis.
-Recovery from the global crisis is expected in the second half of 2009 and in 2010

CHAPTER 9 - POPULATION
Population Growth
-World population has followed an ‘S’ shaped pattern of growth over time
- growth accelerated from the 18th century through to the 19th century due to
advances in medicine.
-The strong growth in world population in more recent times (beginning from the mid-
1900s) is mainly due to high growth rates in developing countries
Population Growth: Some Basic Concepts
 Birth rate = number of births per thousand people per year
 Death rate = refer to number of deaths per thousand people per year
 Population growth rate = birth rate – death rate
 Life expectancy rate = average number of years a person is expected to live.
 Total fertility rate (TFR) = total number of children a woman is expected to have
over her lifetime.
 Infant mortality rate (IMR) = the number of infant deaths per 1000 live births.

-Pakistan, Malaysia and the Philippines stand out as having the highest population
growth rates in 2001 (see Table 8.1)
-Japan, Hong Kong, PRC, Thailand and Singapore are the countries with the lowest
population growth rates – around 1 percent per year or less
-Age distributions show what proportion of the population is in certain age categories
-In Asia and Latin America, proportion under 15 is about one third of the population.
--This group is much smaller in Europe and North America – around one fifth.
-TFR and population growth rates are positively correlated
-Life expectancy and TFR are generally inversely related

Theory of Demographic Transition

Stage 1: High birth and death rates - birth rates slightly higher than death to ensure
population is growing
Stage 2: High birth rates and falling death rates - economies industrialized, medical
technology decreases death rate
-responsible for the dramatic increase in world population
Stage 3: Low birth and death rates -economy is fully industrialized
* Thus, population growth is high in the second stage, and lower in the first and third
stages*

 The demographic transition in early Europe was slow

 In general, demographic transition in the now industrialized countries took many
years, even centuries, to occur.
 Why?
-Slow response of birth rates to changes in death rates
-Slow changes in social norms,
-Inertia from movement from triangular distribution of population to a more
rectangular distribution of population
-In the developing countries of today, demographic transition is seen to occur more
rapidly.

Economics of Fertility
- the demand for children will increase if the cost of children declines, and fall if the
cost of children goes up
-In Becker’s microeconomic model of fertility, demand for children are positively
related to household income and wealth; and negatively related to the value or price
of children relative to other goods.
-A substitution effect occurs between the quality and quantity of children, where an
increase in the price of one will cause an increase in the demand for the other.
-In poorer countries, the opportunity costs are deemed low and the perceived
benefits higher.
-In richer countries, the anticipated cost of having children is higher since more
education is the norm

Why is there high demand for children in developing countries?

 Old age support: children are relied on to support parents in their old age.
- developing and/or strengthening the country’s social security system can serve to
lower demand for larger families
 low opportunity costs for women.
-women’s education and job opportunities may be a powerful policy instrument for
lowering fertility rates

Economics of Fertility: Empirical Results

-female education beyond four years of elementary education have a strong negative
effect on fertility
-Studies also show that when the labor force participation rate of women goes up
fertility falls
-The substitution effect between quality and quantity of children implies that lower
costs of education can induce families to have smaller number of children who they
can send to school.

The Asian Experience

-For economies in the Asian region, dramatic changes in population levels began to
occur only from the early 1900s. Population exploded just after WWII , particularly in
the NIEs and the PRC.
-Beginning in the mid-1960s, population growth in the NIEs began to fall dramatically
at the same time that economic growth was accelerating
-By the 1990s, many countries in Asia had completed the demographic transition
 Countries with low fertility:
PRC, NIEs, Sri Lanka & Thailand
 Countries with medium fertility:
India, Indonesia, Malaysia, Philippines, Vietnam
 Countries with high fertility:
Bangladesh, Cambodia, Laos, Nepal and Papua New Guinea

Policies to Reduce Population Growth in Asia

-Thailand, Malaysia and Sri Lanka devoted most resources to contraceptive use –
supplying information and subsidizing the cost.
-Other countries, such as India and PRC, used incentive payments.
-Remark: In the Philippines, religious beliefs have constrained the use of
contraceptives. As a result, population growth have remained relatively rapid.
-Women’s education has also played an important role in lowering fertility
-Coercion has been used in India and PRC
-One child per family policy has been in force in China for over 20 years:
-Policy raises ethical considerations, particularly since there is a preference for boys.
-This has led to infanticide and abortion of girl infants and fetuses.
-Preference for males in India has led to similar problems

Prospects for the Future

-The “demographic dividend” is a term coined to describe the demographic transition
when the working population is growing faster than the child and adult populations
combined.
-This means that the dependency rate (non-working population over working
population) is falling.

“Demographic Dividend”
-This demographic dividend trend is most evident in East Asia, Thailand and
Indonesia
-It is not as strong in South Asia where population growth is still high
-accentuated by an increase in the labor force participation among women
-As populations age, the demographic dividend dissipates
-Population age structures will begin to look like an inverted triangle
Issues in Population Growth & Control
-Many questions to be answered such as “Which population control programs are
most effective?” and “How should resources be allocated to different programs?”
-Although we know that raising women’s educational attainment works to reduce
fertility and that some family planning interventions work, a better data base for
analyzing these population issues needs to be developed.