EAST AND SOUTHEAST ASIAN
NIEs:4
Late 1990s financial crisis
Risks of EOI development
Strategies• Vulnerability to external shocks• self-limiting nature of dependence on low cost
labor as an economic development strategy• sudden changes in consumer demand• technological change• exchange rate movements• protectionist policies by industrialized
economies
My perspective on the late 1990s East Asian
“boom and bust” cycleSteven Radelet and Jeffrey Sachs, Harvard Institute for International Development
Don’t simply focus on what these NIEs did wrong. A more even-handed treatment. External
actors were also at fault.
Useful starting point
Defining element of this crisis
Item 1994 1995 1996 1997 1998Current account balance -24.6 -41.3 -54.9 -26.0 17.6External financing (net) 47.4 80.9 92.8 15.2 15.2Private inflows (net) 40.5 77.4 93.0 -12.1 -9.4 Equity investment 12.2 15.5 19.1 -4.5 7.9 Direct equity 4.7 4.9 7.0 7.2 9.8 Portfolio 7.6 10.6 12.1 -11.6 -1.9 Private creditors 28.2 61.8 74.0 -7.6 -17.3 Commercial banks 24.0 49.5 55.5 -21.3 -14.1 Non-bank 4.2 12.4 18.4 13.7 -3.2 Official inflows (net) 7.0 3.6 -0.2 27.2 24.6 Internat’l institutions -0.4 -0.6 -1.0 23.0 18.5 Bilateral creditors 7.4 4.2 0.7 4.3 6.1Resident lending and other (net) -17.5 -25.9 -19.6 -11.9 -5.7 Reserves change, excl. gold -5.4 -13.7 -18.3 22.7 -27.1
External financing in billions
Korea, Indonesia, Malaysia, Thailand, Philippines
This followed a period of large increases in cross-border bank
loans
0
50
100
150
200
250
300
Totaloutstanding
Japan U.S.
End 1995
End 1996
Mid-1997
58
60
62
64
66
68
70
72
Total outstanding
End 1995
End 1996
Mid-1997
International claims held by foreign banks
All 5 economies
Thailand only
Distribution of foreign bank claims by sector, mid-1997
0 50 100 150
All five
Indonesia
Malaysia
Philippines
Thailand
Korea
Non-bank private
Public Sector
Banks
Other indicators of lack of foresight
Why didn’t the alarm bells ring???
Government budgets registered regular
surpluses
-4
-3-2-10123
45
1990 1991 1992 1993 1994 1995 1996
Indonesia
Malaysia
Philippines
Thailand
Korea
Overall central gov’t budget balance as % of GDP
• Inflation levels remained below 10%
• sovereign debt was low or falling (Philippines and Indonesia)
• very high domestic savings and investment rates
• growing foreign exchange reserves
• favorable world market conditions
What indicators of increasing financial
vulnerability SHOULD HAVE been picked up???
Growing current account deficits
-8-6-4-20246
Ko
rea
Ind
on
es
ia
Ma
lays
ia
Ph
ilip
pin
es
Th
aila
nd
1985-89
1990-96
Balance of payments, 1985-1996
Significant exchange rate appreciation
0
20
40
60
80
100
120
Dec
-88
Dec
-89
Dec
-90
Dec
-91
Dec
-92
Dec
-93
Dec
-94
Dec
-95
Dec
-96
Real exchange rate index, Thailand, (1990=100)
Sharp declines in export growth rates
-5
0
5
10
15
20
25
30
35
1994* 1995* 1996*
Korea
Indonesia
Malaysia
Philippines
Thailand
Export growth rates (by value), 1994-96
Financial trends: sharp increase in short term
debtShort-term debt and reserves, June 1997
0 50 100 150 200 250
Indonesia
Malaysia
Philippines
Thailand
Korea
Short term debts as % ofreserves
Short term
Total claims
Proximate causes of the withdrawal of foreign
funds• BANK FAILURES. Especially Thailand. Role
of lending to property companies which got hit by steep falls in property markets.
• CORPORATE FAILURES. Especially Korea. Hanbo Steel collapses in January 1997. Then Sammai Steel and Kia Motors. Puts merchants banks under pressure. Channels for foreign borrowing.
• INTERNATIONAL INTERVENTIONS. Recommendation by IMF of immediate suspensions or closures of financial institutions. Actually helped to incite panic.
• FOREIGN INVESTORS. Fail to distinguish between healthy and unhealthy projects and settings.