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.