1997 - 1998

Economic success

• Annual GDP growth in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8% over the decade before the crisis

• Almost half of total capital inflows to developing countries– nearly $100 billion in 1996

• inflation & unemployment rates both low

Ramifications

• Negative consequences– Environmental degradation– growing inequality between rich and poor– rampant corruption– social malaise

• Significant and real benefits– great majority of the people’s living standard– have not been erased by the crisis

Weaknesses in financial system

• inadequate financial sector supervision

• poor assessment and management of financial risk– growth of bad loans– state-directed lending

• relatively fixed exchange rates

• violent asset price cycles– property boom bubbles

Weaknesses in financial system

• Large amounts of short-term international capital, denominated in foreign currency

Corruption

• Transparency International’s 1999 survey of corruption– Singapore 7th– Malaysia 31st– South Korea 50th– Philippines 54th crisis countries– Thailand 68th– Indonesia 96th

Diary of the crisis: I

Diary of the crisis: II

The cause of capital outflows

• Bank failure in Thailand

• Corporate failure in Korea

• Political uncertainty due to the potential for a change in government in Korea, Thailand, the Philippines, and Indonesia

• net outflow of $105b from Thailand, Malaysia, South Korea, and the Philippines between 1996 and 1997

The cause of capital outflows

• Contagion effects hit Malaysia, the Philippines and Indonesia

• The IMF’s intervention actually helped to incite panic

Causes of financial crisis

• macroeconomic imbalances

• structural deficiencies in financial sector

• loss of market confidence

• rising political risk

IMF's immediate response

• Help Indonesia, Korea, and Thailand arrange programs of economic stabilization and reform

• Approve IMF financial support for reform programs in Indonesia, Korea, and Thailand

IMF’s immediate response

• Consult with other members that needed to take policy steps toward off the contagion effect

Asian programs

• comprehensive reform of financial systems

• closure of unviable financial institutions– associated write down of shareholders' capital

• recapitalization of undercapitalized institutions

• close supervision of weak institutions

• increased potential for foreign participation in domestic financial systems

Reforms in governance

• break the close links between business and governments

• ensure that the integration of the national economy with international financial markets is properly segmented

Real GDP Growth (%)

Inflation rate (%)

GDP growth rate (%)

Impact on Japan

Impact on World

Three schools of thought

Three schools of thought

• Revisionist: “developmental state”– Market must be mediated, regulated and

guided by the state

• Culturalist– “Asian values”– Culture context of East Asia explains the

miracle

Recovery from the Crisis

Lessons from the Crisis

• Better information

• Regulation and restraint

• Controlling capital flows

International Organizations

• Authority vis-à-vis sovereign governments

• Access to information

• Risk of ``creating” a crisis

• Globalization and interdependence