The Asian Financial Crises: A Comparative Study

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The Asian Financial Crises A Comparative Study

• Thailand, South Korea, and Japan

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I will begin with a real story. Oct 17th 1997, on
a golf course in Taipei, a group of businessmen
were playing a round of golf. Among them, were
the governor of Taiwans Central Bank, Mr. Hsu,
and the governor of Koreas Central Bank, Mr.
Lee. During the game, Lee, the Korean banker,
noticed Hsu, the Taiwanese banker, were
frequently interrupted by his cell phone. When he
answered, he spoke in hash and agitated tone in
Chinese. Lee instinctively felt something was
going on. Something big. But what is it?
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The Asian Financial Crisis
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He found it out the next day Taiwan just
devalued its currency while they golfed. This
move not only lowered Taiwans export price and
made the Korean export more expensive, but left
the Korean currency, the won, exposed to
speculative attacks. At that moment, Lee felt
like the last gazelle in the herd with a cheetah
on their tails. Class, welcome to the Asian
Financial Crisis!
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Introduction

• About This Presentation
• Abbreviations/acronyms AFC, Korea
• Presenters
• Countries Selected for Comparison and Why
• Thailand the first to fall (Dan)
• South Korea why me? (Johnny)
• Japan the alpha goose (Shin)

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This is presentation is a comparative study of 3
Asian countries during the crisis. First of all,
let me clarify some abbreviations and acronyms we
are to use during the presentation AFC stands
for Asian Financial Crisis We may use Korea and
South Korea interchangeably during the
presentation.
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Here are the presenters My name is Bing, and
this is Dan, Shin and Johnny. For this
presentation we picked 3 Asian countries. They
are Thailand, South Korea and Japan. Thailand
was the first to fall during AFC. So its symptoms
and fate is somewhat indicative of the crisis in
general.
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South Korea had been an understudy of Japans
success. It had consecutive, fast growing economy
until the eve of AFC. After AFC it recovered
quickly and repaid the massive IMF loan in less
than 4 years. So what is a healthy economy like
the Koreas doing in AFC? Japan is selected
because it was one of the economies survived the
AFC. So it is interesting for us to find out why.
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Introduction

• When
• July 1997 to Feb 1998
• What happened around us?
• Chicago Bulls, FL Marlins, Denver Broncos,
  Titanic, Backstreet Boys
• Which Countries
• Almost all Asia-Pacific countries, minus Japan,
  Mainland China, Taiwan

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AFC lasted only about 8 month. However, during
that 8-month, more than 20 million people lost
their jobs. Those still had their jobs took a
double-digit pay cut on average. Imaging yourself
graduating that year!
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As sudden as AFC was, and as traumatic as it was,
it did not happen in vacuum, here is some
historical perspective
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Introduction

• Historical Context
• Prior Crisis Mexico peso 1994-5, European
  Monetary System 1992
• The East Asia Miracle
• In relation to Globalization

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Prior to AFC, there had been a few other recent
financial crisis. All were very destructive to
the economies affected. Asia-Pacific economies
had been enjoying decade long sustained growth,
which led to remarkable improvement of general
welfare. This sense of achievement played a
significant role in the events leading to, during
and after AFC. For example, as early as 1995,
critics have highlighted some structural
deficiencies in South Koreas economy. But nobody
paid attention, because, as one IMF official
conceded, it is hard to argue with success.
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Compared to other regions in the world,
Asia-Pacific was, and still is, an exemplary
model of embracing globalization. It is
considered the trophy of open economy and global
integration. However, after the AFC, particularly
after seeing the devastation it left in its wake,
opinions shifted. Eventually, AFC became one of
the rallying cries for the anti-globalization
movement. As many of us witnessed during the 1999
WTO protests couple of exits down I-5
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Before we move on, I feel it is important to tell
you this. AFC is a very complicated topic. In the
short time we have, we will only focus on some of
the issues that are related to this class but we
strong encourage you to learn more about this
event outside of the class. With this being said,
we will start our country studies.
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What We Have Learned

• In the Wake of AFC
• National Economy
• National Finance
• General Welfare
• Socio-Political
• World Economy

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Now we have heard the stories from the 3
different countries, lets try to summarize what
we have learned. Obviously, any financial crisis
is destructive. AFC is no different. Here are
some charts to show macroeconomic measurement
changes, grouped by internal and external
balances
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Other than those tangible numbers, lets not
forget there are many intangible losses For
example, the social effect of high unemployment
rate, public healthcare and education suffered
tremendously. Social groups that are perpetually
on the margin of economic activities seniors,
the poor, the unskilled faired the worst. In
addition, the overall decline of aggregate demand
caused commodity price to drop. It is like a
virus that spread around the globe. Economies
that relies heavily on exporting natural
resources were all hurt, e.g. Russia and later,
Argentina.
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What We Have Learned

• The Complexity and Diversity of AFC
• Do not believe That is whys
• Liquidity
• Over-spending/borrowing
• Poor Management
• IMF and the Washington Consensus
• Political Factors

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I like to stress again that AFC is an complicated
topic. Although the symptoms were similar among
countries affected, the causes varied a great
deal. Unless you are a politician, do not simply
say, That is why about AFC. Just like we are
exposed to all kinds of viruses very day but we
dont get sick unless everything turned out
against us someone who is very close to you pass
on to you a virus that you never had before on a
day that you were really tired.
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In the AFC case, we have identified some factors
but cannot say AFC was caused by just one of
them. For example, is liquidity or reserve the
cause? We would argue it is the symptom, but not
the cause. So what caused the liquidity problem?
Was is overspending? Not exactly, in the case of
Thailand and Korea, government deficit were well
within 5 limit when they did occur. Most of the
Asian nations had high savings rate too.
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If not over-spending, could be unwise spending?
For example, borrowed too much short term loans?
In Koreas case, that appears to be the case,
given how fast the country repaid its IMF loan.
However, in Thailand, Indonesia and Malaysia, the
recoveries were slow and painful. This cannot be
explained by short-of-cash only.
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So were the economies affected by AFC poorly
managed? There is certainly a lot truth to that.
For example, it is commonly accepted that AFC
economies rely too heavily on banks alone.
Financial market lacks transparency and
independence. And so on. But there are exceptions
to this generalization. For example, Japanese
economy has similar deficiencies, but it was not
as much affected. The U.S., the supposedly model
economy of the world, almost had a FC of its own
a year after AFC.
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You may also hear the term Washington Consensus
during AFC discussions. The term implies that the
U.S. used IMF to take advantage of the FC in Asia
for its own benefit. There is no reason to
believe that the U.S. acted outside of its stated
intentions. It does have tremendous leverage but
not direct control over IMF. What IMF failed to
do during AFC is indicative of the limitations of
macroeconomics as a science. Regardless what
political factors may be involved, we have to
accept the premise that AFC was in its core an
economic affair.
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What We Have Learned

• How to Prevent Future FC
• Is it possible?
• Some tips from AFC
• Listen to the Devil
• Too Many Banks?
• Is Japan the Model to Follow?

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So what can we do to prevent the next Financial
Crisis? Or is that even possible? We should not
stop trying. Some specific lessons we have
learned from AFC are, Listen to the Devil. The
Devil here are the currency speculators. There is
a nicer term for them macro hedge fund. They are
like computer hackers they improve our lives in
a perverse way.
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The other thing to watch out for is the
healthiness of domestic capital market. For
emerging economies, fragmented financial market
poses an acute problem. In the case of South
Korea, most of the short term loans were borrowed
by banks themselves. So was the case in Thailand.
As a result, many banks failed during
AFC. Japans banking system had similar
deficiencies. Thanks to its large economy and
substantial foreign reserves, it survived AFC
while smaller economies did not.
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What We Have Learned

• The Tools We Have
• Monetary Policy
• FOREX
• Administrative
• Signaling

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Financial crisis, especially those caused by
predatory attacks, are difficult to stop once it
started. During AFC, Hong Kong was able to defend
its currency. Thailand almost succeeded but the
levee broke at the last minute. Among the type of
tools listed, we are surprised to find the
empirical evidence suggests currency control is
an effective tool to combat attacks. However, it
is questionable as a long term solution.
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Q AOpinion Poll
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Opinion Poll

• China the Next FC Victim?
• Opportunity and Crisis
• Large economy
• Internal and external balances
• FOREX control
• Banking system, financial market in general

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Opinion Poll

• Financial Crisis to Happen in China?
• Not likely
• Very likely in 5 years
• Probably in 10 years