Asia Economic Crisis

1
Asia Economic Crisis
2
IMF and World Bank

• IMF to rescue during emergency
• World Bank (International Bank for Reconstruction
  and Development) to help plan for development
• Old boy rules the US names the president of the
  World Bank (Paul Wolfowitz, past deputy defense
  secretary of US), European countries name the
  head of IMF

3
IMF Articles of Agreement explicitly permitted
capital controls

• Article VI section 3 Controls of capital
  transfers Members may exercise such controls as
  are necessary to regulate international capital
  movements, but no member may exercise these
  controls in a manner which will restrict payment
  for current transactions or which will unduly
  delay transfers of funds in settlement of
  commitments, (signed in 1944)
• The US, didnt not remove its most prominent
  capital controls in 1974.

4
Washington concensus

• A term referring to the policy held by the US
  Treasury, IMF, and World Bank
• Privatization, financial liberalization, budget
  balance
• First successfully applied in Chile, Argentina,
  etc. (in a time with rampant inflation,
  government deficits, etc.)
• Should the same be applied to other countries?

5
Type 1 Financial Crisis Excessive Lending

• Banks and creditors stop to roll in loans in a
  massive way and firms are unable to repay
• moral hazard, corny capitalism gtseems to suggest
  Asia countries were rotten and corrupt
• But since lending is voluntary, can we say the
  lenders (foreign banks, the Wall Street, etc.)
  are equally rotten and corrupt?

6
Type 2 Financial Crisis Speculative Attacks

• Speculators short sell a countrys currency (say,
  HK) in a massive way, wishing to force a
  devaluation/depreciation and gain from it
• Time 1 Soros gets US1B now by short selling
  HK7.8B.
• Time 2 After devaluation, one US is worth
  HK15.6.
• Time 3 Soros buys HK7.8B using US0.5B to
  complete the deal, gaining US0.5B.

7
Self Fulfilling Prophecy

• Even with sound fundamentals, a country may still
  be susceptible to self fulfilling prophecy
• That is, an outcome may result where a lot of
  speculators short sell the currency leading to a
  devaluation
• However, the outcome is possible where nobody
  short sells and no devaluation occurs.
• The country, just a victim, should not be blamed.
• Bank runs is a related phenomenon

8
What caused the crisis?

• Viewpoint 1 Crony capitalism
• Viewpoint 2 Capital account liberalization
  (pushed by IMF)
• If these countries have not had capital account
  liberalization, their firms would not have had
  excessive loans, neither would speculators have
  been able to short sell.

9
What caused the crisis?

• Asian countries had very high savings rate and
  capital account liberalization would give little
  help to them.
• IMF pushed them with little evidence that they
  promoted growth, but ample evidence that they
  imposed huge risks.

10
Remedies proposed by IMF

• Contractionary Policies
• In light of looming recession!
• High interest rate to defend currency
• Leading to distress or bankruptcy of highly
  indebted firms
• Trade balance
• Beggar-thy-neighbor contagion as countries tried
  to cut down imports in the same time

11
Remedies proposed by IMF

• Structural Reforms
• Shutting down banks
• Tightening controls on banks
• Restructuring distressed firms
• Fiscal Austerity
• Cutting down government subsidies on food, fuel,
  etc.
• The Washington consensus, which cured Latin
  America, was inadvertently used to cure Asia
• But crisis was not caused by structural problems.
  Pointing out deep structural problems is like
  crying fire in a theater!

12
A conspiracy theory?

• A conspiracy theory like that of EHM?
• I Stiglitz believe that there is a simpler set
  of explanationsthe IMF was not participating in
  a conspiracy, but it was reflecting the interests
  and ideology of the Western financial community
  (GAID, p.130)