A Comparative Study of

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• Global Financial Crises

• A Comparative Study of
• East Asia and India

Avinash Chandiramani Scott Dicks Erin
Fitzpatrik Salil Jayakar Ruhi Khan Chad Simon
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Disaster Strikes East Asia
Decades of impressive growth
Crisis
The intensity and the duration of the crisis were
inconceivable
The effects of the crisis spread through the
Global economy
THE INDIAN ECONOMY ESCAPED THE CRISIS VIRTUALLY
UNHARMED
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Agenda
INTRODUCTION TO THE CRISIS Macroeconomic
fundamentals Theories
FINANCIAL AND TRADE LIBERALIZATION Banking
Sector Capital flows Debt / equity
markets Real Trade Linkages
EXCHANGE RATE REGIMES Foreign reserves
Banking sector Financial sector Trade
CONCLUDING REMARKS
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Introduction to the Crisis
1997 East Asia falls into crisis

• Bankruptcy rates skyrocket
• Stock markets crash
• Growth rates tumble
• Currency speculation forces Thai Baht depreciation

THIS IS A TRIGGER FOR THE CRISIS
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Introduction to the Crises

• Following this, Malaysia, Indonesia and
  Philippines allow depreciation
• China, Hong Kong, Korea, Singapore and Taiwan

TIGERS
PAPER TIGERS
CREDIT CRUNCH
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Macroeconomic Fundamentals
East Asia India
GDP Growth Exceptional Moderate
Inflation Low Low
Saving Rate High High
Current Account Deficit Over 5 of GDP Under 5 of GDP
Exchange Regime Pegged Floating
Trade Very Important Less Important
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Bad Policy Theory

• Dramatic increase in credit
• Socially Risky behavior encouraged
• Moral hazard by monetary authorities

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Financial Panic Theory
Systemic Risk
Expectations of Instability
Coordination Failure

• Downturn in Real Economic Variables (GDP)

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Moral Hazard
A situation which creates incentives to engage
in risky behavior. Decreased personal liability
acts as an incentive
Two Types
Corporate Level
International Level
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Contagion
The transmission of shocks to other countries or
the cross-country correlation, beyond any
fundamental link among the countries and beyond
common shocks. This definition is usually
referred to as excess co-movement, commonly
explained by herd behavior.
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Liberalization Policy

• Banking sector

• Privatization

• Capital Flows

• Capital Account Convertibility (CAC)

• Debt/Equity Markets

• Introduction of financial institutions

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Liberalization Policy
Liberalization Policy
An influx of capital
More efficient and competitive markets
but Proper regulation is needed
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Banking Sector
East Asia
India
High level of privatization
Low levels of privatization
Increased supervision Diversity in investments
Regulation was not enforced Little diversity in
investment
Implicit Guarantee
Morally hazardous behavior
Less moral hazard
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Capital Flows
East Asia
India
Partial Capital Account Convertibility
Full Capital Account Convertibility
Increasing portfolio investment
No change in portfolio investment
Turnaround of short term capital flows
Less dependence on short term capital
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Debt/ Equity Markets
Ineffective rating and regulation agencies
Overvalued stock markets
Financial assets as collateral for loans
Corporate bankruptcy in East Asia
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Real Trade Linkages
East Asia
India
Trade makes up large of GDP
Trade makes up small of GDP
Similar trading partners
Small amount of trade with East Asia
Competitive exports to similar countries.
Different exports than East Asia
Investors group Asian economies
India was not connected with East Asia
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Exchange Rate Regimes
Pegged Exchange Rate Regimes
Advantages

• Associated with stability and low inflation
• Forces authorities to adhere to disciplined
  monetary and
• fiscal policies

Disadvantages

• Misalignments may occur when foreign and
  domestic
• countries face different economic conditions
• Maintaining pegs in the face of increased
  speculation can be
• costly

MOST EAST ASIAN COUNTRIES ADOPTED PEGGED RATES
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Exchange Rate Regimes
Floating Exchange Rate Regimes
Advantages

• Currency moves with the relative performance of
  the
• economy
• Serves as an adjustment mechanism, insulating a
  currency
• from speculative attacks.

Disadvantages

• Fluctuations may reflect non-fundamental noise

INDIA ADOPTED A FLOATING EXCHANGE RATE IN 1994
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Foreign Reserves
India
East Asia
Indias reserves also grew
1990-96 foreign reserves grew
Short term debt rising
India discouraged short term debt
Capital Outflows in 97 ? reserves decrease
Capital Inflows in 97 ? reserves increase
Pegs unsustainable ? depreciation
Floating rate ? No dramatic depreciation
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Banking Sector
East Asia
India
Depreciation ? foreign denominated debts
unsustainable
No depreciation ? Foreign debts sustainable
1997 Lower levels of non-performing assets
1997 High levels of non-performing assets
Decreased credit by banks
No decrease in credit by banks
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Financial Sector
East Asia
India
Switch to floating exchange rate ?
rapid depreciation, ? uncertainty
Indias exchange rate provided a greater
predictability
Further capital outflow ensued
1997 experienced an increase in capital inflows
of 24
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Trade
East Asia
India
Trade played less influential role in Indian
economy
Trade played an influential role in East Asian
economies
Crisis depreciations did not ? competitiveness
1. High levels of intra-
regional trade 2. Increased cost of
raw material imports
No dramatic swing in rates to alter
competitiveness
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Conclusion
The financial crisis reflects three important
considerations

• Liberalization
• Exchange rate regimes
• Combination of the above two

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Conclusion
Liberalization

• Partial capital account convertibility
• Less dependence on short term flows
• Diversified allocation of capital

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Conclusion
Exchange Rate Regimes
East Asia
Pegged currency increased risk of speculative
attack
India
Float allowed currency to reflect economic
fundamentals
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Conclusion
Combined Effect
FULL CAPITAL ACCOUNT CONVERTIBILITY PEGGED
EXCHANGE RATE SPECULATIVE ATTACK
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Conclusion
Summing up
The East Asian and the Indian economies are
fundamentally different and are at different
stages of growth and liberalization.
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Recommendations
Considerations relevant for economic and
financial policy

• Controls on capital account convertibility
  or a
• commitment to flexible exchange rates

• Less dependence on short term capital inflows

• Enforce regulation policies in financial and
  banking
• sectors

• Increased transparency in all transactions

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• Any Questions?

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Trade as a of GDP (1997)
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East Asia Trading Partners (1997)
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Portfolio Investment as a of GNP
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Credit Contraction
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Currency Depreciation
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International Reserves (mill. SDRS)
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Indias International Reserves (USDbillions)
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of Non-Performing Bank Assets in 1997
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Capital Outflows
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Values in billions of US
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Selected Macroeconomic Variables
(India)
1990 1991 1992 1993 1994 1995 1996 1997
Inflation 8.97 13.87 11.79 6.36 10.21 10.22 8.98 7.36
Gross National Savings 21.99 22.20 22.43 20.70 28.90 25.37 23.92 22.57
Overall Budget Surplus 8.12 5.81 5.65 7.47 5.89 5.35 5.19 4.86