The East Asian Crisis 1997-1999

1
The East Asian Crisis1997-1999
International Finance and its Political
Implications

• SOSC 228

2
KEY POINTS

1. Key role of shifts in international capital flows
   in affecting the political structure of the
   region and the domestic politics within the
   countries of East Asia.
2. The crisis was a major challenge to the East
   Asian Miracle model, both by proving that there
   were weaknesses in the model and challenging the
   views that government involvement in the economy
   was benign or not harmful.
3. Showed the inability of the international
   organizations in East AsiaASEAN, APEC, and
   PECCto cope with major economic crisis.
4. Strengthened the hegemonic role of the US in East
   Asia through IMF and the role of U.S. economy in
   pulling Asia out of the crisis.
5. Increased U.S. influence challenged by China
   which seeks to play the major role in East Asia
   and resolve Taiwan issue.

3
Roots and History of the Crisis

• Economic Roots
• High level of financial deregulation of global
  economy and major flow of FDI and loans
• Excessive foreign loans flow into East Asia in
  1995-96, as West seeks to replace Japanese
  capital and to benefit from East Asian boom.
• crony capitalism and too little local controls
  or regulation over banks and capital flows.
• Critical errors by IMF which sent economies into
  downward spirals.

4
Roots and History of the Crisis (cont)

• Political Roots
• authoritarian political systems whose leaders
  refused to respond to crisis because systems were
  very fragile
• democratic political systems led by people deeply
  involved in the financial scandal and therefore
  unable to respond to the crisis

5
Roots and History of the Crisis (cont)

• Key Historical Events
• Begins in Thailand on July 2nd, 1997 when
  Thailand proceeds to devalue its currency.
• Major run on Thai currency as people panic and
  buy U.S. dollarsdrop in value of Thai baht of
  40.
• golf course capitalism with oversupply of
  luxury condominiums.
• Spreads quickly to Indonesia and Malaysia whose
  currencies are quickly devalued by global markets
  and financial speculators.
• Indonesia pressured by IMF to close down 16
  banks, which leads to run on banks and financial
  panic in IndonesiaIndonesia goes into tailspin

6
Roots and History of the Crisis (cont)

• Key Historical Events
• Malaysia had excessive infratructure investments
  in new airport, technology highway, new capital
  and Petronas Towers.
• Major depreciation crisis of 50-80 percent in
  some countries.
• Many banks holding very high debt in U.S.
  dollars, but as value of their currency drops,
  they need twice as much local money to buy the
  needed U.S. dollars to pay back loans.
• Korea highly dependent on loans and its chaebol
  or corporations have built up huge debt buying up
  foreign companiesthey must divest of the foreign
  firms.
• Hong Kong stock market drops in half from 16,000
  to 9,000, 40 drop in property marketssuddenly
  everyone feels very poor!

7
Capital Flows and Political Restructuring

• Economic crisis led to political changes in
  almost all government in East Asia, particularly
  those deeply affected by the crisis
• Governments involved in creating the crisis
  cannot resolve itneed for elite rotation to
  resolve crisis.
• Major challenge to authoritarian regimes whose
  only source of political legitimacy was their
  ability to deliver economic development.

8
Capital Flows and Political Restructuring (cont)

• Indonesia
• Anti-Chinese riots in Sept/97, and China town in
  Jakarta destroyed in May 1998
• fall of Suharto in May 1998--had run the country
  since 1965 coup
• first democratic elections in spring 99

9
Capital Flows and Political Restructuring (cont)

• Malaysia
• Crisis leads to major split between Mahatir and
  his chosen successor, Anwar Ibrahim, over issue
  of whether or not to bail out failed banks and
  companies which have gone into debt at
  encouragement of Mahatir.
• Ibrahim arrested and charged with many ridiculous
  crimes.
• End of stable succession that had been arranged.

10
Capital Flows and Political Restructuring (cont)

• Thailand
• Parliament forced to close, new government formed
  in Nov./97 which passes constitutional amendments
  to try to create more open government
• South Korea
• Fall of Kim Young Sam, who had been first
  non-military leader elected as President and on
  platform to fight corruption.
• Kim Dai-jung, former dissident and target for
  assassination by KCIA elected president in FEB/98
• promises to restructure economy and chaebols.

11
Capital Flows and Political Restructuring (cont)

• China
• Reform of SOEs put on holdno capital in Hong
  Kong for listing of SOEs
• dramatic drop in FDI from overseas Chinese into
  China and weakened markets in East Asia cut
  Chinese exports
• Zhu Rongji reforms planned for 1998 falls victim
  to East Asian CrisisZhu loses much power by 1999

12
Capital Flows and Political Restructuring (cont)

• Japan
• continues in economic sleep since 1991,
• Hashimoto government forced to resign in AUG/98
• Hong Kong
• Economic crisis, high unemployment and stock
  market intervention lowers public approval for
  Tung

13
Major challenge to East Asian Economic Miracle

• Shows that government involvement in picking
  winners leads to crony capitalism,
• where capital is too cheap and no protection
  against bad loans, East Asian Miracle does not
  work
• Major loss of face for World Bank which had
  published book entitled East Asian Miracle

14
Impact on Inter-State Relations

• Mahatir tries to resist West by freezing capital
  of foreign investorsClinton refuses to meet with
  him at APEC summit
• Leaders in East AsiaHabibie of Indonesia and
  Estrada of Philippines express public concern
  about Ibrahim arrestfirst time that ASEAN
  leaders comment on each others domestic affairs
• Philippines cancels joint military exercises
• China gains some stature in West for not
  devaluating its currency since it would trigger
  new round of devaluations
• Spread of crisis to Brazil and Russia

15
Sino-American Relations

• Visit of Jiang Zemin to U.S. in October 1998,
• China pushes for strategic partnership
• Clinton visits China June/99, reinforces three
  nos on Taiwan,
• U.S. will not support Taiwanese independence
• U.S. will not support Taiwanese membership in
  international organizations
• U.S. sends envoys to Taiwan telling them not to
  move towards independence

16
Sino-American Relations (cont)

• Taiwan nervous about increasing external pressure
  from U.S.,
• greater leverage for PRC as they move to
  political talks.
• Lee Teng-hui two state theory, where he asserts
  that bilateral relations must be treated like two
  states, not seeing PRC as more powerful in the
  dialogue.
• China threatens military attack

17
Changes in Security Environment

• U.S.-Japan sign new security treaty, Japanese
  promise to participate with U.S. in activities in
  East Asia
• China sees U.S.- Japan collusion to defend
  Taiwanese efforts at independence
• Theatre Missile DefenseTMD
• US congressmen suggest including Taiwan under
  U.S. programseen by China as effort to protect
  Taiwan from Chinese missile attacks if it
  declares independence
• Cox Report, accuses China of stealing U.S.
  nuclear technology

18
Kosovo and Sino-American Relations

• China very nervous about humanitarian
  interventionsees US acting like hegemon,
  willing to interfere in internal affairs to
  promote independence
• China seeks better ties with Russia, based on
  opposing U.S. hegemony
• U.S. bombs Chinese embassy in Kosovo, discussions
  on China entry to WTO put on hold

19
North Korean Missile Threat Emerges

• North Korea terrifies Japanese by sending missile
  over Japan.
• U.S. begins to put great pressure on North Korea
  to stop its missile testing in return for
  humanitarian food assistance

20
Pakistan and India fire off nuclear weapons

• New members of nuclear club who are deeply
  hostile towards each other, having fought wars in
  1948, 1965, 1971 and 1999.