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1. Causes of the Asian Financial Crisis
2. Consider two country groups: When examining the data, you may find the overall picture to be quite different between the following two groups of countries:
Group 1: Thailand, Philippines, Indonesia, Malaysia, and Korea.
This includes those countries that were hit hardest during the crisis.
Group 2: China, Japan, Singapore, Hong Kong, and Taiwan.
This includes those countries that survived relatively better during the crisis.
3. Examine the country data on saving, business investment, and government spending (Table 2): Saving
The Asian countries under study had generally a rather high saving rate.
Singapore and China had among the highest saving rates (40 to 50%).
The Philippines had the lowest, though still good, saving rate (just short of 20%).
Generally healthy with no sign of overspending on the part of the government.
Many of the Asian countries actually ran a fiscal budget surplus.
Some countries (e.g., China and the Philippines) maintained a budget deficit, but the deficit size was reasonably small.
Countries like Malaysia, Philippines, Thailand, and Korea had an investment rate consistently higher than the saving rate. (The excessive investment was fueled by rapid credit growth see Table 4.)
Although other Asian countries including China, Japan, Hong Kong, Singapore, and Taiwan all had a high investment rate, the investment rate remained generally lower than the saving rate.
4. Examine the country data on trade and capital flows (Table 3): Trade Balance
China, Japan, Singapore, and Taiwan all consistently ran a trade surplus.
Indonesia, Malaysia, Thailand, Philippines, and Korea all ran a large and persistent current account deficit over many years.
Among all the different countries, China was most successful in attracting a lot of foreign capital inflows. Japan and Taiwan, on the other hand, actually had a lot of investment overseas, resulting in net capital outflows. Hence, these two countries depended relatively less on capital inflows.
For China, most of the capital inflows came in form of foreign direct investment.
The current account deficits of Indonesia, Malaysia, Thailand, Philippines, and Korea were mostly financed by foreign capital inflows.
Among those countries that needed foreign capital inflows, the FDI/net capital inflow ratio is relatively low for Indonesia, Malaysia, Thailand, Philippines, and Korea (with Thailand having the lowest ratio). Accordingly, these countries relied heavily on short-term capital inflows to finance their current account deficit.
5. Examine the country data on international reserves and foreign liabilities (Table 5): International Reserves
Indonesia, Philippines, and Korea having among the lowest ratios of international reserves (in months of imports). The available reserves amount could only sustain two to three months of imports.
In terms of banks exposure to foreign debt, Indonesia, Malaysia, and Thailand (plus Philippines in 1996) faced an excessively high ratio of foreign liability to foreign assets for banks. The banking sector of these countries faced high risks of a liquidity crisis, making them vulnerable to capital outflows.
6. Summary on the causes of the financial crisis: Overall Picture
Countries in Group 2 had stronger economic fundamentals than those countries in Group 1 had. This can explain why those countries in Group were hit much more severely than the other countries during the financial crisis.
Fueled in part by excessive credit expansion, those hardest hit countries all suffered from over-investment. In every case, business investment was too high to be supported by domestic saving.
As these countries spent more than it produced and saved, the over-investment led to persistently large current account deficits.
To finance their current account deficits, these countries relied too heavily on short-term capital inflows, which could reverse and flee the country quickly.
The international reserves and external debt positions were not good
7. General lessons learned: A developing country needs to prompt corrective actions when the economy shows signs of overheating.
A developing country should build up and keep a healthy level of international reserves.
A country should rely less on short-term capital inflows and promote long-term foreign investment.