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EAST AND SOUTHEAST ASIAN NIEs:4 Late 1990s financial crisis

EAST AND SOUTHEAST ASIAN NIEs:4 Late 1990s financial crisis. Risks of EOI development Strategies. Vulnerability to external shocks self-limiting nature of dependence on low cost labor as an economic development strategy sudden changes in consumer demand technological change

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EAST AND SOUTHEAST ASIAN NIEs:4 Late 1990s financial crisis

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  1. EAST AND SOUTHEAST ASIAN NIEs:4Late 1990s financial crisis

  2. Risks of EOI development Strategies • Vulnerability to external shocks • self-limiting nature of dependence on low cost labor as an economic development strategy • sudden changes in consumer demand • technological change • exchange rate movements • protectionist policies by industrialized economies

  3. My perspective on the late 1990s East Asian “boom and bust” cycle Steven Radelet and Jeffrey Sachs, Harvard Institute for International Development Don’t simply focus on what these NIEs did wrong. A more even-handed treatment. External actors were also at fault.

  4. Useful starting point

  5. Defining element of this crisis External financing in billions Korea, Indonesia, Malaysia, Thailand, Philippines

  6. This followed a period of large increases in cross-border bank loans

  7. International claims held by foreign banks All 5 economies Thailand only

  8. Distribution of foreign bank claims by sector, mid-1997

  9. Other indicators of lack of foresight

  10. Why didn’t the alarm bells ring???

  11. Government budgets registered regular surpluses Overall central gov’t budget balance as % of GDP

  12. Inflation levels remained below 10% • sovereign debt was low or falling (Philippines and Indonesia) • very high domestic savings and investment rates • growing foreign exchange reserves • favorable world market conditions

  13. What indicators of increasing financial vulnerability SHOULD HAVE been picked up???

  14. Growing current account deficits Balance of payments, 1985-1996

  15. Significant exchange rate appreciation Real exchange rate index, Thailand, (1990=100)

  16. Sharp declines in export growth rates Export growth rates (by value), 1994-96

  17. Financial trends: sharp increase in short term debt Short-term debt and reserves, June 1997

  18. Proximate causes of the withdrawal of foreign funds • BANK FAILURES. Especially Thailand. Role of lending to property companies which got hit by steep falls in property markets. • CORPORATE FAILURES. Especially Korea. Hanbo Steel collapses in January 1997. Then Sammai Steel and Kia Motors. Puts merchants banks under pressure. Channels for foreign borrowing.

  19. INTERNATIONAL INTERVENTIONS. Recommendation by IMF of immediate suspensions or closures of financial institutions. Actually helped to incite panic. • FOREIGN INVESTORS. Fail to distinguish between healthy and unhealthy projects and settings.

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