IBEC203 Macroeconomics K. Matsuda. December 20, 1997 -Asian Economy collapses, US still rises.
1997 Asian Eco Crisis
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Transcript of 1997 Asian Eco Crisis
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Why talk about a crisis thats over now?
Anything we should learn from this?
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Summer of 1997 Bangkok, Thailand, East Asia
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FromFrom 19851985 toto 19961996,, growthgrowth raterate averagingaveraging almostalmost 99%%annuallyannually -- increasedincreased pressurepressure onon Thailand'sThailand's currency,currency,thethe bahtbaht
From 1985 until July 1997, Baht was pegged at 25 US$
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Mid-May 97: Thai Baht was hit by massive speculativeattack
Spark: End-June 97, Thai Prime Minister declaredthat he would not devaluate the Baht
Thai Government failed to defend the Baht againstInternational speculators
Financial Crisis hits.
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Primary Casualty:Thailand, Indonesia, South
Korea
Fairly hurt:
Hong Kong, Malaysia, Laos
and Philippines
Most Asian countries
currencies fall significantlyrelative to the US$
Fear of Financial
Contagion,Globally
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Drastic devaluation of the rupiah:from 2,000 to 18,000 for 1 US$
Sharp price increase
Wake of widespread rioting:500 deaths in Jakarta alone
Governor, Bank Indonesia wassacked
President Suharto was forced to step downin May 1998 after 30 years in power
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Drastic devaluation of the won: from 1,000 to1,700 for 1 US$
Credit rating of the country (Moodys): A1 to B2
National Debt-to-GDP ratio more than doubled
Major setback in Automobile industry
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Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ to even
55/US$
President Joseph Estrada was forced to
resign
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40% of Japans export go to Asia, so it wasaffected even if the economy was strong
Japanese Yen fall to 147 as mass selling began
GDP real growth rate slowed from 5% to 1.6%
Some companies went Bankrupt
Being worlds largest currency holder, Japan couldbounce back quickly
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Markets did not collapse, but were severely hit
NYSE briefly suspended trading, for the first time
Dow Jones Industrial Average suffered as 3rdbiggest point losses ever
Relationship with JapanJapan changed forever: US stopped supporting the highly artificial Trade
environment and Exchange Rate
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Lets hear to what Paul Krugman was trying to say since1994
"Asian economic miracle..
Result of capital investment(high interest rate to attract
foreign investment)
Growth in productivity,without much improvement inTotal Factor productivityTotal Factor productivityneeded for long-term prosperity
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Bubble TheoryBubble Theory
bubble fueled by "hot money
More and more was required as the size of the bubblegrew
short-term capital flow was expensive and often highlyconditioned for quick profit
Development money went in a largely uncontrolledmanner to people closest to the political power
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Real Estate Speculation
Excessive real estate speculation
Chinese effect
Competition from China due to its export-orientedreforms in 90s
Western importers found cheaper manufacturers inChina whose currency was depreciated relative to theUS$
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Policy that distorts the incentives within the lenderPolicy that distorts the incentives within the lender--borrowerborrowerrelationshiprelationship
Artificially high Interest rate to attract investors
Large quantities of available credit
Highly-Leveraged economic climate
Asset prices pushed up to unsustainable level, and eventually collapse
Default on Debt obligation
Panic among Lenders
Large withdrawal of credit
Credit crunch and further bankruptcies
Depreciative pressure on credit rates
Potential Collapse of the market Government enters..
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Poli t t i tort t i ti it i t l r Poli t t i tort t i ti it i t l r-- orrowerorrowerrel tionshirel tionshi ( ontinued)( ontinued)
overnment is for ed to r ise omesti interest r te toexceedingl highEconomy ecomesmore fr gile
Government uysexcessdomesticcurrency t fixedexchange rateHemorrhaging foreign reservesofcentral anks
Tideof fleeingcapital doesnot stopAuthorityceases todefend fixedexchange rateCurrency floatsanddepreciatesForeigncurrency-denominated liabilitiesgrewsubstantially (indomestic
currency terms)orebankruptcies
Furtherdeepeningof thecrisis
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Lets assume that foreign investors buy Thai Bond when they invest
Exceedingly high interest rate attracts more such investment
So Bond Demand > Bond Supply and Money demand < Money Supply
Equilibrium is disturbedwhen Interest rate is pushedto artificially high, higherthan the optimum rate r*
With higher rate r, M/p(Money/price) decreases
Asset price falls
Govt increases Interest rate
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Mistakes:
Goals of raising interest rates, ideally:
economic growth
to combat unemployment and inflation to cool an otherwise overheated economy
ContractionaryContractionary PolicyPolicy
Incorrect Monetary Policy, artificially raising the Rate ofInterest to exceedingly high
Fiscal Policy related problem:
incorrect distribution of wealth
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Lets see what happened to our Thai friends
IMF unveiled a $17 billion rescue package, and another
bailout package of $3.9 billion subject to conditionality for reorganizing and restructuring,
establishing strong regulatory frameworks
Tax revenue balanced thebudget in 2004,4 years ahead of schedule
Baht reached 33/US$ by 2007
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References:
Miles, Scott, Understanding the Wealth of Nations
Krugman, Paul: The Myth of Asia's Miracle: A Cautionary Fable
Palma, Gabriel: The Three Routes to Financial Crises
Hughes , Helen: Crony Capitalism & East Asian Currency Financial Crises
Bello, Walden: IMF's Role in the Asian Financial Crisis
Yellen, Janet: The Asian Financial Crisis Ten Years Later
Wikipedia.com
newschool.edu