Singapore Hong Kong

Singapore & Hong Kong• Area• Singapore: 697 km2

• Hong Kong: 1,104 km2

• Population• Singapore: 4.7 million• median age 40• Hong Kong: 7.1 million• median age 43

Singapore and Hong Kong• Each is separated from the mainland by a narrow

waterway• Singapore’s relationship with Malaysia has been

volatile• brief merge in 1963-1965• disputes about water delivery, islands, etc.

• Hong Kong benefits from mainland China’s cheap labor and market

Singapore and Hong Kong• Both are mostly ethnic Chinese societies• Singapore: 77%• Hong Kong: 95%

• both had over 100 years of British rule• Singapore: 1819 - 1959• Hong Kong: 1841 - 1997

• both were occupied by Japan• 1942 - 1945

GDP (purchasing power parity)• Singapore:• Around US$240 billion• Ranked 45th in the world• per capita 8th in the world

• Hong Kong:• Around US$300 billion• Ranked 38th in the world• per capita 15th in the world

GDP Growth Rates (% ) of Singapore (red bars) and Hong Kong (blue bars)

-6

0

6

12

18

Singapore and Hong Kong• Both are newly industrialized economies• GDP composition:• Sector Singapore Hong Kong• agriculture 0% 0.1%• industry 28% 8%• service 72% 91.9%

Singapore and Hong Kong• Exports:• Singapore: 13th in the world• Hong Kong: 11th in the world• 51% to mainland China

• Imports:• Singapore: 15th in the world• Hong Kong: 9th in the world• 46% from mainland China

Economic development• Singapore and Hong Kong• have achieved similar economic success• through very different economic approaches

• path of economic development diverged after World War II• similar experience under British colonial rule• divergent political development after WWII• divergent economic models after 1960s

Colonial legacies• Both became entry ports to mainland• both benefited from British management and

technological expertise• both attracted inflow of Chinese emigrants• Chinese population in Singapore doubled in 1820s• Chinese population in Hong Kong quadrupled between the

two World Wars

Divergent paths after WWII• Singapore gained independence (1959)• Lee Kuan Yew’s People’s Action Party

• economy grew at a slow pace in 1950s• still based on intermediary trade• boosted by the Korean War of 1950 - 1953

Divergent paths after WWII• Hong Kong restructured its economy• population quadrupled 1945 - 1955• large-scale relocation of capital, entrepreneurs, and assets

from mainland China• trade embargo against mainland China after Korean War

broke out actually benefited HK

• relative political stability• popular political apathy

Divergent development model• Singapore’s People’s Action Party• faced severe internal and external conflicts in 1960s• PAP became a elitist and paternalistic party• neo-Confucianism?

• government intervention in the economy• drew up a state development plan

Singapore’s development 1960s• New institutions• Economic Development Board• promote industrial development

• Housing and Development Board• develop industrial estates

• Development Bank of Singapore• provide industrial financing

• Jurong Town Corporation• acquire, develop, and manage development sites

Singapore’s development 1960s• Restructured from trading port to manufacturing

base• government intervention to attract foreign

investment• in labor market• in providing public housing• in improving educational facilities• in developing a social security system

Singapore’s development 1960s• produced phenomenal economic growth• achieved full employment by early 1970s• ventured into high-tech, capital-intensive

industries and high value-added services

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1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Singapore's GDP 1960-1984 (in constant local currency)

Hong Kong’s development• Hong Kong also enjoyed phenomenal economic

success• rapid expansion in manufacturing in 1960s• industrial diversification in 1970s

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1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Hong Kong's GDP 1960-1984 (in constant local currency)

Hong Kong’s development• government’s laissez-faire principle• reactive, selective, & reluctant intervention• development of public housing• provide lower-middle-income families with access to home

ownership• social expenditure & community development• development of human resources

• intervention to maintain competitiveness

Convergence since 1980s?• Singapore reconsidered its development strategy• economy diversified from manufacturing to financial and

professional services• aims to surpass Hong Kong as an international center of

finance & business HQ• government relaxed intervention in economy• free capital flows and foreign investment even after Asian

Financial Crisis of 1997

Convergence since 1980s?• Hong Kong government moved in the opposite

direction• became more interventionist• to cope with the political uncertainty during the

negotiations between PRC and UK• intervened in stock and currency market• has linked HK$ to US$ since 1983

Convergence after crisis?

Asian Crisis

The Asia Crisis

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• Who are the Asian Tigers?

• Mid-1990s we spoke of the “Asian Tigers” with awe.

• Heavy savings and investment

• rapid development. • Activist, statist

economic planning

Countries Affected in the Contagion• Thailand• July, 1997

• Indonesia• June to August, 1997

• Korea• July, 1997

• Japan had already been through its own crisis earlier and was in an economic depression

• Russia, Brazil, Mexico followed a little later with crises of their own.

Three mistakes of Asian Lenders • The countries involved usually had some

international indebtedness, • Asian banks and borrowers used short-term

credits to finance long-term loans.• Asian borrowers (banks and firms) borrowed in

foreign currencies and loaned in local currency. • No hedging to counter foreign exchange risk.

Three mistakes of Asian Lenders• Asian bankers often did not ask to see

consolidated balance sheets. • They didn’t monitor the total assets and liabilities

of the borrowers.• IMF paid the bills for such banks, finance

ministries and countries. • Moral hazard problems• Investors should pay for bad decisions.

Economic success• Annual GDP growth in the ASEAN-5 (Indonesia,

Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8% over the decade before the crisis

• Almost half of total capital inflows to developing countries• nearly $100 billion in 1996

• inflation & unemployment rates both low

Ramifications• Negative consequences• Environmental degradation• growing inequality between rich and poor• rampant corruption• social malaise

• Significant and real benefits• great majority of the people’s living standard• have not been erased by the crisis

Asian Weakness• Three weaknesses in the Asian economies’

structures became apparent with the 1997 financial crisis:• Productivity• Rapid growth of production inputs but little increase in

the output per unit of input• Banking regulation• Poor state of banking regulation

• Legal framework• Lack of a good legal framework for dealing with

companies in trouble

Weaknesses in financial system• Inadequate financial sector supervision• Poor assessment and management of financial

risk• Growth of bad loans• State-directed lending

• Relatively fixed exchange rates• Violent asset price cycles• Property boom bubbles

Weaknesses in financial system

• Large amounts of short-term international capital, denominated in foreign currency

The Asian Crisis: Finance and the Bubble• Only modest returns

needed with interest rates very low.

• Emphasis on market share and growth, not on profits in Japan.

• Japan was the governance model for “statist” Asian economies.

Bangkok, Thailand

The Asian Crisis: Finance and the Bubble

• Bad debts accrue. • Investors look for larger returns, but

these have higher risks.• “Keep the Finance Ministry off our

case.”• Non-Functioning Loans fill bank

portfolios.

Asian Crisis: The Finance Problem• Ultimately, long- and short-term investors notice

the lack of returns. Then the crisis begins. How?• With capital mobile, flight can occur with any

provocation. (Modern version of a run on the bank.)

Asian Crisis: The Finance Problem• Stock values plummet as they are sold off.• Currency values?

• They drop precipitously as funds are sold off then the yield is exchanged for the investors’ currencies.

Asian Crisis: The Finance Problem• Import prices (for productive materials and parts

and for consumption goods) skyrocket.• Severe recession begins• Consumption and production expenditures falter

and prompt layoffs.• Foreign exchange is now so costly that needed

production inputs and consumer goods cannot be afforded.

Corruption• Transparency International’s 1999 survey of

corruption

• Singapore 7th• Malaysia 31st• South Korea 50th• Philippines 54th crisis countries• Thailand 68th• Indonesia 96th

Diary of the crisis: I

Diary of the crisis: II

The Asian Crisis: BOOM AND BUST• First Phase: • Currency undervalued to promote exports. • Government picks and promotes “winners” • (major projects and firms).

The Asian Crisis: BOOM AND BUST• Second Phase:

• Export successes produce large earnings. • Heavy investment inflows by the early 1990s.

•Available – a plethora of capital.

The Asian Crisis: BOOM AND BUST• Inflation should have produced some currency

devaluations in these countries, • currencies were tied to US Dollar, which was

appreciating at the time.

The Asian Crisis: BOOM AND BUST• Currencies were then overvalued..• A bubble starts to develop•Banks not monitored.•Real estate craze starts to develop

The Asian Crisis: Finance and the Bubble• Japanese rice

subsidies: • inflate the value of land

to promote the real estate bubble.

• Real estate inflation and subsequent collapse.

• Japan fight depression making Japanese interest rates zero.

The cause of capital outflows• Bank failure in Thailand• Corporate failure in Korea• Political uncertainty due to the potential for a

change in government in Korea, Thailand, the Philippines, and Indonesia

• net outflow of $105b from Thailand, Malaysia, South Korea, and the Philippines between 1996 and 1997

The cause of capital outflows

• Contagion effects hit Malaysia, the Philippines and Indonesia

• The IMF’s intervention actually helped to incite panic

Causes of financial crisis• macroeconomic imbalances• structural deficiencies in financial sector• loss of market confidence• rising political risk

By the number

Real GDP Growth (%)

Inflation rate (%)

GDP growth rate (%)

Impact on Japan

Impact on World

Impact of Currency Devaluation: Indonesian Example

After devaluation of Rph

PhilipinesIndonesiaThailandGermanyFranceKoreaJapan

SingaporeMalaysia

USAHK

Consequences

IMF's immediate response• Help Indonesia, Korea, and Thailand arrange

programs of economic stabilization and reform • Approve IMF financial support for reform programs

in Indonesia, Korea, and Thailand

IMF’s immediate response

• Consult with other members that needed to take policy steps toward off the contagion effect

Asian programs• comprehensive reform of financial systems• closure of unviable financial institutions• associated write down of shareholders' capital

• recapitalization of undercapitalized institutions• close supervision of weak institutions• increased potential for foreign participation in

domestic financial systems

When the Bubble Burst• What happened when the bubble burst?• Worldwide, foreign direct investment is far and

away the largest part of net financial flows to the developing economies.

When the Bubble Burst• These are highly concentrated and nearly 75%

flowed to the ten largest recipients in Asia and Latin America

• The onset of the crisis for 22 countries of South and East Asia in 1997 made itself manifest with an outflow of approximately $92 billion in short-term borrowing, stock market net flows, and net outflows of funds from domestic residents.

When the Bubble Burst

• Stock markets crashed, national currencies collapsed, and imports and production shriveled up miserably.

Reforms in governance• break the close links

between business and governments

• ensure that the integration of the national economy with international financial markets is properly segmented

Three schools of thought

Three schools of thought• Revisionist: “developmental state”• Market must be mediated, regulated and guided by the

state

• Culturalist• “Asian values”• Culture context of East Asia explains the miracle

Recovery from the Crisis

Lessons from the Crisis• Better information• Regulation and restraint • Controlling capital flows

International Organizations• Authority vis-à-vis sovereign governments• Access to information• Risk of ``creating” a crisis• Globalization and interdependence