Zaid Asia Crisis

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The 1997 1998

Asian Financial Crisis

Submitted by:Syed Mohd. Zaid



THE ASIA CRISIS

Who are the AsianTigers?

In the mid-1990s wespoke of the ³AsianTigers´ with awe.Heavy savings and

investment, rapiddevelopment. Activist,statist economicplanning

nutwn[1].jpe

Singapore



COUNTRIES AFFECTED IN THE

CONT

AGION 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 and Mexico followed a little later

with crises of their own.



THE ASIAN CRISIS: BOOM AND

BUST

First Phase: Currency undervalued to

promote exports. Government picksand promotes ³winners´ (major projectsand firms).




BUST

Second Phase:Export successes produce large

earnings.

Heavy investment inflows by the early1990s.

Available ± a plethora of capital.




BUST

Inflation should have produced somecurrency devaluations in these

countries, but currencies were tied toUS Dollar, which was appreciating atthe time. Currencies were thenovervalued..

A bubble starts to develop ± Banks not monitored.



THE ASIAN CRISIS:

FINANCE

AND

THE

BUBBLE

Japanese rice subsidies inflate the

value of land to promote the realestate bubble. Huge real estateinflation and subsequent collapse.

Japan trying to fight a depression soJapanese interest rates were at zero.



THE ASIAN CRISIS:

FINANCE

AND

THE

BUBBLE

Only modest returnsneeded with interest

rates very low.Emphasis on marketshare and growth, noton profits in Japan.

Japan was thegovernance model for ³statist´ Asian

economies.

Bangkok, Thailand



THE ASIAN CRISIS:FINANCE AND THE BUBBLE

Bad debts accrue.Investors look for

larger returns, butthese have higher risks.

³Keep the FinanceMinistry off our case.´

Non-FunctioningLoans fill bank

portfolios.

Bangkok, Thailand



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.)




PROBLEM Stock values plummet(fall rapidly) as

they are sold off.

Currency values?

They drop precipitously (dangerously

steep) as funds are sold off then theyield is exchanged for the investors¶currencies.




PROBLEM Import prices (for productive materials and

parts and for consumption goods) skyrocket.

Severe recession begins as consumptionand production expenditures falter

(unsteadily) and prompt layoffs.Foreign exchange is now so costly thatneeded production inputs and consumer goods cannot be afforded.



THREE MIST AKES OF ASIAN

LENDERS The countries involved usually had

some international indebtedness, and Asian banks and borrowers used short-term credits to finance long-term loans.

Asian borrowers (banks and firms)

borrowed in foreign currencies andloaned in local currency. No hedging tocounter foreign exchange risk.



THREE MIST AKES OF ASIAN

LE

NDE

RS Asian bankers often did not ask to seeconsolidated balance sheets. Theydidn¶t monitor the total assets andliabilities of the borrowers.

The IMF paid the bills for such banks,

finance ministries and countries. Moralhazard problems! Investors should payfor bad decisions.



Maturity Distribution

PhilippinesIndonesia SouthKorea Thailand Taiwan

0

10

20

30

4050

60

70

80

90

(Proportion of loans with maturity one

year or less at the end of 1996)



Causes of the crisis (1)

Inadequately development financialservices sector

Lack of control and sufficientregulations in capital market

Close alignment between the localcurrency and US dollar



Causes of the crisis (2)

Weakening Economic performance andbalance of payment difficulties

Currency speculation

Technological changes financial market

Lack of confidence in the ability of thegovernments in questions to resolvetheir problems successfully.



CONCLUDING REMARKS

The rapidly increasing globalization without fully

appreciate the new challenges and risk was theroot cause the Asian crisis.

Globalization, if properly managed, may help pushsome developing countries into modernity andaffluence. The Asian crisis has shown howimportant it is to have effective state institutions.

Developing countries must have to develop their own defense mechanism by establishing a systemof capital controls and exchange rate regime.



THANK Y0U



Keynes and the CorporateGovernance Problem

What did this chapter address?

Written to solve theproblem of the greatdepression, thischapter turns out tobe the intellectualfoundation of postwar thought on economicgrowth and planning.

Lord Keynes



The Investment Problem: Choosing theRight Projects under Uncertainty

Personally acquainted with theuncertainties of investment prospectsand market performance, Keynesnoted:

³the extreme precariousness of the

basis of knowledge on which our estimates of prospective yield have tobe made,´



The Investment Problem: Choosing theRight Projects under Uncertainty

What is precarious here?

Our ability to deal with the future¶suncertainty.

What are investors engaged in³enterprise´?

Those who will ³purchase investmentson the best genuine long-termexpectations he can frame.´



America¶s Wall Street: Speculation

There are also the ³game-players´ whoare involved in the speculation thatseeks for capital appreciation rather than income. Such speculation hefound to be particularly common

among Americans.





America¶s Wall Street: Speculation

Keynes believed investment outcomes were

³a result of animal spirits -- of aspontaneous urge to action rather thaninaction, and not as the outcome of aweighted average of quantitative benefits

multiplied by quantitative probabilities.´



The Keynesian Conclusion

Due to the difficulties of investment uncertainty,

³I expect to see the state,

which is in a position tocalculate the marginalefficiency of capital-goods on

long views and on the basis of the general social advantage,«

.



The Keynesian Conclusion

«taking an ever greater responsibility for directly

organizing investment.´

After WWII, economic

planning was adopted bymost nations.



National economic plans

What would be the objective of anational economic plan?

Plans enunciated the aims and guidingprinciples of development policy,




described the desired development of the country as a whole,

described development of theeconomy¶s principal sectors,

provided estimates on production andinvestment figures.

Often a plan was ³consideredsynonymous with a program of investment projects.´




Most plans were relatively innocuousas compared to the comprehensiveand authoritarian planning of the Sovietbloc countries.



Planning Results

Over the next few years, few positiveresults recommended continued

planning, so most nations downsizedtheir planning experiments into variousforms of ³structural policies.´



Planning Results

In Japan, the model Asian developmentcountry, postwar MITI was to ³target a

potentially growing industry andimplement an industrial policy that wouldenhance productivity in that industry andultimately improve its competitiveness in

the global market through coordinatedefforts by the government and businessleaders.´





How successful was the Japanesedevelopment model?

-- Japanese savings are immense.

The Japanese Model of Economic Development



-- The American market is an openexport target for Japan,

-- Deming¶s Quality Control andworld class manufacturing,




-- Large NetExport Earnings,

-- Japan seen asthe world¶s firsteconomic

superpower.


Tokyo Stock Exchange



³Insurmountable´ US Problems

For whom does U.S. industry produceits fruits?

What is corporate governance?

The U.S. system of corporategovernance is designed to assureshareholder earnings.




Corporations secure strong, short-termreturns or stockholders will walk.

Critique: ³Preoccupation with thebottom line is hostile to long-termprojects which might generate returnslater but which may not be profitable at

the present.´




Selecting projects without regard totheir short-term profitability is viewed

as a disadvantage to their strategicperformance.

C. 1993: ³The U.S. is finished as aneconomic power.´



Michael Porter on Government Policy

³Government is prominentlydiscussed in treatments of

international competitiveness. Manysee it as a vital, if not the mostimportant, influence on moderninternational competition.



Michael Porter on Government Policy

Government policy inJapan and Korea isparticularly

associated with thesuccess thesenations¶ firms haveenjoyed.´

T he Competitive

Advantage of Nations

The Free Press,

1990), p. 126

ester urow: ea to ea



ester urow: ea to eaStrategy

Early 1990's: there is no way tocompete against Japan and Europe,Thurow said, without restructured

antitrust laws. Larger units must becapable of competing with the morelong-term oriented k eiretsu of Japan.



Lester Thurow: A Head to HeadStrategy

Implement measures that makeinvestments in American corporations

more long-term.

ester urow: ea to ea



ester urow: ea to eaStrategy

A national strategy or national industrial

policy essential tosurvival as a competitor in world markets.

See H ead to H ead: T he

Coming Economic Battle Among Japan,Europe, and America,New York: Warner

Books, 1993.



Investment processes became globalized.

By the early nineties, a net transfer of financial resources flowed into Asia. Itsupplemented gross domestic savingsin the Asian countries.

Capital poured in from the West, but aconsiderable share also came fromJapan, and other Asian countries

investing in their less developedneighbors.



Investment processes became globalized

The United States also became amajor supplier of funds to Asia and therest of the world, both through directand portfolio investment, the sum of these being $178 billion in 1993 and

$119 billion in 1994.





When the Bubble Burst

These are highly concentrated andnearly 75% flowed to the ten largestrecipients in Asia and Latin America

The onset of the crisis for 22 countriesof South and East Asia in 1997 madeitself manifest with an outflow of approximately $92 billion in short-termborrowing, stock market net flows, andnet outflows of funds from domesticresidents.



When the Bubble Burst

Stock markets crashed, nationalcurrencies collapsed, and imports and

production shriveled up miserably.

Zaid Asia Crisis

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