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8/8/2019 Zaid Asia Crisis
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The 1997 1998
Asian Financial Crisis
Submitted by:Syed Mohd. Zaid
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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
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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.
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THE ASIAN CRISIS: BOOM AND
BUST
First Phase: Currency undervalued to
promote exports. Government picksand promotes ³winners´ (major projectsand firms).
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THE ASIAN CRISIS: BOOM AND
BUST
Second Phase:Export successes produce large
earnings.
Heavy investment inflows by the early1990s.
Available ± a plethora of capital.
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THE ASIAN CRISIS: BOOM AND
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.
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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.
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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
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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
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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.)
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ASIAN CRISIS: THE FINANCE
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.
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ASIAN CRISIS: THE FINANCE
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.
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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.
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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.
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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)
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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
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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.
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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.
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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
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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,´
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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.´
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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.
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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.´
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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,«
.
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The Keynesian Conclusion
«taking an ever greater responsibility for directly
organizing investment.´
After WWII, economic
planning was adopted bymost nations.
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National economic plans
What would be the objective of anational economic plan?
Plans enunciated the aims and guidingprinciples of development policy,
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National economic plans
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.´
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National economic plans
Most plans were relatively innocuousas compared to the comprehensiveand authoritarian planning of the Sovietbloc countries.
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Planning Results
Over the next few years, few positiveresults recommended continued
planning, so most nations downsizedtheir planning experiments into variousforms of ³structural policies.´
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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.´
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How successful was the Japanesedevelopment model?
-- Japanese savings are immense.
The Japanese Model of Economic Development
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-- The American market is an openexport target for Japan,
-- Deming¶s Quality Control andworld class manufacturing,
The Japanese Model of Economic Development
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-- Large NetExport Earnings,
-- Japan seen asthe world¶s firsteconomic
superpower.
The Japanese Model of Economic Development
Tokyo Stock Exchange
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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.
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³Insurmountable´ US Problems
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.´
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³Insurmountable´ US Problems
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.´
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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.
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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
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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.
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Lester Thurow: A Head to HeadStrategy
Implement measures that makeinvestments in American corporations
more long-term.
ester urow: ea to ea
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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.
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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.
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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.
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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.