quiz

Class5.ppt

Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value.

It is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence.

East Asia Crisis

Development, Crisis and Asian Values

Received large inflow of money

High growth rate (8-12%GDP)

Dramatic run up in asset prices

Increase capital investment

High per Capita Income

Thailand, Indonesia and South Korea had large private current account deficit

It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

Development, Crisis and Asian Values

Before Crises

The rapid reversal of private capital inflows into Asia.
Net private inflows dropped from $93 billion to

-$12.1 billion.

The sudden drop in bank lending followed a sustained period of large increases in cross border bank loans.

At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea, 50% for the Philippines, 65% for Thailand, and 84% for Taiwan.

Development, Crisis and Asian Values

Beginning of Crises

Per Capita GDP

Source : The onset of East Asia Crisis

The Asian financial crisis had substantial elements of panic and disorderly workout.

The crisis was largely unanticipated.

The crisis involved considerable lending to debtors that were not protected by state guarantees

The sudden withdrawal of investor funds to the region, rather than simply a deflation of asset values

Development, Crisis and Asian Values

Element of Panic

South Korea:

Drastic devaluation of the won: from 1,000 to 1,700 per us$
National debt to GDP ratio more than doubled.
Major setback in automobile industry.

Japan:

40% of Japan’s export go to Asia, so it was affected even if the economy was strong
GDP real growth rate slowed from 5% to 1.6% .
Some companies went bankrupt
The Japanese yen fell to 147
Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back.

Development, Crisis and Asian Values

Effects on Countries

China:

The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994.
Heavy speculation that China would soon be forced to devalue its currency to protect the competitiveness of its exports.

RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia.

China was unaffected by the crisis compared to Southeast Asia and South Korea.

Development, Crisis and Asian Values

Effects on Countries

Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc). A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.

Outside Mainland

Hong Kong :

Hong Kong dollar came under attack in November as a result of currency depreciations.
Hong Kong banks faced steeply rising interest rates on liabilities

Taiwan:

New Taiwan dollar also came under pressure and fell sharply, despite Taiwan's huge stock of reserves.

Development, Crisis and Asian Values

Effects on Countries

Provided $120 billion as bailout package. Imposed restrictive condition

IMF programs up till the end of 1997 apparently added to the panic.

The IMF programs generally called for six key actions:

immediate bank closures;

quick restoration of minimum capital adequacy standards;

tight domestic credit;

high interest rates on central bank discount facilities;

fiscal contraction;

non-financial sector structural changes.

Domestic bank lending stopped abruptly in countries with Fund programs.

Development, Crisis and Asian Values

IMF Role

The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by bank supervisors and by the IMF.

Currency depreciation and stock market collapse continued long after the programs were signed

More bankruptcies

Local called the financial crisis “the IMF crisis” due to its controversial role.

Development, Crisis and Asian Values

IMF Role

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

Development, Crisis and Asian Values

Asian Values

Introduction

Asian values was a political ideology of the 1990s, which defined elements of society, culture and history common to the nations of Southeast and East Asia.

It aimed to use commonalities – for example, the principle of collectivism – to unify people for their economic and social good and to create a pan-Asian identity.

This contrasted with perceived European ideals of the universal rights of man.

Development, Crisis and Asian Values

Asian Values

Introduction

The concept was advocated by Mahathir Mohamad (Prime Minister of Malaysia during 1981–2003) and by Lee Kuan Yew (Prime Minister of Singapore, 1959–1990).

The popularity of the concept waned after the 1997 Asian financial crisis, when it became evident that Asia lacked any coherent regional institutional mechanism to deal with the crisis.

The ‘Asian values’ argument

Mahathir bin Mohamad and Lee Kuan Yew were particularly vocal advocates of Asian values.

The main claims of the Asian values argument are as follows:

A set of values is shared by people of many different nationalities and ethnicities living in East Asia. ('Asian values' are today usually associated solely with East and Southeast Asia).

These values include:

a stress on the community rather than the individual
the privileging of order and harmony over personal freedom

Development, Crisis and Asian Values

refusal to compartmentalize religion away from other spheres of life

a belief that government and business need not necessarily be natural adversaries

a particular emphasis on saving and thriftiness

an insistence on hard work

a respect for political leadership

an emphasis on family loyalty

The ‘Asian values’ argument

Development, Crisis and Asian Values

In seeking to understand the economic success of certain Asian societies, credit must be given to the role of these 'Asian values'.

It is not appropriate to analyze Asian economic success in culture-free economic terms.

It is not appropriate to characterize Asian economic success as a result of the adoption of specifically Western values.

Asian values and Asian Economy

Development, Crisis and Asian Values

Modern political systems in Asian societies should be grounded in the specific Asian cultures in which they are to be situated.

It is not acceptable to reform or criticize Asian societies solely on the basis of liberal-democratic forms developed in Western societies.

Asian values and Asian Politics

Development, Crisis and Asian Values

Proponents of Asian values believe that a major international shift is underway, involving the rise of 'the East' and the fall of 'the West'.

Samuel Huntington also offers this argument in ‘The Clash of Civilizations’.

Proponents of Asian values are critical of certain Western values and behavior patterns.

The West: In Decline and In Decay

Development, Crisis and Asian Values

Proponents of Asian values have argued that the West is experiencing social decay. Evidence of this decay includes:

Increases in antisocial behavior, such as crime, drug use, and general violence in society.

The breakdown of family life, including increased divorce rates, increased illegitimacy, a rise in the number of teenage pregnancies, and a growth in the number of single-parent families.

Social Decay in the West

Development, Crisis and Asian Values

Western values place too much emphasis on the individual rather than the community.

Western societies lack social discipline, and there is too much tolerance of eccentricity and abnormality in social behavior.

The suggestion is sometimes made that Western countries would do well to learn from 'Asian values‘, rather than the other way around.

The West: In Decline and In Decay

Development, Crisis and Asian Values

Criticisms of the Asian values argument

The Asian values argument is premised on the economic success of Asian countries.

The economies of a number of Southeast Asian and East Asian countries collapsed in the 1990s.

This gave a significant boost to the 'anti-Asian values' case.
Proponents of Asian values suggest that a set of 'Asian values' operate throughout the Asian region.

Critics argue that there are long-standing religious (Islamic, Buddhist, Confucian), political and other divisions in the region.

Huntington, for example, argues that Asia contains five different civilizations.

Development, Crisis and Asian Values

Asian Values

commitment to hard work

sense of thriftiness

emphasis on education

well-defined family structure

respect for political authority

society above self

Development, Crisis and Asian Values

East Asia

Economic Crisis in Japan

East Asia

Economic Development

Economic Crisis in Japan

Economic Development

Introdution

At the end of the 1980s real estate prices rose by three times, producing a real estate bubble. This uncovered one of the unspoken factors of the Japanese economic miracle, i.e. the power of big speculators, with ties to the criminal world as well as top politicians.

Japan’s Central Bank responded first by raising interest rates and this determined a steep fall of house prices in 1991. This was not, however, accompanied by economic recovery, rather it was followed by a creeping recession.

Economic Crisis in Japan

Introduction

In the next stage, interest rates were lowered, down to zero, in order to jump start the economy. The State launched big public expenditure programs, borrowing large quantities of money.

The economy did not react as hoped. Japan’s economy was based on a low rate of private consumption. GDP growth rates remained low, below the economy’s growth potential. In other words Japan had fallen into a deflationary trap.

Economic Crisis in Japan

Japan’s growth rate.

Economic Crisis

Japan’s economic problems were compounded by the fact that its banking sector became heavily indebted.

Stagnation also meant a rise in unemployment, which reached 5% of the work force. Investment and consumption both were flat or negative.

Reflationary policies proved too weak.

Reforming the economy proved difficult, because of over regulation and structural rigidities.

Japanese society resisted steps towards liberalization. The Japanese social model was called into question, but reforming it was slow and painful.

Economic Crisis in Japan

Economic Crisis

Two mistakes in economic policy:

A) Government did not act consistently. In 1997 after a few years of slow recovery, fears were raised about the rise in public debt due to government deficits and projected pension costs. As a result taxes were raised, growth was throttled and the country plunged again in recession.

B) Politicians failed to address the real weakness which lay in the banking system. Banks had suffered from the fall in real estate stock and, following that, they had exposed themselves by lending to the State. Protracted recession compounded the problem.

Recapitalization of the banks was carried out in 1998, with a State injection of $ 500 bn.

Economic Crisis in Japan

Economic Crisis

1992-3 Crisis in the European Exchange Rate Mechanism. (ERM). The Italian Lira and the pound sterling devalue.

1994-5, a boom in Mexico attracts short term capital flows from the US.

In December 1994 the Mexican peso devalues, following an abrupt crisis of confidence in the Mexican economy. President Clinton leads a recovery effort, sustained by US Treasury funds as well as by the IMF. In 1995 Mexico’s GDP fell by 6%.

Economic Crisis in Japan

Economic Issues

The Toyota Recall

announced the vehicle recalls on three continents and shut down five assembly plants in the US
A downgrade in the Japanese government's credit rating because Prime Minister Yukio Hatoyama is moving too slowly to reduce the debt.
China overtook japan as the world’s largest maker of cars, according to an announcement from the Japanese Automobile Manufacturers Association.

Economic Crisis in Japan

Economic Issues

The working-age population

Collapsing - according to some economists
Japan has fewer children and more senior citizens as a percentage of its population than any country in recorded history, but the government does little to encourage childbirth or enable immigration.
Japan's economy remains addicted to exports for growth.
Deflation, the curse of the "Lost Decade" of the 1990s. Prices and wages are falling as aging consumers save their pension checks and wait for still-lower prices. Because of the seniors in Japan the consequence.

Economic Crisis in Japan

Economic Issues

Debts

Japan's public debt is the highest among industrial countries as a percentage of GDP, but it is probably not going to be the problem that sinks the economy. For unlike the United States, which has borrowed heavily from China, Japan borrows almost exclusively from its citizens.

Economic Crisis in Japan

Employment “ice-age”

68.8 % of those graduating from a university receives a job offer
There is an obvious decline in employment.

Economic System

Agricultural Age Economic Systems:
During this age Japan's economics were limited to trading with foreigners who were deemed a non threat. There economic system was nowhere near what it is today because they were a isolated island nation who didn't trust anyone. However their farmers and fishermen were some of the world's best at their specialty, at this time they didn't recognize that there was large profits to be made from trading goods.

Economic Crisis in Japan

Economic System

Industrial Age Economic Systems:
This age saw Japan capitalize on the trading system. They became a textile manufacturing nation. The Japanese then began developing heavy industries such as steel and shipbuilding. After they started to be a financially rich country from the goods they were creating, their was no stopping them from creating new industries to exploit and reap a economic gain from during this age.

Economic Crisis in Japan

Economic System

Information Age Economic Systems:
In this age Japan is still striving to create new industries for additional revenue. This is the age where Japan really exploded on the economic scene with it's new inventions and it's improving of other nations existing inventions. For example during this era Japan improved on or created color television, VCR, walkmen, fax machines, compact discs, etc.

Economic Crisis in Japan

Best Practices

Joint Development in Asia

Create a Free and Open Economic Area in Asia - Economic activities in Japan are deeply embedded in the dense manufacturing network in East Asia that is a growth center in the world. In order to ensure a foundation for long-term growth in Japan, it is necessary to strengthen the growth mechanism through which growth in Asia as a whole drives continuing growth in Japan. It is where free trade and business activities are governed by the rule of law.

Economic Crisis in Japan

Best Practices

Joint Development in Asia

The formation of [East Asia Free Trade Areas] - Japan has relied primarily on bilateral free trade agreements. Now, it is necessary to shift to a wide-area approach covering East Asia as a whole, once the negotiation of a Japan-ASEAN Economic Partnership Agreement is concluded.

Economic Crisis in Japan

Best Practices

In recognition of such, this strategy makes two specific proposals in order to further the economic integration in East Asia. These are:
The vision of a Comprehensive Economic Partnership in East Asia (CEPEA);
The establishment of an international organization in East Asia that serves as a policy forum and think tank that operates like the OECD (Organization for Economic Cooperation and Development).

Economic Crisis in Japan

Best Practices

Taking advantage of “soft power”

“hard power,” - economic strength and military strength.
“Soft power,” - social values, culture, political ideology, policy appeal, and the ability to form alliances are also important national strengths.

Economic Crisis in Japan

Japan Recovers?

First signs of recovery of the Japanes economy had to wait until 2003. In that year GDP grew by more than 2% and the deflationary spiral began to loosen.

Japanese exports benefited from the rise in US trade deficit and from the strong performance of China. Big flows of Japanese FDI to China.

Interest rates remained very low, leaving Japanese monetary policy almost defenseless against the new economic crisis of 2008.

Economic Crisis in Japan