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East Asia

East Asia

Ten Years After: Revisiting the Asian Financial Crisis

East Asia

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Introduction

  • Before the 1997 crisis there had been rapid increases in capital flows from developed to developing countries - a six-fold increase in six years. Afterwards, capital flows to developing countries stagnated.

  • Before the crisis, some thought risk premia for developing countries were irrationally low. These observers were proved right: the crisis was marked by soaring risk premia.
  • Risk premia refers to the amount of excess return an asset must produce over that offered by a less risky asset (say a t-bill), to entice an investor to hold it.

Revisiting the Asian Financial Crisis

Introduction

  • Today, the global surfeit of liquidity has once again resulted in comparably low risk premia and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premia to more normal levels.)

  • In 1997, the IMF and the United States Treasury blamed the crisis on a lack of transparency in financial markets.

Revisiting the Asian Financial Crisis

Introduction

  • In 1997, the IMF and the United States Treasury blamed the crisis on a lack of transparency in financial markets. But when developing countries pointed their fingers at secret bank accounts and hedge funds, IMF and US enthusiasm for greater transparency diminished. Since then, hedge funds have grown in importance, and secret bank accounts have flourished.

  • But there are some big differences between then and now. Most developing countries have accumulated massive foreign currency reserves, and have increasingly borrowed in their own currencies during the last few years, thus reducing their foreign exchange exposure.

Revisiting the Asian Financial Crisis

Introduction

  • The impact of the Asian financial crisis raised deep doubts about the reigning ideology of financial globalization and the design of the international financial architecture.

  • In the ten years since the Asian crisis, many scholarly as well as popular evaluations of the crisis have contended that international financial liberalization, characterized by the free and rapid mobility of short-term capital, played the central role in instigating the crisis.

Revisiting the Asian Financial Crisis

Introduction

  • The crisis-affected Asian countries also learned a critical lesson through their loan programs with the IMF. The Fund provided more than $100 billion in emergency funds to Thailand, Indonesia, and Korea—the three worst-hit countries—with the goal of restoring investor confidence and ameliorating the economic crisis.

  • However, rather than achieving their stated goals, the Fund’s programs seemed to accelerate capital flight. Steven Radelet and Jeffrey Sachs argue that the IMF’s inappropriate focus on “overhauling” financial institutions in the heat of the crisis worsened investor confidence by re-emphasizing domestic financial weaknesses.

Revisiting the Asian Financial Crisis

Introduction

  • Ten years onward, the economies once under attack in the Asian financial crisis have demonstrated what many experts claim is a remarkable “V-shaped recovery.”

  • The macroeconomic indicators of the region today illustrate that after a deep decline in 1998, the average GDP of the region climbed back to 4-6 percent annual growth between 1999-2005, although this is still lower than the average of 7-9 percent the region experienced in the pre-crisis years of 1991-1996.

Revisiting the Asian Financial Crisis

Introduction

  • Currency depreciation, however, has not fully recovered. The Korean won has recovered to 95 percent of its pre-crisis level, the Thai baht and Malaysian ringgit to 70 percent, the Philippine peso to 50 percent, and the Indonesian rupiah, faring the worst, to 25 percent.

  • In 2007, the foreign currency reserves of the region exceeded $3.2 trillion, of which China’s reserves constituted $1.1 trillion. There is also evidence that the lessons of unbridled financial liberalization have been absorbed by regional policymakers and firms, as they now issue fewer external bonds.

Revisiting the Asian Financial Crisis

Joint Development in Asia

  • Created a Free and Open Economic Area in Asia - Economic activities in the regions.

  • It is deeply embedded in the dense manufacturing network in region that is a growth center in the world.

  • In order to ensure a foundation for long-term growth in region, it is necessary to strengthen the growth mechanism through which growth in Asia.

Economic Crisis in Japan

Joint Development in Asia

  • It is where free trade and business activities are governed by the rule of law.

  • The formation of East Asia Free Trade Areas.

  • Now, it is necessary to shift to a wide-area approach covering East Asia as a whole, once the negotiation of a 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