INTERNATIONAL ECONOMICS
oguzhansaglik
International_Economics_April_18.pptINTERNATIONAL ECONOMICS
SECTION 11. NATURAL RESOURCE EXPORTS: CURSE OR BLESSING?, CONCLUSION
By
Francisco L. Rivera-Batiz
BAU International University
April 18, 2018
@ 2018 Francisco Rivera-Batiz, All Rights Reserved
*
- Assignment #4 due today.
- Sample questions for the final exam distributed last week, available through Schoology.
- Note that the final exam is next week, on Wednesday, April 25th, from 6 to 9 PM.
- Because we need to make up the class we missed earlier, we will be extending the class for 15 minutes each day, so we will end at 9:15 PM tonight (if needed).
The exam covers all material after the midterm exam, from March 7th until today.
Topics:
- 6. The National Income Accounts: Savings, Investment and the Current Account
- 7. The Effects of Macroeconomic Policies in the Open Economy
- 8. The Expansion of World Trade: Multilateral and Regional Policies, Technology and Geography
- 9. The Theory of the Determinants and Gains/Losses from Trade
- 10. The Evidence on the Impact of International Trade Liberalization
- 11. Natural Resource Exports: Curse or Blessing?
- 12. Export Promotion, Infant Industries and the Asian Tigers
- 13. The East Asian Financial Crisis
- Basic concepts and topics to study and know about:
Section 6: The National Income Accounts
- National income and product accounts: what are they
- Current account balance is equal to the excess of income over spending
- Current account balance is equal to the excess of national savings over national investment
- Current account balance is equal to the excess of private savings over investment plus the government budget balance
- U.S. twin deficits: budget deficits and current account balance deficits
- Effects of public debt on economic growth: is there a level of public debt above which economic growth slows down?
*
Section 7. The Effects of Macroeconomic Policies
- The effects of a currency devaluation and the Marshall-Lerner condition
- J-curve effect of an exchange rate change on the trade balance
- Mundell-Fleming model to examine the effects of macroeconomic policies
- Effects of monetary policy using the Mundell-Fleming model (including the international repercussions of those policies
- Dutch disease and how it is explained by the Mundell-Fleming model
- Section 8. The Expansion of World Trade
- Tariffs and non-tariffs barriers to trade
- Sachs-Warner index of an open economy
- Why has trade increased so much since 1985?
- Multilateral versus bilateral/regional trade agreements.
- The GATT and the WTO
- Protectionism in agricultural trade
- Trade creation and trade diversion
*
Section 9. The Theory of the Determinants and Gains/Losses from Trade
- The effects of international trade on the economy: export versus import markets
- David Ricardo’s theory of comparative advantage
- Hecksher-Ohlin theory of what determines comparative advantage
- Sectoral effects of trade and fair trade
- Section 10. The Evidence on the Impact of Trade Liberalization
- The effects of trade on economic growth. What is the evidence?
- The Stolper-Samuelson theorem and the effects of trade on poverty and income inequality
- Is trade associated with greater poverty? What is the evidence
- Is trade associated with greater inequality? What is the evidence?
- Section 11. Natural Resource Exports: Curse or Blessing?
- Do countries with more natural resource exports grow faster than other countries?
- What policies can be adopted to avoid the natural resource curse?
- Intra-industry trade: what is it?
- Grubel-Lloyd index of intra-industry trade
Section 12. Export Promotion, Infant Industries and the Asian Tigers
- What explains the East Asian economic miracle?
- Infant industry argument and learning by doing
Section 13. The East Asian Crisis
- What caused the East Asian crisis?
- What policies can be adopted to avoid the East Asian crisis?
As we saw in the last class, most people believe that oil-exporting countries grow faster than countries that do not have natural resources.
But the reality is very different.
The evidence shows that resource-rich countries on average do not grow faster than other countries.
*
In fact, if you do a simple correlation between natural resource exports and economic growth, you find that the relationship is negative!
*
- But the available evidence also suggests that countries with high quality of public sector governance can introduce institutions that counteract all the problems often associated with the natural resources curse.
- In other words, the natural resource curse can be exorcized.
*
- In terms of corruption, part of the strategy in some countries has been to pre-empt possible corruption arising from the natural resource revenues by earmarking or assigning a share of those revenues directly to finance social programs, such as education and health.
*
Consider the case of Norway.
- Norway discovered massive reserves of oil in 1971.
- Growth in Norway was not hurt by the exploitation of natural resources.
Its government has been able to effectively manage the revenues obtained from the exploitation of these natural resources.
*
- In order to effectively manage government revenues collected from taxes imposed on oil producing companies, Norway created its Oil Fund in 1990.
- This is what is called a sovereign wealth fund (involving government assets) and it is currently worth about 1 trillion U.S. dollars or about $300,000 per Norwegian citizen.
- Norway has used the returns from its sovereign wealth fund to finance pension funds and social safety nets.
- These have benefitted everybody in the economy.
- In Chile, the administration of former President Ricardo Lagos imposed a tax on copper production in order to finance a Competitiveness Innovation Fund (Fondo de Innovación para la Competitividad).
- This Fund currently receives more than 100 million dollars every year and is financing a variety of technology projects in both the public and private sectors, including funds allocated to universities for these purposes.
*
- So, through the use of innovative government policies, trade in natural resources can indeed have positive effects.
- This is in fact the point developed by Joseph Stiglitz in his article: “Making Natural Resources into a Blessing Rather Than a Curse,” In Svetlana Tsalikad and Anya Schiffrin, eds., Covering Oil, Open Society Institute, New York, 2005, 13-20.
*
INTERNATIONAL ECONOMICS
SECTION 12. EXPORT PROMOTION, INFANT INDUSTRIES AND ASIAN TIGERS
By
Francisco L. Rivera-Batiz
BAU International University
April 18, 2018
@ 2018 Francisco Rivera-Batiz, All Rights Reserved
*
12. Export Promotion, Infant Industries and the Asian Tigers
Readings: Dani Rodrik, “What’s So Special About China’s Exports?,” China & World Economy, Vol. 14, No. 5, September-October 2006, pp. 1-19.
Dani Rodrik and Arvind Subramanian, “From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition,” IMF Staff Papers, Vol. 52, No. 2, March 2005, 193-228.
Dani Rodrik, "Getting Interventions Right: How South Korea and Taiwan Grew Rich," Economic Policy, 1995.
So, as we saw before, in general, countries tend to grow faster after trade liberalization.
In fact, there is a group of countries that have grown very fast in the last decades and they also appear to have followed a strategy of promoting international trade.
These are the East Asian “miracle” economies.
Top Ten Countries/Regions in Economic Growth, 1960-2013
__________________________________________________
Country/region Annual Growth of Real Per-Capita Income, 1960-2013 (average % per year)
__________________________________________________
China, People’s Republic of 6.2%
Republic of Korea 5.7
Singapore 5.1
Taiwan 5.0
Hong Kong 5.5
Thailand 4.0
Malaysia 3.9
Botswana 3.8
Ireland 3.4
Japan 3.1
___________________________________________________
Source: World Bank, World Development Indicators, 2017.
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What explains
the East Asian
Growth Success,
that is, the
so-called
East Asian
‘miracle.’?
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In 1993, The World Bank issued a report on their study of the economic growth in the East Asian “miracle” countries.
What was their conclusion?
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The World Bank argued that there were many factors involved, but that:
“The export-push strategy was the high-performing East Asian countries’ most broad-based and successful application of selective interventions”
“Furthermore, of the many interventions tried in East Asia, those associated with their export push hold the most promise for other developing economies.”
World Bank (1993), p. 358.
*
In view of our analysis so far, both theoretical and empirical, maybe we should share the World Bank’s conclusion that trade liberalization is behind the East Asian countries’ economic growth miracle?
But wait…
There is no question that these countries/regions did engage in development strategies that had openness as a cornerstone.
Consider the cases of Taiwan and South Korea.
Growth of the export sector,
Taiwan and South Korea
________________________________________
Exports/GNP
1960 1990
________________________________________
Korea 2% 32%
Taiwan, China 10% 42%
________________________________________
Source: Rodrik.
But Dani Rodrik, the Turkish economist we have talked about before, has disagreed that growth in East Asia was caused by trade liberalization.
He argues instead that it was capital accumulation, reflected in a rapid increase of investment rates, that was the leading factor in the East Asian “miracles.”
Openness, for him, had a “supporting” role in the process, but would have been ineffective without the investment spurt.
Export-Push or Investment-Push?
Export/GDP (%)
1960 1970 1990
________________________________________________________
Korea 2% 9% 32%
Taiwan 10% 19% 42%
________________________________________________________
Investment/GDP (%)
1960 1970 1990
________________________________________________________
Korea 8% 25% 37%
Taiwan 12% 25% 28%
________________________________________________________
Source: Dani Rodrik, “Getting Interventions Right: How South Korea and Taiwan Grew Rich,” Economic Policy, 1996.
- The relatively high investment rates in East Asia generally continue today.
- They are also comparatively high in India, another country that has been growing rapidly in recent decades.
- But other regions of the world are not doing so well on this regard.
Gross Investment as a % of GDP
_______________________________________________
Country/region Investment/GDP (%), 2016
_______________________________________________
East Asia 40.0%
China 44.3
South Korea 29.1
Vietnam 28.0
India 30.0%
Latin American and the Caribbean 19.0%
Brazil 15.0
El Salvador 14.0
Sub-Saharan Africa 21.0%
Nigeria 15.0%
Guinea-Bissau 4.0%
_______________________________________________
Source: World Bank, 2018.
*
In China, international trade has been an engine of economic growth, but as we have just seen it has been accompanied by sky-high savings and investment rates.
*
- But why did investment rise so much in the East Asian economies?
Rodrik argues that the rise of private sector investment in East Asia was spurred by public sector interventions in the form of tax-subsidy policies (regarding subsidized credit to exporters, infrastructure subsidies, tax credits, etc.).
It is important for Rodrik, then, that the public sector adopt the appropriate policies to provide incentives for the growth of private savings and investment.
Without a high-quality public sector governance, he argues, trade liberalization is bound to fail.
In a recent paper, Rodrik and Subramanian have made this point very clear in relation to the Indian economic miracle also.
Dani Rodrik and Arvind Subramanian, “From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition,” Mimeo., Kennedy School of Government, March 2004.
- To summarize: the main point made here is that trade liberalization is a necessary but not sufficient condition for trade.
- In order to have positive effects of trade, the country must increase investment rates in physical –and I would say– human capital, and reform its public sector governance to make it more agile and efficient in fostering a competitive private sector development.
- Without these complementary actions, free trade agreements have no great effect.
- There is another reason why public sector governance is so important.
- Part of the explanation why export industries need appropriate government support early in their growth –just as they did in East Asia– is because of what is called the “infant industry argument.”
The infant industry argument is based on the fact that most firms require some period of time before they become fully-efficient in what they do.
The reason is because of learning-by-doing.
Learning by doing means that, as firms increase their production activities over time, they usually become better at what they are doing (workers become more adept) and firm productivity rises because of this.
*
- This means that a young (infant) industry may take time to become fully productive and may require some policy support and protection during this time period of learning.
- This suggests that temporary government protection of new industries may be required for those industries to “grow up” and become competitive in world markets.
Kenneth J. Arrow , a Stanford
University economist, was the
first one to do a formal
theoretical analysis of
learning by doing in his
Paper: “The Economic
Implications of Learning
By Doing” in 1962.
He won the Nobel
Prize in economics in 1972.
One example of the labor productivity gains associated with learning by doing is provided by economist Robert Lucas.
He has presented evidence looking at how the number of hours it takes to make a merchant ship varies in response to the experience of the shipbuilders in building more and more ships over time.
*
*
108.bin
- A more recent study of the automobile industry finds the same results.
- Steven Levitt, John List and Chad Syverson, “Toward an Understanding of Learning by Doing: Evidence from an Automobile Assembly Plant, Journal of Political Economy, August 2013, 643-681.
- They investigate how long it takes to assemble new models of cars introduced by an automobile producer in the U.S.
Average Hours Required to Assemble a Car
- They conclude:
- “Consonant with previous learning by doing studies, we find that the auto assembly plant quickly realized large efficiency gains in both the quality and quantity dimensions. Both assembly defects per vehicle and the average number of hours required to assemble a car dropped by about 70 percent during the first eight weeks of production.”
- Policies that temporarily protect export sectors that are beginning to grow need to be implemented, in order for greater trade and exports to succeed.
- But this requires governments that are agile and can adopt the appropriate policies.
INTERNATIONAL ECONOMICS
SECTION 13. THE EAST ASIAN FINANCIAL CRISIS
By
Francisco L. Rivera-Batiz
BAU International University
April 18, 2018
@ 2018 Francisco Rivera-Batiz, All Rights Reserved
*
13. The East Asian Financial Crisis
The factors leading to the East Asian financial crisis, including the role of capital inflows and capital flight, exchange rate policy, central banks and macroeconomic policies, speculative investments, etc.
Readings:
Francisco L. Rivera-Batiz, “The East Asian Crisis and the Anatomy of Emerging Market Disease,” in Arvid Lukauskas and Francisco L. Rivera-Batiz, eds., The Political Economy of the East Asian Crisis: Tigers in Distress, Edward Elgar Publishers, London, 2001, pp. 31-73.
The following
discussion is based
on my article ,
which is available
at Schoology.
- One must say that the East Asian crisis came as a surprise to most economists and observers.
The economies –except perhaps for the
Philippines-- just looked like they were doing
very well, up to their collapse in 1997.
Growth of Real Gross Domestic Product Per-Capita in East Asia, 1960-95
_______________________________________________________________
Country Per-Capita GDP Per-Capita GDP Rate of Growth,
1960 (in 1995 $) 1995 (in 1995 $) 1960-95 (%)
______________________________________________________________
Indonesia $621 $2,602 4.1%
Korea, Rep. Of 883 8,505 6.5
Malaysia 1,381 6,613 4.5
The Philippines 1,112 1,756 1.3
Thailand 923 5,034 4.8
United States 9,774 19,621 2.0
_______________________________________________________________
Sources: Barro and Lee 1994 and World Bank 1998. The data are expressed in constant 1995 dollars and have been adjusted for differences in purchasing power among the various countries.
Investment Rates in East Asia, 1960-96
__________________________________________________________
Country Investment as a percentage of Gross Domestic Product
1960-69 1970-79 1980-89 1990-96
__________________________________________________________
Indonesia 9.8% 21.8% 29.1% 34.8%
Rep. of Korea 18.4 27.3 30.0 36.9
Malaysia 19.2 25.5 30.3 39.8
The Philippines 19.6 25.6 22.1 22.5
Thailand 20.5 25.8 27.6 42.1
________________________________________________________
Source: The World Bank 1995, Asian Development Bank 1998.
Exports were booming in the region, as we have previously
discussed, and is also documented in the next slide.
Export Growth in East Asia, 1960-98
________________________________________
Country Exports/GDP (%)
1960 1998
________________________________________
Indonesia 3.0% 53.4%
Rep. of Korea 9.0 41.3
Malaysia 22.9 99.3
The Philippines 7.0 45.3
Thailand 5.6 47.4
________________________________________
Source: Barro-Lee 1994 and World Bank 2000d.
Currency values were stable
Republic of Korea
Exchange rate, Won-Dollar
Hundreds
of
Won
Per
dollar
109.bin
Malaysia’s exchange rate,
Ringitt-dollar
Ringitt
Per
dollar
110.bin
Thailand exchange rate,
Baht-dollar
↓
Baht
Per
dollar
111.bin
Indonesia’s exchange rate,
Rupiah-Dollar
Thousands
of
Rupiah
Per
dollar
112.bin
Philippines’ exchange rate,
Pesos per dollar
Pesos
Per
dollar
113.bin
- In contrast to the situation in many other countries, such as Greece, the governments in East Asia did not have huge budget deficits or huge debts.
The Government Budget Balance in East Asia Before the Crisis, 1992-1996 Average
____________________________________________
Country Budget Balance as a % of GDP
____________________________________________
Indonesia +0.1%
Korea +0.1
Malaysia +1.6
Philippines -1.5
Thailand +1.6
______________________________________________
Inflation was not a major problem either.
Inflation Before the Crisis: East Asia vs. the Rest of the World, 1980-1996
_______________________________________________________________
Country Average Annual Increase of Consumer Price Index (%)
1980-1989 1990-95 1996
_______________________________________________________________
East Asia 9.1% 7.9% 7.0%
Indonesia 9.6 8.7 7.9
Rep. of Korea 6.4 6.2 5.0
Malaysia 3.6 3.5 3.5
Philippines 14.1 10.8 8.4
Thailand 5.7 5.0 5.9
Industrialized 5.5 3.3 2.2
Countries
Developing 36.0 43.6 13.7
Countries
______________________________________________________________
Stock markets were booming
The Stock Market in East Asia Before the Crisis, 1988-1997
___________________________________________________________
Country Market Capitalization* Real growth per year**
Dec. 1988 June 1997 Dec 1988 - June 1997
___________________________________________________________
Indonesia 434,178 259,561,000 2,952%
South Korea 64,543,684 136,229,883 18.4%
Malaysia 63,193 714,170 336.3%
Philippines 88,592 1,961,893 66.4%
Thailand 221,958 1,614,920 655.8%
___________________________________________________________
* Nominal value, in millions of local currency.
** The increase in real capitalization is equal to the percentage increase in nominal capitalization adjusted by a stock market price index.
- And foreign capital was flowing into the East Asian economies in great proportions, partly because these countries had liberalized their international financial transactions, eliminating taxes and restrictions on foreign investments in their countries.
Capital Flows to East Asia, 1990-1996
__________________________________________________________
Country Net capital inflows
(billions of U.S. dollars)
__________________________________________________________
Indonesia 62.6
Republic of Korea 70.9
Malaysia 53.8
Philippines 23.5
Thailand 52.0
__________________________________________________________
Source: World Bank 1999.
- The economies were booming, as reflected in rapidly rising GDP, as shown next.
Growth of Real GDP Before the Crisis:
East Asia versus the World, 1980-1996
______________________________________________________________
Country Average Annual Rate of Growth of Real GDP (%)
1980-1989 1990-95 1996
_______________________________________________________________
East Asia (5) 5.6% 6.9% 7.1%
Indonesia 5.3 8.0 8.0
Rep. of Korea 7.8 7.8 7.1
Malaysia 5.8 8.8 8.6
Philippines 1.9 2.3 5.7
Thailand 9.0 7.3 5.5
Industrialized 2.7 1.8 2.5
Countries
Developing 4.3 5.8 6.6
Countries
_______________________________________________________________
- Very few had the foresight to predict what was coming.
- In its annual World Economic Outlook published in May 1996, the IMF forcefully stated:
- “It is likely that the emerging Asian economies will continue to boom during the next 12 months.”
- In al of the economies, the financial crisis starts with a foreign exchange crisis.
- Remember that these countries, until that time, had very stable, basically fixed, exchange rates.
- Their central banks purchased and sold foreign exchange reserves in order ro keep those exchange rate more or less fixed.
- DEVELOPMENT OF THE EAST ASIAN CRISIS:
- JULY 2, 1997: BANK OF THAILAND ABANDONS PEGGED EXCHANGE RATES AND ALLOWS THE BAHT TO FLOAT AFTER ACCUMULATING $23 BILLION IN DEBT TO SUPPORT THE CURRENCY.
- JULY 11, 1997: THE CENTRAL BANK OF THE PHILIPPINES LETS THE PESO FLOAT AFTER LOSING $1 BILLION IN FOREIGN EXCHANGE RESERVES A DAY.
- JULY 14, 1997:THE CENTRAL BANK OF MALAYSIA LETS THE RINGGIT FLOAT AFTER LOSING $10 BILLION IN RESERVES IN JUST TWO WEEKS.
- AUGUST 14, 1997: THE CENTRAL BANK OF INDONESIA LETS THE RUPIAH FLOAT AFTER LOSING BILLIONS OF DOLLARS IN RESERVES.
- DECEMBER 1997: KOREA ABANDONS EFFORTS TO SUPPORT THE WON, DAYS BEFORE ITS FOREIGN EXCHANGE RESERVES ARE EXPECTED TO BE TOTALLY DEPLETED.
IMMEDIATE IMPACT OF THE CRISIS AFTER JULY 1997:
- SHARP DEVALUATIONS OF THE CURRENCIES
- RISING INTEREST RATES AND THE CLOSING OF FINANCIAL INSTITUTIONS
- STOCK MARKET CRASHES
- SHARP GROWTH SLOWDOWN AND RECESSION IN 1998-2000.
Currency Depreciation in Five East Asian Economies: 1997 - 2004
_______________________________________________________________________
Country Value of Currency per Dollar
May 30 Dec. 19 May 11, March 3 March 8 December 8
1997 1997 1998 1999 2000 2004
_______________________________________________________________________
Indonesia 2,432 5,100 9,400 8,885 7,447 9,085
(Rupiah)
Korea 891 1,550 1,395 1,229 1,118 1,057
(Won)
Malaysia 2.51 3.82 3.86 3.80 3.80 3.80
(Ringgit)
Philippines 26.4 39.6 39.3 39.1 41.2 56.1
(Peso)
Thailand 24.8 44..8 38.6 37.7 38.0 39.2
(Baht)
_______________________________________________________________________
Source: The Wall Street Journal, several issues.
RISE OF INTEREST RATES AND COLLAPSE OF FINANCIAL SYSTEMS.
Interest Rates in East Asian Countries
________________________________________
December 1997 January 1998
________________________________________
Indonesia 13.3% 40.0%
Malaysia 7.4 11.1
Philippines 11.7 19.3
Korea 12.8 25.1
Thailand 9.2 27.0
________________________________________
Crash of Stock Markets in all Five Countries
Korean Stock Market,
Dow Jones Index
Dow
Jones
Index,
In
Local
currency
114.bin
- THE ECONOMIES COLLAPSED
Growth of GDP in East Asia:
Before and After the Crisis
_____________________________________________
Annual rate of growth
of real GDP (%)
1990-97 1998-2000
_____________________________________________
East Asian countries 6.6% 0.1%
Industrialized countries 2.0 2.8
China 10.7 7.6
_____________________________________________
Source: Asian Development Bank, IMF.
- IMF BAILOUT PACKAGES FOR EAST ASIAN ECONOMIES:
- AUGUST 1997 THAILAND $17 BILLION
- NOVEMBER 1997 INDONESIA $43 BILLION
- DECEMBER 1997 KOREA $55 BILLION
What
Went
Wrong?
- Not everything was rosy before 1997.
- Let us look at the CURRENT ACCOUNT BALANCE, which is essentially the balance of exports minus imports of goods and services of a country.
The Current Account Balance of the Balance of Payments, as a % of GDP
_______________________________________________
1985-89 1990-95 1996
_______________________________________________
Indonesia -2.5% -2.4% -3.5%
Korea 4.3 -1.3 -4.8
Malaysia 2.4 -5.6 -4.9
Philippines -0.5 -3.7 -4.6
Thailand -2.0 -6.8 -8.3
_______________________________________________
Source: IMF.
- Why did the current account balance deteriorate so drastically?
- Let us look at an indicator that we have studies before, but is essential in understanding the financial crises in East Asia and other developing countries.
The concept of a real exchange rate is intended to measure the competitiveness of a country’s products in world markets.
Symbolically, the real exchange rate is defined as:
q = eP*/P
Where:
e is the exchange rate (say in won per dollar)
P is the price of domestic (Korean) goods
(in won) and
P* is the price of foreign goods (say, American
goods) in dollars.
- That the real exchange rate is an index of competitiveness can easily be seen by the fact that the real exchange rate compares the prices of domestic and foreign goods, when they are converted to the same currency.
Consider the relative price of cellphone in South Korea:
eP* e (in won per $) x P* (price of iPhone in $)
q = ----- = ---------------------------------------------------------------
P P (price of Samsung cellphone in Korean won)
An increase in the real exchange rate:
q = eP*/P ↑
Means that domestic goods (in Korea) have become relatively cheaper compared to foreign goods (when compared in the same currency).
So, Korean price-competitiveness has increased.
This is generally good for South Korea’s international trade.
A decrease in the real exchange rate:
q = eP*/P ↓
Means that the domestic (Korean) goods have become relatively more expensive compared to foreign goods.
So, Korean price-competitiveness has declined.
This is not so good for Korean international trade.
- The real exchange rate is an important index of an economy because it is associated with its international trade competitiveness.
- A country whose real exchange rate is declining for an extended period of time risks having its export sectors deteriorate sharply compared to its foreign competitors.
What happened to the real exchange rate in the East Asian economies?
Let me show you some examples.
Thailand,
Real Exchange Rate
q=eP*/P
Real
Exchange
Rate
Index
115.bin
Korea, Real Exchange Rate
q
116.bin
Malaysia’s real exchange rate
q
117.bin
Chart6
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
ASIA
| 1997 | 2.4320 | 2.5127 | 8.9100 | 25 | 26 | 233 | 216 | 115 | 296 | 92 | 1997 |
| 2.5820 | 2.6340 | 8.9100 | 32 | 29 | 235 | 201 | 113 | 277 | 116 | ||
| 2.7850 | 2.7800 | 8.9500 | 32 | 30 | 210 | 180 | 117 | 266 | 107 | ||
| 2.8950 | 2.9200 | 9.0900 | 34 | 32 | 211 | 174 | 105 | 239 | 93 | ||
| 3.4950 | 3.0900 | 9.1400 | 36 | 33 | 189 | 162 | 93 | 226 | 87 | ||
| 3.4050 | 3.3000 | 9.8900 | 31 | 33 | 160 | 134 | 76 | 202 | 75 | ||
| 5.6000 | 3.8700 | 15.2000 | 47 | 41 | 126 | 105 | 68 | 193 | 59 | ||
| 1998 | 7.4000 | 4.2500 | 17.6000 | 51 | 42 | 152 | 101 | 78 | 179 | 60 | 1998 |
| 9.4500 | 3.7500 | 16.5000 | 43 | 40 | 184 | 137 | 87 | 235 | 89 | ||
| 10.3000 | 3.7800 | 14.7000 | 40 | 39 | 199 | 134 | 86 | 244 | 88 | ||
| 7.7500 | 3.6800 | 14.0000 | 40 | 38 | 194 | 128 | 78 | 244 | 77 | ||
| 9.4500 | 3.8600 | 14.0000 | 39 | 39 | 161 | 112 | 62 | 240 | 65 | ||
| 13.9500 | 4.0400 | 14.0000 | 44 | 40 | 159 | 91 | 51 | 174 | 45 | ||
| 14.1500 | 4.1100 | 12.9000 | 41 | 42 | 198 | 84 | 64 | 163 | 52 | ||
| 1987 | 1.6500 | 2.4900 | 7.9500 | 25 | 21 | 161 | 60 | 45 | |||
| 1988 | 1.7170 | 2.7100 | 6.8400 | 25 | 21 | 124 | 56 | 39 | |||
| 1989 | 1.7970 | 2.7000 | 6.7700 | 26 | 22 | 109 | 56 | 53 | |||
| 1990 | 1.8890 | 2.7000 | 7.1400 | 25 | 27 | ||||||
| 1991 | 1.9840 | 2.7200 | 7.5800 | 25 | 26 | ||||||
| 1992 | 2.0630 | 2.6200 | 7.8800 | 26 | 26 | ||||||
| 1993 | 2.1030 | 2.7000 | 8.0800 | 26 | 27 | ||||||
| 1994 | 2.1980 | 2.5500 | 7.8800 | 25 | 24 | ||||||
| 1995 | 2.2860 | 2.5400 | 7.7500 | 25 | 26 | ||||||
| 1996 | 2.3620 | 2.5200 | 8.4600 | 26 | 26 | ||||||
| 1997 | 5.6000 | 4.2000 | 17.6000 | 51 | 41 | ||||||
| 1998 | 14.1000 | 4.1100 | 12.9000 | 41 | 42 | ||||||
| 1988 | 102 | 98 | |||||||||
| 1989 | 0.4988 | 98 | 93 | ||||||||
| 1990 | 0.5435 | 0.6530 | 100 | 100 | |||||||
| 1991 | 1.6415 | 0.5534 | 0.7010 | 97 | 99 | ||||||
| 1992 | 1.6174 | 0.5437 | 0.6790 | 90 | 92 | ||||||
| 1993 | 1.7559 | 0.5865 | 0.7380 | 88 | 88 | ||||||
| 1994 | 1.7991 | 0.5966 | 0.7820 | 89 | 92 | ||||||
| 1995 | 1.8405 | 0.5854 | 0.7950 | 87 | 89 | ||||||
| 1996 | 1.6951 | 0.5353 | 0.7450 | 80 | 80 | ||||||
| 1997 | 1.7916 | 0.5640 | 0.7990 | 76 | 78 | ||||||
| 1998 | 1.7451 | 0.5398 | 0.7770 | 124 | 150 | ||||||
| 1982 | 48.5000 | 85.9000 | 71.0000 | 78 | 100 | 116 | 128 | 58 | |||
| 1983 | 56.2000 | 90.9000 | 66.0000 | 87 | 105 | 152 | 137 | 64 | |||
| 1984 | 56.0000 | 91.6000 | 62.0000 | 77 | 89 | 152 | 122 | 63 | |||
| 1985 | 55.0000 | 99.1000 | 64.0000 | 73 | 91 | 154 | 138 | 71 | 63 | 320 | |
| 1986 | 71.0000 | 116.0000 | 78.0000 | 92 | 126 | 176 | 160 | 82 | 62 | 550 | |
| 1987 | 92.0000 | 117.0000 | 83.0000 | 95 | 123 | 177 | 182 | 86 | 77 | 550 | |
| 1988 | 98.0000 | 102.0000 | 98.0000 | 90 | 106 | 159 | 156 | 94 | 75 | 550 | |
| 1989 | 93.0000 | 95.0000 | 94.0000 | 85 | 107 | 175 | 250 | 99 | 98 | 1218 | |
| 1990 | 100.0000 | 100.0000 | 100.0000 | 100 | 100 | 100 | 100 | 100 | 100 | 1258 | |
| 1991 | 99.0000 | 99.0000 | 99.0000 | 82 | 85 | 112 | 66 | 91 | 88 | 1352 | |
| 1992 | 92.0000 | 94.0000 | 87.0000 | 69 | 74 | 119 | 49 | 74 | 91 | 1600 | |
| 1993 | 88.0000 | 93.0000 | 88.0000 | 71 | 67 | 148 | 42 | 71 | 91 | 1880 | |
| 1994 | 92.0000 | 91.0000 | 86.0000 | 62 | 111 | 53 | 44 | 66 | 89 | 1940 | |
| 1995 | 89.0000 | 88.0000 | 84.0000 | 63 | 123 | 39 | 46 | 65 | 88 | 1995 | |
| 1996 | 80.0000 | 88.0000 | 78.0000 | 56 | 95 | 35 | 44 | 61 | 84 | 2130 | |
| 1997 | 78.0000 | 89.0000 | 75.0000 | 54 | 79 | 33 | 42 | 55 | 80 | 2450 | |
| 1998 | 150.0000 | 157.0000 | 108.0000 | 75 | 75 | 33 | 41 | 53 | 87 | 2760 |
ASIA
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THAREAL2
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THAREAL
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THAIST2
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THAILA
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THA8796
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
THA87-98
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
TAILAST
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
PHIREAL
| 1997 |
| 116 |
| 107 |
| 93 |
| 87 |
| 75 |
| 59 |
| 1998 |
| 89 |
| 88 |
| 77 |
| 65 |
| 45 |
| 52 |
| 45 |
| 39 |
| 53 |
PHILPST
| 1997 |
| 32 |
| 32 |
| 34 |
| 36 |
| 31 |
| 47 |
| 1998 |
| 43 |
| 40 |
| 40 |
| 39 |
| 44 |
| 41 |
PHILLIP
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
PHI97-98
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
PHI8796
| 1997 |
| 116 |
| 107 |
| 93 |
| 87 |
| 75 |
| 59 |
| 1998 |
| 89 |
| 88 |
| 77 |
| 65 |
| 45 |
| 52 |
PAREXC
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
PARAREAL
| 1997 |
| 277 |
| 266 |
| 239 |
| 226 |
| 202 |
| 193 |
| 1998 |
| 235 |
| 244 |
| 244 |
| 240 |
| 174 |
| 163 |
MEXREAL
| 1997 |
| 29 |
| 30 |
| 32 |
| 33 |
| 33 |
| 41 |
| 1998 |
| 40 |
| 39 |
| 38 |
| 39 |
| 40 |
| 42 |
MALREAL
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
MALEXCH2
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
MALEX982
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
MALAYST
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
MALAYS
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
MALAREA2
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
MAL8796
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
MAL87-98
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
KOREAST2
| 1997 |
| 201 |
| 180 |
| 174 |
| 162 |
| 134 |
| 105 |
| 1998 |
| 137 |
| 134 |
| 128 |
| 112 |
| 91 |
| 84 |
KOREAST
| 1997 |
| 3 |
| 3 |
| 3 |
| 3 |
| 3 |
| 4 |
| 1998 |
| 4 |
| 4 |
| 4 |
| 4 |
| 4 |
| 4 |
KOREAL2
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
KOREAL
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
KOREA
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
KOR8796
| 1997 |
| 113 |
| 117 |
| 105 |
| 93 |
| 76 |
| 68 |
| 1998 |
| 87 |
| 86 |
| 78 |
| 62 |
| 51 |
| 64 |
| 60 |
| 56 |
| 56 |
INDREAL
| 1997 |
| 113 |
| 117 |
| 105 |
| 93 |
| 76 |
| 68 |
| 1998 |
| 87 |
| 86 |
| 78 |
| 62 |
| 51 |
| 64 |
INDORE2
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
INDONST2
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
INDONEST
| 1997 |
| 9 |
| 9 |
| 9 |
| 9 |
| 10 |
| 15 |
| 1998 |
| 17 |
| 15 |
| 14 |
| 14 |
| 14 |
| 13 |
INDONESI
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
INDONE
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
INDOE882
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
INDO87-98
| 1997 |
| 235 |
| 210 |
| 211 |
| 189 |
| 160 |
| 126 |
| 1998 |
| 184 |
| 199 |
| 194 |
| 161 |
| 159 |
| 198 |
| 161 |
| 124 |
| 109 |
IND8796
| 1997 |
| 235 |
| 210 |
| 211 |
| 189 |
| 160 |
| 126 |
| 1998 |
| 184 |
| 199 |
| 194 |
| 161 |
| 159 |
| 198 |
FIG1-1B
| 1997 |
| 3 |
| 3 |
| 3 |
| 3 |
| 3 |
| 6 |
| 1998 |
| 9 |
| 10 |
| 8 |
| 9 |
| 14 |
| 14 |
FIG1-1A
| 1997 |
| 3 |
| 3 |
| 3 |
| 3 |
| 3 |
| 6 |
| 1998 |
| 9 |
| 10 |
| 8 |
| 9 |
| 14 |
| 14 |
CHIREAL
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
BRAREAL
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
ARGREAL
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 3 |
| 3 |
| 3 |
| 3 |
| 3 |
| 4 |
| 1998 |
| 4 |
| 4 |
| 4 |
| 4 |
| 4 |
| 4 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1997 |
| 3 |
| 3 |
| 3 |
| 3 |
| 3 |
| 6 |
| 1998 |
| 9 |
| 10 |
| 8 |
| 9 |
| 14 |
| 14 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
| 1982 |
| 1983 |
| 1984 |
| 1985 |
| 1986 |
| 1987 |
| 1988 |
| 1989 |
| 1990 |
| 1991 |
| 1992 |
| 1993 |
| 1994 |
| 1995 |
| 1996 |
| 1997 |
| 1998 |
- In all of the East Asian countries, real exchange rates were declining, which was a disaster for their export sectors and eventually led to a financial and economic collapse of the countries in 1997.
- Why did real exchange rates decline in East Asia?
- The countries did have more or less fixed nominal exchange rates.
- But by fixing their nominal exchange rates, and with some moderate inflation going on, the real exchange rate declined.
- That is, a real currency appreciation(a reduction of the real exchange rate) occurred in all of the five East Asian countries.
- And it was the capital inflows that were associated with an a real appreciation of the currency (a reduction of the real exchange rate).
- The capital inflows, as we saw before, had generated an over-heating of the economies, causing inflation.
- But the real currency appreciation (the reduction of the real exchange rate) was a bad indicator and it is a bad indicator for any economy.
- If it goes on for an extended period of time, it suggests to investors that, combined with the reduced exports and rising imports (the rising current account balance deficits), the countries might be forced to devalue their currencies at some point.
- An expected devaluation then can lead to immediate capital flight.
Joseph Stiglitz has stated that:
“The three biggest problems (in the East Asian crisis) were:
- 1. The risky form of financing, especially borrowing short-term debt on international markets, and
- 2. The very high levels of debt relative to equity.
- 3. The misallocation of investment, most notably to speculative real estate
- Consider the first problem: the expansion of short-term debt from international markets.
- Why is this a problem?
- This short-term capital is volatile and can leave a country very quickly in response to expectations of currency, devaluation, default, etc.
- The second problem mentioned by Stiglitz is the high level of debt relative to foreign direct investment.
Capital inflows in five East Asian countries,
In Billions of US$, 1990-96
________________________________________
Net Capital inflow 92.8
Official Flow -0.2
Net Private Flow 93.0
Foreign Direct Investment 7.0
Stocks/Bonds 12.0
Private Sector Credit (Banks) 74.0
________________________________________
- Foreign Direct Investment (FDI) is much less volatile than short-term bank debt.
- But the capital inflows financing the growth of investment in East Asia in the early 1990s were not FDI.
- Finally, the massive financing available to the banking sector occurred in a situation where the banking systems were weak, supervision slack and regulation lax.
- As a result, as the capital inflows grew, the banking sector began to invest in speculative or low-productivity projects.
- Many of these projects were risky or otherwise involved long-term payoffs.
- Malaysia was investing massive amounts of capital in such projects as a hydroelectric plant, a new airport and a number of new, tall buildings.
- Indonesia was at the verge of completing the financing for a 60-mile long bridge between Indonesia and Malaysia. It is still in a proposal stage.
- The Jakarta Tower was going to be built, which was going to be the tallest building in the world. It is still being completed today.
- The culprit behind all these changes was the rushed international capital market liberalization.
- This liberalization was promoted by the IMF, the US Treasury Department, the World Bank, and many academics.
- It was clearly the wrong policy to promote. All of the countries involved were unprepared for the consequences of the capital flows.
Alternative policies that could have been followed –with the benefits of hindsight– are:
- 1. limited, gradual expansion of capital inflows, with restrictions on those inflows. This was what Chile established in the 1980s, avoiding the problems faced by the East Asian and other economies.
- 2. Greater exchange rate flexibility. International Capital flows –particularly short-term flows– are inconsistent with fixed exchange rates.
- 3. Reliance on longer-term capital inflows with a larger equity component. Such is the case with Foreign Direct Investment. One can impose taxes on short-term capital flows and leave long-tern flows free to cross borders.
- 4. Policies that strengthen the diversity of financial institutions, their supervision and their regulation (CAMELS).
East Asia has recovered since the crisis, but it remains a warning for other economies trying to develop their economies by attracting foreign capital.
- And this is all.
- Good luck on the final exam!!!!
PHILIPPINES
Real Effective Exchange Rate
0
20
40
60
80
100
120
198219841986198819901992199419961998
December 1982 to june 1998
Index (Increase = Real
Depreciation)
