The Asian Crisis:A Perspective after Ten

Years

W. Max Corden

Department of Economics University of Melbourne

Yueqin Yang presents:

The Asian Crisis:a Perspective after Ten Years

• Introduction Background Focus on four nations: Thailand, Indonesia, Malaysia, Korea

• The Boom• The Bust and The Trigger• Financial Crisis and Exchange Rate

Regime• Policy Responses• Some Special Aspects of the Four

Countries• Conclusion

The Asian Crisis:a Perspective after Ten Years

The Asian Crisis: BackgroundThe crisis was period of financial crisis in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Tailand with the financial collapses of Thai habt. Other Southeast Asian countries were affected.

According to the UN, the crisis was “perhaps the most serious financial crisis since the breakdown of the Bretton Woods system in the early 1970s, in terms of both its scope and its effects”

The BoomFinanced by both local savings and by foreign capital

inflow

Three forms of foreign capital inflow:

Foreign direct investment (FDI)

Portfolio capital into local stock markets

Short-term borrowing

1.2.3.

The Asian Crisis:a Perspective after Ten Years

The Bust and The Trigger•Fundamental CauseInevitable ending of the investment boomFinancial difficulties•Trigger in Thailand:

Internal and External factors collapse in exports growth rate increase in current account deficit exchange rate crisis (depreciation of Thai)

•Trigger of the other three countries: Thai Baht depreciation

The Asian Crisis:a Perspective after Ten Years

The Exchange Rate Regime and Crisis The East Asian crisis is often thought of as a currency or exchange rate crisis.

•Fixed Exchange-rate System: not perceive hedging

governments try to keep the value of their currencies constant against another (usually US dollars)

•Floating Exchange Regime: perceive hedging

a currency's value is allowed to fluctuate according to the foreign exchange market.

The Asian Crisis:a Perspective after Ten Years

Currency Mismatch Unhedged Foreign Borrowing

• Apply to Indonesia, Thailand and Korea• Balance Sheet Effects

Unhedged foreign borrowing (US dollars)

A depreciation of the domestic currency

Big losses incurred by domestic banks

The Asian Crisis:a Perspective after Ten Years

Recession• Decline in Investment • Financial crisis due to excessive

domestic lending and decline in assets value

• Reduction of private consumption

• Currency mismatch on Balance Sheet

The Asian Crisis:a Perspective after Ten Years

The Policy Responses• Moderate the Depreciation• Rescue the Banks• Keynesian Demand Expansion Various increases in public expenditure Public sector infrastructure investment Deliberate reductions in interest rates

The Asian Crisis:a Perspective after Ten Years

Some Special Aspects of the Four Countries

• Thailand:Fixed-but-adjustable Exchange rate Regime(FBAR)• Indonesia: Economic problem interacted with political problem• Korea: Achieve more assistance from IMF and US• Malaysia: Have no currency mismatch problemGovernment control on short-term capital outflow

The Asian Crisis:a Perspective after Ten Years

Q&A

The Asian Crisis:a Perspective after Ten Years