Financial Crisis

Globalization and the Financial Crisis in Southeast Asia : Globalization and the Financial Crisis in Southeast Asia Nov. 15, 2005


Study Questions : Study Questions What are the new challenges for SE Asia in the world of global finance?* Are they more structural or more relevant to some actors? What were the internal and external causes of the Financial Crisis?* What are the roles of int’l institutions in SE Asia after the crisis, esp. the IMF?* Do you think it is fair to criticize ASEAN as not doing enough in the crisis?* If so, what do you expect ASEAN to do? Is it feasible in reality or not?* What are the constraints preventing ASEAN from doing more during and after the crisis?* What are domestic consequences of the crisis in the hard hit countries?* What are the consequences of the crisis to IR b/w SE Asia and Japan, China, and the U.S.?


What are the new challenges for SE Asia in the world of global finance? : What are the new challenges for SE Asia in the world of global finance? Globalization: massive increase of trade and capital flows with the rise of information and communication technology Global capital: availability and willing to take risk in fast-growing economies, but volatile and unstable. Neo-liberal Agenda – Washington Consensus (1989): liberalization of trade/finance/(foreign) investment, privatization, deregulation, etc.  Structural challenges and opportunities for emerging economies


Backgrounds for Growth : Backgrounds for Growth From ISI (Import Substitute Industrialization) to EOI (Export-Oriented Industrialization) The Four Dragons – NICs (Newly Industrialized Countries): Korea, Hong Kong, Taiwan, Singapore The New Tigers: Malaysia, Thailand, Indonesia, the Philippines FDI from Japan after 1985 Plaza Accord Results: around 10% of growth (1986-95)


What were the causes of the Financial Crisis? : What were the causes of the Financial Crisis? 4 views Macroeconomic mismanagement (esp. exchange rates) Regulatory and structural problems (esp. in the financial sector) Volatility of int’l financial markets* Political uncertainty (esp. on govt. policy and regime change)


Int’l Contexts before the Crisis : Int’l Contexts before the Crisis Chinese devaluation in 1994  the full rise of Chinese export  compete w/ SE Asia Prolonged economic recession in Japan  lower capacity to absorb SE Asian export Collapse of semiconductor prices  hurt Korea and Malaysia


Towards the Financial Crisis : Towards the Financial Crisis East Asian economic model: debt-financing (bank loan) > equity (stock market) Availability of global capital = cheap money for Asian businesses  capital liberalization (esp. offshore banking)  rapid increase of private short-term loans Pegged exchange rates to US$ = guarantee for unhedged loans and reassurance against currency for investors


Why Thailand? : Why Thailand? Weak financial supervision after liberalization  too many unproductive/speculative loans, esp. in real estate and stock market Also unhealthy corporate governance and indecisive govt. Worsening macroeconomic situations: deficit in Balance of Payment, Trade Balance  investors began to call back loans Unlikely to keep pegged exchange rate  hedge funds’ speculative currency attack Devaluation (July 2, 1997)  skyrocketing import bills/debt-servicing costs  scarce capitals  heightened interest rates  liquidity problem  bankruptcies “chain reaction”


The Effects : The Effects Contagion to other countries, esp. Korea, Malaysia, and Indonesia Economies with high foreign reserves (HK) and also with open exchange-rate regime (Singapore) were able to largely escape the crisis. Social effects: hundreds of thousands of workers lost jobs, even millions in Indonesia Political unrest and regime changes in Indonesia and Thailand


What are the roles of int’l institutions (IMF, ADB) after the crisis? : What are the roles of int’l institutions (IMF, ADB) after the crisis? IMF bailout package of $120 billion to Thailand, Indonesia, Korea and the Philippines Restrictive conditions – keep interest rates high, restrictive bank loans  severe liquidity problem  more bankruptcies And even more neo-liberal agenda – privatization, deregulation, liberalization of foreign investment  massive asset sell-off to foreign companies


Criticism against IMF : Criticism against IMF Wrong prescriptions - too restrictive - same prescriptions to all countries - gave priority to investor protection the Wall St-Treasury-IMF Complex


ASEAN and the Crisis : ASEAN and the Crisis ASEAN financial ministers started to talk in early 1997, but too optimistic. Later on emphasize macroeconomic coordination and financial supervisory mechanisms also through peer review, but ASEAN lacks capability and the norm of non-interference Need to get help from Japan and China ASEAN+3 The Chiang Mai Initiative (for swap arrangement) Asia Bonds


Japan, China, the U.S. and the Crisis : Japan, China, the U.S. and the Crisis Japan proposed AMF (Asian Monetary Fund), but was shot down by the U.S. Then substituted with a moderate “Miyazawa Fund” China loaned some money to SE Asia during the crisis, but more importantly not to devalue its currency. The U.S. offered only moral support and urged for reforms.


Consequences in IR : Consequences in IR The U.S. reputation was tarnished by predatory practices of takeover and the Wall St-Treasury-IMF Complex. Compared to friendly supports from Japanese companies. The growth of nationalism and Islamic activism in SE Asia More regionalism in East Asia (i.e. ASEAN+3) with Japan and China playing key roles (stemmed from anger + anxiety) China and Japan compete for leadership in East Asia.