Gianni Vaggi
ECONOMIC AND FINANCIAL INSTABILITY: LESSONS FORM THE ASIAN CRISIS
in “International Financial Systems and Stocks Volatility: Issues and Remedies”, Edited by
Nidal R. Sabri, The International Review of Comparative Public Policy, Vol. 13, Elsevier
Science Ltd. 2002.
Faculty of Economics, University of Pavia
Via S. Felice 5, 27100 PAVIA, Italy
gvaggi@eco.unipv.it
Abstract
The paper examines the major macroeconomic features of the 1997 financial and
currency crisis of some South-east Asian countries. Within a few weeks the Thai baht, the
Philippine peso, the Malaysian ringgit and the Indonesian rupiah lost 20-30% of their value
against the dollar. The role of the so called ‘fundamentals’ and in particular of the current
account balance is examined also with respect to the previous Mexican crisis of 1944-95.
The financial and monetary crisis of 1997-98 brings to light the differences more than the
analogies between the Asian economies, despite the common collapse of their currencies
and stockmarkets. There was a major contagion ‘effect’, but the actual development of the
crisis highlights the peculiarity of each country case as well as the role played by the
International Financial Institutions. Important indications could be drawn in order to try to
reduce financial and macroeconomic instability even though not all the lessons learned form
that major crisis are yet being put in practice.
JEL Classification numbers: F31, F41, G15, O53
Keywods: Asian crisis, currency crisis, fundamentals, instability, development.
1. The history of an economic success
In June 1997 some South-east Asian countries were hit by the “Tequila syndrome”, a
affliction which had struck the Mexican peso just two and a half years earlier, and which
forced them to devalue their currencies. Within a few weeks the Thai baht, the Philippine
peso, the Malaysian ringgit and the Indonesian rupiah lost 20-30% of their value against the
dollar. Had the Asian road to prosperity and capitalism come to a dead end? Important
differences and not only analogies exist between Mexico and the first four countries struck
by the crisis: Indonesia, Malaysia, the Philippines and Thailand1. Moreover, there are
differences between these Asian economies and those which had industrialised earlier, the
first four “tigers”: Singapore, Hong Kong, Taiwan and South Korea, without mentioning
China. The financial and monetary crisis of 1997-98 brings to light the differences more
than the analogies between the Asian economies, despite the common collapse of their
currencies and stockmarkets. There was certainly a contagion effect”, but to understand the
possible future evolution of the crisis, it becomes important to single out the differences
between these economies and the political conditions they operate under, which have for
twenty years attracted the admiration and studies of economists. The fact remains that the
once booming East Asian economy and not only troubled Latin America is doing through a
grave crisis. Yet, what exactly is the East Asian model of growth and industrialisation?
Between 1965 and 1996 East Asia had an average rate of per capita product growth near
to 6%, in comparison with 2% for developed countries and South Asia, 1% for Latin
America and negative rates for the Middle East and Africa. The average annual GDP growth
rates were 7.2% from 1965 to 1980, 7.6% in the 1980s and 10.3% from 1990 to 1995
(World Bank 1989, p. 167 and 1997, p. 235; World Bank 1994, p. 7). This impressive
growth led some countries, like South Korea, to increase their per capita product ten fold
between 1965 and 1995, and to double it over the last ten years.
As the Vice-President of the World Bank, Joseph Stiglitz, recognised, it was the success
of the East Asian economies which led his organisation to reconsider some of its
prescriptions and advice on political economy often indicated with the expression,
Washington Consensus (Stiglitz 1998, pp. 2-3, 34). Give room to the market, liberalisation,
no subsidies to companies and industrial sectors and so on. In an effort to understand the
reasons for the high rates of Asian growth, the World Bank published a book in 1993 with
an important sounding title: The East Asian Miracle. The World Bank emphasised how the
main economic policies applied by the countries in the region were always ‘market friendly’
(World Bank 1993, Chap. 1) and hence saw no contradiction with the liberalising policies it
and the International Monetary Fund advocated. However, the World Bank’s explanation
for the success of the Asian model is not very convincing.
Excepting the motivation of the famous “Asian values”, economic and industrial policies
in these countries have been very different. Of the four Newly Industrialising Economies, or
NIEs, only Hong Kong had really followed liberalising policies (Akyüz 1998 p. 1). In fact,
the economic and industrial structure of the other three evolved differently and saw more or
less heavy intervention by governments, reaching a high point with the South Korean five
year plans.
The country which most caught the imagination of economists was South Korea, which
ten years ago was being touted as the next economic giant in the region, to paraphrase the
title of Amsden’s book. This author argued that the role of the state and in particular the
formation of human capital linked to the workplace as the key to the Korean success story
(Amsden 1989, Chap. 5, par. 5.5). Robert Wade also believed that the success of South
Korea and Taiwan was linked to the active role played by the state in the economy. In
particular, regarding South Korea he emphasises the role of industrial and commercial
policies (Wade 1990, Chap. 4, par. 3), which led in 1964 to the establishment by the
government of the Korean association for the promotion of trade, or KOTRA. In practice,
the state, while not opposing the market2, played and important part in orienting credit, in
favouring investment, especially in manufacturing, and in incentivating and supporting
exports(Chang1993).
According to a study by UNCTAD, the economic growth in Asia can be interpreted by
the paradigm of the “flying geese” which fly in an inverted V formation (UNCTAD 1996,
pp. 75, 102-103). According to this argument, in industrial development there is a ‘product
cycle’ which allots work intensive sectors to poorer countries while wealthier ones
specialise in new products. However, there are countries with different levels of
industrialisation and development which grow together because from time to time, they
specialise in products with different degrees of technological content. Hence, there is a
leading goose that leads all the rest, which in this case is, of course, Japan3. The ‘product
cycle’ is associated with the growth cycles of the countries in the region. Japan is the guide
supplying the technologically most advanced products, following which there are the NIEs
which were the “first tigers” producing traditional manufactured goods, then following we
find the ASEAN countries and China producing goods which are the most work intensive
and have the lowest technological content.
The model of Asian economic integration assigns a fundamental role to Foreign Direct
Investment, or FDI. South East Asia is the region which has received by far the most foreign
investment. (World Bank 1996, p. 95) And a substantial amount of this investment has
come from within the region, as can be seen in Table 1.
TABLE 1 HERE
It must be remembered that these investment flows are concentrated in a few countries
and even the investing countries are not very differentiated. From 1986 to 1992, over 80%
of FDI in China came from only five Asian countries: Japan, Singapore, Hong Kong, South
Korea and Taiwan. In Thailand, the percentage of FDI from NIEs is greater than 70%. Of
the other South East Asian countries, only in the Philippines is the quota of United States
investment significant. Regarding investments towards other emerging Asian countries (the
so-called second tier NIEs: Indonesia, Thailand, Philippines and China), UNCTAD
emphasises how the NIEs play a very similar role to that played by Japan towards them in
the past (UNCTAD1996, pp. 81-85). In practice, Japan during the 1960s and 70s invested
heavily in the four NIEs enhancing their growth. In the second half of the 80s, the NIEs
together with Japan, invested in other Asian countries.
If direct investments have surely played a vitally important role in South East Asian
economic growth, regional trade has also steadily increased over the decades. From 1980 to
1994 exports from developing East Asian countries towards other countries in the same area
increased nine fold, against five fold in their total exports towards the world as a whole.
Direct investments and growth in trade have occurred hand in hand. Exports play a
fundamental role in the scheme of Asian regional. On the one hand, from 1980 to 1994, all
the economies in the area saw their exports grow towards the rest of the world, but exports
within the different regional areas increased even more.
The explanation provided by the “flying geese” model for the success of East Asia has the
advantage of accounting for the role played by trade and investment policies which were a
fundamental aspect of economic growth in the area.
2. Asian ‘flue’ and the “contagion”
Some of the most interesting short term characteristics of the East Asian economic crisis
are the modalities and the timing of the development of the currency crisis for the countries
involved. If we go over the events taking place in the last year, we discover that the
differences in the modalities and timing of the crisis between the countries involved are
more interesting then the analogies. Figure 1 describes the changes in the exchanges rates
and equity prices in 1996 and during the months of the crisis.
FIGURE 1 HERE
The currency crisis began in the second half of June 1997 with strong speculative attacks
by international investment funds4(the so called hedge funds) on the baht which in the
course of these two weeks lost 15% of its value with respect to the dollar (IMF 1998a, pp. 56). From July 2 there was controlled fluctuation, but towards the end of the month the loss
in value was already 30%. This was not an complete surprise. For some months the Thai
economy had shown strong similarities with the situation in Mexico in 1994, when the peso
was heavily devalued against the dollar. In the case of Thailand there were three factors
which can be considered indicators of the possibility of a financial crisis. First, a current
account deficit of about 8% of the GDP, similar to Mexico’s two and a half years earlier.
Second, an exchange rate substantially pegged to the dollar which had brought about an
increase of the real exchange rate (which takes into account relative inflation) by 17%
between 1995 and June 1997, with the resulting loss of competitivity and the risk of
worsening the current account deficit (World Bank 1997b). Third, a high foreign debt and
especially an extremely high ratio between short term debt and currency reserves. Between
1990 and 1996, 46% of private flows of capital were short term loans (ibid).
There were thus many reasons for anticipating a crisis, which it was believed would be
less extensive than the Mexican one.
The rescue package needed for Thailand was
originally calculated to be about 17 billion dollars, less than half the Mexican one, and in
any case the devaluation of the baht was expected to be much less than the peso. In addition,
between mid June and the end of August, the baht had stabilised at the rate of about 32 per
dollar. It looked like a crisis which could be contained, even though the “contagion” effect
towards other currencies had already begun.
The “contagion” describes the situation where a country undergoes an economic shock
such as a devaluation and a stock exchange crash, following a similar crisis in another
country. The theories which explain the transmission mechanisms of this “virus” can be
placed into two different categories. According to the first, the contagion occurs simply
because economic operators, above all financial market investors, perceive significant
similarities between the two economies, in particular similar pathologies, such as elevated
current account deficits. Following the 1994 Mexican crisis, conventional wisdom was that
deficits above 3% were difficult to sustain (Wolrd Bank 1995).
In this regard there are similarities between Thailand in 1997 and Mexico in 1994. In the
case of the 1994 Mexican crisis, international investors quickly abandoned Mexican
government debt bonds, the Tesobonos, bringing about the devaluation of the peso. The
crisis appeared to have been triggered by the excessive current account deficit, which in
1994 exceeded 8% of GDP. International investors considered this level of deficit to be
inconsistent with an exchange rate of little more than 3 pesos per dollar, causing a
confidence crisis. The peso was devalued by about 100% within a few months, and short
term interest rates almost touched 80%. At that time, the term “Tequila effect” was coined,
to express the likelihood that the Mexican crisis would involve other countries which had
followed similar policies in stabilising money supply and exchange rates, principally
Argentina. This country saw an increase in the differential of the interest rates of its Brady
Bonds by 150 base points, with a resulting significant increase in the cost of servicing its
foreign debt5.
Following the December 1994 Mexican crisis, a number of factors were singled out for
the construction of an index describing crises due to macroeconomic imbalances. Some
argue that these three factors indicate the likelihood a currency crisis will take place: an
increase in the exchange rate, a rapid expansion of credit and a low ratio between currency
reserves and money supply (for some authors the current account deficit and capital flows
play a secondary role) (Sachs, Tornell and Velasco 1996)6.
The second mechanism of transmission concerns trade. According to this theory, an
economy is “infected” because an important trading partner undergoes a currency crisis and
enters into a recession. In the case of industrialised countries for the period 1959-1993, it
has been emphasised that a currency crisis in a country increases the likelihood that it will
also take place in other countries (Eichengreen, Rose and Wyplosz 1996). However, the
prevalent mechanism of transmission appears to be linked to the existence of significant
trade between countries rather than similarities in macroeconomic conditions7.
In the case of the Asian currency crisis, infection was quite rapid, but not as virulent, in
three other currencies: the Malaysian ringgit, the Philippine peso and the Indonesian rupiah.
In was at this point that the four ASEAN countries, or the “second generation tigers”,
encountered their currency crisis. Towards the end of July the peso was devalued by 15%,
while the rupiah and ringgit held on for one week more and then went down, but not
suddenly. Up to this stage, the crisis was worrying but not excessively, nor were its effects
on the Philippines, Malaysia and Indonesia all that unexpected.
In reality, the Philippines had a current account deficit which was lower than 4% of
GDP, and the same could be said for Malaysia8. In 1997 Malaysia was improving its balance
of payments, which in 1995 was still 10% of GDP, hence higher than Mexico’s fateful 8%
in 1994 (IMF 1998a, p. 57). It should be noted that despite the high current account deficit
and the very recent Mexican crisis, no currency crisis hit the ringgit in 1995 nor
significantly in 1996, when information regarding the worsening Malaysian balance of
payments between 1994 and 1995 became already available. This fact rebuts the hypothesis
of “contagion” due to analogies in macroeconomic imbalances. In Malaysia’s case, an
important compensating factor was considered to be its strong economic growth, which was
over 9% in 1995 and had settled down to 8% in 1996. In effect, Malaysia had not been
influenced by the “Tequila effect”, despite incorporating many of its preconditions. Instead,
the crisis broke a year later in Thailand.
The case of Malaysia in 1995 and 1996 indicates a phenomenon which has not been
adequately highlighted and which may indicate how international investors and the great
financial centres considered East Asia a promising area thanks to high levels of GDP growth
and perhaps also to the duration of the same growth. It was believed that crises of the type
that struck Latin America at fairly regular intervals could not occur in East Asia. The
mechanism or the miracle of Asian economic growth appeared to have immunised these
economies despite very marked macroeconomic imbalances.
In the summer of 1997, the crisis appeared to be confined to the four ASEAN countries
and of smaller dimensions than the Mexican one. The press over this period contained
numerous comments about how the economies of Singapore, Hong Kong, Taiwan, South
Korea and China were successfully holding out. Although their currencies had been
devalued, this had been limited and especially, had not collapsed ruinously.
3. The ‘second contagion’ and the breaking of the “dams”
In the Autumn of 1997, three events showed how much the crisis had changed in
dimension and nature, highlighting to the world the economic, political and institutional
differences existing between East Asian countries. Not only did the crisis persist and the
contagion continue to spread, but the “pathology” also changed character, affecting the
nature of the problems that these economies had to face.
To begin with, a first ‘dam’ broke. The exchange rate stabilisation effected in August
failed, and the currencies of the four ASEAN countries continued to fall suddenly,
devaluing for four months. By the end of January 1998, the baht had lost more than 50% of
its value against the dollar, and the ringgit and peso about 45%. Successively there was a
rally, with devaluation settling on between 30% to 40% for the three currencies (see Figure
1). However, during the Spring of 1998 both the stockmarkets and the currencies of these
countries continued to oscillate greatly, generally downwards. The impact was felt
prevalently in Thailand, whose economy appeared weaker than Malaysia and the
Philippines’ making it difficult to define credible thresholds for the exchange rate and
stockmarket values.
The second event was the total economic collapse of Indonesia, followed in the Spring
by an increasingly acute political crisis which led to the resignation of Suharto in May. The
rupiah collapsed, devaluing by 85% against the dollar at the end of January, and rising only
marginally to 72% in April. Of the four ASEAN countries affected by the crisis, Indonesia
was the one posing the greatest problems and presenting the most fragile political and
economic situation. Like Latin American countries, Indonesia had been burdened for
decades with a high foreign debt, which had already amounted to 100 billion dollars before
the 1997 crisis. Then there were internal ethnic tensions, especially hostility towards the
dynamic Chinese community, enormous regional differences, and to cap it all off an
authoritarian political system. The over thirty year rule by Suharto had been accompanied
by economic growth, but of the second tier NIEs Indonesia was the country that had
developed last. As late as in the mid 1980s Indonesia’s had a per capita income which was
only slightly higher than India and China’s (World Bank 1989, p. 164). It had been
classified as a poor, middle income country as recently as 1994. In 1995 Indonesia’s per
capita income reached 980 dollars, while the Philippines’ was just over 1,000, Thailand’s
2,740 and Malaysia’s almost 3,900 (World Bank 1997c, pp. 214 –215).
The third event which highlighted the seriousness of the crisis, and motivated massive
intervention by the IMF, was the economic crisis in South Korea. This event is of capital
importance because at this point the crisis had broken through the second ‘dam’ to become
more than just a regional concern, but one which was beginning to create serious problems
for financial markets and the world monetary system. In the last months of 1997, the Korean
won devalued by 50% compared to the dollar, picking up a little only in Spring 1998. But
the devaluation was still between 40% and 50% compared to 1996.
The South Korean situation shed light on an aspect of the crisis which had hitherto
remained in the dark, except for some signs in Thailand: the crisis was no longer monetary,
but had become financial and had affected the banking system9. Banking crises are denoted
by the insolvency of the big national and international banks due to the high proportion of
irrecoverable credit, to the point of causing their collapse. In the case of South East Asian
banks, the percentage of bad loans was between 10 to 20%, against 1% for United States’
banks. While it is true that in Thailand 58 financial companies had to be suspended from the
very beginning of the crisis, the South Korean case was different in character and
dimensions. The South Korean economic system is the closest to Japan’s in its strong links
between banks, companies and the government, meaning that banking crises endanger the
fundamental framework of the economy. In 1995, South Korea was classified as a high
income country by the World Bank with a per capita income of 9,700 dollars (World Bank
1997c, p. 63 and World Bank 1997a, p. 215). It is the most important of the first generation
NIEs, and with a GDP of 430 million dollars holds eleventh place among the economically
most advanced nations, after Spain, Canada, Brazil and China, but before Australia and
India. The sheer size of the initial rescue package organised by the IMF, with the help of the
World Bank and the wealthier countries was astonishing: over 58 billion dollars,
significantly more than Mexico’s in 1994 and that given to both Thailand and Indonesia put
together. In addition, of the over 20 billion dollars directly committed by the IMF from
April 10, 1998, 15 had already been granted; a clear sign of the liquidity crisis in which
South Korea had already been embroiled (see Tabl2 2).
The size of the bail-out and the fact that it had been added to already large loans given to
Thailand and Indonesia give the Asian financial and monetary crisis such dimensions as to
beg the question of the adequacy of the IMF’s resources and more generally, those of its
member states, in facing crises of such magnitude.
Also in South Korea’s case there had been warning signals. If we look at Figure1 we can
see that in Thailand the stockmarket crisis had begun before its currency collapsed. Already
in 1996 and particularly in the early months of 1997 there was a continuous deterioration in
equity prices leading to a nearly 50% drop in the Bangkok stock exchange index between
the Spring of 1996 and 1997. Over the same period, the Seoul stock exchange index lost
about 40% of its value and was the only Asian stock exchange, aside from Bangkok’s to
experience this rapid fall in its index. The currency crisis appeared to be more a product of
the fall in equity prices than its cause.
South Korea found itself in the midst of a liquidity crisis with a drop in reserves and the
risk of a collapse in its banking system. For the first time in over twenty years it had to
renegotiate with foreign creditors for its debt repayments. South Korea was already an
indebted economy at the beginning of the 1980s, but until 1998 it never had to ask for a
modification of its terms of payment for its foreign debt and interest rates. Indeed it was the
only remaining country which had always honoured its debts. South Korea had hitherto
been able to avoid debt rescheduling, a typical feature of Latin American and some Asian
economies, which for fifteen years had been one of the main instruments used to face debt
crises. (Vaggi 1993, pp. 97 and ff). The legend of the model debtor, which service its
foreign debt thanks to a strongly growing economy had been decisively shattered.
This growth in foreign debt stock is the other face of the current account deficit in the
balance of payments. South Korea had experienced these from the 1960s onwards, reaching
in some years 8-10% of GNP, excepting a period of surpluses in the mid 1980s. Following
the Mexican crisis in 1994, it has been emphasised by economists that to judge the solidity
of an economic system the reasons behind a current account deficit also had to be fathomed
and not just simply note taken of its dimensions. In particular, comparisons were made
between Mexico and South Korea. In Mexico the deficit was caused by an excess in imports
of consumer goods and weak exports, while South Korea imported investment goods and
was a strong exporter. The South Korean deficit appeared to be justified by the need for
accumulation and not consumption, and yet this did not prevent the crisis from emerging in
all its virulence.
4. Intervention by the IMF
From August 1998, the IMF intervened with loan packages (see Table 2), including
reform programs, with the aim of getting these economies back on their feet. From the start,
the declared objective of the IMF was maintaining active financial channels between the
economies in crisis and international markets, guaranteeing the former access to the latter.
In practice, the IMF tried to prevent any block to loans10.
TABLE 2 HERE
The restructuring policies dictated by the IMF were not very different to traditional ones,
being similar to the structural adjustment programs of the 1980s. In the event, the following
main recommendations were formulated (IMF 1998b. pp. 1-2):
a) Financial companies on the verge of collapse had to be closed, while those that could
survive had to be kept under close surveillance.
b) Fiscal tightness was recommended, in particular cuts to current spending, to cover
costs due to the restructuring of the financial and credit sectors, even though some lip
service was paid to the need to maintain present levels of social security outlays.
Indonesia was asked to reduce or eliminate subsidies on some goods, particularly on
fuel products such as petrol and kerosene, even though policy makers were well
aware of the impact this would have on the population’s living standards(IMF
1998c).
c) Monetary policy had to be restrictive temporarily, with increases in interest rates, to
contain inflation and lessen pressure on the balance of payments.
d) Exchange rates had to be flexible.
e) Although not always stated explicitly, greater flexibility in the labour market was
advocated, making retrenchments and hiring easier so as to rapidly reallocate
manpower from crisis sectors.
f) In this context, the request to liberalise access to foreign capital becomes extremely
important, especially in the financial and credit sectors, so as to guarantee entry of
new capital to the economy during a liquidity crisis, and to increase the participation
of foreign capital in local concerns, especially in the financial sector.
In South Korea’s case, the IMF insisted particularly on the removal of procedures and
regulations which hindered trade liberalisation and access to foreign capital, to the point of
setting the deadline of the 31 December 1997 for this to happen (IMF 1998a, box 4).
Indonesia represented a special case, with an explicit connection between the concession
of loans and the dismissal of Suharto.
The IMF was criticised for having used the same instruments to face this crisis as it had
for previous ones, underestimating the deflationary impact of the combined measures of
fiscal and credit tightness. These measures would not only have a heavy impact on society,
but could even bring more financial institutions and banks to the point of bankruptcy,
particularly after increases in interest rates and the drop in equity and bond prices. This
criticism is well founded. However, it should be noted that the Asian crisis eventually led to
changes in the IMF’s approach.
On the one hand, these changes were positive: the IMF rapidly changed its
recommendations with regard to fiscal tightness and in particular its request for an budget
surplus. The adjustment program for Thailand in August 1997 was modified for the first
time at the beginning of November and then at the end of February 1998. From the initial
request for a budget surplus equal to 1% of GDP, the IMF finally ended up accepting a 2%
deficit (IMF 1998b, box 2). For Indonesia, the request to reach a surplus 1% of GDP in
November, became a 1% deficit in the following January, given the reduction in the growth
of the economy. The IMF even accepted the continuation of a budget deficit for South
Korea (Ibid, box 4). In addition, the IMF insisted on measures to lessen the impact of these
measures, such as the social safety nets, in favour of those sectors of the population struck
hardest by the crisis.
On the other hand, these continuous changes and repeated reviews of forecasts also
indicate the difficulties which the IMF had in following the development of the crisis. Even
the predictions regarding the effects of the crisis, especially its impact on growth rates were
continually being revised downwards. During Autumn 1997 and Winter 1998, it became
increasingly clear that the world was facing a different and much more serious crisis than
Mexico’s in 199411.
5. The Real and financial effects of the crisis
The most important effect of the crisis is on the real economy, that is, on the potential
reduction in GDP, primarily due to the collapse of many companies, financial institutions
and banks. In dollar terms, the figures are staggering: on the basis of the exchange rate with
the dollar, the GDP of the South Korean and Thai economies was halved compared to 1996;
Malaysia and the Philippines lost respectively 12% and 20%, and Indonesia’s GDP dropped
from 226 to 51 billion dollars. In terms of Purchasing Power Parities which take into
consideration the incidence of internal prices on the cost of living, the drop is not so
catastrophic12.
In any case, these figures give a measure of the loss of purchasing power of these
economies on international markets and thus explain the collapse of their imports, which
was by about 30% in the first quarter of 1998. Over the same period, Indonesia’s GDP,
diminished by 8.5%, Malaysia’s by 1.8% and even Hong Kong saw its decrease by about
2%. It was almost as if these countries had gone backwards five or ten years.
Of course, this collapse in imports led to a rapid improvement in the balance of payments
and in the current account deficit, so that already in 1998, the four ASEAN countries and
South Korea had a surplus in their trade balance, which progressed from a deficit of about
50 billion dollars in 1996 to a surplus of similar value in 1998 (IMF 1998a. p. 64). This
striking improvement by 100 billion dollars in one year, was obtained however, mainly by a
drastic contraction in imports due to the drop in domestic demand and only later by an
increase in exports benefiting from the devaluation in the exchange rate.
In the beginning, it was thought that the Asian crisis could be overcome fairly rapidly
after Mexico’s example. There, the GDP had dropped by nearly 6% in 1995, but by 1996 it
had already reached 4%. The crisis had been violent but brief, even though salaries had not
yet reached 1994 levels. In Mexico’s case, international intervention, amounting to 50
billion dollars, had been sufficient to plug the holes and convince markets that the
international community, particularly the United States, would aid this economy in crisis.
Moreover, NAFTA ensured that the impact of the devaluation of the peso on foreign
accounts would be rapid and positive. In effect, the Mexican case brought out some
favourable circumstances, principally the “big brother” to the north, which guaranteed the
country from a financial point of view and provided an important market for exports, also
thanks to the expansion of the United States economy over the same period. However much
it may be criticised, the financial, economic and political commitment by the United States
in favour of Mexico played a fundamental role in stopping the crisis.
In Asia, there were a number of circumstances which could have been favourable if the
crisis had been limited to only a few countries, but which became boomerangs when it
spread. At the very beginning many countries came to Thailand’s aid: these were Japan and
Australia, but also South Korea, Malaysia, Hong Kong, Singapore and Indonesia itself (IMF
1997a and IMF 1997b). There was a sharing of the risks by the main trading partners and by
others in which Thailand had made direct or financial investments. The “flying geese”
model based on regional trade and direct foreign investment could have been a factor
supporting the recovery of the Thai economy. But the spread of the crisis changed this
advantage to a weakness when demand in neighbouring countries which supported the Thai
economy fell. Indeed, the same recession could then spread to countries whose financial
institutions were grounded on more solid foundations13. Regional integration could be a
protective shield in the case of isolated crises, but it became a negative factor in widespread
ones.
To this should be added Japan’s economic stagnation beginning in 1990 , and worsening
in 1992. In fact, Japan had offered to prepare a 100 billion dollar fund to rescue the East
Asian economies, but this was met with the refusal by the United States and the IMF, which
imposed the latter’s traditional procedures, restrictions and programs. Japan had reserves of
220 billion dollars, a trade surplus of 23% in terms of its GDP, and over 800 billion dollars
worth of credit invested abroad (Bank of Italy 1998a, Appendix, p. 52). Japanese
intervention was therefore credible in size, but would have probably led to disinvestment
from other activities, including American bonds, with possible repercussions on the
financial system of the United States and its interest rates. In any case, the Japanese
proposal for a regional solution to the crisis was not adopted.
Outside the region the countries hit the hardest were those trading extensively with this
region. Excluding Japan, the European countries and the United States export towards Asia
about 2% of their GDP. However, this figure in New Zealand and Australia reached 7-8%
and these two countries suffered the most from the collapse in demand in this region.
Moreover, the impact of the heavy devaluations and hence the greater competitivity of
exports from the same economies caused a worsening of the trade surplus enjoyed in 1997
by the main European countries with regard to the region. The United States saw their
already enormous trade deficit to increase even more. The immediate effects of the Asian
crisis on the most developed economies will also be a ‘flight to quality’ of capital leaving
these areas for economies with stronger currencies, like the dollar but also the Euro group,
in the search for safer investments.
Another aspect of the Asian financial crisis are the spreads, or the differences between
interest rates on bonds issued on international markets by some developing countries,
especially in Asia and Latin America, and interest on American treasury bonds. This
difference is an index of “country risk” and expresses the extra cost that some countries
have to pay to place their bonds. These spreads, which had gone down to about 3% in the
Summer of 1997, went up to nearly 7% during the Autumn, fell again to 4.5% in Spring
1998, and rose once more in August because of the Russian crisis and That of Brazil in
winter 1998-99.
6. Excesses of investment and of short-term financial inflows
How could a crisis of this size occur in countries with so many positive economic
indicators such as: strong and prolonged growth, high savings, very small budget deficits,
controlled inflation, export diversification based principally on manufactured products and
not raw materials unlike Africa and Latin America? With rates of saving and investment
above 30% of GDP and the government budget under control, the NIEs did not appear to be
susceptible to foreign limitations or dearth of internal savings. The 1990s carried some
novelties with them, which turned out to be among the fundamental causes of the crisis. If
we examine average rates of investment and savings as a percentage of GDP in the four
ASEAN countries and South Korea between 1989 and 1993 we can see that the former are
about 32.2% and the latter 28.9%. Even with such high rates of saving there is an excess of
investment by over 3% of GDP (World Bank 1996, p. 22}. The difference between internal
savings and investment must be financed by money from abroad and this shows in the
current account deficit. It must be noted that an excess of investments over savings is quite a
normal feature in some East Asian countries, particularly the Philippines, Thailand and
South Korea (World Bank 1996, pp. 58-59)14.
A study by the IMF highlighted this excess of private investment by comparing it with
what had happened in the 1970s in some Latin American countries. For South Korea and
Malaysia, starting in 1970, when savings exceeded investment, there was a current account
surplus and vice –versa (Milesi-Ferretti and Razin 1996, pp. 24c and 24d). In contrast to
Latin America in the 1980s, balance of payment deficits in Asia in the 1990s were caused
by an excess of private investment. By themselves these are not considered a risk factor,
because they are held to be intrinsically more efficient than public investment in that they
involve a direct risk for the investor and hence a more careful evaluation of the efficiency of
the enterprise is assumed (Eatwell 1997, pp. 9-11)15. Already during the 70s and 80s, the
Asian economies had large current account deficits, which could be eliminated thanks to
diversification of the productive base and the export boom. In addition, Asian foreign debt
consisted not only of bank loans but also portfolio investments and especially direct
investment, which are the direct foreign capital flows considered to be the most stable and
least liable to fluctuate. This too appeared to be an element making the Asian situation much
more stable than Latin America’s in the 80s16. The high rates of investment led to a
significant process of accumulation even in those sectors which in the 90s had already
shown excess productive capacity, like the automobile industry. But the “new tigers”
insisted on wanting to repeat Japan and South Korea’s experience, to gain prominence in
world automobile markets. Thus Malaysia got its national car, made in Proton City by a
joint venture with Mitsubishi. But in August 1997, car sales collapsed by two thirds and the
Proton went the way of the rest of the sector, having to postpone a planned increase in the
production capacity of the plant.
Other sector in East Asia where heavy investments were made, was new technology,
especially production of semi-conductors and hardware structures. For both these products
world demand did not seem to be able to keep up with potential supply. Semi-conductor
prices decreased significantly which further reduced the value of exports. For many
important sectors of production, one can talk about overproduction consequent to the fact
that in the last twenty years a new region had entered the world market: Asia, with its old
and new “tigers”. Thence derives the difficulty in making investments profitable, which was
instead ensured mainly by continued export growth.
Another two factors created difficulties for exports from the East Asian countries: the
devaluation of China’s currency by 35% against the dollar at the beginning of 1994 and
Chinese government financial support for exports. This lead to a drop in China’s export
prices by about a quarter between 1994 and 1997. In addition, the increase in the value of
the dollar against the yen created further difficulties for those countries in the area whose
currencies were pegged to the dollar. This link had favoured exports when the yen was
increased against the dollar; but then it became a problem. The result was an increase in the
real exchange rate from1995 onwards and a loss in competitivity.
Economic policy mistakes were also made in the 90s and particularly from 1994
onwards. In the first place, the danger of a fixed exchange rate with the dollar had been
underestimated, despite clear signals after the Mexican crisis. What would have been
necessary was a gradual movement away from a fixed exchange rate or at least a more
flexible exchange based on a range of fluctuation as in Chile or Brazil. Another option
would have been to fix the exchange with reference to a basket of currencies, including
those of the major trading partners, and not just the dollar17.
In the second place, governments thought they could absorb any external or internal
shocks by relying on high growth rates, so that they continued to look upon only the “good
side” of investment and accumulation. In addition, the countries in the region had gone
through a number of speculative bubbles both in the stockmarkets and real estate. The
capital that was entering these countries was not all being invested in factories and
productive capacity, but also being fed into the stockmarket and real estate markets. Thus,
the increasing value of shares and real estate masked the problems many financial and
industrial companies had in balancing their books, making microeconomic sustainability
indicators appear positive, including risk indexes for new international loans. Thanks to the
continuous flow of capital, and especially short term portfolio investments, very high values
were reached which in turn justified further capital flows from abroad.
Paul Krugman emphasised the nature of the crisis of the financial system and argued that
the exchange rate crisis was an effect rather than a cause (Krugman 1998a, pp. 5-6). The
collapse of the stock exchange and the real estate market reduced the value of the assets
held by listed companies and financial brokers. In turn these, when in difficulty, either sold
their equity leading to further drops in share prices or bankrupted outright. A similar
mechanism can be imputed to loans guaranteed by real estate. In both cases the amount of
bad loans would increase, leading to further reductions in share values and triggering a
confidence crisis among investors, both foreign and domestic. In these circumstances, there
would be a flight from the local financial system and the beginnings of the currency crisis.
The financial crisis was also due to the fact that both domestic and international operators
were taken in by the so-called ‘moral hazard’, a belief that their investments were safe or
that the problems financial companies and/or private banks had in balancing their accounts
would be solved by government intervention or by an external investor (such as Japan)
saving them from bankruptcy. International money markets are very susceptible to
alternating waves of optimism and pessimism which can either lead to speculative bubbles
or excessive downturns, with strong destabilising effects. Such behaviour is called
‘herding’; investors rush to invest or to sell by following leading financial operators or junk
fund operators like a herd. In either of these cases, we have a self fulfilling prophesy, with
overshooting, or excessive bear or bull reactions in prices. During 1998 currencies and
Asian equity prices appeared to be undervalued, provoking acquisitions of businesses and
companies, particularly South Korean ones, at bargain basement prices by investors and
companies from OECD countries or the United States. These preoccupations were also
voiced by the Malaysian Prime Minister Mahatir Mohamad as well as by Krugman
(Krugman 1998b, p. 2).
7. International finance in the 90s
Errors of judgement committed by Asian governments in managing the economy reflect
their difficulties in interpreting the changes taking place in the international financial system
in the 90s. Capital flows, particularly short term capital and currency exchanges, reached
levels unheard of only ten years earlier. In 1973, currency markets exchanged from 10 to 20
billion dollars per day, in 1980 the figure was 80. But in 1992 currency transactions reached
880 billion dollars per day, becoming 1,260 billion in 1995. This was 50 times more than
the entire value of world trade and 70 times more than the value of all gold and currency
reserves, and these figures refer to days in which trading was average (ul Haq, Kual and
Grunberg 1996, Statistical Appendix). Moreover, most of these currency transactions were
extremely short lived; more than 80% last less than a week (Eatwell 1997, p. 4).
This market, which lies at the centre of the international financial system, is the largest,
the most liquid, the most innovative and only world market open 24 hours a day. Daily
exchanges are concentrated in only a handful of international banks18 .
Although this does not justify errors of judgement by governments and East Asian
operators, it still explains their difficulties in facing the impact of this new situation. Hence,
these economies continued to fall into debt, and increasingly over the last three before the
crisis years, with short term capital. Between 1994 and 1996 net private flows more than
doubled with a particularly high increase in short term credits by commercial bank and non
bank creditors(IIF 1998, p. 2). Thus in the five Asian countries capital flows exploded,
leading to a foreign debt structure excessively skewed towards the short term and hence
susceptible to liquidity crises. A measure of the fragility of the structure of foreign debt is
given by summing the current account deficit and short term debt in relation to reserves,
indicating the capacity of the economy to face rapid flights of capital. Table 3 shows the
three year trend for this relationship for some East Asian economies and compares it with
four Latin American countries.
TABLE 3 HERE
South Korea’s particular situation emerges clearly from these figures: in two years it fell
into incredible levels of debt, almost as if the economy had lost control of its credit and
financial instruments. It did this by betting implicitly on the capacity of its economy to
exploit this mass of dollars in the very short term and with high returns, thus placing thirty
years of growth at risk. With the increase of short term foreign capital private institutions
and the government did not move to cover this capital with financial and insurance
measures in case of flight by the same capital or a collapse in the exchange rate. In the
language of international finance these short term debts were ‘unhedged’. In 1996 the 30
most important chaebols showed a debt to total share value ratio of approximately 400%,
bringing eight of them to bankruptcy (IIF 1998, p. 12a). Instead China, Malaysia and Chile
navigated in much calmer waters, in line with economic indicators in other developing
countries.
The financial and credit system of many of these countries turned out to be insufficiently
transparent and without rules to guarantee the stability of those institutions operating in it.
There was thus a lack of intervention by the government and monetary authorities leading to
the growth of unreliable financial companies which could continue to operate only thanks to
the constant influx of foreign capital together with the stockmarket and real estate boom.
The reasons behind the short term capital flows towards East Asia was slowing growth
and especially falling interest rates in the more industrialised countries. Many institutional
investors, pension and health insurance funds, invested in emerging market equity
particularly in East Asia. At the same time, the spread between equity from these emerging
countries and developed countries was becoming smaller, making it less expensive for local
companies to secure loans on international markets (ibid., p. 11a). In contrast, the increase
in spread during the crisis made it much more costly to service foreign debt. The spread on
South Korean bonds compared to European bonds was nearly zero until 1997, but it
increased to nearly 700 base points at the end of the same year, then coming down to 50019.
Portfolio investments, especially those in bonds, were in practice part of the ‘hot money’
typically financial investments seeking high returns over the short term) that caused strong
flows of capital from Mexico after December 1994. The issue of bonds by emerging
markets went from 40 billion dollars in 1995 to 108 in 1997, with a peak of nearly 40 billion
in the third quarter of that year (IIF 1998, pp. 5-6). Indonesia and South Korea continued to
issue bonds, and so found acquirers for their bonds until Autumn 1997, which underscores
once again the difficulty even institutional investors have in forecasting crises.
The East Asian crisis cannot be explained only by the imposing amount of short-term
capital that moves daily in the international market. But the sheer size of this phenomenon is
a new factor that will pose new problems during the adjustment phase of these crisis. The
liberalisation of the capital market remains an important objective, especially because it can
guarantee finance for developing countries. However, in the light of the Asian crisis of
1997-98, some cautionary measures appear to be necessary. Following the Mexican crisis of
1994, the IMF recommended that those countries that had made little progress in
strengthening their internal financial markets should be cautious about removing barriers to
foreign capital flows, particularly short term ones (IMF 1998d).
Many voices have been heard in support of a tax on short term capital flows (Eatwell
1997; ul Haq, Kaul and Grunberg 1996). Even within the IMF, studies exist which indicate
that capital flows can have destabilising effects. The examples given here of countries with
effective control of speculative movements of capital are Chile and Colombia, but also
South Korea and Thailand in the 80s (Lee 1997, p. 3). In the presence of large movements
of capital in currency markets, it becomes difficult to choose the best exchange policies and
the management of the exchange rate may pose problems (Caramazza and Aziz 1998). The
IMF emphasises the need to liberalise capital flows, but also indicates what conditions
should be met before continuing on this track. In particular, an already solid domestic
financial sector should already be in place, carefully controlled and transparent. In addition,
controls over capital movements should be removed only gradually (Fischer 1997, pp. 5-6).
8. Asian countries and the Latin American syndrome?
Does the crisis of 1997 mark the end of the East Asian miracle? Would the area become
a second Latin America with continuous currency and financial problems(see also Palma
1998)? Some considerations can be attempted. Certainly a high growth economic phase
closed with 1997, these countries will have fluctuations in GDP and the exchange rates and
equity prices, together with growing unemployment. This latter problem is particularly
grave because we are dealing with countries which had been used to long periods of high
economic growth, nearly negligible unemployment and which have no social welfare
buffers capable of lightening the impact of unemployment on the living conditions of the
population.
Some analogies with the 1980s debt crisis in Latin America exist: the Asian economies
now have in common with their Latin American counterparts a huge amount of foreign debt.
The existence of a very large stock of foreign debt manifests itself in the so called debt
overhang. This consists in a vicious circle in which the existence of foreign debt and the
costs of servicing it discourages foreign investment. Indeed, there a real risk exists for new
loans, given that the resources of the country are already being used to pay arrears on
already existing debt; any profits from local activities could be taxed to pay for previous
debts. Moreover this crisis is more widespread and involves more than one country in the
same area. Unlike the Mexican crisis, the Asian crisis is a regional one.
Unlike Latin America, the Asian countries, however, have a solid industrial base and
their exports are not concentrated on a limited number of primary goods, but are strongly
diversified. The quality of the workforce together with the high levels of primary and
secondary education ensure a high quality of human capital which will be of certain
usefulness in overcoming the crisis. Their infrastructures need to be improved, but they
exist, and have already made an important contribution to the fight against poverty. After
the collapse of the weaker financial institutions the remaining institutions and structures will
continue to allow these countries to intervene in international financial and credit markets.
It must be noticed that already in 1998 some of the affected countries were able to repay
part of the money received from the IMF. As soon as 1998 the Asian countries had strong
trade and current account surpluses, a clear indication of the ability of the economic
structure to face the crisis and to repay the loans. Inflation has increased but has also been
kept largely under control. After the initial large depreciation of 1997 the exchange rates
have partly recovered. At mid 2001 the percentage depreciation of the exchange rate with
respect to June 1997 was: 16% for South Korea, 19% for Malaysia, 20% for Thailand, 32%
for the Philippines and 43% for Indonesia. The latter country is a much more serious case;
this country is still affected by political uncertainty and major economic problems.
Another element which indicates the renewed strength of many economies in the region
is the high level of foreign reserves which have been built there since the crisis. The four
Asean countries, Malaysia, Thailand, the Philippines and Indonesia, have combined reserves
of almost 100 billion dollars(excluding gold). The average amount for each country does
not shield her from the risk of a possible run on the currency. But the story is different for
the rest of Asia: South Korea has almost 100 billion dollars by herself. Coming to the Asian
countries which have not been deeply affected by the 1997 crisis we have: Taiwan with
more than 110 billion and Singapore with almost 80 billion. Therefore the economies of
South East Asia plus Korea have almost 400 billion dollars of foreign reserves. This is
almost the size of the United States trade deficit for 2001, but to this already impressive sum
we may add the nearly 300 billion dollars of China and Hong Kong. The highest share of
world currency reserves is in developing Asia and by large.
In the region there is only one currency on a fixed exchange rate and hence more prone
to an attack; the Hong Kong dollar has a fixed exchange rate with the dollar at 7. 8 regulated
by a currency board introduced far back in 1983. Under this system, the Hong Kong
Monetary Authority only issues money, the actual printing of which is delegated to three
commercial banks, after having deposited the exact equivalent in US dollars in its own
reserves20. Speculation already attacked the Hong Kong dollar in the first half of June 1998
but failed to achieve a devaluation and the joint reserves of Hong Kong and China seems to
be a sufficient deterrent.
Despite the financial crisis of 1997 the East Asian countries will continue to represent an
pole of growth for trade and the world economy, not to mention a pole of attraction for
direct and portfolio investments. East Asia will continue to be an important competitor on
international markets for the most industrialised countries. However the whole of East Asia
may now face another problem, which is not limited to the countries involved in the 1996
crisis. The slowdown of the American economy in 2001, the persistent recession in Japan
and the signs of an over-capacity in the sectors linked to the new and information
technology may lead to a reduction of demand on these markets, which are of great
importance for the Asian economies. Both the growth rate of the GDP and of exports of east
Asia could suffer. The continuing long stagnation of the Japanese economy seems to have
set in a type of sclerosis, reminiscent of the “liquidity trap” described by Keynes, when
businesses refuse to invest even at minimal interest rates. One cannot exclude the risk of
widespread deflation, especially if Europe and Japan continue with policies which do not
encourage growth in demand(Akyüz 1998, pp. 8 and ff.).
The Asian crisis of 1997 is different to previous currency crises of the 90s 21 and teaches
us that no economy is immune from financial crises. But perhaps this will be a continuing
characteristic denoting economic fluctuations that we will just have to get used to.
References
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Geneva.
Amsden, A. 1989. Asia’s Next Giant. On South Korea and Late Industrialization Oxford
University Press Oxford.
Bank of Italy 1998a. Relazione Generale Rome May.
---------------- 1998b. Economic Bullettin n. 30 Rome February.
Caramazza F. e Aziz J. 1998. “Fixed or Flexible? - Getting the Exchange Rate Right in the
1990s” IMF Economic Issues n. 13 Washington.
Chang H.J. 1993. “The Political Economy of Industrial Policy in Korea” Cambridge
Journal of Economics vol. 17.
Eatwell J. 1997. “International Financial Liberalization: The Impact on World
Development” UNDP Discussion Papers n. 12 New York.
Eichengreen B. Rose A. e Wiplosz C. 1996. “Contagious Currency Crises” NBER Working
Paper n. 5681 July.
Fischer S. 1997. Capital Account Liberalization and the Role of IMF, IMF, Washington,
September.
Grilli E. 1994. Interdipendenze macroeconomiche Nord-Sud il Mulino Bologna.
Heidensohn K. 1995. Europe and World Trade, Pinter, London.
Krugman P. 1998a. What Happened to Asia, mimeo, January.
Krugman 1998b. Fire-Sale FDI, mimeo, Maggio.
IIF 1998. Institute of International Finance Capital Flows to Emerging Market Economies
January.
IMF, International Monetary Fund 1998a. World Economic Outlook, May, Washington.
---------------------------------------- 1998b. The IMF’s Response to the Asian Crisis, April,
Washington.
---------------------------------------- 1998c. IMF Survey May11 Washington.
---------------------------------------- 1998d. IMF Survey April 6 Washington.
---------------------------------------- 1997a. IMF Survey August 18 Washington.
---------------------------------------- 1997b. IMF Survey September 17 Washington.
Lee Jang-Yung 1997. “Sterilizing Capital Inflows” IMF Economic Issues n. 7 Washington.
Lopez J. G. 1997. “Mexico’s Crisis. Financial Modernization and Financial Fragility”
Banca Nazionale del Lavoro Quarterly Review vol. L n. 201 June.
Milesi-Ferretti G.M. e Razin A. 1996. “Current Account Sustainability: Selected Asian and
Latin American Experiences” IMF Working Paper n.110 Washington.
Palma G. 1998. “Three and a half cycles of ‘mania’, panic and [asymmetric] crash’: east
Asia and Latin America compared” Cambridge Journal of Economics vol. 22 n. 6
November
Sachs J. Tornell A. e Velasco A. 1996. “Financial Crises in Emerging Markets: the Lessons
from 1995” NBER Working Paper n. 5576 May.
Stiglitz J. E. 1998. More Instruments and Broader Goals: Moving toward the PostWashington Consensus, WIDER Annual Lectures 2, Helsinki.
Taylor L. 1991. Income Distribution, Inflation and Growth-Lectures on Structuralist
Macro-economic Theory, MIT Press Cambridge, Massachusetts.
ul Haq M., Kaul I. e Grunberg I. 1996. The Tobin Tax: Coping with Financial Volatility,
Oxford University Press Oxford.
UNCTAD 1997. Trade and Development Report, 1997, United Nations Publications, New
York and Geneva.
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Sustainable Development - Changing Perspectives on North-South Relationships
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TABLES AND FIGURE
Table 1. Direct Foreign Investment in East Asia according to origin and destination (1986-92).
Economy
Receiving Economy
(or region)
(percentage of FDI from the economy of origin)
Of origin
China
Indonesia
Malaysia
Philippines
Thailand
Hong Kong
62.8
7.6
3.1
10.4
17.1
South Korea
0.4
5.7
5.5
3.3
0.6
Singapore
1.3
3.8
6.8
1.5
9.5
Taiwan
6.4
8.0
22.3
2.7
8.2
Total NIEs
70.9
25.1
37.7
17.9
35.4
Japan
10.2
17.6
22.2
26.4
35.6
NIESs + Japan
73
59.9
44.3
71
42.7
Source: Figures based on World Bank data, 1996b, p. 29.
Table 2. Commitments by the International Community and Loans by the International Monetary Fund
in Response to the Asian Crisis
(billions of US dollars)
Commitments
Loans by IMF
Country
IMF1
Multilateral2
Bilateral3
Total
to 10 April 1998
Indonesia
9.9
8.0
18.7
36.6
3.0
S. Korea
20.9
14.0
23.3
58.2
15.1
Thailand
3.9
2.7
10.5
17.1
2.7
Total
34.7
24.7
52.5
111.9
20.8
1
IMF loans amount to 36 billion dollars if we include those given in 1997 to the Philippines.
2
World Bank e Asian Development Bank.3 Directly by governments.
Source: IMF 1998b, Box 1.
Table 3. Short Term Debt plus Current Account deficit (% of reserves)
1994
1995
1996
China
42
40
35
Indonesia
139
169
138
South Korea
125
164
251
Malaysia
46
60
55
Thailand
127
152
153
Philippines
212
203
149
Argentina
151
118
110
Brazil
101
124
121
Mexico
900b
267
241
Chile
43
37
31
a
. International Reserves excluding gold at the end of the period; at the end of February 1997 for
Indonesia and Malaysia. b. Estimate of reserves at mid December, just before the crisis.
Source: UNCTAD 1997, pp. 32-33.
Figure 1. Some Asian Economies: Bilateral Exchange Rates with the Dollar Equity Prices.
(In dollars per currency unit, logarithmic scale, January 5: 1996=100)
Source: IMF 1998b. 1.Pegged to the US dollar. 2. Indonesia’s currency reached the low exchange rate of
14.750 rupees per dollar (corresponding to a value of 15.5 in the index used here) during the week ending
January 23 1998 and recovered to 8.150 (28.1 in terms of the index) in the week ending April 10 1998.
ENDNOTES
1 ASEAN gathers together more countries than these, but unless otherwise indicated, with
ASEAN we shall refer to these four countries only.
2 On the type of intervention by the state which has always given room to private enterprise
see also: Chang 1993.
3 See Unctad 1966 pp. 75 and ff., Akamatsu’s model has been available in English since the
Sixties see Akamatsu 1962.
4 It appears that these speculative funds, the hedge funds, in the Asian currency crisis
played an important role only for the baht (see IMF 1998a, pp. 5-6).
5 The Argentinian bonds had been guaranteed by United States Treasury Bonds, on the
basis of the scheme laid down by the Brady Plan for indebted countries.
6 According to these authors the current account deficit and capital flows play a secondary
role.
7 In the case of industrialised countries for the period 1959-1993, it has been emphasised
that a currency crisis in a country increases the likelihood that it will also take place in other
countries (Eichengreen, Rose and Wyplosz 1996). However, the prevalent mechanism of
transmission appears to be linked to the existence of significant trade between countries
rather than similarities in macroeconomic conditions.
8 The short term debt of Malaysia and the Philippines was also very limited, with only
Indonesia having worrying levels of foreign debt.
9 World Bank 1998a, pp. 112 and ff., 133. For a classification of the various types of crises
see: IMF 1998a, pp. 112-ss e 133.
10 Japan system of credit is one of the largest creditors of the East Asian crisis economies.
Less well known is the fact that Europe has a total amount of credit to Asian banks,
including China and Taiwan’s, which is greater than Japan’s. According to figures held by
the Bank of International Regulations in Basel, out of a total of 357 billion dollars in foreign
bank debt to the end of June 1997, Europe held over 39%, with Germany in the lead, with
Japan holding over 33%, while the United States held only 8%. Thus, European bank
exposition was about 140 billion dollars, a huge figure.
11 In November 1997, the IMF predicted for Indonesia a GDP growth rate drop from 8% in
1996-7, to 5% in 1997-8, and to 3% in 1998-99. Hence, one which was still positive (IMF
Survey 17 November 1997). In the course of 1998, however, it recognised that GDP growth
would be negative.
12 It should be noted that the negative impact on growth was limited by the fact that the
currencies of China, Hong Kong, Taiwan and Singapore had not been subjected to heavy
devaluations, so that the negative impact of these changes mainly involved the ASEAN
countries and South Korea.
13 We have already seen that for some authors the contagion is transmitted by trade (see
Eichengreen, Rose e Wyplosz 1996).
14 In economic development literature the phenomena associated with such constraints have
been termed foreign exchange constraints or saving constraints, respectively (Taylor 1991,
pp. 160 and ff.; Grilli 1994, pp. 151-152). Economic systems labouring under these two
deficits will certainly have difficulty in launching development sustainable over the middle
to long term, especially from the macroeconomic point of view.
15 For some authors it was a typical crisis due to an excess of private foreign debt, in which
even capital flows which do not create debt, like the acquisition of shares and real estate by
foreigners, contributed to the speculative bubble over the two markets (Akyüz 1998, p. 4).
16 The excess of private investment over private savings had already been pointed out in
Mexico in 1994 where the public sector had a surplus, while between 1987 and 1994 the
rate of private savings had decreased steeply (Lopez 1997, pp. 168-170).
17 It must be said, however, that exchange fluctuations are very difficult to predict: the
exchange rate between the yen and the dollar went from 260 yen per dollar in 1985 to 80 in
1995, only to return to nearly 150 in June 1998, when an agreement between Hashimoto and
Clinton appeared to give the Federal Reserve’s support to the yen which then rose to above
140 per dollar. These variations can be only with difficulty explained by reference to the socalled economic fundamentals.
18 IMF Survey 23 September 1996, also ul Haq, Kaul e Grunberg 1996. It is worthwhile
remembering that in September 1992 both the Bank of England and the Bank of Italy were
‘taken by surprise’ by the size and weight of the so-called speculation in the world. Both
these prestigious institutions sought to defend the exchange rate of their national currencies
for one day and little more, consuming very significant amounts of their reserves. The crisis
of the European Monetary System in 1992 was perhaps the first signal denoting this new
context which had been created in the currency markets in the 90s.
19 Between 1994 and 1996, in the five economies hit hardest by the crisis, short term bank
loan flows doubled and most of the new bank loans were concentrated in South Korea and
Thailand.
20 The most well known example of currency board is in Argentina where a convertibility
plan was devised by Domingo Cavallo which laid down the fixed exchange rate of one
dollar for one peso. This measure probably helped to tame the hyper-inflation of the
eighties, but certainly has created problems in the trade balance and has not shielded
Argentina from the risk of a currency crisis.
21 In the case of the British pound and the Italian lira in 1992 as well as for Mexico’s peso,
the decisive event was rapid devaluation, but these currency crisis were briefer.