East Asian Crisis: Summary
Beginning in 1997, a set of rapidly changing macroeconomic conditions, referred to as
the Asian crisis, were felt through out the economies of East Asia. The most dramatic
turnarounds were seen in 4 countries: Indonesia, Korea, Malaysia and Thailand. In this
section, we examine similar features of the economic events in the latter three countries.
Along many dimensions, Indonesia faced the most severe changes in conditions.
However, Indonesia also experienced a dramatic change in government subsequent to the
crisis and much of the macroeconomic outcomes in Indonesia may be due to the chaos
associated with that political upheaval. As reported by the Bank of International
Settlements, one condition shared by all three economies at the onset of the crisis was a
large outstanding external debt. A measure of the outstanding stock of debt to OECD\
banks was US$103.1 billion in Korea, US$28.5 Billion in Malaysia and US$96.7 billion
in Thailand. Each of these debt levels was a substantial fraction of GDP. Converting the
debt into won at market rates, the Korean debt was 83.2% of Korean second quarter 1997
GDP; the Malaysian debt was 106.6% of Malaysian second quarter 1997 GDP; the Thai
debt was 220.9% of second quarter 1997 GDP. During the second half of 1997, there
was a dramatic reduction in the stock of these loans. In Figure 1, I show a time series
showing the outstanding stock of foreign bank debt in these countries relative to their size
in the second quarter of 1997. By the third quarter of 1998, Korean external debt levels
had fallen by 38%; Malaysian debt levels had fallen by 29%; and Thai levels had fallen
by 41.1% of the pre-crisis levels. That these drops in bank debt on net represent dramatic
capital outflows can be seen from the second panel of Figure 1 which shows the response
of the trade balance concurrent with the drop in bank debt. In the second quarter of 1997,
Malaysia had a trade deficit of 4.4% of GDP; one year subsequent the trade balance was
in a surplus of 20.9% of GDP. Similarly dramatic turnarounds were seen in Korea and
Thailand. The second quarter 1997 trade surplus in Korea was -2.2% of GDP; one year
subsequent it was 13.8% of GDP. The second quarter 1997 trade surplus in Thaliand was
-2.2% of GDP; one year subsequent it was 16% of GDP.
In addition to the sudden drop in foreign debt levels and dramatic current account
turnaround, the events of 1997-1998 share similar features for all three countries. In each
country, there was a large reduction in production levels, a larger reduction the private
components of absorbtion, and a depreciation in the exchange rate, both nominal and real.
We use a simple event study analysis to measure these impacts. We will measure the
``effects'' of the crisis on various macroeconomic variables as the differences in their
outcomes from a deterministic forecast based on their trend growth path from the earliest
available measure after 1990:1 until 1997:2. The reported series are the difference
between the logarithm of a time series and the linear trend path of the logarithm of the
series. We refer to a log difference between the actual realization of the series and the
trend path of -.x as x% below trend.
In Figure 1, we show the response of domestic production and expenditure to the Asian
crisis. Both Korea and Malaysia were near their recent trend growth path at the second
quarter of 1997; Thailand was already somewhat below the growth path. In each country,
output begins to fall sharply in the second half of 1997. Output continues to fall through
1998 reaching a trough in either the 3rd or 4th quarter. The fall below trend is sharpest in
Thailand where output reaches a nadir of 28.1% below previous trend. Output falls by
23.4% below trend in Malaysia and 15.9% in Korea. In percentage terms consumption
falls by more than output in each country. The peak fall in consumption below trend in
Korea is 20.5%; in Malaysia is 27.7% and in Thailand is 30.4%. The largest relative
decline is in investment. Investment falls at peak 40% below trend in Korea; 69% below
trend in Thailand; and, 98% below trend in Malaysia Prior to 1997: some of the real
effects of the crisis. The collapse in lending led to a collapse in the major elements of
absorption as real consumption falls by more than 25% below trend and investment falls
close to 100% below the previous trend. Simultaneously, real gross domestic product also
falls by close to 25% below the previous trend. The fall in absorption exceeds the fall in
output. The current account as a % of GDP rises by 25 percentage points above its
previous share. Though output and consumption do show some small signs of reverting to
trend in the most recent period (1999:2), consumption, investment and GDP remain near
the trough of the recession.
One of the most noticeable aspects of the crisis was the sharp decline in the value of the
Korean won, Malaysian ringit, and Thai baht versus the US dollar. Each currency had
depreciated by at least 40% off trend by the first quarter of 1991. Both the won and the
baht substantially overshot their long run levels. This rise in the currency was reflected in
the real exchange rate. Define the real exchange rate as the product of the nomianl
exchange rate and the ratio of the US and respective domestic GDP deflators. In each
case, the real exchange rate reached levels nearly 40% above trend by the first quarter of
1998. This decline in the real exchange rate has persisted to the current period in all
cases. An examination of the response of the GDP deflators of the various countries to
the shock shows a distinct but temporary rise in the price level in all countries. In each
case, this rise in the aggregate price index is less than 10% at peak. Finally, we show the
response of the nominal domestic country prime lending rate. In each case, the capital
account turn around led to a temporary rise in nominal interest rates.
FIGURE 1
Ex ternal Bank Debt
% of 2nd Qrtr, 1997 Debt Level
110
100
90
80
70
60
50
40
96:3
97:1
97:3
98:1
98:3
99:1
99:3
98:3
99:1
99:3
Net Ex ports
0.3
as % of GDP
0.2
0.1
0.0
-0.1
96:3
97:1
Korea
97:3
98:1
Malaysia
Thailand
FIGURE 2
Gros s Dom es tic Produc t
Cons umption
0.05
0.1
% Dev i ation from Trend
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
97:1
97:3
98:1
98:3
99:1
0.0
-0.1
-0.2
-0.3
-0.4
99:3
97:1
In v e s tm e n t
0.2
0.0
% Dev i ation from Trend
% Dev i ation from Trend
0.00
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
97:1
97:3
Korea
98:1
98:3
Malay s ia
99:1
99:3
Thail and
97:3
98:1
98:3
99:1
99:3