What Happened to the Asian Miracle?. The Asian Tigers Throughout the 1990s, Asian economies were...

What Happened to the Asian What Happened to the Asian Miracle?Miracle?

The Asian TigersThe Asian Tigers

Throughout the 1990s, Asian economies Throughout the 1990s, Asian economies were reporting stellar rates of economic were reporting stellar rates of economic growthgrowth Per Capita income has increased by a factor Per Capita income has increased by a factor

of ten over the past 30 years.of ten over the past 30 years. Asian countries attracted over half of all Asian countries attracted over half of all

capital inflows to developing countriescapital inflows to developing countries

The Asian Tigers: GDP The Asian Tigers: GDP GrowthGrowth

CountryCountry 19919922

19919933

19919944

19919955

19961996

KoreaKorea 5.065.06 5.755.75 8.588.58 8.948.94 7.107.10

IndonesiaIndonesia 6.466.46 6.506.50 15.915.933

8.228.22 7.987.98

MalaysiaMalaysia 7.807.80 8.358.35 9.249.24 9.469.46 8.588.58

PhilippinPhilippineses

.34.34 2.122.12 4.384.38 4.774.77 5.765.76

SingaporSingaporee

6.296.29 10.410.444

10.010.055

8.758.75 7.327.32

ThailandThailand 8.088.08 8.388.38 8.948.94 8.848.84 5.525.52


Throughout the 1990s, Asian economies Throughout the 1990s, Asian economies were reporting stellar rates of economic were reporting stellar rates of economic growthgrowth

Suddenly, however, in the summer of Suddenly, however, in the summer of 1997, Thailand devalued the Baht 1997, Thailand devalued the Baht followed by devaluations of the followed by devaluations of the Philippine Peso, the Philippine Peso, the the Malaysian the Malaysian Ringgit, then the Indonesian RupiahRinggit, then the Indonesian Rupiah

The Asian TigersThe Asian Tigers Throughout the 1990s, Asian economies Throughout the 1990s, Asian economies

were reporting stellar rates of economic were reporting stellar rates of economic growthgrowth

Suddenly, however, in the summer of 1999, Suddenly, however, in the summer of 1999, Thailand devalued the Baht; followed by Thailand devalued the Baht; followed by devaluations of the Philippine peso, the devaluations of the Philippine peso, the the the Malaysian Ringgit, then the Indonesian Malaysian Ringgit, then the Indonesian RupiahRupiah

Following the devaluation, the Following the devaluation, the region region suffered a major contraction and suffered a major contraction and persistently lower rates of economic growth.persistently lower rates of economic growth.

The Asian Tigers: Post The Asian Tigers: Post Crisis GDP GrowthCrisis GDP Growth


19919999

20020000

20020011

20022002

KoreaKorea -7-7 1111 99 33 66

IndonesiaIndonesia -13-13 11 55 33 44

MalaysiaMalaysia -7-7 66 88 00 44


-1-1 33 44 33 55

SingaporSingaporee

-1-1 66 99 -2-2 22

ThailandThailand -11-11 44 55 22 55

Why did Asia CollapseWhy did Asia Collapse

Malaysian Prime Minister Mahathir Malaysian Prime Minister Mahathir Mohamad has been the wild man Mohamad has been the wild man of the Asian crisis, blaming all his of the Asian crisis, blaming all his problems on manipulations by problems on manipulations by Jewish speculatorsJewish speculators

Was the Asian Crisis due to Was the Asian Crisis due to irrational speculation or were there irrational speculation or were there real structural problems in Asia?real structural problems in Asia?

The Good NewsThe Good News

On the surface, the Asian On the surface, the Asian economies looked very strongeconomies looked very strong High rates of economic growthHigh rates of economic growth High labor productivity growthHigh labor productivity growth High rates if investment financed by High rates if investment financed by

high domestic savingshigh domestic savings Low government deficitsLow government deficits

Investment Rates (% of Investment Rates (% of GDP)GDP)


19919944

19919955

19919966

19971997

KoreaKorea 3535 3636 3737 3838 3434

IndonesiaIndonesia 2929 3131 3131 3030 3131

MalaysiaMalaysia 3737 4040 4343 4141 4242


2323 2424 2222 2424 2424

SingaporSingaporee

3737 3232 3333 3535 3737

ThailandThailand 3939 4040 4141 4141 3434

TaiwanTaiwan 2525 2323 2323 2121 2222

Savings Rates (% of GDP)Savings Rates (% of GDP)


19919944

19919955

19919966

19971997

KoreaKorea 3434 3434 3535 3333 3333




1717 2020 1717 1919 1818

SingaporSingaporee

4646 5050 5151 5151 5151


TaiwanTaiwan 2828 2626 2525 2525 2525

Labor Productivity GrowthLabor Productivity Growth


19919944

19919955

19919966

19971997

ThailandThailand 2020 1919 1212 1212 -5-5

Government Government Deficits/Surplus (% of Deficits/Surplus (% of GDP)GDP)


19919944

19919955

19919966

19971997

KoreaKorea .64.64 .32.32 .30.30 .40.40 .46.46

IndonesiaIndonesia .64.64 1.031.03 2.442.44 1.261.26 00

MalaysiaMalaysia .23.23 2.442.44 .89.89 .76.76 2.522.52


-1.46-1.46 1.041.04 .57.57 .28.28 .06.06

SingaporSingaporee

15.615.677

11.911.933

13.013.077

14.014.011

9.529.52

ThailandThailand 2.132.13 1.891.89 2.942.94 .97.97 -.32-.32

TaiwanTaiwan -3.88-3.88 -1.73-1.73 -1.09-1.09 -1.34-1.34 -1.68-1.68

More Good NewsMore Good News

Asian Stock and Real Estate Asian Stock and Real Estate Markets were boomingMarkets were booming

Stock Market IndicesStock Market Indices


19919911

19919922

19919933

19941994

KoreaKorea 696696 610610 678678 866866 10271027




651651 11511151 12561256 31963196 27852785

SingaporSingaporee

11541154 14901490 15241524 24252425 22392239


TaiwanTaiwan 43504350 46004600 33773377 60706070 71117111

However, underneath the However, underneath the good news……good news……

Was Asian growth due to Was Asian growth due to “inspiration” or “perspiration”?“inspiration” or “perspiration”?

However, underneath the However, underneath the good news……good news……

Was Asian growth due to Was Asian growth due to “inspiration” or “perspiration”?“inspiration” or “perspiration”?

All the Asian countries had very high All the Asian countries had very high rated f labor productivity growth, rated f labor productivity growth, where labor productivity is defined aswhere labor productivity is defined as

LP = Y/L (real output per labor LP = Y/L (real output per labor hour)hour)

This measure of productivity omits an This measure of productivity omits an important inputimportant input

Sources of Economic Sources of Economic GrowthGrowth

Recall, that we assumed three Recall, that we assumed three basic inputs to productionbasic inputs to production


Recall, that we assumed three Recall, that we assumed three basic inputs to productionbasic inputs to production Capital (K)Capital (K) Labor (L)Labor (L) Technology (A)Technology (A)


Recall, that we assumed three Recall, that we assumed three basic inputs to productionbasic inputs to production Capital (K)Capital (K) Labor (L)Labor (L) Technology (A)Technology (A)

Growth accounting attempts to Growth accounting attempts to separate the growth effects of separate the growth effects of each inputeach input

Growth AccountingGrowth Accounting

Step 1: Estimate Step 1: Estimate capital/labor share of capital/labor share of incomeincome

K = 30%K = 30%

L = 70%L = 70%



K = 30%K = 30%

L = 70%L = 70%

Step 2: Estimate capital, Step 2: Estimate capital, labor, and output growthlabor, and output growth

%Y = 5%Y = 5

%K = 3%K = 3

%L = 1%L = 1



K = 30%K = 30%

L = 70%L = 70%


%Y = 5%Y = 5

%K = 3%K = 3

%L = 1%L = 1

Productivity growth will be Productivity growth will be the residual output the residual output growth after correcting growth after correcting for inputsfor inputs



K = 30%K = 30%

L = 70%L = 70%


%Y = 5%%Y = 5%

%K = 3%%K = 3%

%L = 1%%L = 1%

Productivity growth will be Productivity growth will be the residual output growth the residual output growth after correcting for inputsafter correcting for inputs

%A = %Y – (.3)*(%K) – %A = %Y – (.3)*(%K) – (.7)*(%L)(.7)*(%L)



K = 30%K = 30%

L = 70%L = 70%


%Y = 5%Y = 5

%K = 3%K = 3

%L = 1%L = 1

Productivity growth will be Productivity growth will be the residual output growth the residual output growth after correcting for inputsafter correcting for inputs

%A = %Y – (.3)*(%K) – %A = %Y – (.3)*(%K) – (.7)*(%L)(.7)*(%L)

%A = 5 – (.3)*(3) + (.7)*(1) %A = 5 – (.3)*(3) + (.7)*(1)

= 3.4%= 3.4%

Sources of US GrowthSources of US Growth

1929 - 1929 - 19481948

1948 - 1948 - 19731973

1973-1973-19821982

1982-19971982-1997

OutputOutput 2.542.54 3.703.70 1.551.55 3.453.45

CapitalCapital .11.11 .77.77 .69.69 .98.98

LaborLabor 1.421.42 1.401.40 1.131.13 1.711.71

Total Total InputInput

1.531.53 2.172.17 1.821.82 2.692.69

ProductiviProductivityty

1.011.01 1.531.53 -.27-.27 .76.76

Productivity Growth in Productivity Growth in ThailandThailand

Labor productivity growth in Labor productivity growth in Thailand averaged around 15% in Thailand averaged around 15% in the 90’s, but how much of this was the 90’s, but how much of this was technological?technological? %Y = 8%Y = 8 %L = 3%L = 3 %K = 40%K = 40

Productivity Growth in Productivity Growth in ThailandThailand

Labor productivity growth in Labor productivity growth in Thailand averaged around 15% in Thailand averaged around 15% in the 90’s, but how much of this was the 90’s, but how much of this was technological?technological? %Y = 8%Y = 8 %L = 3%L = 3 %K = 40%K = 40

%A = 8 – (.7)(3) – (.3)(40) = -6%A = 8 – (.7)(3) – (.3)(40) = -6

The Bad NewsThe Bad News

The growth in Thailand was The growth in Thailand was attracting lots of foreign attracting lots of foreign investment and was fueling an investment and was fueling an investment boom. investment boom. This boom was largely debt financedThis boom was largely debt financed

However, without technological However, without technological improvement, this growth is not improvement, this growth is not sustainable.sustainable.

Bank Lending (% of GDP)Bank Lending (% of GDP)


19919944

19919955

19919966

19971997

KoreaKorea 5454 5454 5656 5757 6161




2626 2929 3737 4848 5656

SingaporSingaporee

8484 8484 9090 9595 100100


TaiwanTaiwan 137137 146146 149149 146146 146146

Finances of Korean Finances of Korean Chaebol (in 100 Million Chaebol (in 100 Million Won)Won)

ChaebolChaebol DebtDebt Debt/Debt/EquityEquity

RatioRatio

SaleSaless

JinroJinro 3939 8598.78598.7 14.814.8

SammiSammi 25.925.9 32453245 5353

HallaHalla 63.263.2 2067.62067.6 52.952.9

New CoreNew Core 25.925.9 12241224 18.318.3

BongilBongil 18.318.3 920.5920.5 8.78.7

HanhwaHanhwa 97.297.2 778.2778.2 96.996.9

Asian FinancingAsian Financing

While these countries did have While these countries did have high domestic savings rates, much high domestic savings rates, much of the financing came from of the financing came from overseasoverseas

Current Account Balance Current Account Balance (% of GDP) (% of GDP)


19919944

19919955

19919966

19971997

KoreaKorea .30.30 -1.02-1.02 -1.86-1.86 -4.75-4.75 -1.85-1.85

IndonesiaIndonesia -1.33-1.33 -1.58-1.58 -3.18-3.18 -3.37-3.37 -2.24-2.24

MalaysiaMalaysia -4.66-4.66 -6.24-6.24 -8.43-8.43 -4.89-4.89 -4.85-4.85


-5.55-5.55 -4.60-4.60 -2.67-2.67 -4.77-4.77 -5.23-5.23

SingaporSingaporee

7.577.57 16.116.122

16.816.811

15.615.655

15.3715.37

ThailandThailand -5.08-5.08 -5.60-5.60 -8.06-8.06 -8.10-8.10 -1.90-1.90

TaiwanTaiwan 3.163.16 2.702.70 2.102.10 4.054.05 2.722.72

Foreign Debt (% of GDP)Foreign Debt (% of GDP)


19919944

19919955

19919966

KoreaKorea 2525 2525 5151 5050

IndonesiaIndonesia 2020 1818 2121 2424

MalaysiaMalaysia 2626 2121 2121 2727


6666 6262 5353 4949

SingaporSingaporee

99 1010 99 1212

ThailandThailand 3434 3333 3333 5050

TaiwanTaiwan 1010 1010 1010 1010

Asian FinancingAsian Financing

While these countries did have While these countries did have high domestic savings rates, much high domestic savings rates, much of the financing came from of the financing came from overseasoverseas

Further, a large fraction of this Further, a large fraction of this debt (20-70%) was short term.debt (20-70%) was short term.

Asian Financing: Moral Asian Financing: Moral HazardHazard

A further complication was that the A further complication was that the Asian governments implicitly Asian governments implicitly backed all private sector loans. backed all private sector loans. This exacerbates the natural moral This exacerbates the natural moral hazard problem already present in hazard problem already present in financial marketsfinancial markets

The Beginning of the EndThe Beginning of the End

By the mid nineties, the By the mid nineties, the profitability of Asian companies profitability of Asian companies began to fallbegan to fall

Return on Assets by Return on Assets by Korean ChaebolKorean Chaebol

ChaebolChaebol 1992 -1992 -19961996

19961996

HanboHanbo 3%3% 1.7%1.7%

SammiSammi 2.9%2.9% 3.2%3.2%

JinroJinro 2.7%2.7% 1.9%1.9%

KiaKia 18.9%18.9% 8.7%8.7%

DainongDainong 6.8%6.8% 5.5%5.5%

The Beginning of the EndThe Beginning of the End

By the mid nineties, the By the mid nineties, the profitability of Asian companies profitability of Asian companies began to fallbegan to fall

As profits fell, loan defaults As profits fell, loan defaults increasedincreased

Non-Performing Loans (% Non-Performing Loans (% of Total Loans) of Total Loans)


KoreaKorea 88

IndonesiaIndonesia 1313

MalaysiaMalaysia 1010

PhilippinesPhilippines 1414

SingaporeSingapore 44

ThailandThailand 1313

TaiwanTaiwan 33

To Make Matters WorseTo Make Matters Worse

Most countries were pegged to the Most countries were pegged to the dollar. As domestic inflation rates dollar. As domestic inflation rates rose, they experienced a real rose, they experienced a real appreciation against the US.appreciation against the US.



As the dollar appreciated against As the dollar appreciated against the Yen, so did the Baht, Ringgit, the Yen, so did the Baht, Ringgit, etc. etc.



As the dollar appreciated against As the dollar appreciated against the Yen, so did the Baht, Ringgit, the Yen, so did the Baht, Ringgit, etc. etc.

Japan slid into a recession in the Japan slid into a recession in the early nineties. early nineties.

Liquidity ProblemsLiquidity Problems

With exports falling, there was With exports falling, there was insufficient cash to refinance short insufficient cash to refinance short term borrowingterm borrowing

Further, many of these loans were Further, many of these loans were dollar denominated, which put dollar denominated, which put additional strain on dollar reserves additional strain on dollar reserves (to maintain the peg)(to maintain the peg)

Why not float?Why not float?

Why not float?Why not float?

With many loans denominated in With many loans denominated in dollars, a currency depreciation raises dollars, a currency depreciation raises the value of the loan in domestic the value of the loan in domestic currency.currency.

Domestic interest rates would have to Domestic interest rates would have to be raised to attract capital (interest be raised to attract capital (interest rates would need to compensate for rates would need to compensate for the currency depreciation)the currency depreciation)

Is maintaining the peg Is maintaining the peg better?better?

Is maintaining the peg Is maintaining the peg better?better?

Not really…….by maintaining the Not really…….by maintaining the peg to the dollar, the central bank peg to the dollar, the central bank must continue to buy up domestic must continue to buy up domestic currency which contracts the currency which contracts the domestic money supply.domestic money supply.

Enter the IMFEnter the IMF

As the Asian debts piled up, the As the Asian debts piled up, the IMF (International Monetary Fund) IMF (International Monetary Fund) intervened. The offered intervened. The offered emergency loans, but with strings emergency loans, but with strings attached.attached.

Enter the IMFEnter the IMF

While the IMF did not insist that While the IMF did not insist that the countries maintain their pegs the countries maintain their pegs at all cost, they required three at all cost, they required three policies to “restore confidence”policies to “restore confidence” Raise interest ratesRaise interest rates Balance Government BudgetsBalance Government Budgets Conduct Fundamental ReformConduct Fundamental Reform

Did the IMF make things Did the IMF make things better, or worse?better, or worse?

Those countries that were able to Those countries that were able to meet the requirements slipped meet the requirements slipped further into recessionsfurther into recessions

Those countries that couldn’t meet Those countries that couldn’t meet the requirements suffered further the requirements suffered further “investor confidence”“investor confidence”

Malaysia opts outMalaysia opts out

Malaysia, rather than accepting the IMF terms, Malaysia, rather than accepting the IMF terms, chose to follow a different strategychose to follow a different strategy Malaysia imposed capital controls which Malaysia imposed capital controls which

restricted capital flows out of the country. restricted capital flows out of the country. This allowed Malaysia the freedom to follow This allowed Malaysia the freedom to follow

more expansionary policies without more expansionary policies without worrying about losing foreign capital.worrying about losing foreign capital.

This strategy seemed to work in that Malaysia This strategy seemed to work in that Malaysia recovered faster than other countries.recovered faster than other countries.

What’s the moral of the What’s the moral of the storystory

In bad times, policies required to In bad times, policies required to maintain external balance (currency maintain external balance (currency value) turn out to be policies that would value) turn out to be policies that would never have been considered in never have been considered in countries with a peg.countries with a peg.

Typically, the better solution is:Typically, the better solution is: Devalue, but devalue “enough”Devalue, but devalue “enough” Drop the peg and concentrate on economic Drop the peg and concentrate on economic

recovery.recovery.

What Happened to the Asian Miracle?. The Asian Tigers Throughout the 1990s, Asian economies were...

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