The Asian Crisis: a Perspective After Ten
YearsW. Max Corden
Presented by Trace Hayles
The Asian Crisis: Prelude
• 1997: Thailand, Indonesia, Malaysia, and Korea in the midst of an investment boom• Comprised of local savings and FDI• Result of favorable macroeconomic policies
• 3 Forms of capital inflow that fueled boom• FDI• Inflow of portfolio capital into local stock markets• Short term borrowing by local banks
The Bubble Bursts
• Catalyst: Eventual slowdown of export growth in Thailand (20% to 0% year over year)• 1997: Exchange Rate crisis for baht
• This triggered crises in the other three Asian Tigers (contagion)• Free movement of capital policies – not in place in China
and India
GDP Growth
Country 1988-95 1996 1997 1998 1999 2000
Indonesia 7.9 7.8 4.7 -13.1 0.8 4.9
Malaysia 9.4 10 7.3 -7.4 6.4 8.9
South Korea 8.1 7 4.7 -6.9 9.5 8.5
Thailand 10 5.9 -1.4 -10.5 4.4 4.8
Currency Crisis
• Outside of Malaysia, other three countries held large amounts of $-denominated short term debt• With no hedging, this led to sharp depreciation• Domestic banks exposed to both currency risk
and credit risk
Unique Crises
• Thailand: FBAR• Indonesia: Suharto• Korea: faster recovery from larger IMF infusions• Malaysia: Capital outflow restrictions
Policy Response
• Domestic Interest Rates• Bank Rescues• Keynesian Expansion
Conclusion
• Key factor: run-up in investment, “hard landing” after• Recession was not inevitable, but events in
Thailand accelerated region-wide crisis
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