The 1997 – 1998

Asian Financial Crisis

Submitted by:
Syed Mohd. Zaid
 THE ASIA CRISIS
• Singapore • Who are the Asian
Tigers?
• In the mid-1990s we
spoke of the “Asian
Tigers” with awe.
nutwn[1].jpe Heavy savings and
investment, rapid
development. Activist,
statist economic
planning
 COUNTRIES AFFECTED IN THE
CONTAGION
• Thailand, July, 1997
• Indonesia, June to August, 1997
• Korea, July, 1997
• Japan had already been through its own
crisis earlier and was in an economic
depression
• Russia and Mexico followed a little later
with crises of their own.
THE ASIAN CRISIS: BOOM AND
BUST

• First Phase: Currency undervalued to

promote exports. Government picks
and promotes “winners” (major projects
and firms).
THE ASIAN CRISIS: BOOM AND
BUST
• Second Phase:
Export successes produce large
earnings.

Heavy investment inflows by the early

1990s.
Available – a plethora of capital.
THE ASIAN CRISIS: BOOM AND
BUST
• Inflation should have produced some
currency devaluations in these
countries, but currencies were tied to
US Dollar, which was appreciating at
the time. Currencies were then
overvalued..
• A bubble starts to develop
– Banks not monitored.
 THE ASIAN CRISIS:
FINANCE AND THE BUBBLE

• Japanese rice subsidies inflate the

value of land to promote the real
estate bubble. Huge real estate
inflation and subsequent collapse.

• Japan trying to fight a depression so

Japanese interest rates were at zero.
 THE ASIAN CRISIS:
FINANCE AND THE BUBBLE
• Only modest returns
needed with interest Bangkok, Thailand
rates very low.
Emphasis on market
share and growth, not
on profits in Japan.
• Japan was the
governance model for
“statist” Asian
economies.
 THE ASIAN CRISIS:
FINANCE AND THE BUBBLE
• Bad debts accrue.
Investors look for Bangkok, Thailand
larger returns, but
these have higher
risks.
• “Keep the Finance
Ministry off our case.”
• Non-Functioning
Loans fill bank
portfolios.
ASIAN CRISIS: THE FINANCE
PROBLEM
 Ultimately, long- and short-term
investors notice the lack of returns.
Then the crisis begins. How?
• With capital mobile, flight can occur
with any provocation. (Modern version
of a run on the bank.)
ASIAN CRISIS: THE FINANCE
PROBLEM
• Stock values plummet(fall rapidly) as
they are sold off.
• Currency values?

• They drop precipitously (dangerously

steep) as funds are sold off then the
yield is exchanged for the investors’
currencies.
ASIAN CRISIS: THE FINANCE
PROBLEM
• Import prices (for productive materials and
parts and for consumption goods) skyrocket.

• Severe recession begins as consumption

and production expenditures falter
(unsteadily) and prompt layoffs.
Foreign exchange is now so costly that
needed production inputs and consumer
goods cannot be afforded.
THREE MISTAKES OF ASIAN
LENDERS
• The countries involved usually had
some international indebtedness, and
Asian banks and borrowers used short-
term credits to finance long-term loans.
• Asian borrowers (banks and firms)
borrowed in foreign currencies and
loaned in local currency. No hedging to
counter foreign exchange risk.
THREE MISTAKES OF ASIAN
LENDERS
Asian bankers often did not ask to see
consolidated balance sheets. They
didn’t monitor the total assets and
liabilities of the borrowers.

The IMF paid the bills for such banks,

finance ministries and countries. Moral
hazard problems! Investors should pay
for bad decisions.
 Maturity Distribution
90
80
70
60
50
40
30
20
10
0
Indonesia SouthKorea Philippines Thailand Taiwan

(Proportion of loans with maturity one

year or less at the end of 1996)
 Causes of the crisis (1)

 Inadequately development financial

services sector

 Lack of control and sufficient

regulations in capital market

 Close alignment between the local

currency and US dollar
 Causes of the crisis (2)
 Weakening Economic performance and
balance of payment difficulties
 Currency speculation
 Technological changes financial market
 Lack of confidence in the ability of the
governments in questions to resolve
their problems successfully.
 CONCLUDING REMARKS
• The rapidly increasing globalization without fully
appreciate the new challenges and risk was the
root cause the Asian crisis.
• Globalization, if properly managed, may help push
some developing countries into modernity and
affluence. The Asian crisis has shown how
important it is to have effective state institutions.
• Developing countries must have to develop their
own defense mechanism by establishing a system
of capital controls and exchange rate regime.
THANK Y0U
 Keynes and the Corporate
Governance Problem
What did this chapter
address?
Lord Keynes

Written to solve the

problem of the great
depression, this
chapter turns out to
be the intellectual
foundation of postwar
thought on economic
growth and planning.
The Investment Problem: Choosing the
Right Projects under Uncertainty

• Personally acquainted with the

uncertainties of investment prospects
and market performance, Keynes
noted:
• “the extreme precariousness of the
basis of knowledge on which our
estimates of prospective yield have to
be made,”
The Investment Problem: Choosing the
Right Projects under Uncertainty

• What is precarious here?

Our ability to deal with the future’s
uncertainty.
• What are investors engaged in
“enterprise”?
• Those who will “purchase investments
on the best genuine long-term
expectations he can frame.”
America’s Wall Street: Speculation

There are also the “game-players” who

are involved in the speculation that
seeks for capital appreciation rather
than income. Such speculation he
found to be particularly common
among Americans.
 America’s Wall Street: Speculation

What did he believe they were interested in?

“Unduly interested in discovering what

average opinion believes average opinion
to be.” This “national weakness finds its
nemesis in the stock market.”
America’s Wall Street: Speculation
Keynes believed investment outcomes were

“a result of animal spirits -- of a

spontaneous urge to action rather than
inaction, and not as the outcome of a
weighted average of quantitative benefits
multiplied by quantitative probabilities.”
 The Keynesian Conclusion
• Due to the difficulties of
investment uncertainty,
“I expect to see the state,
which is in a position to
calculate the marginal
efficiency of capital-goods on
long views and on the basis of
the general social advantage,
…
.
The Keynesian Conclusion

…taking an ever greater

responsibility for directly
organizing investment.”

After WWII, economic

planning was adopted by
most nations.
 National economic plans

• What would be the objective of a

national economic plan?
• Plans enunciated the aims and guiding
principles of development policy,
National economic plans
• described the desired development of
the country as a whole,
• described development of the
economy’s principal sectors,
• provided estimates on production and
investment figures.
Often a plan was “considered
synonymous with a program of
investment projects.”
National economic plans

• Most plans were relatively innocuous

as compared to the comprehensive
and authoritarian planning of the Soviet
bloc countries.
 Planning Results

• Over the next few years, few positive

results recommended continued
planning, so most nations downsized
their planning experiments into various
forms of “structural policies.”
 Planning Results

• In Japan, the model Asian development

country, postwar MITI was to “target a
potentially growing industry and
implement an industrial policy that would
enhance productivity in that industry and
ultimately improve its competitiveness in
the global market through coordinated
efforts by the government and business
leaders.”
 Planning Results

• Targeted industries were plied with capital

from the local bank, as directed by the
Ministry of Finance. Japanese industrial
power was perceived as a function of its
ability to administer “guided capitalism.”
The Japanese Model of Economic
Development
How successful was the Japanese
development model?
-- Japanese savings are immense.
The Japanese Model of Economic
Development
 -- The American market is an open
export target for Japan,
• -- Deming’s Quality Control and
world class manufacturing,
The Japanese Model of Economic
Development
Tokyo Stock Exchange
 -- Large Net
Export Earnings,
• -- Japan seen as
the world’s first
economic
superpower.
“Insurmountable” US Problems

• For whom does U.S. industry produce

its fruits?
• What is corporate governance?
• The U.S. system of corporate
governance is designed to assure
shareholder earnings.
“Insurmountable” US Problems

• Corporations secure strong, short-term

returns or stockholders will walk.
• Critique: “Preoccupation with the
bottom line is hostile to long-term
projects which might generate returns
later but which may not be profitable at
the present.”
“Insurmountable” US Problems

• Selecting projects without regard to

their short-term profitability is viewed
as a disadvantage to their strategic
performance.
• C. 1993: “The U.S. is finished as an
economic power.”
Michael Porter on Government Policy

• “Government is prominently
discussed in treatments of
international competitiveness. Many
see it as a vital, if not the most
important, influence on modern
international competition.
Michael Porter on Government Policy
• Government policy in
Japan and Korea is
particularly

 
associated with the
success these
nations’ firms have
                                                     

enjoyed.”
The Competitive
Advantage of Nations
The Free Press,
1990), p. 126  
 Lester Thurow: A Head to Head
Strategy

• Early 1990's: there is no way to

compete against Japan and Europe,
Thurow said, without restructured
antitrust laws. Larger units must be
capable of competing with the more
long-term oriented keiretsu of Japan.
 Lester Thurow: A Head to Head
Strategy

• Implement measures that make

investments in American corporations
more long-term.
Lester Thurow: A Head to Head
Strategy

• A national strategy or
national industrial
policy essential to
survival as a competitor
in world markets.
• See Head to Head: The
Coming Economic
Battle Among Japan,
Europe, and America,
New York: Warner
Books, 1993.
Investment processes became globalized.
• By the early nineties, a net transfer of
financial resources flowed into Asia. It
supplemented gross domestic savings
in the Asian countries.
• Capital poured in from the West, but a
considerable share also came from
Japan, and other Asian countries
investing in their less developed
neighbors.
Investment processes became globalized.

• The United States also became a

major supplier of funds to Asia and the
rest of the world, both through direct
and portfolio investment, the sum of
these being $178 billion in 1993 and
$119 billion in 1994.
 When the Bubble Burst

• What happened when the bubble

burst?
• Worldwide, foreign direct investment is
far and away the largest part of net
financial flows to the developing
economies.
 When the Bubble Burst

• These are highly concentrated and

nearly 75% flowed to the ten largest
recipients in Asia and Latin America
• The onset of the crisis for 22 countries
of South and East Asia in 1997 made
itself manifest with an outflow of
approximately $92 billion in short-term
borrowing, stock market net flows, and
net outflows of funds from domestic
residents.
 When the Bubble Burst

• Stock markets crashed, national

currencies collapsed, and imports and
production shriveled up miserably.