International Financial

Management
Topic- Tiger Economies
Submitted by
C. Nanda Kumar
Steve
Sharath
Hemanth
Who are called Tiger Economies.

– Hong Kong
– Singapore
– Taiwan
– South Korea
– Malaysia
 The Asian Tigers
While Japan was building one of the world’s strongest economies in the years after
World War II, other Asian nations were also making great economic gains. Because
of economic successes, South Korea, Hong Kong, Taiwan and Singapore became
known as the Asian Tigers.

Spectacular Growth Industrial Expansion

• Asian Rim entered 1960s as poor,
undeveloped region
• Over next few decades, Asian Tiger
economies performed spectacularly
• Growth higher than that of similar
economies in Latin America, Africa
• Countries followed pattern similar to
one used by postwar Japan
• Ample education, training for citizens;
skilled workforce necessary for
industrial expansion
• Also received U.S. economic aid

The nations further benefited from their access to the major shipping routes of the
Pacific Ocean.
 Manufacturing

As in Japan, Asian Tigers focused on growth

• Growth came through exports of consumer goods, primarily to
United States
• Low costs for labor, production, as well as loyal, dedicated
workforce allowed manufacture of low-cost products that could
sell in U.S.
 East Asia: Success and Crisis
• The East Asian Economic Miracle
– Until 1997 the countries of East Asia were
having very high growth rates.
– What are the ingredients for the success of the
East Asian Miracle?
• High saving and investment rates
• Strong emphasis on education
• Stable macroeconomic environment
• Free from high inflation or major economic slumps
• High share of trade in GDP
 An Economic Crisis
Success Led to Failure
• 1997, economies of Japan, Asian Tigers suffered shock when severe financial crisis
hit region, partly due to region’s great success
• Superior performance led foreign companies to invest heavily in economies

Thailand’s Banks Failed

• Lack of government regulations allowed Asian Tiger banks to borrow more than
they needed
• Crisis began when banks began to fail in Thailand

Financial Panic
• Financial panic quickly spread through region; foreign investors sold holdings
• Stock, real estate prices collapsed, currencies lost value
• Region overwhelmed by debts it could not pay; collapse undid years of progress
 East Asia: Success and Crisis
• Asian Weaknesses
– Three weaknesses in the Asian economies’
structures became apparent with the 1997 financial
crisis:
• Productivity
– Rapid growth of production inputs but little increase in the
output per unit of input
• Banking regulation
– Poor state of banking regulation
• Legal framework
– Lack of a good legal framework for dealing with companies in
trouble
 Causes of foreign capital inflow
• Expansionary monetary policy in money
centers (US, Europe, and Japan)
• Excess world liquidity (yen bubble)
• Financial deregulation in Europe
• Higher interest rates in Asian countries
relative to money centers
• Asian countries liberalize capital accounts

Inflow of foreign capital

Government policies
Debt Maturity
toward foreign capital Structure
• Capital account
liberalization biased toward • Accumulation of short-
short-term capital term debt denominated in
foreign currency

Financial vulnerability
• To banking crisis

Triggers
The Asian Financial Crisis • Economic vulnerabilities Crisis
revealed (collapse of • Speculative attack on
chaebol; revelation of true
Short-term Capital Flows short-term debt burden) currency
• Credibility of fixed • Capital outflow
(South Korea) exchange rate undermined
 Causes of foreign capital inflow
• Expansionary monetary policy in money
centers (US, Europe, and Japan) Government macroeconomic
• Excess world liquidity (yen bubble) policy
• Financial deregulation in Europe • Fixed exchange rate (dollar peg)
• Higher interest rates in Asian countries
relative to money centers
• Asian countries liberalize capital accounts

Macroeconomic vulnerability
• High relative inflation caused by expansion
Inflow of of domestic money supply
foreign • Real exchange-rate appreciation (also
because dollar strengthening)
capital
• Widening of current account deficit

Triggers
• Depletion of foreign exchange reserves
•Economic vulnerabilities revealed (real
estate bubble bursts and Bangkok Bank
of Commerce fails)
• Credibility of fixed exchange rate
undermined

The Asian Financial Crisis

Macroeconomic Fundamentals (Thailand) Crisis
• Speculative attack on currency
• Capital outflow
“Crony Capitalism”

Bank credit to the private sector, 1981-1997

Annual rate of As a percentage

expansion (in percent) of GDP
1981-1989 1990-1997 1997

Indonesia 22 19 57
Thailand 15 18 105
South Korea 13 12 64
Malaysia 11 16 95
Philippines -5 18 52
Sin gapore 10 12 97
Hong Kong 13 8 157
Taiwan 15 13 138

(reproduced from Eichengreen (1999))

Government policies toward
financial system
• Bank-centered financial system
• Weak bank supervision
• Moral hazard (Banks used as
instrument of public policy and too
big to fail)
Misallocation of capital
• Overinvestment
• Asset price bubble (real estate)
• Corruption
The Asian Financial Crisis
“Crony Capitalism”
Causes of foreign capital inflow
• Expansionary monetary policy in money
centers (US, Europe, and Japan)
• Excess world liquidity (yen bubble)
• Financial deregulation in Europe
• Higher interest rates in Asian countries
relative to money centers
• Asian countries liberalize capital accounts
Inflow of foreign capital
Financial
vulnerability
• To banking crisis
• Public debt crisis
Triggers
• Economic vulnerabilities Crisis
revealed (bank collapses; • Speculative attack on
corruption exposed)
• Credibility of fixed
currency
• Capital outflow
exchange rate undermined
 East Asia: Success and Crisis
• The Asian Financial Crisis
– It stared on July 2, 1997 with the devaluation of the
Thai baht.
– The sharp drop in the Thai currency was followed by
speculation against the currencies of: Malaysia,
Indonesia, and South Korea.
• All of the afflicted countries except Malaysia turned to the
IMF for assistance.
– The downturn in East Asia was “V-shaped”: after the
sharp output contraction in 1998, growth returned in
1999 as depreciated currencies spurred higher exports.
 Trade Balance
(Billions U.S.Dollar)

1200 911.9
1000 682.1
800
600
400
200
0
-200
-229.8
-400
1990 1992 1994 1996 1998
Export Import Balance
 Devaluation of currencies
Indonesia Malaysia
1996 1997 1998 1999 2000 1996 1997 1998 1999 2000
0 2

2000
2.5

4000
3

6000

3.5
8000

4
10000 3.92
10014

12000 4.5
 Devaluation of currencies
Thailand Philippines
1996 1997 1998 1999 2000 199 6 199 7 1998 1 999 200 0
20 20

25
25

30

30

35

35
40

40.89
40
45

41.36

45 50
Thank You