Transcript background

East Asia Crises
Presented By
Tze-chi Lin (Jacky)
Walid Metwaly
Wei Zhang (Richard)
6/2/05
1
East Asia Crises








Background. - Jacky
Causes. - Jacky
Effects. - Jacky
IMF’s Response – Richard
Individual responses – Richard
Criticism of the IMF Remedies - Walid
Lesson Learned - Walid
Conclusion – Walid
6/2/05
2
background


The East Asian Crisis unveiled in the
July of 1997 when the Thai Currency,
the baht, floated and devalued by more
than 15 percent.
A wave of hysteria then followed with
the crisis spreading from Thailand to
Malaysia, the Philippines, then to South
Korea.
6/2/05
3
Causes


Unwise domestic policies such as overpeculation, the ill judgment of the banks and
financial institutions, the collusion between
government and businesses, the fixed
exchange rates, and high current account
deficits.
Quick deregulation and liberalization prior to
a strong formation of institutions and
knowledge base, leading to powerful shocks
and instability
6/2/05
4
Causes


The development of large institutional
financial players that resulted in
speculative attacks.
Tremendous and rapid expansion of
credit that drastically increased the
number of bad loans
6/2/05
5
Effects




6/2/05
Decreased economic growth and a drop in
GDP.
Sharp rise in unemployment.
Sudden outflow of foreign investment and
capital.
Sudden depreciation of the Asian currencies
along with the reduction of foreign reserves
causing an accumulation of debt.
6
Effects



6/2/05
Stock markets crashed due to stock market
co-movements aka contagion.
Depreciation – led inflow of cheap Asian
exports into foreign countries such as the
U.S., Canada, and European countries
Social costs ( labor and social unrest, riots,
increased apprehension of illegal immigrants,
and growing trafficking of women)
7
IMF’s Response

Financial Assistance
The rescue packages were notionally for the
public sector in the affected countries. At
$112 billion, the total value of the rescue
packages for Indonesia, Malaysia and
Thailand was more than twice the size of the
$50.8 billion aid that was arranged for the
Mexican bailout in 1994.
6/2/05
8
IMF’s Response (Cont.)

The Austerity Programme.


Fiscal policy
Fiscal policy is tightened to limit the need for inflows of
capital from overseas. As it became apparent that the
economic impact of the Asian Crisis was deeper than had
been expected, fiscal targets in Asian countries were relaxed
to take account of falling government tax revenues.
Monetary policy
A high interest rate policy has the twin effects of reducing
the need for external capital inflows and helping to maintain
export competitiveness by controlling domestic prices.
6/2/05
9
IMF’s Response (Cont.)

Restructuring
The aim of such structural reforms is to
remove features of the economy that
had become impediments to growth,
such as monopolies, trade barriers and
non-transparent corporate practices.
Immediate action was taken to correct
the weaknesses in the financial system.
6/2/05
10
Individual Responses


Malaysia rejected the IMF rescue package
and claimed capital control, the prohibiting
short-term selling currency made by foreign
speculators and hedge funds and protecting
their own currency, as their policy response.
Korea accepted the IMF loan, the highest
ever at the time, and had repaid it by August
2001.
6/2/05
11
Criticism of the IMF Remedies



The IMF mistook the East Asian crisis as a
traditional balance-of-payments problem.
while governments was running Surplus.
IMF bailout policy pushed Asia further into
recession with its demands for high interest
rates and rigid monetary and fiscal policies.
IMF intervention to close indebted banks and
industrial organization worsened the problem.
6/2/05
12
Lesson Learned



Avoid large current account deficits financed
through short-term, unhedged private capital
inflows.
Aggressively regulate and supervise financial
systems to ensure that banks manage risks
efficiently.
Put in place incentives for sound corporate
finance to avoid excessive reliance on foreign
borrowing.
6/2/05
13
Lesson Learned (Cont.)


There is no one-size-fits-all prescription
for monetary and fiscal policy in
response to crises.
Move rapidly to establish domestic and
international resolution mechanisms for
impaired assets and liabilities of
nonviable banks and corporations.
6/2/05
14
Lesson Learned (Cont.)


Cushion the effects of crises on low-income
groups through social policies to improve
social tensions associated .
Improve mechanisms for crisis prevention,
management, and resolution at the regional
level in a way consistent with improvements
in the global framework.
6/2/05
15
Conclusion



The Asian financial crisis started in July 1997
after a Sudden depreciation of the Asian
currencies followed by drop in GDP and sharp
rise in unemployment.
Quick liberalization and expansion of credit
are the major causes of the problem
IMF policies didn’t help in crises remediation
as they applied There is no one-size-fits-all
prescription.
6/2/05
16
Questions ??
6/2/05
17