Transcript Stallings-Two-Crises-PPT

Barbara Stallings
International Studies Assn
March 2011
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Introduction
Literature and hypotheses
Financial policy changes after 1997
Outcomes of policy changes
Korea case study
China case study
Conclusions
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Crises of 1990s and 2000s were both crucial
for East Asia, but their origins and
consequences were different
Why no financial crises in EA in 2000s, when
finance was main source of crises there in
1990s and elsewhere today?
Two-part study: regional economic analysis
and country political economy analysis
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The 1997 crisis stimulated a new theoretical
literature on financial crisis
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Previous view: crises caused by loose
macroeconomic policy or banking panics
that spread
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Neither fit the situation in EA in 1990s
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New approaches came in two versions
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Internal explanations for crises
-- Macroeconomic policy errors (overinvestment, fixed exchange rates)
-- Financial sector weaknesses (poor
regulation and supervision, lack of
transparency, imprudent lending)
-- Political improprieties (“crony
capitalism,” moral hazard)
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External explanations for crises
-- Internal issues had existed for a long
time without hindering success in EA
-- Real changes were external, following
liberalization of capital account
-- Resulting large capital inflows and
“sudden stops” led to crisis
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Hypothesis 1: East Asia suffered both
internal and external problems in 1990s;
policy changes corrected problems, thus
avoiding financial crises in 2008-09
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Hypothesis 2: Policy changes came about in
different ways in different countries,
depending on whether they suffered crises
in 1990s or not
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Banking sector
-- Eliminate NPLs from balance sheets
-- Recapitalize banks, sometimes
nationalizing them in the process
-- Privatization (or re-privatization) of
banks, sometimes to foreign capital
-- Improvement of regulation/supervision
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Capital markets
-- Main focus: promoting bond markets to
provide alternative source of finance
-- Various economic reforms were
important: financial liberalization, opening
capital account, pension reform
-- Institutional reforms: better regulation
and supervision, corporate governance
East Asia: Composition of Domestic Financial Sector, 1990-2007 (% GDP)
Asset type
1990
1995
2003
2007
Bank claims
67
87
103
93
Bonds outstanding
30
31
60
61
Stock market
49
95
90
123
146
213
253
277
Total
East Asia: Indicators of Banking Strength, 1997-2009 (percent)
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
NPLs
4.9
24.6
21.1
16.8
15.8
15.9
11.4
8.9
7.1
5.9
4.7
3.3
Provisions
31.5
37.2
38.7
65.5
70.8
76.2
88.7
103.7
115.5
Capital
12.0
8.9
12.7
15.0
14.3
14.3
12.9
12.6
13.6
14.2
13.9
13.9
2009
3.3
112.9
15.0
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East Asian economies slowed, but recovered
quickly through stimulus
Feedback of economic crisis to financial
sector? Still early, but some indicators
-- No bank failures
-- Indicators deteriorated, but still strong
-- Stimulus may lead to more NPLs in the
future
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Korea’s 1997 crisis resulted from a poorly
executed financial liberalization, which led
to heavy borrowing, especially short-term
Cutoff of access to international financial
markets triggered crisis
Government requested IMF loan in Dec.
1997; it was large but not large enough and
poorly designed
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After crisis, many banks were closed or
taken over by the government and later
reprivatized
An asset management company (KAMCO)
purchased most NPLs
Regulation and supervision were
consolidated; forward-looking approach
was adopted
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Deposit insurance limits were made clear to
avoid moral hazard, and corporate
governance and transparency were
strengthened
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Complete foreign ownership was permitted
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Capital markets were a lower priority;
similar reforms introduced
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Indicators of banking sector strength rose
substantially
Both banks and capital markets increased
finance to Korean economy, in part as
result of policy changes
Economy was hit hard by fall in trade and
withdrawal of international finance in 2008,
but no crisis like 1997
Korea: Banking Strength Indicators, 1997-2009 (percent)
Year
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
NPLs
5.8
7.6
11.3
8.9
3.3
2.4
2.6
1.9
1.2
0.8
0.7
1.1
Provisions
Capital
84.0
104.5
131.4
175.2
205.2
146.3
8.2
10.8
10.5
10.8
10.5
11.1
12.1
13.0
12.8
12.3
12.3
2009
1.5
125.2
14.2
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Several approaches
1) Domination by foreign actors
-- IMF imposed macroeconomic and
structural reforms (especially financial
opening) on an unwilling Korean
government
-- US government was partner, perhaps
acting on behalf of US firms
2) Domination by domestic actors
-- Democratization was key factor, which
changed the relative power of political
actors in Korea
-- This weakened the executive and led to
“western style” reforms
-- IMF as scapegoat, not main actor
3) Interaction of foreign and domestic actors
-- Role of political leadership (President Kim
Dae-Jung) in mediating domestic and
external pressures
-- Kim persuaded labor to accept reforms
-- Foreign actors played specific roles:
pressed for recognition of NPLs, financial
institution reforms, corporate reforms
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China escaped crisis in 1997 because
financial sector was still largely closed; no
international borrowing binge as in other
East Asian countries
Growth slowed, which was met with
stimulus but no devaluation
Saw neighbors’ crisis as a call for reform in
China itself
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Reforms moved in similar direction as
Korea’s, but did not go as far
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AMCs were created to clean up problem
loans in major banks
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Major banks were recapitalized several
times
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Improved regulation/supervision (CBRC)
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Increased role of foreign capital
-- Foreign banks purchased small shares of
several Chinese banks
-- IPOs in Hong Kong by largest stateowned banks
-- “Strategic investors”
-- But significant barriers remain for foreign
ownership
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Like Korea, banking strength indicators in
China rose significantly
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China’s banks became increasingly oriented
toward the corporate sector, although bond
markets used mainly by government
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Stimulus funneled through banks was key
to quick recovery in China in 2009
China: Banking Strength Indicators, 2000-2009 (percent)
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
NPLs
22.4
29.8
25.5
20.4
13.2
8.6
7.1
6.2
2.4
Provisions
4.7
5.2
5.3
19.7
14.2
24.8
34.3
39.2
116.4
Capital
13.5
12.3
11.2
-5.9
-4.7
2.5
4.9
8.4
12.0
2009
1.6
155.0
10.0
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Dominance by domestic actors is usually
assumed by China scholars
CCP as ultimate source of decisions
Political leadership seen as important,
especially role of Premier Zhu Rongji, but
several variants re financial reform
-- Zhu pursuing ideological agenda
-- Zhu fighting for political survival
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New literature suggests that external forces
are also important in Chinese policy making
-- International structural constraints
-- Internalization of international norms
Case study of international role – explaining
WTO accession, which is important for
financial sector
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Support found for both hypotheses about
political economy of finance in East Asia
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Region did not have financial crises in
2008-09 (as opposed to serious economic
problems) because of strengthening of
financial sector after 1997 crisis
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Different processes of policy change in
crisis and non-crisis countries in 1997
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Despite support for the two hypotheses,
there are some interesting caveats
Problems were created, as well as resolved,
in cleaning up banks
Government role seems to have increased
because of crisis
Both foreign and domestic actors can play
a significant role; interaction is important