AAE/IS 373 Class 4 Economic growth
Download
Report
Transcript AAE/IS 373 Class 4 Economic growth
6a. SE Asian boom and bust
1986-99
0
Overview
Global economic shocks and national responses, 1973-85
Global trade boom and Asian FDI
Thailand’s manufacturing export boom
Structure of production and the labor force
Discussion: vulnerability?
1
Four defining events
First oil price shock (1973-5). Recycling of “petrodollars” in
global markets --> cheap credit for developing countries.
Second oil price shock 1979-80. Global recession; high real
interest rates on new and existing debt
Global commodity price slump mid-1980s. Export
revenues collapse for resource-dependent economies. Debt
servicing crises and recessions (1985). Collapse of inwardoriented strategies.
Plaza Accord 1985. Recovery in US and world economies (-> boom in global manuf. trade) and “hollowing-out” of
Japanese economy (--> SE Asian FDI boom)
2
After the oil shocks: recession and
recovery
After 1973 oil price shock, period of “cheap and easy capital” for
developing country borrowers
Very low (or negative world real interest rates encouraged
borrowing to maintain growth momentum
After 1979 shock, world recession with high real int. rates
Commodity price crash accompanied interest rate hike
Gov’ts which accommodated these negative shocks through credit
creation experienced high inflation or hyper-inflation
“Lost decade” (1980s) for heavily indebted econs, e.g. Lat. Am
Other gov’ts chose earlier adjustment, with lower growth but greater
stability of prices and macro aggregates (debt, etc)
Mid-1980s: recession everywhere, but varying severity
E/SE Asian economies showed generally high growth
3
4
5
Governments vs markets in 1970s-80s
During period of ‘cheap and easy credit’, many gov’ts attempted large-
scale industization via public projects
Philippines, “11 major industrial projects” (all failed)
Indonesia: Pertamina (national oil company) borrowing spree for
development, mid-1970s (ended in bankruptcy & default)
Malaysia, HICOM heavy & chemical industry initiative 1982-85
(expensive flop)
Malaysia,1982 attempt to corner world tin market (disaster)
Speed with which K-intensive ‘showcase’ projects were abandoned
helped determine adjustment and recovery
Divergence once again: Philippines adjusts slowly, falls behind
neighbors in growth
6
Elements of SE Asian adjustment &
recovery
Fiscal conservatism: low deficits, low public sector debt
Thus relatively low inflation in most of SE Asia
Gov’t debt used more for investment than for consumption
Price and exchange rate stability
Political aversion to high inflation in Indonesia, Thailand, …
Conservative fiscal policies underpinned exch. rate stability
‘Fixed but adjustable’ exch. rate pegs
Relatively friendly investment climate
Few fears of nationalization/expropriation
Exch. rate stability helped guarantee returns to FDI
Outward-oriented industries promised sustained returns on
K
7
Price stability
8
Stabilization efforts
9
The global trade and investment boom
Global trade liberalization, lower transport costs, more
open capital markets from mid-1980s
1985: World oil prices collapse to mid-1970s levels
Recovery and boom in West; world trade grows by much
more than income
More open economies poised to capture gains
Major realignment of JP Yen-US $ (Plaza Accord), Sept.
1985
Japanese manufacturers seek offshore bases
SE Asian economies are close, relatively open, politically &
economically stable, with cheap and ‘docile’ labor forces
10
11
Thailand’s policy shift, and its reward
Since 1960s, strongly ISI-oriented
1971 ERPs ranged from -20 to 236
1982 ERPs ranged from -21 to 1693
Trade liberalization begins mid-1980s
1988 reform reduced tariffs and tariff dispersion on many products
More reforms in 1990s
Macro stability: Baht/US$ exch rate = 25 from 1984 to 1997
Openness & stability attracts FDI and domestic investment:
ΔGDP = 8.60 + 1.43*L + 0.3*K – 0.15*FDI + 0.62*OPEN*FDI
(data for 1970-99; source Kohpaiboon 2002)
-
Strong support for Bhagwati hypothesis
12
Foreign investment... and domestic too
GFCF: Gross fixed capital formation (i.e. new investment before depreciation)
13
Turning Japanese
Cumulative
FDI ($m)
FDI From
Indonesia
Malaysia
Philippines
Thailand
To 1976
Japan
USA
2,044
1,000
255
108
134
175
75
30
To 1980
Japan
USA
3,372
575
226
80
299
752
77
28
To 1983
Japan
USA
7,268
764
721
521
To 1993
Japan
USA
13,366
4,585
1,904
5,476
Bowie and Unger Table 2.1
14
Effects of the investment boom
Transformation of agricultural to industrial economy
See earlier data on GDP shares by sector
Thailand emerges as leading regional exporter in key product
areas, e.g. motorcycles, automobiles
These are primary areas of investment by E. Asian capital-complementary with the post-Plaza Accord “hollowing-out”
Effects on total growth: Thailand
Real GDP per capita growth, 1951-86 average: 3.9%
1987-96 average: 8.0%
15
16
17
Economy-wide impacts
18
Economy-wide impacts
19
Thailand: welfare effects of the boom
Year
1969
1975
1981
1986
1988
1992
1994
1996
1998
2001
Source: Warr 2005
Poverty (%)
Total
Rural
Urban
63.1
69.6
53.7
Inequality
(Gini)
0.43
48.6
35.5
44.9
57.2
43.1
56.3
25.8
15.5
12.1
0.43
0.43
0.48
32.6
23.2
16.3
40.3
29.7
21.2
12.6
6.6
4.8
0.48
0.52
0.54
11.4
12.9
13.0
14.9
17.2
16.6
3.0
3.4
5.1
0.52
0.52
0.52
20
Consequences of post-Plaza growth
Comparative advantage and EOI mean:
Potential for sustained growth by exporting into world mkt
Increasing integration with global capital markets
Gains: rapid, labor-intensive growth
Immediate impacts on wages, employment, poverty
Costs
Inequality? Rising returns to skilled L relative to unskilled L;
pressure to maintain competitive labor costs
Greater vulnerability to shocks from international economy
Limits on domestic policies
Foreign capital owners “vote” on domestic policy choices
21
Break time!
22
Overview
Thailand’s boom
Macroeconomics of a boom
Sources of vulnerability: Thailand and Indonesia
24
Boom, bubble and bust
Boom: “E. Asian Miracle” in early 1990s: Thailand, Singapore, Malaysia,
Indonesia grow at record rates
Based on rising exports of low-end manufactures
Financed largely by foreign fixed capital investments
Bubble: overoptimism about continued growth; speculative booms in
property, construction, stocks
Financed increasingly by short-term borrowing from foreign banks
Bust: loss of export competitiveness, financial crisis
Chinese competition; labor costs; human capital constraints
Inability to earn enough to service foreign debts
Recession and recovery: slow for some; permanent reduction in growth
rate?
25
Thailand’s boom and bubble economy
Double-digit growth 1989-91, concentrated in Bangkok
Non-ag GDP growth rate 2–3 times faster than ag.
See labor force transition data (class 14)
Sources of rapid growth? Not TFP
Total factor productivity (TFP) growth is supposed to be the biggest
contributor to long-run growth (Solow; Radelet et al)
But pre-boom growth in ‘new tiger’ economies due to factor
accumulation, not productivity increases (Krugman: “Myth of Asia’s
Miracle”, 1994)
In Thailand. apparently large ‘Solow residual’ during boom years
But: underinvestment in education
TFP was due to foreign K inflows (Warr, “Boom, bubble, bust”)
26
Thailand’s boom and bubble economy
A key point: domestic and foreign capital are not perfect substitutes in
Thailand
One consequence: FDI raises the productivity of domestic capital, stimulating
dom. investment
Another consequence: limited success of demand-constraining ‘sterilization’
attempts by central bank
Mundell-Fleming: sale of bonds to raise interest rates, with fixed exch. rate and open
capital account, stimulates short-term K inflow that drives int. rates down again;
reserves rise but no domestic effects
When dom. & for. K are imperfect substitutes, rate rise can persist, attracting
additional foreign K inflows
Foreign reserves will increase, raising investor confidence
Inflows will also contribute to growth in dom. demand, and
thus cause a real appreciation (rise in relative prices of
nontraded goods)
27
Opening the capital account
Hospitable environment for FDI
Stable price level and baht-dollar exchange rate since 1984
Capital account liberalization
1993: Bangkok Int’l Banking Facility (BIBF) created to facilitate
foreign borrowing for domestic investment
Fixed exch. rate and Bank of Thailand guarantees on solvency of
financial institutions reduce risks of borrowing by private sector
Result: boom in K inflows, with short-term debt dominating
Changing contributions (%) to total savings:
Foreign investment
Period
H’holds Gov’t Total
Long
term
Total
Shor
t
term
1973-86
112.9
–16.7
3.8
5.1
2.1 100
1987-96
93.1
–11.4
18.2
4.1
22.8 100
28
Source: Warr 2005: Boom, bust and beyond. Note: discrepancy = decline in reserves
Capital inflows and reserves
BIBF
29
The confidence game
Price and policy stability
Interest rates above world benchmark
Rising foreign reserves following liberalization
“Implicit guarantee” of exch rate stability
“East Asian Miracle” tag… future rapid growth seems
assured
“Investing in Thailand seemed both safe and profitable. Not
to participate was to miss out.” (Warr, p.640)
Result: accelerating capital inflows, increasingly in form of
int’l borrowing by Thai banks to satisfy demand by
domestic borrowers
30
Composition of short-term capital stocks
BIBF
Banks’ loan
stock
31
Real appreciation
Increasing demand for non-traded services and assets (housing,
offices) fuels speculative investments
The crane becomes Thailand’s national bird: construction sector
employment increases from 6% – 10% of labor force btwn 1985 and
1995.
Debt-fueled speculation in stock market, property development, and
other non-tradable activities
Extent of real appreciation: RER index = 100 in 1973; =70 in 1988, = 40
in 1997.
Real appreciation also undermines profitability of traded goods
industries
They pay more for non-traded inputs, compete with speculative
investors for capital
32
Wage growth = cost increases for L-intensive sectors
33
Signs of vulnerability
Rising domestic inflation (see: real appreciation)
In mid-90s, Thai inflation rose to 5-6%; US inflation fell to
about 2%
Indicators of excess supply in speculative mkts (property
etc)
Declining profitability and export revenues in ‘boom’
industries
Implicit bank failures (actual failures prevented by official
interventions)
Non-objective appraisals of the above by regulators (Bank
of Thailand “blustering” -- Siamwalla)
34
Loss of competitiveness in L-intensive inds
As wages rose, exports from the most labor-intensive industries shrank fastest
35
When the anchor drags
Foreign reserves of BoT:
36
Why does investor sentiment change, and
why so quickly?
Private sector failures: e.g. Bangkok Bank of Commerce
1994-96: Evidence of malpractice & politically motivated
lending
1996: Run on BBC; BoT supports it with $US 7 billion injection
Numerous other “failures” through 1996-97, all bailed out by
BoT
Government failure: democratization reduced influence of
military and technocrats (fiscally conservative forces)
Local money politics, esp. in provinces, busts national budget
Reluctance to cut spending projects even as banking system
began to collapse
Politically-connected banks & companies receive GOT
protection
Institutional failure: decline of the technocrats
In BOT, loss of independence and competence, esp. as private
sector outbid public sector salaries for well-trained economists
37
Income growth forgone
Thailand: Level and growth rate of GDP per capita
10000
15
9000
10
8000
7000
5
6000
0
5000
4000
3000
2000
-5
GDP per capita, PPP
(current international $)
GDP per capita growth
(annual %)
-15
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
1000
-10
Source: WDI
38
Indonesia: a healthy economy?
Indonesia’s economy seemed in good shape prior to 1997
Currency stable against US $; current account deficit relatively small
and stable
Open capital account since 1971
Financial liberalization since 1988
Budget broadly balanced; inflation low and stable
Wages and other business costs fairly stable; no big export
slowdowns in 1995-96
Speculative activity in property markets, but “bubble” small
Signs of economic vulnerability -- pre crisis
Bank collapses (1993) underline inst’l weaknesses in private sector
Short-term debt very high in relation to international reserves; big
private capital inflows raise short-term debt to about twice the
value of international reserves
39
Constitutional weaknesses
“Year of Living Dangerously” (1965): hyperinflation, civil war (1966):
aversion to instability
Under Suharto (1967-99), economic policy made under guidance of
“technocrats” -- until 1993
After 1993, influence passed to “technologs” associated with Dr.
Habibie (Minister for Science & Technology)
Habibie: “you can’t build ships by selling fish”. Major industrial
projects (aircraft, biotech, ship-building… ) launched.
Decline of technocrats coincided with period of rapid capital
inflows with liberalized capital market
Pinnacle of power
No institutional checks on presidency, or safeguards against failure
Concentration of econ. power, poor governance (“KKN”)
40
Vulnerability: who/what to blame?
Stiglitz, Globalization and its Discontents, p. 99: “I believe
that capital account liberalization was the single most
important factor leading to the crisis” in Asia …
… It has become increasingly clear that all too often capital
account liberalization represents risk without a reward…
Probably no country could have withstood the sudden change
in investor sentiment… inevitably, such reversals would
precipitate a crisis, a recession, or worse.
41
Vulnerability: who/what to blame?
Siamwalla, “Can a developing country manage its
macroeconomy?”
“Although the root cause for the crisis lies in excessive
borrowing by the private sector, its effect has been multiplied
by misguided policies, especially those emanating from the
Bank of Thailand.
“Since failure of technocracy could in principle be corrected
by political leadership, it has to be explained why the Thai
political system failed to deliver that leadership.”
42