1997 - 1998

Economic success Annual GDP growth in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8% over the decade before the crisis Almost half of total capital inflows to developing countries nearly $100 billion in 1996 inflation & unemployment rates both low

Ramifications Negative consequences Significant and real benefits Environmental degradation growing inequality between rich and poor rampant corruption social malaise Significant and real benefits great majority of the people’s living standard have not been erased by the crisis

Weaknesses in financial system inadequate financial sector supervision poor assessment and management of financial risk growth of bad loans state-directed lending relatively fixed exchange rates violent asset price cycles property boom bubbles

Weaknesses in financial system Large amounts of short-term international capital, denominated in foreign currency

Corruption Transparency International’s 1999 survey of corruption Singapore 7th Malaysia 31st South Korea 50th Philippines 54th crisis countries Thailand 68th Indonesia 96th

Diary of the crisis: I

Diary of the crisis: II

The cause of capital outflows Bank failure in Thailand Corporate failure in Korea Political uncertainty due to the potential for a change in government in Korea, Thailand, the Philippines, and Indonesia net outflow of $105b from Thailand, Malaysia, South Korea, and the Philippines between 1996 and 1997

The cause of capital outflows Contagion effects hit Malaysia, the Philippines and Indonesia The IMF’s intervention actually helped to incite panic

Causes of financial crisis macroeconomic imbalances structural deficiencies in financial sector loss of market confidence rising political risk

IMF's immediate response Help Indonesia, Korea, and Thailand arrange programs of economic stabilization and reform Approve IMF financial support for reform programs in Indonesia, Korea, and Thailand

IMF’s immediate response Consult with other members that needed to take policy steps to ward off the contagion effect

Asian programs comprehensive reform of financial systems closure of unviable financial institutions associated write down of shareholders' capital recapitalization of undercapitalized institutions close supervision of weak institutions increased potential for foreign participation in domestic financial systems

Reforms in governance break the close links between business and governments ensure that the integration of the national economy with international financial markets is properly segmented

Real GDP Growth (%)

Inflation rate (%)

GDP growth rate (%)

Impact on Japan

Impact on World

Three schools of thought

Three schools of thought Revisionist: “developmental state” Market must be mediated, regulated and guided by the state Culturalist “Asian values” Culture context of East Asia explains the miracle

Recovery from the Crisis

Lessons from the Crisis Better information Regulation and restraint Controlling capital flows

International Organizations Authority vis-à-vis sovereign governments Access to information Risk of ``creating” a crisis Globalization and interdependence