6/2/051 East Asia Crises Presented By Tze-chi Lin (Jacky) Walid Metwaly Wei Zhang (Richard)

6/2/052 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

6/2/053 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.

6/2/054 Causes Unwise domestic policies such as over- peculation, 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

6/2/055 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

6/2/056 Effects 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.

6/2/057 Effects 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)

6/2/058 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.

6/2/059 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.

6/2/0510 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.

6/2/0511 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.

6/2/0512 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.

6/2/0513 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.

6/2/0514 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.

6/2/0515 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.

6/2/0516 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.

6/2/0517 Questions ??