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Rapporteur Report
Topic: Recent Financial Crisis in East Asian Countries Experiences and
Lessons.
Subject: Globalisation and development
Based on book: A Citizen's Guide to the Globalisation
Of Finance.
Presented by: Awanish Kumar (11)
Santosh Kumar Sharma (39)
Rapporteur: Ramanugrah Pandey.
PGPRM 2005-07
Submitted to:
Prof. C. Shambu Prasad
Xavier Institute of Management Bhubaneswar.
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Introduction:
Whether you believe that “globalization” is a panacea for curing all evils in the world, or
that it only brings greater sense of deprivation and poverty to the Third World, everyone
agrees that globalization has affected nation states and citizens worldwide like no other
phenomenon in the world’s history. East Asia is no exception. The Asian financial crisis
of 1997-98 brought to fore the tremendous force of globalized financial capital in making
or breaking an economy as large as that of tiger of East Asia like South Korea, Thailand
and Indonesia. The true irony in this unfolding drama is that in the aftermath of the
financial crisis, however, South Korea and Thailand was forced to open its economy even
wider to the world, so that transnational corporations (TNCs) could freely invest in South
Korea and Thailand, South Korea’s stock market would be open to foreign investors,
South Korea’s real estate could now be bought by foreign nationals, and foreign imported
goods could come into the South Korean market with little or no tariff. All these signaled
the encroaching global economy onto South Korea.
Economic renewal and reforms were concentrated on the liberalization of the
South Korean markets through an open trade policy under "internationalization and
globalization." More radical initiatives included the introduction of real-name systems for
all financial and real-estate transactions to guarantee transparency in financial dealings,
which reduced the underground economy and contained nonproductive land speculation.
Indonesia: The Mighty Fall of Rupiah
As in the South Korean case, a number of Indonesian companies had piled up substantial
foreign debt before the advent of the Southeast Asian currency crisis, and a major part of
this debt had a maturity of less than one year. In 1997, Indonesian companies had $55
billion outstanding in foreign debt, 59 percent of which was in the short-term category.
The rupiah lost 58 percent of its value against the dollar in 1997 as Indonesian companies
with heavy foreign borrowings rushed to buy the currency. With the fall of the rupiah and
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the increase in the domestic rate of interest to prevent capital outflows, the domestic
firms that had borrowed heavily from abroad incurred heavy losses. The cost of repaying
those loans has now more than doubled in rupiah terms, leaving many companies with
debt they simply cannot pay.
Malaysia: Failed to avoid the Currency Crisis
In Malaysia also most of the investment done by the foreign player is in the form of FDI
which is short term loans in portfolio investments in nature. The shout-term loans
supplemented the domestic investments in the unproductive sectors such as consumer and
property finance. The property sector loans grew faster than those in the manufacturing or
other sectors.
Due to over speculation in investment in real estates result in withdrawal of money by
foreign company result in collapse of stock and financial market of Malaysia resulting in
deficit of balance of payment.
The Philippines: Asia’s Next ‘Tiger’
Once the market of Thailand stock falls the tremor was also felt in Manila the capital city
of Philippines. This result in stock exchange fall in this market and result in Currency
(Peso) fall of against US dollar by 35 % during July-December 1997. By the weakened it
led to increase in import costs, besides creating difficulties in the repayment of the $45
billion foreign debt.
Collapse of a ‘Model’: The Mexican Financial Crisis:
The Mexican government liberalized the trade sector in 1985, adopted an economic
stabilization plan at the end of 1987, and gradually introduced market-oriented
institutions. Those reforms led to the resumption of economic growth, which averaged
3.1 percent per year between 1989 and 1994. In 1993 inflation was brought down to
single-digit levels for the first time in more than two decades. As its economic reforms
advanced, Mexico began to attract more foreign investment, a development helped by the
absence of major restrictions on capital inflows, especially in the context of low U.S.
interest rates. Indeed, large capital inflows began in 1990, when a successful foreigndebt renegotiation was formalized. The devaluation of the peso in December 1994 put an
abrupt end to these capital inflows and precipitated the financial crisis.
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The financial sector also underwent a substantial liberalization, which, when combined
with other factors, encouraged an increase in the supply of credit of such magnitude and
speed that it overwhelmed weak supervisors, the scant capital of some banks, and even
borrowers.
Several factors contributed to facilitate the abundance of credit: (1) improved economic
expectations; (2) a substantial reduction in the public debt; (3) a phenomenal international
availability of securitized debt (see Hale 1995);(4) a boom in real estate and in the stock
market; and (5) a strong private-investment response.
Poor borrower screening, credit-volume excesses, and the slowdown of economic growth
in 1993 turned the debt of many into an excessive burden. Nonperforming loans started to
increase rapidly. A process of adjustment of the balance-sheet position of the private
sector, underway by the second half of 1993, and the late adoption by some commercial
banks of prudent policies were signs that nonperforming loans had exceeded reasonable
dimensions before 1994.
Bail out programme:
It was started by IMF to support those countries which is in recession or financial crisis
and not have the potential to meet the balance of deficit to meet the debt clearance
amount taken from foreign country .In this case chance of their default is high ,thus IMF
support those countries financially to meet the debt need. The finance is provided by G7
countries. This support is provided to these countries to meet foreign debt without default
and devaluation, along with a zero-deficit budget target.
Wherever the bailout programme were started, it was due to the reason that private
investors and financial institutions of U.S. were to loose most from the crisis and bailed
out by the U.S. government and the IMF. Thus the argument that there should be no
government interventions in the private sector’s borrowings holds little ground in the
light of bailouts. Under the bailout programme, the foreign banks alone are given huge
subsidies so that they do not have to suffer for their mistakes, while local banks and
companies were forded to go under. Furthermore, the bailout programme encouraged
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commercial banks to continue risky lending as they know that the IMF and national
governments are ever there to bail them out if a crisis occurs.
Who Benefits from Bailout Programme?
The prime cause of the financial crisis is the perverse behavior of the special interest
groups infected with the moral hazards that decades-long government intervention in the
economy fostered. By injecting bailout money through the government bureaucracy, the
IMF helped revive insolvent banks and (conglomerates), which are responsible for the
crisis. But, the ultimate beneficiaries of the IMF bailout are another group responsible for
the crisis, namely international lenders, who are rewarded by the IMF for their reckless
and risky lending with protection from defaults.
The IMF diagnosis of these economies is false. It has diagnosed that these economies
needs more foreign funds. But, Korea’s Thailand, Indonesia and illness was not generated
by a shortage of foreign funds, but rather by too much of them so that they fell into the
wrong hands. The bailout has encourages foreign investor and conglomerates moral
hazards, preparing the road to a bigger disaster. The IMF treatment impedes the true
reform of these economies.
Washington Consensus
The phrase “Washington Consensus” is today a very popular and often pilloried term in
debates about trade and development. It is often seen as synonymous with
“neoliberalism” and “globalization.” John Williamson is the economist who has says:
“Audiences the world over seem to believe that this signifies a set of neoliberal policies
that have been imposed on hapless countries by the Washington-based international
financial institutions and have led them to crisis and misery. There are people who cannot
utter the term without foaming at the mouth.”
Williamson originally coined the phrase in 1990 “to refer to the lowest common
denominator of policy advice being addressed by the Washington-based institutions to
Latin American countries as of 1989.”
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Fiscal discipline
A redirection of public expenditure priorities toward fields offering both high
economic returns and the potential to improve income distribution, such as
primary health care, primary education, and infrastructure
Tax reform (to lower marginal rates and broaden the tax base)
Interest rate liberalization
A competitive exchange rate
Trade liberalization
Liberalization of inflows of foreign direct investment
Privatization
Deregulation (to abolish barriers to entry and exit)
Secure property rights
Since then, the phrase “Washington Consensus” has become a lightning rod for dissatisfaction
amongst anti-globalization protestors, developing country politicians and officials, trade
negotiators, and numerous others. It is often used interchangeably with the phrase “neoliberal
policies.” But, as Williamson also states:
“Some of the most vociferous of today's critics of what they call the Washington Consensus, most
prominently Joe Stiglitz... do not object so much to the agenda laid out above as to the
neoliberalism that they interpret the term as implying. I of course never intended my term to
imply policies like capital account liberalization...monetarism, supply-side economics, or a
minimal state (getting the state out of welfare provision and income redistribution), which I think
of as the quintessentially neoliberal ideas”.
Will India go the Southeast Asian Way?
As it is clear from the above analysis and discussion that the Mexican and Southeast
Asian crises had very little to do with the economic base or the economic fundamentals
of these countries. These crises are the outcome of the huge mobility of short-term capital
flows.
However India has attempted to integrate its financial markets with the rest of the world,
its chances of getting affected by the development in the rest of the world have increased
considerably. Moreover, the financial liberalisation of Indian markets with heavy reliance
on hot money flows will have serious implications for the financing of current account
deficit.
India has the strong macroeconomic policy which has hinder the risk to some extent like:
 Indian rupee is stronger in position to US dollar.
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 India has not done currency devaluation.
 Indian position to keep 80% of Hot money in FRR.
 Still not going for Capital convertibility.
 India is lowering its Fiscal deficit and trying to keep Inflation rate low, with
creating Rural based infrastructure so that primary economy show enough growth
to meet employment need of future.
 Another factor include debt service repayments volatile capital flows such as
short term debt and portfolio investment and foreign assets to currency ratio.
 India have more long term loan than that of short term.
Question discuss after presentation:
 Why OECD countries have less volatility of having financial crisis?
 Comparative aspect of stock and currency market?
 Why country like Luxemburg will not suffer financial crisis?
 How many Indian pay Tax?
 What is the concept of Hot money in FRR in India ?
Following question need to be address?
 What is the role of stock market in any financial crisis?
 How Devaluation of any currency is done?
 What is Euro-convertible debenture?
 Who is responsible if any country take short term loan at cheaper rate and start
lending at higher just to earn higher interest as in the case of Thailand
financial crisis?
 What India should do to avoid this kind of financial crisis?
 What will be the impact of making Banking service more global to Indian
economy?
 Why Mexico went for currency devaluation?
 What was the role of Political atmosphere in any country to bring these kind
of financial crisis?
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