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A Comparative Study of
East Asia and India
Avinash Chandiramani
Scott Dicks
Erin Fitzpatrik
Salil Jayakar
Ruhi Khan
Chad Simon
Disaster Strikes East Asia
Decades of impressive growth
Crisis
Financial Markets
Currency markets
The intensity and the duration of the crisis were inconceivable
The effects of the crisis spread through the Global economy
THE INDIAN ECONOMY ESCAPED THE CRISIS
VIRTUALLY UNHARMED
Agenda
INTRODUCTION TO THE CRISIS
Macroeconomic fundamentals
Theories
FINANCIAL AND TRADE LIBERALIZATION
Banking Sector
Capital flows
Debt / equity markets
Real Trade Linkages
EXCHANGE RATE REGIMES
Foreign reserves
Banking sector
Financial sector
Trade
CONCLUDING REMARKS
Introduction to the Crisis
1997: East Asia falls into crisis
–
–
–
–
Bankruptcy rates skyrocket
Stock markets crash
Growth rates tumble
Currency speculation forces Thai Baht
depreciation
THIS IS A TRIGGER FOR THE CRISIS
Introduction to the Crises
- Following this, Malaysia, Indonesia and Philippines
allow depreciation
-China, Hong Kong, Korea, Singapore and Taiwan
TIGERS
PAPER TIGERS
CREDIT CRUNCH
Macroeconomic Fundamentals
East Asia
India
Exceptional
Moderate
Inflation
Low
Low
Saving Rate
High
High
Over 5 % of GDP
Under 5 % of GDP
Pegged
Floating
Very Important
Less Important
GDP Growth
Current Account
Deficit
Exchange Regime
Trade
Bad Policy Theory
Intense Liberalization
+
=
Crisis
Inappropriate Policies
• Dramatic increase in credit
• Socially Risky behavior encouraged
• Moral hazard by monetary authorities
Financial Panic Theory
Inherent Instability of Financial Markets
+
Loss of Investor Confidence
=
Crisis
Systemic Risk
Expectations of Instability
Coordination Failure
Downturn in Real Economic Variables (GDP)
Moral Hazard
“A situation which creates incentives to engage in risky
behavior. Decreased personal liability acts as an incentive”
Two Types:
Corporate Level
International Level
Contagion
“The transmission of shocks to other countries or the
cross-country correlation, beyond any fundamental
link among the countries and beyond common
shocks.”
This definition is usually referred to as excess comovement, commonly explained by herd behavior.
Liberalization Policy
• Banking sector
• Privatization
• Capital Flows
• Capital Account Convertibility (CAC)
• Debt/Equity Markets
• Introduction of financial institutions
Liberalization Policy
Liberalization Policy
An influx of capital
More efficient and competitive markets
but…
Proper regulation is needed
Banking Sector
East Asia
India
High level of
privatization
Low levels of
privatization
Regulation was not enforced
&
Little diversity in investment
Increased supervision
&
Diversity in investments
Implicit
Guarantee
Morally hazardous behavior
Less moral hazard
Capital Flows
East Asia
India
Full Capital Account
Convertibility
Partial Capital Account
Convertibility
Increasing portfolio
investment
No change in
portfolio investment
Turnaround of short
term capital flows
Less dependence on
short term capital
Debt/ Equity Markets
Ineffective rating and
regulation agencies
Financial assets
as collateral for loans
Overvalued stock markets
Corporate bankruptcy in
East Asia
Real Trade Linkages
East Asia
India
Trade makes up
large % of GDP
Trade makes up
small % of GDP
Similar trading partners
Small amount of trade
with East Asia
Competitive exports to
similar countries.
Different exports than
East Asia
Investors group Asian
economies
India was not connected
with East Asia
Exchange Rate Regimes
Pegged Exchange Rate Regimes
Advantages
• Associated with stability and low inflation
• Forces authorities to adhere to disciplined monetary and
fiscal policies
Disadvantages
• Misalignments may occur when foreign and domestic
countries face different economic conditions
• Maintaining pegs in the face of increased speculation can be
costly
MOST EAST ASIAN COUNTRIES ADOPTED PEGGED RATES
Exchange Rate Regimes
Floating Exchange Rate Regimes
Advantages
• Currency moves with the relative performance of the
economy
• Serves as an adjustment mechanism, insulating a currency
from speculative attacks.
Disadvantages
• Fluctuations may reflect non-fundamental noise
INDIA ADOPTED A FLOATING EXCHANGE RATE IN 1994
Foreign Reserves
East Asia
India
1990-96:
foreign reserves grew
India’s reserves
also grew
Short term debt rising
India discouraged
short term debt
Capital Outflows in ‘97
 reserves decrease
Capital Inflows in ’97
 reserves increase
Pegs unsustainable 
depreciation
Floating rate 
No dramatic depreciation
Banking Sector
East Asia
India
Depreciation  foreign
denominated debts
unsustainable
No depreciation 
Foreign debts sustainable
1997: High levels of
non-performing assets
1997: Lower levels of
non-performing assets
Decreased credit by
banks
No decrease in credit by
banks
Financial Sector
East Asia
India
Switch to floating
exchange rate  rapid
depreciation,  uncertainty
India’s exchange rate
provided a greater
predictability
Further capital outflow
ensued
1997 experienced an
increase in capital
inflows of 24%
Trade
East Asia
India
Trade played an
influential role in East
Asian economies
Trade played less
influential role in Indian
economy
Crisis depreciations did not
 competitiveness:
1. High levels of intraregional trade
2. Increased cost of
raw material imports
No dramatic swing in rates
to alter competitiveness
Conclusion
The financial crisis reflects three important
considerations
•
Liberalization
•
Exchange rate regimes
•
Combination of the above two
Conclusion
Liberalization
•
Partial capital account convertibility
•
Less dependence on short term flows
•
Diversified allocation of capital
Conclusion
Exchange Rate Regimes
East Asia
Pegged currency increased risk of speculative attack
India
Float allowed currency to reflect economic fundamentals
Conclusion
Combined Effect
FULL CAPITAL ACCOUNT
CONVERTIBILITY
+
PEGGED EXCHANGE RATE
=
SPECULATIVE ATTACK
Conclusion
Summing up:
The East Asian and the Indian economies
are fundamentally different and are at
different stages of growth and
liberalization.
Recommendations
Considerations relevant for economic and financial policy:
•
Controls on capital account convertibility or a
commitment to flexible exchange rates
•
Less dependence on short term capital inflows
•
Enforce regulation policies in financial and banking
sectors
•
Increased transparency in all transactions
Any Questions?
Ko
ia
Th
ai
la
nd
M
al
ay
s
.
ia
ep
ne
s
re
a,
R
In
do
In
di
a
Trade as a % of GDP (1997)
200
150
100
50
0
East Asia Trading Partners (1997)
50%
40%
30%
20%
10%
0%
United States
East Asia
(Including Japan)
India
Portfolio Investment as a % of GNP
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
-0.50%
1990
1991
1992
1993
1994
1995
1996
India
EA Average
Credit Contraction
% Change in Credit from Deposit Money Banks
1994 1995 1996 1997 1998
Korea 7.00% 5.00% -3.00% -62.00% 13.00%
Malaysia 90.00% 44.00% 67.00% 37.00% -49.00%
Thailand 53.00% -38.00% -27.00% 19.00% -21.00%
Currency Depreciation
International Reserves ($mill. SDRS)
30000
25000
$ mill. SDRS
20000
R2 = 0.998
15000
10000
Korea
Malaysia
Thailand
AVG
Indonesia
Poly. (AVG)
5000
0
1990
1991
1992
1993
Year
1994
1995
1996
1997
India’s International Reserves (USD$billions)
% of Non-Performing Bank Assets in 1997
Capital Outflows
% Change in Private Capital Flows
1994
1995
1996
1997
India
42.11% -30.97% 35.47% 24.40%
Indonesia
631.57% 48.78% 40.29% -32.81%
Korea, Rep. 102.25% -37.02% 89.00% -37.94%
Malaysia
-24.89% 19.44% 26.75% -27.28%
Thailand
-41.21% 126.29% 35.23% -74.61%
Philippines 18.39% 11.41% 15.76% -16.53%
Foreign Reserves
& Short Term Debt
End 1995
End 1996
Mid 1997
Foreign Res. ST Debt Foreign Res. ST Debt Foreign Res. ST Debt
Indonesia
Korea
Thailand
Average
14.7
32.7
37.0
27.6
54.3
43.6
19.3
34.1
38.7
34.2
67.5
45.7
20.3
34.1
34.1
34.7
70.2
67.5
28.1
41.8
30.7
49.1
29.5
57.5
1 to 1.49 Ratio
Values in billions of US$
1 to 1.60 Ratio
1 to 1.75 Ratio
Selected Macroeconomic Variables
(India)
1990 1991 1992 1993 1994 1995 1996 1997
Inflation
8.97
13.87
11.79 6.36
Gross
National
Savings
21.99
22.20
22.43 20.70 28.90 25.37 23.92 22.57
Overall
Budget
Surplus
8.12
5.81
5.65
7.47
10.21 10.22 8.98
5.89
5.35
5.19
7.36
4.86