Download What Happened to the Asian Miracle?

What Happened to the Asian
Miracle?
The Asian Tigers

Throughout the 1990s, Asian economies were
reporting stellar rates of economic growth


Per Capita income has increased by a factor of ten
over the past 30 years.
Asian countries attracted over half of all capital
inflows to developing countries
The Asian Tigers: GDP Growth
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
1992
5.06
6.46
7.80
.34
6.29
8.08
1993
5.75
6.50
8.35
2.12
10.44
8.38
1994
8.58
15.93
9.24
4.38
10.05
8.94
1995
8.94
8.22
9.46
4.77
8.75
8.84
1996
7.10
7.98
8.58
5.76
7.32
5.52
The Asian Tigers
Throughout the 1990s, Asian economies were
reporting stellar rates of economic growth
 Suddenly, however, in the summer of 1997,
Thailand devalued the Baht followed by
devaluations of the Philippine Peso, the the
Malaysian Ringgit, then the Indonesian
Rupiah

The Asian Tigers
The Asian Tigers
Throughout the 1990s, Asian economies were
reporting stellar rates of economic growth
 Suddenly, however, in the summer of 1999,
Thailand devalued the Baht; followed by
devaluations of the Philippine peso, the the
Malaysian Ringgit, then the Indonesian
Rupiah
 Following the devaluation, the region suffered
a major contraction and persistently lower
rates of economic growth.

The Asian Tigers: Post Crisis
GDP Growth
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
1998
-7
-13
-7
-1
-1
-11
1999
11
1
6
3
6
4
2000
9
5
8
4
9
5
2001
3
3
0
3
-2
2
2002
6
4
4
5
2
5
Why did Asia Collapse
Malaysian Prime Minister Mahathir
Mohamad has been the wild man of the
Asian crisis, blaming all his problems on
manipulations by Jewish speculators
 Was the Asian Crisis due to irrational
speculation or were there real structural
problems in Asia?

The Good News

On the surface, the Asian economies
looked very strong
High rates of economic growth
 High labor productivity growth
 High rates if investment financed by high
domestic savings
 Low government deficits

Investment Rates (% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
35
29
37
23
37
39
25
1994
36
31
40
24
32
40
23
1995
37
31
43
22
33
41
23
1996
38
30
41
24
35
41
21
1997
34
31
42
24
37
34
22
Savings Rates (% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
34
28
27
17
46
34
28
1994
34
29
33
20
50
33
26
1995
35
27
34
17
51
33
25
1996
33
27
37
19
51
33
25
1997
33
27
39
18
51
32
25
Labor Productivity Growth
Country
Thailand
1993 1994 1995 1996 1997
20
19
12
12
-5
Government Deficits/Surplus
(% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
.64
.64
.23
-1.46
15.67
2.13
-3.88
1994
.32
1.03
2.44
1.04
11.93
1.89
-1.73
1995
.30
2.44
.89
.57
13.07
2.94
-1.09
1996
.40
1.26
.76
.28
14.01
.97
-1.34
1997
.46
0
2.52
.06
9.52
-.32
-1.68
More Good News

Asian Stock and Real Estate Markets
were booming
Stock Market Indices
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1990
696
417
505
651
1154
612
4350
1991
610
247
566
1151
1490
711
4600
1992
678
274
643
1256
1524
893
3377
1993
866
588
1275
3196
2425
1682
6070
1994
1027
469
971
2785
2239
1360
7111
However, underneath the
good news……

Was Asian growth due to “inspiration”
or “perspiration”?
However, underneath the
good news……
Was Asian growth due to “inspiration”
or “perspiration”?
 All the Asian countries had very high
rated f labor productivity growth, where
labor productivity is defined as

LP = Y/L (real output per labor hour)

This measure of productivity omits an
important input
Sources of Economic Growth

Recall, that we assumed three basic
inputs to production
Sources of Economic Growth

Recall, that we assumed three basic
inputs to production
Capital (K)
 Labor (L)
 Technology (A)

Sources of Economic Growth

Recall, that we assumed three basic
inputs to production
Capital (K)
 Labor (L)
 Technology (A)


Growth accounting attempts to separate
the growth effects of each input
Growth Accounting
Step 1: Estimate capital/labor
share of income
K = 30%
L = 70%
Growth Accounting
Step 1: Estimate capital/labor
share of income
K = 30%
L = 70%
Step 2: Estimate capital, labor,
and output growth
%Y = 5
%K = 3
%L = 1
Growth Accounting
Step 1: Estimate capital/labor
share of income
K = 30%
L = 70%
Step 2: Estimate capital, labor,
and output growth
%Y = 5
%K = 3
%L = 1
Productivity growth will be the
residual output growth after
correcting for inputs
Growth Accounting
Step 1: Estimate capital/labor
share of income
K = 30%
L = 70%
Step 2: Estimate capital, labor,
and output growth
%Y = 5%
%K = 3%
%L = 1%
Productivity growth will be the
residual output growth after
correcting for inputs
%A = %Y – (.3)*(%K) –
(.7)*(%L)
Growth Accounting
Step 1: Estimate capital/labor
share of income
K = 30%
L = 70%
Step 2: Estimate capital, labor,
and output growth
%Y = 5
%K = 3
%L = 1
Productivity growth will be the
residual output growth after
correcting for inputs
%A = %Y – (.3)*(%K) –
(.7)*(%L)
%A = 5 – (.3)*(3) + (.7)*(1)
= 3.4%
Sources of US Growth
1929 - 1948
1948 - 1973 1973-1982
1982-1997
Output
2.54
3.70
1.55
3.45
Capital
.11
.77
.69
.98
Labor
1.42
1.40
1.13
1.71
Total Input
1.53
2.17
1.82
2.69
Productivity 1.01
1.53
-.27
.76
Productivity Growth in
Thailand

Labor productivity growth in Thailand
averaged around 15% in the 90’s, but
how much of this was technological?
%Y = 8
 %L = 3
 %K = 40

Productivity Growth in
Thailand

Labor productivity growth in Thailand
averaged around 15% in the 90’s, but
how much of this was technological?
%Y = 8
 %L = 3
 %K = 40
%A = 8 – (.7)(3) – (.3)(40) = -6

The Bad News

The growth in Thailand was attracting
lots of foreign investment and was
fueling an investment boom.


This boom was largely debt financed
However, without technological
improvement, this growth is not
sustainable.
Bank Lending (% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
54
48
74
26
84
80
137
1994
54
51
74
29
84
91
146
1995
56
53
84
37
90
97
149
1996
57
55
93
48
95
101
146
1997
61
69
106
56
100
116
146
Finances of Korean Chaebol
(in 100 Million Won)
Chaebol
Jinro
Sammi
Halla
New Core
Bongil
Hanhwa
Debt Debt/Equity
Ratio
39
8598.7
25.9 3245
63.2 2067.6
25.9 1224
18.3 920.5
97.2 778.2
Sales
14.8
53
52.9
18.3
8.7
96.9
Asian Financing

While these countries did have high
domestic savings rates, much of the
financing came from overseas
Current Account Balance
(% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
.30
-1.33
-4.66
-5.55
7.57
-5.08
3.16
1994
-1.02
-1.58
-6.24
-4.60
16.12
-5.60
2.70
1995
-1.86
-3.18
-8.43
-2.67
16.81
-8.06
2.10
1996
-4.75
-3.37
-4.89
-4.77
15.65
-8.10
4.05
1997
-1.85
-2.24
-4.85
-5.23
15.37
-1.90
2.72
Foreign Debt (% of GDP)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1993
25
20
26
66
9
34
10
1994
25
18
21
62
10
33
10
1995
51
21
21
53
9
33
10
1996
50
24
27
49
12
50
10
Asian Financing
While these countries did have high
domestic savings rates, much of the
financing came from overseas
 Further, a large fraction of this debt
(20-70%) was short term.

Asian Financing: Moral Hazard

A further complication was that the
Asian governments implicitly backed all
private sector loans. This exacerbates
the natural moral hazard problem
already present in financial markets
The Beginning of the End

By the mid nineties, the profitability of
Asian companies began to fall
Return on Assets by Korean
Chaebol
Chaebol
Hanbo
Sammi
Jinro
Kia
Dainong
1992 1996
3%
2.9%
2.7%
18.9%
6.8%
1996
1.7%
3.2%
1.9%
8.7%
5.5%
The Beginning of the End
By the mid nineties, the profitability of
Asian companies began to fall
 As profits fell, loan defaults increased

Non-Performing Loans (% of
Total Loans)
Country
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Taiwan
1996
8
13
10
14
4
13
3
To Make Matters Worse

Most countries were pegged to the
dollar. As domestic inflation rates rose,
they experienced a real appreciation
against the US.
To Make Matters Worse
Most countries were pegged to the
dollar. As domestic inflation rates rose,
they experienced a real appreciation
against the US.
 As the dollar appreciated against the
Yen, so did the Baht, Ringgit, etc.

To Make Matters Worse
Most countries were pegged to the
dollar. As domestic inflation rates rose,
they experienced a real appreciation
against the US.
 As the dollar appreciated against the
Yen, so did the Baht, Ringgit, etc.
 Japan slid into a recession in the early
nineties.

Liquidity Problems
With exports falling, there was
insufficient cash to refinance short term
borrowing
 Further, many of these loans were
dollar denominated, which put
additional strain on dollar reserves (to
maintain the peg)

Why not float?
Why not float?
With many loans denominated in
dollars, a currency depreciation raises
the value of the loan in domestic
currency.
 Domestic interest rates would have to
be raised to attract capital (interest
rates would need to compensate for the
currency depreciation)

Is maintaining the peg better?
Is maintaining the peg better?

Not really…….by maintaining the peg to
the dollar, the central bank must
continue to buy up domestic currency
which contracts the domestic money
supply.
Enter the IMF

As the Asian debts piled up, the IMF
(International Monetary Fund)
intervened. The offered emergency
loans, but with strings attached.
Enter the IMF

As the Asian debts piled up, the IMF
(International Monetary Fund)
intervened. The offered emergency
loans, but with strings attached.
Enter the IMF

While the IMF did not insist that the
countries maintain their pegs at all cost,
they required three policies to “restore
confidence”
Raise interest rates
 Balance Government Budgets
 Conduct Fundamental Reform

Did the IMF make things
better, or worse?
Those countries that were able to meet
the requirements slipped further into
recessions
 Those countries that couldn’t meet the
requirements suffered further “investor
confidence”

Malaysia opts out


Malaysia, rather than accepting the IMF terms, chose
to follow a different strategy
 Malaysia imposed capital controls which restricted
capital flows out of the country.
 This allowed Malaysia the freedom to follow more
expansionary policies without worrying about
losing foreign capital.
This strategy seemed to work in that Malaysia
recovered faster than other countries.
What’s the moral of the story
In bad times, policies required to maintain
external balance (currency value) turn out to
be policies that would never have been
considered in countries with a peg.
 Typically, the better solution is:



Devalue, but devalue “enough”
Drop the peg and concentrate on economic
recovery.