Download Politics of India

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
– 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 Korea50th
– Philippines 54th
– Thailand
68th
– Indonesia 96th
crisis countries
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