10. East Asian Crisis

Question 1

What was the East Asian miracle?

Answer 1

• Hong Kong, Japan, Thailand, Taiwan, South Korea, Singapore, Malaysia, and Indonesia all achieved equity and were growing faster than any other region between 1965-1990
• Human welfare improved dramatically
• Life expectancy increased, absolute poverty decreased, and education improved

Question 2

What factors led to the East Asian miracle?

Answer 2

1. Domestic investment
2. High savings
3. Productivity gains
4. Growing human capital
5. Gradual financial liberalisation
6. Government intervention
   - promoted the growth of certain industries, implemented policies to boost savings and investment, strengthened financial institutions, and moved towards export-oriented economies

Question 3

What led to the East Asian crisis?

Answer 3

1. Appreciation of the Renminbi and the Yen
2. Sharp decline in the price of semiconductors which they heavily exported
   - Led to speculative attacks and put pressure on exchange revenue

Question 4

What are the two main points of view that prevailed?

Answer 4

1. Nothing was wrong

2. The financial systems were weakening, leading to a lack of risk management

Question 5

What were the problems with growth?

Answer 5

1. Fast economic liberalisation led to hot money entering the system
2. Local currencies appreciated which led to a drop in exports
3. Inadequate risk management because they expected the government to bail them out

Question 6

What is the chain of events that took place?

Answer 6

Currency collapsed, capital flight, economic destabilisation

Question 7

How did the IMF respond?

Answer 7

1. Fast financial liberalisation
(+) increases competition which improves efficiency
(-) leads to hot money entering the system 
2. Increasing interest rates
(+) increases loans 
(+) reduces financial outflow 
(-) decreased loans 
(-) increased financial outflow 
(-) increased defaults and bankruptcies 
3. Contractionary policies
(+) address structural problems and financial austerity 
(-) slows down the economy 
4. Increasing trade surplus 
(+) increases revenue 
(-) exports couldn't increase, so imports had to decrease. This worsened the problem and led to beggar-thy-neighbour policies
5. Restructuring 
(+) addresses structural problems 
(-) bank runs 
6. Social and political turmoil