TOPIC 2.2 - The East Asia Crisis Flashcards
Who were the Tiger Economies of Asia, when did their growth spike?
Hong Kong, Singapore, South Korea, Taiwan
1960s
Who were the Tiger Cubs of Asia, when did their growth spike?
Indonesia, Malaysia, Thailand.
1970s - 1980s
Who was the first HPAE, and when did their growth spike?
Japan
1950s
Four characteristics of HPAEs?
Very open to international trade
High Savings Rates and FDI (very important)
Growth and decrease in poverty
Health improvements.
What are the possible explanations for the HPAEs growth ‘miracle’?
Govts intervened heavily rather than relying on market mechanisms
FTAs
Hard-working people
High rates of savings and investment
Until 1997 most ER in the east Asian region were pegged against what currency?
USD
Characteristics of overvaluing the fix of your currency, what does it result in for the CB?
Keep inflation under control
Imports cheaper, Exports expensive
Easier to handle foreign debt
National pride
Results in Excess Supply so the CB buys baht and sells foreign exchange to keep fixed ER.
Characteristics of Undervalued ER, what does it result in for CB?
Boost exports
Decrease in Trade Deficits
Increase in Tourism
Results in Excess Demand for Baht so CB sells Baht and buys foreign currency
Explain the Inefficiency view of the Crisis?
Huge CA deficits (S < I)
Risky investments due to Moral Hazard
Lack of transparency by the government regarding debt
Debt was also ST used for LT investments.
Explain the Panic View?
People began to default on their loans.
People then began to panic and withdraw their own funds
Heard mentality ensued
Govt was forced to buy up all excess Baht from capital outflows.
Government ran out of foreign reserves.
Explain the Speculation View
Speculation and malicious attacks were the main problem. When panic ensued speculators saw an opportunity to attack the currency
They dumped currency
Forcing downward pressure on the ER.
Thus tipping the amount of capital outflow over the edge and pushing the CB to devalue the currency, therefore, making them a profit.
To make profit from currency the currency must be bought while it is …
overvalued.
Advantages and disadvantages of Foreign Exchange Speculators.
Advantages:
- Helps get prices right
- Serves as a check and balance in the economy
- Provides liquidity; matching buyers with sellers
Disadvantages
- creates a lack of confidence in the currency
- can attack even if the currency is not overvalued.
Why was the Crisis unexpected? (three reasons)
CA Deficits - usually not a problem if investments are good
Debt - Lack of transparency in banks and government, mismatched debt to investment terms
Growth - Countries were still posting High Growth Rates
What were the initial effects after the crisis?
ER devalued = price of imports increased = inflation
Why couldn’t they export themselves out of trouble?
Inefficient investment means exports aren’t competitive
EA trading partners are also in crisis
Low ER = Exports increase = inflation increases
What were the consequences of decreasing government spending?
Government spending decreases = decrease in consumption = businesses struggling = increased unemployment
How does the IMF promote international monetary cooperation and ER stability?
Surveillance - monitors economic and fiscal policies of members
Lending - provides loans to help achieve BOP
Capacity Development - tech assistance and training
Who did the IMF bail out in the EA crisis?
Thailand. Indonesia, South Korea
Who didn’t go to the IMF during the EA crisis?
Malaysia
What are the six IMF conditionality’s?
(Internal Farts Creep Right Past Shaun)
Increase IR Fiscal Contraction Close non-performing banks Raise capital adequacy ratios Pay debts as they are due Structural Change
What is the rationale and possible problems with increasing IR?
To stop currencies from falling further
However, it stifles the economy
What is the rationale and possible problems with Fiscal Contraction
Close the Investment and Savings gap
However, stifles economic activity, affects the poor most.
What is the rationale and possible problems with closing non-performing banks
Clean up the banking sector
However, this may cause a run on banks
What is the rationale and possible problems with raising capital adequacy ratios
Make banks safer
However, could create credit shortage
What is the rationale and possible problems with paying debts as they are due?
Restore confidence,
This has no problems
What kind of Structural Change does the IMF want the countries to implement?
Reduce monopoly power
Increase trade and FDI liberalisation
How did Malaysia address the EA currency crisis?
Imposed capital controls.
Government Spending increased
Corporate taxes were cut to encourage spending in the private sector to spend.
What year did it seem that the countries had completely recovered?
1999, speedy
No matter whether the countries got IMF help or not how did they all recover so fast?
More stable ER
Growing world economy
From 1999 to 2000 Indonesia…
Banking sector clean-up still needed
Between 1999 and 2000 South Korea…
Chaebols are reducing debt levels, but still dominant
Between 1999 and 2000 Thailand …
Decrease in government spending, large number of inefficient finance companies allowed to go under
Between 1999 and 2000 Malaysia …
Corporate taxes were cut, govt spending increased.
What external factors did the EA economies expect to help with growth in 2001?
Growth of US and European Economies
Stable Petrol Prices
Increase in IT exports
Increase FDI in Asia, China joins WTO in 2001
What actually happened in 2001?
EA economies, especially Singapore and Taiwan slipped into recession.
Why did the EA economies slip into recession between 2001 and 2002?
Govt complacency
Banking sector clean up still needed
Heavy reliance on external factors
Alongside major events such as 9/11, dot com bubble, and Mad cow disease in Europe
Were the EA countries affected by the Global Financial Crisis in 2009?
No, they were relatively okay.
