Cengage Eco Dev Chapter 4 - Asian Crisis and Recent Developments

Chapter 4
The Asian Crisis

and Recent Developments
Chapter Objectives
After completing the chapter, the students should be able to:
1. Explain how the Asian Crisis evolved and what are the recent
developments in the region.
2. Understand the World Economy, Economic Growth, Economic
Recovery, and the emerging Development in Asia.
3. Explain the Social Impact of the Economic Crisis.
Post-Crisis
The Bubble
Economy
The World Economic
Economy Growth
External Contagion,
Sector Globalization Social
Difficulties Financial Impact of
Integration Economic
Crisis
Asian Crisis
Divide in Economic
Asia Recovery
Lessons and Prospects for

the Future
Development in the New

Millennium Chapter 4
Causes of the Asian Financial Crisis
An economic bubble, also known as a

market bubble or price bubble, occurs
when securities are traded at prices
considerably higher than their intrinsic
value, followed by a ‘burst’ or ‘crash’,
when prices tumble.
Causes of the Bubble Economy
Inadequate Fund Restriction on

Management System Foreign Banks’ Entry
Ineffective Non-performing
Sterilization of Loans
Capital Inflows
High Costs of
Balance Sheets
Financial Services
Rapid Growth in Current
Account-Deficits
External
Difficulties
Overvalued Collapse in
Exchange Rates Exports
Contagion Effect
The contagion effect explains the

possibility of spread of economic crisis or
boom across countries or regions. This
phenomenon may occur both at a
domestic level as well as at an
international level. The failure of Lehman
Brothers in the United States is an
example of a domestic contagion.
Economies of nearby countries or regions

may affect the economies of other
countries or regions.
Globalization
World trends that influenced events as

the crisis sets in. Globalization
linked the East Asian markets for
goods and assets much more closely to
the markets of other countries such as
trade liberalization in goods and capital
n the Asian countries.
Financial markets of East Asian economies
were less integrated into the world
economy due to restrictions of entry
of foreign financial institutions.
Post-Crisis Experience of Asia
Restructuring
Economic growth was not seen of the financial
system
until 5 years after the financial
crash. It was only then when the
Equity prices
world economy recovered, led increased
by India and China.
Exchange rates
Living standards rose and poverty
strengthened
fell. Increase in domestic demand
and foreign trade were significant
contributory factors in the
economic
uptrend in the Asian region.
Emerging Development Divide in Asia
Country GDP Annual Growth
2001 & 2007
ASEAN-5
Indonesia 5.1%
Malaysia 4.4
Philippines 4.4
Singapore 5.2
Thailand 5.0
Average for ASEAN-5 4.8
East Asia-4
China 10.2%
Hongkong 4.9
Korea 4.7
Source: Asian Development Bank, Taiwan 3.8
Asian Development Outlook,
various issues. Average for East Asia 4 5.9
Average without China 4.4
Social Impact of Economic Crisis
Banks reluctant to Firms lacked Currency High Purchasing Power

lend money working capital Depreciation Inflation Fell
High Poor Public

Increased Reverse Increased Incidence
Unemployment Services
Migration of Poverty
Rate
Unemployment Rates, 1997-1998
Country 1997 1998

Indonesia 4.7% 21.3%
Korea, Rep. of 2.6 7.7
Malaysia 2.7 6.4
Thailand 1.9 4.4
Source: Economic and Social Commission for Asia and the Pacific (ESCAP), Economic and
Social Survey of Asia and Pacific, Bangkok: United Nations (1999, p. 119)
Lessons and Prospects for the Future
Reform Agenda
Debt Restructuring
Close scrutiny and evaluation of borrowers to avoid the

Occurrence of bad debts.
Private-Sector Credit Lines
Government has to establish credit lines with the private

Sector given the difficulties of borrowing from the international
lending institutions.
Reform Agenda
Reformation of Exchange Rate Regimes
Prudent borrowings of the business sector in foreign currency.

These borrowings have to be hedged for protection against
sudden devaluation of exchange rates.
Capital Account Reform
Capital market regulation should be revisited such as

the imposition of taxes which serves as an incentive for
private sector to expand business. Capital market deregulation
has to be carefully examined to pump-prime underdeveloped
domestic capital markets.
Reform Agenda
International Portfolio Controls
Monitoring and supervision of international financial firms such

Banks, insurance companies, pension funds, and financial
Conglomerates. Ceilings on loans have to be established.
Minimum International Standards of Financial Practices
Auding and accounting practices must adhere to international

Standards, and practices in corporate governance.
Reform Agenda
Information and Transparency
Accounting and financial reporting must reflect accurate information

based on international standards.
Global Surveillance
Heed the advice of independent financial institutions like the IMF.

IMF has to put emphasis on external policies of key industrial countries
rather on domestic policies.
Reform Agenda
Reformation of Financial Markets
Revisiting the financial market regulation of the individual countries

must be done.
Greater Competition
Relax regulation of foreign financial institutions to enter the domestic

financial market.
Reform Agenda
Consolidation
Fold-up non performing banks and allow mergers.
Stock Markets
Introduce derivatives markets especially those that implement

Better hedging of equities exposures.
Reform Agenda
Trade Policies
Review and relaxation of tarriff policies to motivate exports.
Foreign Direct Investment (FDI)
Multilateral agreement among countries must be pursued to

obviate skeptiscm that the FDI will just be unilaterally
advantageous for just one party.
Reform Agenda
Human Capital
Upgrade productivity via the development of skills and knowledge

Of workforce in knowledge-intensive industries.
Better Understanding of the Crisis Process
Anticipation and forecasting of economic trends to influence

Intelligent economic and financial decisions.

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Chapter 4

The Asian Crisis

After completing the chapter, the students should be able to:

Lessons and Prospects for

Development in the New

An economic bubble, also known as a

Inadequate Fund Restriction on

The contagion effect explains the

Economies of nearby countries or regions

World trends that influenced events as

Banks reluctant to Firms lacked Currency High Purchasing Power

High Poor Public

Country 1997 1998

Close scrutiny and evaluation of borrowers to avoid the

Private-Sector Credit Lines

Government has to establish credit lines with the private

Prudent borrowings of the business sector in foreign currency.

Capital Account Reform

Capital market regulation should be revisited such as

Monitoring and supervision of international financial firms such

Minimum International Standards of Financial Practices

Auding and accounting practices must adhere to international

Accounting and financial reporting must reflect accurate information

Heed the advice of independent financial institutions like the IMF.

Revisiting the financial market regulation of the individual countries

Relax regulation of foreign financial institutions to enter the domestic

Fold-up non performing banks and allow mergers.

Introduce derivatives markets especially those that implement

Review and relaxation of tarriff policies to motivate exports.

Foreign Direct Investment (FDI)

Multilateral agreement among countries must be pursued to

Upgrade productivity via the development of skills and knowledge

Better Understanding of the Crisis Process

Anticipation and forecasting of economic trends to influence

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