Asian financial crisis

This paper assesses the relationship between economic growth and poverty reduction in Indonesia before and after the Asian financial crisis (AFC). Indonesia has a significantly slower poverty reduction post-AFC compared to the pre-AFC era. The trend in the growth elasticity of poverty indicates that the power of each% of economic growth to reduce poverty did not change greatly between the pre and post-AFC time periods. During both these periods, the growth of services sector is the largest contributor to poverty reduction in both rural and urban areas. Post-AFC, industrial sector growth has become largely irrelevant for poverty reduction even though this sector makes up the second largest share of GDP. Meanwhile, the importance of agricultural sector growth for poverty reduction is confined only to rural areas. Finally, the findings suggest that there is a need to promote economic growth in all sectors as the current rates are insufficient to recover to the rates of poverty reduction in the pre-AFC era.

The Asian financial crisis was preceded by a significant lending boom that subsequently came to a very abrupt end; the availability of bank loans dried up almost instantaneously, leading to a reduction in the level of capital available for production, and therefore, a general fall in production output. Following the initial breakout of the crisis in Thailand, the contagion had spread rapidly across the whole of Asia resulting in unprecedented economic depression; with stock prices falling dramatically between 1997 and 1998, there was considerable shrinkage in firms’ overall asset values. An illustration of the stock price index for four selected Asian countries, Indonesia, Korea, Malaysia and Thailand, is provided in Figure 1.

As it became clear that the trajectory supported by the IMF was ill-suited to supporting an Asian recovery, think tanks started to capitalise upon the growing belief that ‘the role of the IMF as a support body … was not optimal and imposed too strict conditionality to ASEAN countries’ (Blizkovsky, 2012, p. 96). From this vantage point think tanks began to endorse programmatic ideas that incorporated reactions to austerity politics by including individual policies aimed at softening the societal impact of the financial crisis and the most ‘detrimental aspects of globalisation’ (PECC, 2001). In 2001, Indonesia established a new think tank, the SMERU Research Institute, with the specific aim of understanding ‘the socio-economic impact of the Asian financial crisis’ (Nachiappan et al., 2010, p. 14; SMERU Research Institute, 2016). Policies promoted by think tanks using their coordinative discourse abilities were not specifically ‘Asian’ in origin, but rather a combination of ideas drawn from the emerging post-Washington Consensus, those put forward by some Asian states at the beginning of the crisis (e.g. Japan’s attempts at establishing a so-called ‘Asian Monetary Fund’), and reactions to the neoliberalism of the West. While these ideas had failed to gain critical mass directly after the AFC, they remained active. Think tanks, using their coordinative discourse abilities were then able to adapt these ideas to local political environments and transmit them to policy-makers.

While the liberalization of short-term capital movements should therefore be undertaken only gradually and with extreme caution, the opening of the financial sector to foreign direct investment should probably be undertaken much more quickly and forthrightly. Indonesia, Korea, Malaysia, and Thailand were all characterized by a limited presence of foreign bank branches and subsidiaries, especially in the latter three countries. Despite significant interest in establishing a full banking presence in these countries, foreign banks were generally unable to obtain general banking licenses, as a result of protectionism in support of domestic banks. More foreign banks would almost surely have helped to calm the Asian financial crisis, for several reasons. First, branches of major international banks would have been much less subject to depositor panics (indeed, in Indonesia, depositors fled from Indonesia national banks to the few foreign banks). Second, these foreign banks would have been less likely to withdraw their own loans to local customers than they were to withdraw their cross-border credits to Asian banks. Third, these banks would have raised the general level of competition in the banking system, and would probably have helped to limit the politicization of bank ownership and bank lending.

prohibiting banking institutions from lending to their directors and officers. This prohibition was aimed at curtailing any potential misuse and irregular practices by the shareholders. During the Asian financial crisis, it was evident that poor asset quality as well as the absence of sound risk management in banking institutions could threaten the solvency of the institutions and further threaten economic activities as a whole. It was necessary to establish prudent risk management in order to maintain asset quality in the banking system, thereby minimizing the risk of potential bank failures. BNM issued guidelines on credit risk management. They denoted specific requirements and practices that banking institutions ought to adopt. The objectives of the guidelines were to ensure adequate supervision, to control risks in the banking institutions, and to include credit exposure measurements, minimum capital funds requirements, disclosure requirements, and guidelines on liquidity. Details are in section 5. The limit on credit facilities to a single customer was also tightened from 30% to 25% of capital funds.

Because the key innovation of this paper involves constructing exchange rate shocks from information on firms’ export destinations prior to the 1997 Asian financial crisis, we focus ou[r]

The year 1997 was special to Hong Kong. It simultaneously experienced the reunification with mainland China and the Asian financial crisis (AFC). These events brought mixed feelings to Hong Kong citizens: honour on returning to the home country and uncertainty over the future. In hindsight however, most of the apprehension was unnecessary. Hit by speculative attacks and regional spill over, Hong Kong still managed to maintain its linked exchange rate and strengthen its position as an international financial centre. Regarding Hong Kong’s defensive activities, several typical questions have been raised: With alternative options, why did Hong Kong insist on defending its exchange rate regime? Why did not Hong Kong simply prohibit the currency convertibility to draw back hostile speculative attacks? Why was the Mainland cautious in intervening in Hong Kong at that time? How did Hong Kong mitigate the impact of the financial crisis? Trying to answer these questions, this paper assesses the importance of the Hong Kong financial system and the influences from mainland China amid the AFC with the use of information collected from fieldwork.

Abstract: Every country leaders would have probably face the economic crisis but have we ever wondered why some leaders seem to remain calm in the face of economic disaster such as Tun Dr Mahathir Mohammad during the 1997 Asian Financial Crisis, while others seem to fall apart. Leaders who are able to remain calm and patient have what psychologists call resilience, or more known as an ability to cope with problems and setbacks. Resilient leaders are able to utilize their skills and strengths to cope and recover from problems and challenges, which may include job loss, financial problems, high rate of unemployment, and currency depreciation. This study focuses on how the Asian Financial Crisis 1997 initiated when Thailand first began to float its national currency, Baht (฿). This leads to an economy crisis that includes the neighboring country such as South Korea, the Philippines, Malaysia and Indonesia. Our research also focuses on how Malaysia was affected by the Asian Financial Crisis 1997 and steps taken by the leader especially Tun Dr Mahathir in fighting back the financial crisis which lasts for about two years.

From its inception in 1967 under the Bangkok Declaration, ASEAN has largely been a political organization established essentially to contain the rise of communism in southeast Asia. It has undoubtedly been successful in containing intra-ASEAN conflict and in providing a forum for the discussion of regional matters, including disputes over territorial claims in the south China sea, but as a political force it has exerted little influence on the world stage given its heterogeneous character and the decline of the communist threat. The Asian financial crisis has further eroded the political consensus within ASEAN and Singapore, in particular, has tended to look to its own geo-political interests, which increasingly lie outside ASEAN. One example is its determination to pursue bilateral preferential trading Arrangements with countries outside the region, such as the USA, even if this upsets her ASEAN partners and weakens the solidarity of ASEAN as a trading bloc. 4 It is widely accepted that apart from providing some common policies on food, energy and tourism, ASEAN achieved little in terms of tangible economic benefits for its members in the first two decades of its existence (Wong, 1988, Yeung, 1999), and much of the gains would probably have been achieved without coordinated initiatives through ASEAN from unilateral trade liberalization after the mid-1980s (Singapore much earlier), driven by private

and Zimbabwe) comparing to Radelet and Sachs (1998) analysis, subject to the data availability, but consists of an additional year, 1998. The event of interest is a financial crisis in a given country. The dependent variable takes the form of a dummy variable, which equals one when the country fell into the crisis and zero otherwise. There are nine countries in the sample which did not experience a crisis in the period under consideration, therefore serving as a control group: Brazil, Chile, Columbia, India, Jordan, Peru, Poland, Russia, South Africa and Sri Lanka. Following Radelet and Sachs (1998), a financial crisis is defined as an abrupt shift from the capital inflows to the capital outflows between the year t-1 and the year t. The only exception is the case of Mexico where 1994 and 1995 were checked as the date of event. The reason why both years were tried instead of just 1995 as in Radelet and Sachs (1998), is the fact that it was the 1994 devaluation which gave rise to a run on peso and the panic in the market. Besides, the March 1994 assassination of the presidential candidate Colosio dried up a significant part of the capital inflow. In 1995 growth was returning to the region while inflation was declining [Edwards, 1997]. Because the estimation setting 1994 as a crisis year was found to be more significant, all robustness analysis was consistent with this choice. However, this finding shows how sensitive is the probit estimation and thus very limited. Also, it points out on the importance of inclusion of lagged variables in the estimation whenever the crisis starts in the beginning of the year (as Radelet and Sachs marked the Mexico collapse).

The currency crisis that started in Thailand in July 1997 worsened the existing serious conditions of the balance sheets (accumulated non-performing loans (NPLs)) of financial institutions. In order to restore external confidence as well as to stabilize the financial market, the Government pressed ahead with financial reform program agreed upon by the government and the International Monetary Fund (IMF). The distressed commercial banks and Merchant banking corporations with large NPLs and poor asset quality had to be closed down. The number of banks declined from 33 at the end of 1997 to 19 at the end of 2004. The number of Merchant Banks declined significantly from 30 at the end of 1997 to 2 at the end of 2004. For viable financial institutions, the government provided funds through the recapitalization and the purchase of their NPLs on the condition of their own intensive self-rescue efforts. To qualify the government’s assistance, banks and financial institutions were required to downsize their branch network and layoff employees.

significantly more "bang for the buck" in the mid-1990s than it had a decade earlier. Indeed, on a variety of financial market indicators, on the eve of the crisis, the Philippine financial system looked more solid than did others in Asia (tables 3 and 4). Although the Philippines experienced a domestic credit boom in the mid-1990s, it went on for a shorter duration than those else where in Asia. So, for example, the Philippine banking sector appears to have been less "over-lent" than others in Asia on the eve of the crisis in aggregate terms. Moreover, the quality of bank lending appears to have been higher as well: exposure to the real estate sector was lower, collateral valuations were lower, and capital adequacy was higher. Non-performing loans were lower going into the crisis, and increased less once the crisis was underway. This is not to say that the Philippine financial sector was perfect: as Williamson and Mahar (1998) observe, despite the abolition of directed credit, commercial banks remained dependent on the central bank's discount window providing a mechanism for the government to influence lending, and cartel price-fixing practices had not been eradicated, despite new entries into the market. Nor have subsequent events demonstrated that the financial system is free of taint. Rather, this is only to say that the Philippine system looked good relative to those elsewhere in Asia.

The chaebol of Korea, which appeared in the 1950s, rapidly accumulated wealth through foreign aid and government property transfers to private ownership. Under Park, who came to power in the 1960s, the chaebol dominated the product market of Korea, assisted by heavy and chemical industry policy and an import-substitution indus- trialization policy. The government intensively supported the chaebol in order to raise the competitiveness of Korean corporations in the international market. Furthermore, the financial liberalization policy of the 1980s helped the chaebol to enter the financial market. The chaebol expanded to the non-banking sector immediately, prompted by deregulation of non-bank depository institutions and the privatization of some govern- ment-owned banks. Through financial liberalization and the growth of the stock market, the fund-raising strategy of the chaebol changed from indirect to direct. This has been noted in previous research and is also found in the FOF accounts used in this analysis, which are composed of only financial items.

The vector of pre-crisis control variables includes: fixed effects for province-industry combinations (of which there are between 300-400 depending on the specification); 1995 log sales[r]

Existing financial institutions that were facing trouble were either shut down or recapitalised, and there was a removal of all restrictions on overseas borrowings by domestic firms (Kim, 2000, p.13). The IMF forced banks to adhere to Western standards of credit evaluation, limiting the loans available to the chabols for expansion (Corning, 2000, p.6). The chaebols were the most powerful economic institutions in South Korea which, at the time of the crisis in 1997, were burdened with high debt ratios (Hayo and Shin, 2002, p.90). The IMF intended to end the monopoly of chaebol in the Korean economy by lowering tariffs and raising import restrictions; this allowed for sectors such as the automobile industry to be exposed to imports and international competition (Corning, 2000, p.6).The IMF reform package also stipulated that the interest rate be raised, with the aim of stabilising the value of the Korean won through attracting foreign investment and also inducing Korean investors to keep their savings in domestic currency. Interest rates were raised from the pre-crisis rate of 12 percent to 27 percent by the end of 1997, and then elevated to 30 percent in early 1998 (Kim, 2000, p.13).

If international pressure keeps mounting and China is indeed forced to abandon its peg, there might be another financial crisis in Asia. Distayat’s (2001) model predicts such a crisis when a peg is abandoned. Fischer (2004) mentioned in his remarks to the IMF forum that countries that have high level of reserves have faired better when financial crisis strikes. China might be accumulating reserves for the future when it will be forced to abandon its peg and thus its reasons to accumulate reserves are different than those for any other economy that is not at risk of having a currency crisis. This would also explain the escalating demand for reservers among other Asian countries that have close ties with China, and it will also align China’s motives with the self-insurance model mentioned in the literature review. If that is the case, an intervention model like the one that is used in this paper would not predict China’s reserve levels very accurately. Mendoza (2004) found that both China and India could be properly classified as self-insurers with respect to their reserve holdings. Kapur and Patel (2003) also concluded that India is acting as a self insurer.

We next move to a simple analysis of the determinants of the maturity of the debt obligations in our sample. We focus on foreign-currency denominated debt, i.e. debt issued in a currency other than the bank’s domestic currency. The first two columns of Table 4, Panel A, present the results of OLS regressions in which debt maturity (in years) is regressed on a dummy variable which takes the value 1 if the issuing bank has failed according to our definition, and zero otherwise. In the second column we add a dummy variable which takes the value 1 if the obligation in question (mostly bonds and notes) was rated by Standard & Poor’s. In both regressions we include year and country fixed effects, as well as an interaction term of year with the failure dummy. We see that debt obligations taken by failed banks were of shorter maturity, approximately 1.6 years lower on average relative to obligations taken by banks which survived the crisis. Adding the bond rating dummy in the second regression adds some explanatory power, but does not change the quantitative effect. We see that having a Standard & Poor’s rating is associated with a significantly increased bond maturity. The next two columns in Panel A of the table present the results of probit regressions (marginal effects are reported), where the dependent variable is the probability that maturity is equal to or less than one and two years, respectively. We again include year and country fixed effects, as well as an interaction term as before. The probit results

reserves to GDP was higher, precrisis real exchange rate appreciation was lower, credit expansion was lower, the current account surplus was larger, the precrisis infl ation rate was lower, and the export share was larger. This helps to explain why Asian countries responded better to the shocks during the more recent global crisis. Policy variables were more appropriate for reviving aggre- gate demand and growth, and the interest rate fell and real government expen- diture rose after the 2008 crisis. Monetary and fi scal policy thus reduced the severity of the recession and laid the foundation for recovery. Recovery was faster and more robust as a result of aggressive fi scal expansion, particularly in the fi rst year (as shown in the fourth line from the bottom of table 4.14). This was possible because the Asian countries were in a healthy budget situation.

Before turning to these central causal arguments, all would agree on a number of factors that played a background role in the crisis or constituted permissive conditions. The Chinese devaluation of 1994, that country’s increasing entry into export markets, and the continued sluggishness in the Japanese economy all had implications for the middle-income coun- tries of the region. The unexpected depreciation of the yen posed difficult- ies for a number of Asian countries (Noland et al. 1998), particularly for South Korea, which competed head to head with Japan in a number of sectors. Different countries also faced particular terms of trade shocks. For example, South Korea and Malaysia were adversely affected by a collapse of semiconductor prices. But it is highly implausible that these developments were enough, in themselves, to generate crises of the magni- tude that ensued.

See Reborto Chang & Andres Velasco, Financial Crises In Emerging Markets: A Canonical Model (Fed. Res. Bank, Working Paper No. 98-10, 1998); Giancarlo Corsetti, Paolo Pesenti & Nouriel Roubini, What Caused the Asian Currency and Financial Crisis? Part I A Macroeconomic Overview (Nat’l Bureau of Econ. Research, Working Paper No. 6833, 1998); Jeffrey A. Frankel & Andrew K. Rose, Currency Crashes In Emerging Markets: Empirical Indicators (Nat’l Bureau of Econ. Research, Working Paper No. 5437, 1996); IMF, World Economic Outlook (Oct. 1999); Graciela L. Kamiski, Currency and Banking Crises: The Early Warning of Distress, (Board of Governors of Fed. Res. Sys., Int’l Fin. Discussion Papers No. 629, 1998); Graciela Kaminski, Saul Lizondo & Carmen M. Reinhart, Leading Indicators of Currency Crises IMF Western Hemisphere Department (1997); and more recently, Swati R. Ghosh & Atishi R. Ghosh, Structural Vulnerabilities and Currency Crises, 50 IMF S TAFF P APER 481 (2003), Marcelle Chauvet & Fang Dong, Leading Indicators of Country Risk and Currency Crises: The Asian Experience, 89 F ED . R ESERVE B ANK OF A TLANTA E CON . R EV . 25 (2004) (noting articles that analyzed macroeconomic and financial indicators in predicting the financial crisis).