Presentation delivered on November 1, 2013 for East Asia Political Economy class at the University of Pennsylvania

1. Desmond Wee
PSCI214 East Asia Political Economy
University of Pennsylvania

2. Background: Chain Reaction
 Thailand (early 1997): Exports decline →Loss of
investors’ confidence → Currency depreciation due to
lack of foreign reserve → IMF’s aid package required
currency devaluation & higher domestic interest rate
→ Increase in non-performing loans → Local stock
market tumbles
 Domino effect: spread from Indonesia to the
Philippines, Malaysia and Korea.
 Trade effect: Taiwan and China

3. Inflow of International Capital
 Most fundamental change in the majority of East
Asian economies is the 1990s
 Private capital flows
 Access to foreign funds
 Increasing internationalization of the activities of East
Asian firms
 Most governments at least partially liberalized foreign
capital movement

4. Liberalization within a Flawed
Policy Framework
 Inadequate regulation to cope with foreign capital
inflows
 Governments lacked the experience
 Predominance of short-term debt
 High short-term debt to reserves ratio → vulnerable to
speculative attack
 Newly-licensed banks
 Risky lending practices
 Unproductive, speculative investments

5. Liberalization within a Flawed
Policy Framework
 Fixed exchange rates worsened the vulnerability of
economies to crisis
 Uncontrolled capital inflow → inflation
 Domestic inflation harmed export competitiveness
 Moral hazard problem: domestic borrower of foreign
currencies with no risk of exchange rate

6. Distinguishing Crisis and Non-crisis
economies
 China and Taiwan were not affected as much as
Thailand, Indonesia and Korea.
Heavily-affected
countries
Less-affected
countries
Capital account
liberalization
+
Inflexible exchange
rate
Prudential regulation
Sizeable foreign
exchange reserves

7. Cause of the Financial Crisis?
Fundamentalists Panic-stricken
Root causes of the crisis
lay in misguided
economic policies, &
liberalization of their
financial system was not
enough
Fundamentals of East
Asian economies were
sound and hasty
liberalization of their
financial systems,
followed by asset
bubbles was root cause.

8. The Politics of Financial Policy:
Behind the Fundamentals
 Influences on financial arrangements in Asia:
 Relative strength of social coalitions & economic sectors.
 Korea
 The degree of concentration of the financial sector
 Thailand
 The particular links between individual financial
institutions and state organs, ruling parties and leading
politicians.
 The degree of foreign participation in the financial
sector.

9. The Politics of Financial Policy:
Behind the Fundamentals
 Supply-side approach
 MOF and the central bank are powerful and insulated
from social and political forces?
 Influence of parties and elections

10. Domestic Responses
 Financial liberalization carries substantial risks as well
as benefits
 Capital controls (exit controls & entry taxes)
 Decrease speculative money
 Opposition grew: e.g. IMF and the international
community
 Reintroduction difficult in its implementation
 Discourage investment and growth

11. Domestic Responses
 Selective actions to limit trading currencies and
derivatives or limit repatriation of profits
 Taiwan
 The Philippines
 Hong Kong

12. Domestic Responses
 Measures to improve prudential regulation
 Increase in the ratio of banks’ capital relative to risk-adjusted
assets to 8% or higher
 Increase provisions for reserves agaisnt non-performing
loans
 Stricter assessment of non-performing loans
 Increase in independence and unity of oversight agencies
 The extent of financial and corporate restructuring in
the most severely affected economies remained limited.

13. Reforming the Global Financial
Architecture
 The crisis led to various proposals of global financial
reforms.
 Panic-stricken:
 restrictions on speculative capital
 Additional disbursed assistance to governments whose
currencies were speculative attack
 Cooperation on monetary affairs at the regional level
 Division between twinWashington-based institutions
– IMF and World Bank was deepened.

14. Reforming the Global Financial
Architecture
 Reforming the IMF
 Calls for abolition of IMF
 IMF is internationalizing the moral hazard problem
 Encouraged speculators to undertake dubious investments
 Need for greater transparency of IMF
 Criticism against conditionality by IMF
 Worsened the recession by
 Tight fsical policy
 Increase interest rates
 Ill-timed closure of financial institutions
 Criticism agaisnt private sector actors for not bearing
the cost of the crisis

15. Regional Responses
 Proposal for establishing the Asian Monetary Fund
(AMF)
 Killed by opposition from the US
 Bilateral programs by Japan
 The crisis has drawn East Asian economies together,
realizing that they do not have an effective voice in the
governance of the monetary system. This led to efforts
to establish a representational organization or regime,
the outcome remains to be seen.