Singapore/HongKong, Asian Crisis

2. Singapore Hong Kong

3. Singapore & Hong Kong Area Singapore: 697 km2 Hong Kong: 1,104 km2 Population Singapore: 4.7 million median age 40 Hong Kong: 7.1 million median age 43

4. Singapore and Hong Kong Each is separated from the mainland by a narrow waterway Singapore’s relationship with Malaysia has been volatile brief merge in 1963-1965 disputes about water delivery, islands, etc. Hong Kong benefits from mainland China’s cheap labor and market

5. Singapore and Hong Kong Both are mostly ethnic Chinese societies Singapore: 77% Hong Kong: 95% both had over 100 years of British rule Singapore: 1819 - 1959 Hong Kong: 1841 - 1997 both were occupied by Japan 1942 - 1945

6. GDP (purchasing power parity) Singapore: Around US$240 billion Ranked 45th in the world per capita 8th in the world Hong Kong: Around US$300 billion Ranked 38th in the world per capita 15th in the world

8. Singapore and Hong Kong Both are newly industrialized economies GDP composition: Sector Singapore Hong Kong agriculture 0% 0.1% industry 28% 8% service 72% 91.9%

9. Singapore and Hong Kong Exports: Singapore: 13th in the world Hong Kong: 11th in the world 51% to mainland China Imports: Singapore: 15th in the world Hong Kong: 9th in the world 46% from mainland China

10. Economic development Singapore and Hong Kong have achieved similar economic success through very different economic approaches path of economic development diverged after World War II similar experience under British colonial rule divergent political development after WWII divergent economic models after 1960s

11. Colonial legacies Both became entry ports to mainland both benefited from British management and technological expertise both attracted inflow of Chinese emigrants Chinese population in Singapore doubled in 1820s Chinese population in Hong Kong quadrupled between the two World Wars

12. Divergent paths after WWII Singapore gained independence (1959) Lee Kuan Yew’s People’s Action Party economy grew at a slow pace in 1950s still based on intermediary trade boosted by the Korean War of 1950 - 1953

13. Divergent paths after WWII Hong Kong restructured its economy population quadrupled 1945 - 1955 large-scale relocation of capital, entrepreneurs, and assets from mainland China trade embargo against mainland China after Korean War broke out actually benefited HK relative political stability popular political apathy

14. Divergent development model Singapore’s People’s Action Party faced severe internal and external conflicts in 1960s PAP became a elitist and paternalistic party neo-Confucianism? government intervention in the economy drew up a state development plan

15. Singapore’s development 1960s New institutions Economic Development Board promote industrial development Housing and Development Board develop industrial estates Development Bank of Singapore provide industrial financing Jurong Town Corporation acquire, develop, and manage development sites

16. Singapore’s development 1960s Restructured from trading port to manufacturing base government intervention to attract foreign investment in labor market in providing public housing in improving educational facilities in developing a social security system

17. Singapore’s development 1960s produced phenomenal economic growth achieved full employment by early 1970s ventured into high-tech, capital-intensive industries and high value-added services

18. Hong Kong’s development Hong Kong also enjoyed phenomenal economic success rapid expansion in manufacturing in 1960s industrial diversification in 1970s

19. Hong Kong’s development government’s laissez-faire principle reactive, selective, & reluctant intervention development of public housing provide lower-middle-income families with access to home ownership social expenditure & community development development of human resources intervention to maintain competitiveness

20. Convergence since 1980s? Singapore reconsidered its development strategy economy diversified from manufacturing to financial and professional services aims to surpass Hong Kong as an international center of finance & business HQ government relaxed intervention in economy free capital flows and foreign investment even after Asian Financial Crisis of 1997

21. Convergence since 1980s? Hong Kong government moved in the opposite direction became more interventionist to cope with the political uncertainty during the negotiations between PRC and UK intervened in stock and currency market has linked HK$ to US$ since 1983

22. Convergence after crisis?

23. Asian Crisis

24. The Asia Crisis Who are the Asian Tigers? Mid-1990s we spoke of the “Asian Tigers” with awe. Heavy savings and investment rapid development. Activist, statist economic planning

25. Countries Affected in the Contagion Thailand July, 1997 Indonesia June to August, 1997 Korea July, 1997 Japan had already been through its own crisis earlier and was in an economic depression Russia, Brazil, Mexico followed a little later with crises of their own.

26. Three mistakes of Asian Lenders The countries involved usually had some international indebtedness, Asian banks and borrowers used short-term credits to finance long-term loans. Asian borrowers (banks and firms) borrowed in foreign currencies and loaned in local currency. No hedging to counter foreign exchange risk.

27. Three mistakes of Asian Lenders Asian bankers often did not ask to see consolidated balance sheets. They didn’t monitor the total assets and liabilities of the borrowers. IMF paid the bills for such banks, finance ministries and countries. Moral hazard problems Investors should pay for bad decisions.

28. Economic success Annual GDP growth in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8% over the decade before the crisis Almost half of total capital inflows to developing countries nearly $100 billion in 1996 inflation & unemployment rates both low

29. Ramifications Negative consequences Environmental degradation growing inequality between rich and poor rampant corruption social malaise Significant and real benefits great majority of the people’s living standard have not been erased by the crisis

30. Asian Weakness Three weaknesses in the Asian economies’ structures became apparent with the 1997 financial crisis: Productivity Rapid growth of production inputs but little increase in the output per unit of input Banking regulation Poor state of banking regulation Legal framework Lack of a good legal framework for dealing with companies in trouble

31. Weaknesses in financial system Inadequate financial sector supervision Poor assessment and management of financial risk Growth of bad loans State-directed lending Relatively fixed exchange rates Violent asset price cycles Property boom bubbles

32. Weaknesses in financial system Large amounts of short-term international capital, denominated in foreign currency

33. The Asian Crisis: Finance and the Bubble Only modest returns needed with interest rates very low. Emphasis on market share and growth, not on profits in Japan. Japan was the governance model for “statist” Asian economies. Bangkok, Thailand

34. The Asian Crisis: Finance and the Bubble Bad debts accrue. Investors look for larger returns, but these have higher risks. “Keep the Finance Ministry off our case.” Non-Functioning Loans fill bank portfolios.

35. Asian Crisis: The Finance Problem Ultimately, long- and short-term investors notice the lack of returns. Then the crisis begins. How? With capital mobile, flight can occur with any provocation. (Modern version of a run on the bank.)

36. Asian Crisis: The Finance Problem Stock values plummet as they are sold off. Currency values? They drop precipitously as funds are sold off then the yield is exchanged for the investors’ currencies.

37. Asian Crisis: The Finance Problem Import prices (for productive materials and parts and for consumption goods) skyrocket. Severe recession begins Consumption and production expenditures falter and prompt layoffs. Foreign exchange is now so costly that needed production inputs and consumer goods cannot be afforded.

38. Corruption Transparency International’s 1999 survey of corruption Singapore 7th Malaysia 31st South Korea 50th Philippines 54th crisis countries Thailand 68th Indonesia 96th

39. Diary of the crisis: I

40. Diary of the crisis: II

41. The Asian Crisis: BOOM AND BUST First Phase: Currency undervalued to promote exports. Government picks and promotes “winners” (major projects and firms).

42. The Asian Crisis: BOOM AND BUST Second Phase: Export successes produce large earnings. Heavy investment inflows by the early 1990s. Available – a plethora of capital.

43. The Asian Crisis: BOOM AND BUST Inflation should have produced some currency devaluations in these countries, currencies were tied to US Dollar, which was appreciating at the time.

44. The Asian Crisis: BOOM AND BUST Currencies were then overvalued.. A bubble starts to develop Banks not monitored. Real estate craze starts to develop

45. The Asian Crisis: Finance and the Bubble Japanese rice subsidies: inflate the value of land to promote the real estate bubble. Real estate inflation and subsequent collapse. Japan fight depression making Japanese interest rates zero.

46. The cause of capital outflows Bank failure in Thailand Corporate failure in Korea Political uncertainty due to the potential for a change in government in Korea, Thailand, the Philippines, and Indonesia net outflow of $105b from Thailand, Malaysia, South Korea, and the Philippines between 1996 and 1997

47. The cause of capital outflows Contagion effects hit Malaysia, the Philippines and Indonesia The IMF’s intervention actually helped to incite panic

48. Causes of financial crisis macroeconomic imbalances structural deficiencies in financial sector loss of market confidence rising political risk

49. By the number

50. Real GDP Growth (%)

51. Inflation rate (%)

52. GDP growth rate (%)

53. Impact on Japan

54. Impact on World

68. Impact of Currency Devaluation: Indonesian Example After devaluation of Rph

69. Philipines Indonesia Thailand Germany France Korea Japan Singapore Malaysia USA HK

74. Consequences

75. IMF's immediate response Help Indonesia, Korea, and Thailand arrange programs of economic stabilization and reform Approve IMF financial support for reform programs in Indonesia, Korea, and Thailand

76. IMF’s immediate response Consult with other members that needed to take policy steps toward off the contagion effect

78. Asian programs comprehensive reform of financial systems closure of unviable financial institutions associated write down of shareholders' capital recapitalization of undercapitalized institutions close supervision of weak institutions increased potential for foreign participation in domestic financial systems

79. When the Bubble Burst What happened when the bubble burst? Worldwide, foreign direct investment is far and away the largest part of net financial flows to the developing economies.

80. When the Bubble Burst These are highly concentrated and nearly 75% flowed to the ten largest recipients in Asia and Latin America The onset of the crisis for 22 countries of South and East Asia in 1997 made itself manifest with an outflow of approximately $92 billion in short-term borrowing, stock market net flows, and net outflows of funds from domestic residents.

81. When the Bubble Burst Stock markets crashed, national currencies collapsed, and imports and production shriveled up miserably.

82. Reforms in governance break the close links between business and governments ensure that the integration of the national economy with international financial markets is properly segmented

83. Three schools of thought

84. Three schools of thought Revisionist: “developmental state” Market must be mediated, regulated and guided by the state Culturalist “Asian values” Culture context of East Asia explains the miracle

85. Recovery from the Crisis

86. Lessons from the Crisis Better information Regulation and restraint Controlling capital flows

87. International Organizations Authority vis-à-vis sovereign governments Access to information Risk of ``creating” a crisis Globalization and interdependence