Asian Crisis Research Articles

Global Shocks and the Growth Constraints in the Malaysian Economy 1970-2012

A structural dynamic model is developed to assess Malaysia’s external and internal constraints prior to the East Asian crisis. The model computes the resource requirement to move the economy to a more sustainable form of development. In addition, we examine how the 2008 global financial crisis affected economic performance. The calibrated results clearly show the trade-off between the rate of investment and economic growth under the fiscal and foreign exchange constraints. Our results also highlight the importance of the external trade and FDI to achieve a modest growth.

Predicting Financial Crisis by Examining Risk-Return Relationship

We test the risk-return relationship in and around the global financial crisis for three market groups namely developed, emerging and frontier markets, from June 2005 to June 2016. Four risk proxies are used viz. Standard Deviation, Semi Deviation, Beta and Downside Beta. We find that the global financial crisis had a de-coupling effect as the return associations between global financial markets declined for the post crisis period. We also observe high positive correlations between alternative risk measures implying that asset pricing tests shall be robust to choice of risk measure. Next, we find that the risk-return relationship is absent in the pre-crisis period while it is significantly negative in the post crisis period using standard deviation based measures. Thus, the breaking down of risk-return relationship may be an important predictor of any forthcoming crisis. Further, global capital markets seem to behave like distressed economies in the post crisis period and, hence, exhibit option like behavior. We re-verify our hypothesis by using data in and around the Asian Crisis Period and confirm the absence of risk-return relationship prior to the crisis period. The study contributes to capital market literature with special emphasis on financial crisis.

A fresh view twenty years on: The Asian financial debacle and the Minskyan lessons learnt by the International Monetary Fund

In this paper we shall sketch the anatomy of the Asian financial crisis which erupted twenty years ago. In order to answer the question of how and why this crisis developed and what went wrong in its aftermath we embrace the Financial Instability Hypothesis of the seminal post- Keynesian economist Hyman P. Minsky. The real causes of the Asian crisis were endogenously developed euphoric expectations that followed financial liberalisation and deregulation and propelled the creation of an inverted capital structure and financial fragility. After the initial crisis and subsequent abrupt reverse of investor?s sentiments, the International Monetary Fund intervened and multiplied financial difficulties that strangled regional economies. Fortunately, gradually and in line with the Minskyan approach to financial crises, the International Monetary Fund learned from its Asian mistakes, and starting from the outbreak of the global financial crisis in 2008 and the succeeding financial crisis in Eastern Europe in 2009, dropped its opposition to capital controls and its support for austerity measures in crisis-hit emerging market economies.

Monetary Policy Choice in Developing Countries: A Multinomial Probit Model

The Asian crisis of the 1990s brought into question the adequacy of soft pegs for developing countries. The alternatives suggested by the literature are fixed exchange rates and inflation targeting. This study uses data for 142 developing countries whose monetary policies are classified into three mutually exclusive categories: fixed exchange rates (or hard pegs), inflation targeters, and the reference group (soft pegs). Since the dependent variable is unordered and categorical, a multinomial probit model of monetary policy choice is estimated, in which each country chooses from the three monetary policies the one that provides the highest utility. The multinomial probit model is a choice probability model that allows the three choices to be evaluated simultaneously: based on independent variables that represent country characteristics such as openness to trade, vulnerability to external shocks, fiscal dominance and central bank characteristics, the model reports two sets of results - the log of the ratio of the probability for a country to choose inflation targeting relative to soft pegs, and the log of the ratio of the probability for a country to choose fixed exchange rates relative to the reference choice. The study finds that relative to soft pegs, inflation targeters are less open to trade, are more developed, have more diversified exports and have more independent central banks (as reported by the presence of both lower turnover rates for Central Bank governors and tighter restrictions on government borrowing to finance the budget deficit). Countries with fixed exchange rates are more developed and their central banks have less actual independence than those in the reference group. After accounting for the above country characteristics, the results suggest that fiscal dominance (proxied by variables such as government consumption expenditure, central government debt, share of government purchases and cash surplus/deficit, all expressed as percentage of real GDP) does not play a role in the choice of monetary policy. Average inflation rates were also added to the previous estimations, and the inflation coefficients did not attain statistical significance in any of the specifications suggesting that inflation levels do not influence the choice of monetary policy.

State network approach to characteristics of financial crises

Extensive works have reported that a financial crisis can induce significant changes to topological structure of a stock network constructed with cross-correlations between stocks. But there are still some problems to be answered, such as what is the relationship between different crises in history and how to classify them? In the present work, we propose a new network-based solution to extract and display the relationships between the crises. The Dow Jones stock market is investigated as a typical example. The cross-correlation matrix between stocks is used to measure the state of stock market, called state matrix. All the states cluster into six sub-categories. A state network is constructed further to display the relationships between all the states, which contains a total of nine communities. It is found that three crises C,D and E (refer to the Lehman’s bankruptcy in 2008, the Euro-zone and International Monetary Fund decide the first bailout for Greece in 2010, and the European sovereign debt crisis in 2011, respectively) belong to a specific sub-category and cluster in a single community. The mid-stage of C is closely linked with E, while the other stages with D. The other two crises A and B (refer to the financial crisis in Asia in 1997, and the burst of ”dot-com bubble” in 2002, respectively) belong to another sub-category and gather in a corner of another single community. A and B are linked directly with C and D by two edges. By this way, we give a clear picture of the relationships between the crises.

SENSITIFITAS KINERJA PASAR MODAL INDONESIA DAN NILAI TUKAR RUPIAH TERHADAP PENYEBARAN KRISIS ASIA

This paper tries to examine the impact of Asia crisis on Indonesian stock market and exchange rate. Despite Engle-Granger procedure and Johansen Criterion, error correction model (ECM) of the two variables are employed to simultaneously estimate the short run and the long run dynamics of the variables. Using monthly data covering the January 1995 to December 2006, empirical results showed that there is a cointegration between variables in the crises period but no cointegration before crises period. The result of ECM estimation proves there is a positive effect on the exchange rate when the Indonesian stock price increased and Thailand exchange rate appreciated. It is because the foreign investors enter the domestic stock market. In the crises period, we can prove that the depreciation of domestic currency and Thailand currency have a positive effect on the stock price in the long run. On the other hand, it is evident that there is a stable parameter of analysis.Keywords : Exchange Rate, Stock Price, Interest Rate, Error Correction Model

The Role of the IMF in Managing the Euro Area Sovereign Debt and Banking Crises: Perspectives from East Asia

AbstractThis paper analyzes strategies and policy conditionality of the troika – European Commission, European Central Bank, and IMF – in resolving the euro area crisis from Asia's perspective with the 1997 IMF Asian crisis management as a possible counterfactual and a yard stick for their effectiveness. The IMF entered into collaboration with the EU mainly to provide the technical expertise in and share with its European partners the lessons it learned from managing past crises. But many of these lessons have been unheeded – in particular limitations of the export‐led recovery through internal devaluation and the need to move forward with financial reform at an early stage of the crisis and calibrate supply side reform with the implementation capacity of the crisis countries.

Sovereign Credit Rating Determinants Under Financial Crises

This paper empirically examines the determinants of sovereign credit ratings using panel data of a sample of 86 countries for 1993-2013. It further investigates whether the countries’ average credit rating differs for crisis and non-crisis periods, as well as for the different regions where the countries belong. At last, it examines how the dot-com bubble burst, the Asian crisis and the recent international financial crisis have affected the average rating of each region. The estimation results reveal that a set of macroeconomic, external, government and qualitative factors play an important role on sovereign credit ratings. Moreover, the results provide evidence of differences in the average rating for all geographical regions, except for North America and the Euro Zone. The paper suggests that while the recent international financial crisis had a negative effect on the average rating across all regions, the dot-com bubble burst had no effect on the rating of these regions and the Asian crisis only affected the average rating of Asian countries. Finally, the paper provides evidence that the downgrade on the average rating resulting from the international financial crisis had greater magnitude in the Euro Zone.

The Asian crisis: what did we learn and when did we learn it?

This paper steps back from the detail of the Asian crisis, to ask whether the 1997 crisis advanced our broad understanding of the age‐old problem of economic crises. Some immediate lessons were learned from the failures of the crisis‐response in Indonesia, which was the worst‐affected economy. It is notable, however, how little changed to address the ongoing systemic weaknesses. Three areas of unresolved vulnerability can be identified. First, the sudden stops and reversals of international capital flows. Second, the intrinsic fragility of a financial system that borrows short and lends long. Third, unanchored exchange rates, where the market's price‐discovery can take the rate to levels far from equilibrium, for sustained periods. For more than a decade after the Asian crisis, international capital flows continued to be seen as unambiguously beneficial, with any attempts at capital flow management rejected. At a global level, it was not until the 2008 financial crisis that widespread financial fragility was addressed through tighter regulation and higher capital requirements. On exchange rates, misleading advocacy of corner solutions—either pure floating exchange rates or immutable fixed rates—continued in the face of the real‐world experience that sometimes intervention is needed to maintain an exchange rate close to equilibrium.

Determinants of emerging markets’ financial health: A panel data study of sovereign bond spreads

This research uses Arellano and Bover (1995) and Blundell and Bond (1998) GMM estimator to pinpoint the determinants of sovereign spreads in thirty-one emerging economies from 1994 to 2014. The empirical analysis provides evidence that GDP growth, real effective exchange rate, and political liberation play an essential role in determining the spreads. Openness and geography are surprisingly not significant drivers of a country’s riskiness. In addition, the estimates show a considerable impact of the 1997–1998 Asian Crisis and the 2008–2009 Financial Crisis on emerging countries’ spreads. However, there was no significant increase in bond spreads in the post-Financial Crisis period.

Role of Social Security in Explaining the Rate of Saving Disparity: A Historical Study of New Zealand versus Singapore: 1960-1993

This paper provides evidence to argue that the difference in the social security schemes of two countries may help explain the disparity in their saving rates. We examine the argument by limiting our focus to a comparison of New Zealand and Singapore for the period 1960–1993. We choose the period to avoid the potential impact of the major restructuring of the New Zealand Superannuation since 1994 toward a partially funded system and the East Asia crisis of the late 1990s. In New Zealand, the unfunded system of provision of social security has the effect of reducing the private saving rate. In Singapore, on the other hand, due to the fully-funded nature of the Central Provident Fund (CPF), an increase in CPF saving will increase overall private and gross national saving, with some leakage into consumption. Also, since future social security wealth is directly related to current saving, Singaporeans have more incentives to transfer a higher fraction of the increase in current income for future retirement purposes. For New Zealanders, prior to 1994, the unfunded system did not accord the individuals that same control, because under their old system they could not increase future social security wealth by transferring current resources to the future. Through an empirical exercise, we discover that reasonable differences in thriftiness alone cannot explain the observed disparity in the rate of saving while the estimated differences in the impact of social security on saving provide a sufficient explanation.

A Tale of Two Crises: The Search for the Enduring Reforms of the International Financial System

The Asian economic crisis of 1997 spawned a vast analytical literature and a reconsideration of the international financial architecture. This article seeks a broader perspective on these issues by comparing the causes of the debt crisis of 1982 with those of the Asian crisis. These two crises are the most significant of the last fifty years. Their joint analysis reveals seven enduring lessons of international financial reform that need to be incorporated in any revisions to the international financial system. The debt crisis that erupted in August 1982 was the most damaging and far reaching financial crisis of the late 20th century. It spawned a voluminous literature. Of late we have had crises in Mexico in 1994, East Asia in 1997, Russia in 1998 and Brazil in early 1999. These more recent crises have served to supersede the debt crisis in the public imagination to the extent that that we hear nonsense such as the repeated descriptions of the Asian crisis as “the most severe crisis of the last fifty years”. This article seeks to re-examine the debt crisis in light of our more recent experiences of financial crises. “Those who cannot remember the past are condemned to repeat it.” and mistakes in the finance of developing countries cost the lives of thousands and sacrifice the futures of millions. The methodology of this article is to compare the causes of, and lessons from, the debt crisis with the causes of, and lessons from, the Asian crisis with reference, as appropriate, to the Mexican, Russian and Brazilian experiences. There are certain similarities among each of these four financial crises of the 1990s. The debt crisis of the 1980s was in many ways quite a different type of crisis. The goal of this article is to identify the lessons that have held good throughout the last thirty years of international financial history and across these two different types of crisis. These, it is postulated, will be the lessons most likely to be of relevance in these early years of the next century as we seek to improve the architecture of the international financial system.

Why the Policy Development Capacity of Some Developing Countries Exceeds that of the International Monetary Fund

The IMF’s track record on developing policy to govern the interaction of developing countries and global capital is not strong. Argentina was an IMF poster-child throughout the 1990s. Its economy imploded in 2001. The Brady Plan provided a resolution of the Latin American debt crisis of the 1980s. Yet the Plan was conceived by Brazil and Mexico, not the IMF. Chile successfully charted its own course through the turbulent 1990s with the adroit use of home grown capital controls. Likewise, Malaysia charted its own course out of the 1997 Asian crisis more advantageously than nations that implemented IMF programs and with policies the IMF vehemently opposed. The lesson is that developing nations need to develop their own innovative solutions to the challenges of global capital and are often better placed to do so than the IMF. The International Monetary Fund plays a pivotal role in guiding and shaping the interactions between developing countries and global capital. The Fund advises countries upon when and how to liberalise their financial systems and open up to global capital. In addition, for countries with an IMF program in place, the Fund has direct input into the regulations enacted to achieve these ends, and into the fiscal and monetary policy settings of the country. These functions were not part of the IMF’s original role, but over the past 23 years (since the inception of the Debt Crisis in 1982) the IMF’s role has evolved so that today these functions are central to its mission. Yet the history of the past two decades suggests that the IMF may not be the best placed institution for this purpose. This article analyses four developments in the past fifteen years: (i) Argentina’s recent economic crisis, (ii) the Brady Plan implemented in the early 1990s to address the Latin American debt crisis, (iii) Chile’s response to increasing capital inflows in the early 1990s, and (iv) Malaysia’s response to the East Asian economic crisis that commenced in 1997. The article concludes that some developing countries are better placed than the IMF to develop the policies and regulations that will govern their interaction with global capital and analyzes why this might be so.

The Role of Capital Controls in Financial Crises

In the past thirty years portfolio capital flows have come to prominence, far eclipsing trade flows in volume and significance. In particular, transnational capital flows came to prominence in our region as one of the contributing factors to the Asian economic crisis that commenced in 1997. However, as Frank Partnoy has pointed out: lawyers and legal academics are largely absent from the debate about financial crises. The commentary is dominated by economists, many of whom unfortunately vastly oversimplify or even misunderstand the role of law in recent crises. Partnoy’s complaint is a good one. We lawyers need to get involved. Lawyers need to understand the factors that contribute to financial crises because they have to be intimately involved in the drafting and implementation of measures designed to prevent, or at least ameliorate, such crises. Poor prudential regulation and poor corporate governance standards were each significant contributing causes to the Asian crisis and their upgrading will require the extensive involvement of lawyers. Likewise, a major debate has been in progress, with virtually no input from lawyers, on the role of capital controls in allowing countries the capital they want, while deterring the capital they don't want. Yet capital controls, when applied, have to be drafted, and ultimately enforced, by lawyers. This article critically assesses such capital controls and the role they can play in contributing to a more stable international financial system. In broad terms, capital controls can be either restraints on foreign exchange transactions or on capital account transactions and, if the latter, can be placed on capital inflows or capital outflows. These restraints can, in their turn, take the form of taxes or quantitative restrictions. A detailed analysis of the full gamut of available capital controls is beyond the scope of this work, and has been well done elsewhere. I will focus on capital account controls, and, in particular on the capital inflow controls imposed by Chile from 1991 to 1998 and the capital outflow controls imposed by Malaysia in 1998.

The Progressive Carbon Tax: And the Ability to Pay Doctrine of Taxable Income - Implications to Economic Growth and the Environment: The Issue of Sustainability for Thailand

“Sustainable development is the pathway to the future we want for all. It offers a framework to generate economic growth, achieve social justice, exercise environmental stewardship and strengthen governance.” Ban Ki-moon. With an expanded Gross Domestic Product (GDP) figure of 3.2% in Q1 2016 compared to the 2.8% in Q4 2015, it is hard to imagine that Thailand was one of the poorest countries following WWII (Greg, J 2016). Since 1952, Thailand has shown remarkable economic growth and has one of the fastest growing economies of all developing countries. (Greg, J 2016) Between 1960 to 1996, the economy grew at an average rate of 7.5% per annum, but slowed down to 5% during the Asian crisis (Greg, J 2016). Thailand is showing remarkable progress in socio-economic development with improved levels of GDP, life expectancy, literacy and levels of employment. (World bank, 2017) This allowed the country to move from a low income to an upper income country in less than a generation (World bank, 2017). The key driver of poverty reduction in Thailand is economic growth, which is defined as “the increase in an economy’s capacity to produce goods and service over a long period of time” (Hugh & Neuland, p.131). This means that, a country increases the quality and/or quantity of its factors of production, such as labour and capital, with the limited resources available; improve production techniques and an increased output for the growing demand (Hugh & Neuland p133). The Organisation for Economic Co-operation and Development (OECD) defines sustainability where future generations can meet their own needs and are not compromised by decisions and actions of the human population today, us. By eliminating negative externalities that are responsible for natural resource depletion and environmental degradation, sustainable development can be attained (Chansam, S 2013, p. 512). Thailand is one of the original members of the Association of Southeast Asian Nations (ASEAN) that was established in 1967. The aim of ASEAN is to accelerate economic growth, social progress and cultural development amongst its members. His Majesty King Bhumibol Adulyadeej of Thailand has been promoting sustainable farming, since the 1950’s, and has initiated the concept of having a Sufficiency Economy. This allowed for his country to follow a path of great economic growth and development. Did all this social-economic development come at a price to the environment? Will Thailand be able to grow and develop at a pace that is sustainable? This paper examines the characteristics of a developing country, economic growth impact on sustainability and the trade-off for this high growth rate, but at in terms of The Progressive Carbon Tax: Through the Ability to Pay Doctrine of Taxable Income? The research and hypothesis in this paper aims to prove that a Progressive Value Added Tax/Goods and Services Tax (Fiscal Policy) as a Tool of Inflation Targeting can make the Carbon Tax progressive in nature and thus providing us with a tool that can provide Thailand and other countries with a tax and economic instrument to achieve high economic growth within sustainable development guidelines as argued in the thesis. (Altamirano, 2016) The research proves a Progressive Carbon Tax as an offshoot of a Progressive GST / VAT through the Ability to Pay Doctrine of Taxable Income. The paper proves that a relative price increase of 4.79% per annum (carbon tax content) when disclosed in the price tag or menu, and through a GST / VAT Tax Return can result in progressive rates of the carbon tax of 0%, 10%, 20% or 30%.

Microfinance strategy and its impact on profitability and operating efficiency: evidence from Indonesia

After the Asian crisis in 1998, Indonesian banking transformed very quickly into more market-oriented banking. This development increased the competition, on the one hand, and pressure to perform better financially, especially after foreign investor taking over the ownership, on the other hand. Some banks transformed their business strategies into a microfinance bank for profit motives. Such strategy jointly results in significant profitability and efficiency. Using SUR regression, it is found that for the profitability equation, the profitability relates to the size of the bank, the loan loss reserve to gross loan (LLRGL), equity ratio (ETA) and fixed asset ratio (FIXASEQ). For operating efficiency (CIR), the result is similar and only the sign is different. Interestingly that for profitability, the microfinance strategy (MFS) is significant, but not for operating cost efficiency. It implies the need for more cost efficient commercial banks entering microfinance business as it will benefit small borrowers in terms of lower interest margin.

Crisis phenomena in Central Asian direction development of Russian foreign trade in the Orenburg direction in the 1st quarter of the 19th century

The paper contains analysis of development tendencies of the Russian Empire foreign trade with Central Asian khanates in the first quarter of the 19th century. The authors found that the Russian State didnt pay much attention to the Asian customs policy in this direction for a long time. It was due to the fact that the trade with Central Asian khanates was of exchange and caravan character. The author came to the conclusion that the heads of the Orenburg Region - military and civil governors - made great efforts to change that situation and made special rules for the foreign trade development in the Orenburg Region. It promoted commodity turnover increase. The author proved that in the first quarter of the 19th century the most important element of Central Asian trade development crisis in the Orenburg direction was the fact that merchants from Central Asia dominated Russian merchants in the numerical ratio. However, the ministry of finance and E.F. Kankrin refused to forbid Central Asian merchants to trade at internal Russian fairs as it would result in stagnation in trade and would make prices for goods higher. This problem for the first quarter of the 19th century couldnt be solved as it was connected with the geopolitical status quo existing in the region. It only started to get solutions with an active military advance of Russia to Central Asia in the second half of the 19th century.

Lessons Unlearned? Corporate Debt in Emerging Markets

This paper documents a set of stylized facts about leverage and financial fragility in the non-financial corporate sector in emerging markets since the Global Financial Crisis (GFC). Corporate debt vulnerability indicators prior to the Asian Financial Crisis (AFC) attributed to corporate financial roots provide a benchmark for comparison. The firm-level data suggest that emerging markets post-GFC have lower leverage ratios than the five Asian crisis countries (Asian Five) in the run-up to the AFC. However, a broader set of emerging market countries show weaker liquidity, solvency, and profitability indicators. More countries are also in the Altman Z-score's “grey zone”, that is, at risk for corporate distress. Regression estimates confirm that leading up to the AFC and in the aftermath of the GFC, firms with higher leverage have Z-scores that are closer to the financial distress range. The data also corroborate two macro-related hypotheses: first, that leverage interacted with currency depreciation had a statistically significant adverse impact on Z-scores in pre-AFC; and second, that in countries with higher GDP growth leverage is correlated with less corporate financial fragility. Consistent with Gabaix (2011) the paper finds a granularity effect in that large firms are systemically important — idiosyncratic shocks to large firms significantly correlate with GDP growth in our emerging markets sample. Also, the more-levered large firms are more vulnerable to exchange rate shocks than smaller firms with comparable levels of leverage. While this result holds for the average country in our sample, there is substantial cross-country heterogeneity.

Determinants of board size in an emerging market

AbstractDrawing largely upon the selective adaptation paradigm, the resource dependence literature, and the capture argument, we examine determinants of board size using panel data set of Korean‐listed companies that have experienced dramatic changes in their governance system following the 1997 Asian crisis and regulatory reforms. Observing that the firm's compliance with statutory requirements reflects a strategic choice, our results also investigate the idea that the determinants of board size differ between firms actively and passively adapting to regulatory reforms. For actively adaptive firms, board size increases along with firm complexity but it varies inversely with the power of controlling shareholders (CSHs). In contrast, the roles of complexity andCSHs are not significant but seniority‐based promotion is an important factor to increase the size for the passive firms. Our results suggest that determinants of board size differ depending on corporate strategies to comply with statutory requirements in an emerging market where family business is dominant and corporate governance system has substantially changed.

Foreign Bank Behavior during Financial Crises

This paper studies whether lending by foreign banks is affected by financial crises. We pair a bank‐level data set of foreign ownership with information on banking crises and examine whether the credit supply of majority foreign‐owned banks that underwent home‐country crises differ systematically from those of other foreign banks. In contrast to the literature, our broad global coverage allows us to exploit variations between foreign banks; this enables us to identify an average treatment effect directly attributable to crises. Our baseline results show that banks exposed to home‐country crises between 2007–08 exhibit changes in lending patterns that are lower by between 13% and 42% than their noncrisis counterparts. This finding is robust to potential alternative explanations, and also holds, though less strongly, for the 1997/98 Asian crisis.