Asian Financial Crisis Research Articles

Regional economic resilience of resource‐based cities and influential factors during economic crises in China

AbstractResource‐based cities (RBCs) whose economies depend primarily on exploiting and processing natural resources usually have rigid, singular, and low‐end industrial structures, which often cripples their ability to cope with external disturbances such as international resource price fluctuations and economic downturns. This paper quantitatively analyzes the economic resilience of RBCs in China in terms of resistance and recoverability during the Asian financial crisis and the global financial crisis. Furthermore, it identifies the main factors affecting resilience. There are four main findings: First, RBCs were quickly and negatively impacted by the Asian financial crisis, which suggests that economic resistance was generally low during this period. In the recovery period, while the rate of recovery was slow at the beginning, economic recoverability improved after 2002. Economic resistance and recoverability were found to have a strong negative correlation. Second, at the beginning of the global financial crisis, the economic resistance of RBCs was generally high. However, after 2012, the number of cities that were severely affected by the economic crisis increased rapidly. Third, economic resistance varied across different types of RBCs. Coal‐based and forestry‐based cities had lower economic resistance, while oil & gas‐based cities were more resistant. RBCs in the Eastern region generally had low economic resistance, while the economic resilience of recessionary cities was also low. Finally, while factors affecting the economic resilience varied across the two economic cycles, we found that economic development, labor conditions and, most of all, the industrial structure had a statistically significant negative effect on economic resilience.

Kesinambungan fiskal dan estimasi fiscal reaction function Indonesia tahun 1977-2017

This study aims to identify whether Indonesian fiscal condition in 1977–2017 is sustainable as measured by the government responses to debt burden. Studi on fiscal sustainability is very important since failing to identify its occurrence and determinants will detrimental to fiscal and macroeconomic policy. This study uses Auto-Regressive Distributed Lag – Error Correction Mechanism (ARDL-ECM) to estimate short-term and long-term fiscal reaction functions. The result shows that in the long-term the government responds an increase in debt burden by increasing its primary balance and thus it confirms the existence of fiscal sustainability. Furthermore, by estimating fiscal reaction function this study finds that in the long run exchange rate and Asian Financial Crisis in 1998 have significant effects on primary balance; while in the short run real exchange rates, 1998 economic crisis, and commodity prices affect the primary balance.

Study on the Path Selection of Yen Re-internationalization After Asian Financial Crisis and Its Enlightenment

After Asian financial crisis, the Japanese government quickly adjusted its foreign economic policy and, unlike their traditional image of inaction, actively carried out and led the crisis rescue work through separate policies. The introduction and implementation of the “New Miyazawa Initiative” represented that the focus of the Japanese government has shifted to the preparation for and construction of the regional local currency bond market. This was backed by the strategic consideration to restart yen internationalization (or yen re-internationalization). It reflects the Japanese government’s reflection and adjustment on the path selection of promoting the internationalization of yen in the early stage. Relying on such change, The Japanese government intended to foster regional yen bond market to build yen backflow mechanism in East Asia and to realize the long-term objective of yen internationalization through “regionalization.” On the twentieth anniversary of Asian financial crisis, this paper re-examines the change to yen internationalization strategy, which is of practical significance for other cases’ attempt to internationalize local currencies as RMB internationalization at present. With reference to the strategic change in yen Re-internationalization, RMB internationalization shall shift the focus from “trade settlement” in the past to “capital outflow” through fostering the regional RMB bond market, expand RMB backflow mechanism. China shall focus on Asian Infrastructure Investment Bank (AIIB) and other new regional financial cooperation platforms to promote RMB regionalization, thus finally realizing the strategic objective of RMB internationalization. Nevertheless, this path selection is inseparable from China’s positive attitude toward financial and capital liberalization.

Analyzing Oil Price Shocks and Exchange Rates Movements in Korea using Markov Regime-Switching Models

Korea imports all of its crude oil, and is the world's fifth largest oil importing country. We analyze the effects of oil prices, interest rates, consumer price indexes (CPIs), and industrial production indexes (IPIs) on the regime shift behavior of the Korean exchange rates against the USA from January 1991 to March 2019. We use the Markov regime switching model (MRSM) to detect the regime shift behavior of the movements of Korean exchange rates. In order to select the optimal MRSM, we fit a total of 30 models considering four explanatory variables. The selected model based on Akaike information criteria (AIC) and maximum log likelihood (MLL) includes the log-differentials of oil prices, the log-differentials of CPIs compared to those of the US, and its own auto-regressive terms. Based on the selected MRSM model, throughout all markets, we find evidence to support the existence of two distinct regimes: a stable regime with low-volatility, and an unstable regime with high-volatility. The regime with high-volatility includes the Asian financial crisis of 1997 and the global financial crisis of 2008–2009 in the Korean exchange rates market. In the regime with low-volatility, the Korean exchange rates are not significantly influenced by any of the explanatory variables, except for its own auto-regressive terms. In the regime with high-volatility, the Korean exchange rates are significantly influenced by the CPIs and oil prices. The transition probability from the regime with low-volatility to the regime with high-volatility is about ten times that of the opposite case.

Organizational slack and innovativeness: the moderating role of institutional transition in the Asian financial crisis

Research has suggested that organizational slack can positively or negatively affect the innovativeness of a firm; however, the point at which such slack has a more salient impact remains unclear. This study adds to the literature by highlighting how the effects of organizational slack may differ depending on institutional environments, a market-oriented or a government-driven institutional environment. We posit an inverted U-shaped relationship between organizational slack and innovati`veness. We further hypothesize that institutional environments moderate this relationship. We find broad support for these arguments in a comprehensive data set representing South Korean manufacturing firms from 1992 to 2009.

China’s coal consumption in a globalizing world: Insights from Multi-Regional Input-Output and structural decomposition analysis

The growth of global carbon emissions is largely driven by coal-burning in China. China has consumed approximately half of global coal; as such, limiting its coal demand is important for curbing carbon emissions in the country and around the world. Developing effective approaches to limit China’s coal demand requires comprehensively understanding the trajectory and drivers shaping its coal footprint in the globalized world. Past studies have investigated production-based coal consumption within China’s sovereign territory boundary, but have not addressed consumption-based coal consumption and the globalization background. To fill this research gap, this study conducted a multi-regional input-output analysis – structural decomposition analysis to analyze China’s coal footprint in a globalized world. The results show a continued rise in the influence of globalization on China’s coal consumption, despite the 1997 Asian financial crisis and 2008–09 global economic crisis lowering of global trade. The percentage of other countries’ coal demand on China’s production-based coal footprint increased from 20% in 1995 to nearly 30% in 2011, through a global transfer of virtual coal through trade. Virtual coal refers to the coal consumed to support production activities. Meanwhile, the impact of other countries’ coal supply on China’s consumption-based coal footprint increased from less than 2% in 1995 to more than 4% in 2011. However, the decomposition results showed that domestic demand was the leading contributor to Chinese production-based and consumption-based coal footprint. This was offset by the domestic coal intensity effect. To cut China’s coal, strategies to cap its total coal consumption should be considered in a globalized world. Improving energy intensity is an effective approach for the country; China should be leveraging the globalized world, rather than serving as the world’s factory through high coal consumption and exports.

Financial crisis and cointegration of systemic risk in Southeast Asian banking

This paper aims to investigate the banking sector integration through a cointegration analysis of bank systemic risk in ASEAN-5 from 1998 to 2013 by taking financial crises into consideration. Our empirical findings highlight that there is one cointegrating vector in general, suggesting that the ASEAN-5 banking sectors are not completely segmented in terms of systemic risk. A closer investigation, however, reveals that the banking sectors were completely segmented during the 1997/1998 Asian financial crisis (AFC) and partially segmented during the 2008 global financial crisis (GFC). The latter might indicate an improvement in banking sector integration in several countries of ASEAN-5 during the GFC compared to during the AFC. Hence, this paper highlights that the agenda of banking sector integration in ASEAN-5 should consider the influence of financial crises to ensure the effectiveness of cross-border crisis management protocol when the ASEAN-5 banking sector tends to be segmented in times of crisis. In general, portfolio diversification in ASEAN-5 also remains beneficial for global investors in banking. JEL Classification : F36, G21, G28 DOI: https://doi.org/10.26905/jkdp.v23i4.3669

Thailand

The Thai banking system shows a substantial resilience to severe shocks. The solvency stress tests indicate that the largest banks can withstand an adverse scenario broadly as severe as the Asian financial crisis. While three banks would deplete their capital conservation buffer (CCB) under the adverse scenario, recapitalization needs would be minimal. A battery of complementary sensitivity stress tests, which allows to cover in more detail certain risk factors, also confirmed the overall picture of a resilient baking system: no particular vulnerability emerged from the analysis of the bond portfolio to an increase in government and corporate spreads, exposure to foreign exchange risk, and concentration risk in the loan portfolio, with the possible exception of one entity with a particular concentration on single-name exposures. From a systemic risk perspective, certain risk concentrations can act as shock amplifiers in case of stress, and hence highlight the importance of improving and expanding the range of analytical tools to detect them. The BoT’s solvency stress test exercise, conducted independently based on the same macro scenarios, showed very similar results despite some fundamental differences of approach, providing a mutual check on the overall robustness of the results.

Rational Choice Theory and Social Solidarity

The collapse of New Order regime was caused by the Asian financial crisis with the crisis of confidence by Suharto and his political cronies. The origin of the Indonesian crisis situated in the effort to maintain foreign financial capital could not restore the deficit of the national market, while they also tried to keep the stability of fixed exchange rate. Under Suharto, Indonesia was ruled by the military dual-function system and authoritarianism. Popular uprising, pillages, and demonstrations arose in the breakdown of New Order. The aim of this paper is to analyze the rational choice theory of New Order regime and the social solidarity of the popular uprising in the Indonesian people. By the attempt to scrutinize the New Order regime, there are some questions need to be asked. Firstly, how was the emergence and his political scheme in the history of Indonesia? Secondly, why the Asian Financial Crisis brought Suharto and New Order regime into its downfall? and thirdly, what was the effect of mob violence that appeared in 1998? Through these questions, rational choice institutionalism and social solidarity will be the approaches to delve the analysis of New Order regime by differentiate the governmental, national and international scale of the study.

Crises Beyond Belief: Findings on Contagion, the Role of Beliefs, and the Eurozone Debt Crisis from a Borrower–Lender Game

The 1997 Asian financial crisis, the 1998 Russian crisis, the 2007 global financial crisis, and the 2009 Eurozone crisis redrew the landscape of economic risk. Each crisis elucidated the systemic nature of economic risk, where adverse events appear increasingly capable of quickly spreading from one country to the next through a process commonly known as contagion. This paper presents a borrower–lender game with sequential moves and imperfect information, to discuss the potential for contagion through debt and trade channels while highlighting the role of beliefs. While many in the literature focus on contagion as a direct transmission of economic shocks through debt and trade channels, this paper finds that contagion through trade is unlikely and that the role of lender beliefs can result in apparent contagion. The paper presents new theory, computational solutions, extensive sensitivity analysis, and a case study of the Eurozone crisis. Results demonstrate that changes in lender beliefs following revelations of a crisis in one country may lead a lender to be unwilling to lend to another country. This in turn may create a self-fulfilling prophecy where, without access to credit, that country may be less willing and able to repay past debts. Furthermore, results demonstrate that the borrower–lender game in this paper can explain apparent contagion throughout the Eurozone crisis through deteriorating lender beliefs. While the conventional story is that contagion leads to real propagations through debt (or trade), we find that a real propagation of shocks is not needed.

Opportunity or Crisis? Volatility and Leverage Effect in the World’s Largest Economies

This paper examines the relationship between asset volatility and leverage for the three largest economies (based on purchasing power parity) in the world; US, China, and India. Collectively, these economies represent Int$56,269 billion of economic power, making it important to understand the relationship among these economies that provide valuable investment opportunities for investors. We focus on a volatile period in economic history starting in 1997 when the Asian financial crisis began. Using autoregressive models, we find that Chinese stock markets have the highest volatility among the three stock markets while the US stock market has the highest average returns. The Chinese market is less efficient than the US and Indian stock markets since the impact of new information takes longer to be reflected in stock prices. Our results show that the unconditional correlation among these stock markets is significant and positive although the correlation values are low in magnitude. We also find that past market volatility is a good indicator of future market volatility in our sample. The results show that positive stock market returns result in lower volatility compared to negative stock market returns. These results demonstrate that the largest economies of the world are highly integrated and investors should consider volatility and leverage besides returns when investing in these countries.

Thailand

Banks represent a sizable share of the financial sector in Thailand, but other deposit-taking institutions and NBFIs have grown significantly in the last decade. While assets of banks represented 46 percent of total financial assets at end-2018, the government-owned SFIs and TCCs now play a key role in providing credit to households. Assets of the insurance and mutual fund sectors have doubled as a share of GDP over the last decade, and capital markets are largely on par with regional peers. Financial vulnerabilities appear to be contained, but household indebtedness is relatively high and there are signs of weaknesses in some corporates and SMEs. Weaker-than-expected growth in China and advanced economies, sharp rise in risk premia, and entrenched low inflation would adversely impact the financial system. Despite these risks, the banking sector is resilient to severe shocks. Stress tests results and sensitivity analysis indicate that the largest banks can withstand a shock broadly as severe as the Asian financial crisis. While data is limited, deposit-taking SFIs appear to be vulnerable to asset concentration and interest rate risk. Systemic and contagion risks stemming from interlinkages across banks and nonbanks are limited. Risk analysis could benefit from data improvements, including on liquidity and SFIs, and from the development of tools to assess concentration risk at an entity level.

IMPACT OF FINANCIAL CRISES ON THE DYNAMICS OF CAPITAL STRUCTURE: EVIDENCE FROM KOREAN LISTED COMPANIES

This study examines the impact of the 1997 Asian financial crisis and the 2008 Global economic crisis on the capital structures of Korean non-financial listed companies. Using a panel data covering 1,159 Korean listed non-financial firms from 10 industrial sectors over a 31-year period (1985–2015), this study investigates the patterns of firms’ capital structures before and after the crises and identifies their speeds of adjustment toward the optimal leverage. This study finds different effects of the two crises on both capital structures and adjustment speeds. The average debt ratio fell significantly after the 1997 Asian financial crisis. The distance between the optimal and the observed debt ratios shrank after the Asian crisis, while the speed of adjustment increased two-fold. Unlike the Asian financial crisis, the global economic crisis of 2008 had a positive effect on companies’ debt ratios and the speeds of adjustments toward the optimal leverage. Our empirical analysis shows that, on average, the Korean non-financial listed companies decreased their debt ratios over the entire period of observation, with the leverage being the highest before the Asian financial crisis and lowest after the global economic crisis. Our results also show that the debt ratios of Korean chaebols were higher than that of non-chaebols. Moreover, we find that the high level of leverage of Korean firms was associated with tangible assets, income variability, size and age of the firm, non-debt tax shield and uniqueness.

Investigation of asymmetric impulse responses between average consumption propensity and average food consumption propensity of household in Korea

Average consumption propensity (ACP) and average food consumption propensity (AFCP) are important indices for implementing macroeconomic and food policies. The present paper investigates the existence of asymmetric responses of ACP and AFCP to positive and negative shocks of each series in Korea. According to the estimation results of the Structural Vector Autoregression (SVAR) model, ACP and AFCP are analysed to have asymmetric responses to negative and positive shocks, regardless of whether the shock is imposed on the own or on the other series. The derived absolute values of the responses indicate that ACP is more influenced by AFCP, which implies that a shock on AFCP is more permanent than one on ACP. The responses of ACP and AFCP appear to be lower during the period after 1998 when the Asian financial crisis occurred. This implies that not only food consumption, but also overall consumption of households became stabilised after the Asian financial crisis.

What drives business cycles in Korea?

This paper sets up a two agent new Keynesian model to explore the driving forces in business cycles in Korea. It finds that the estimated share of constrained households increased after the Asian financial crisis. The estimated model via maximum likelihood shows that the technology shocks are important in the variations of output, while the monetary shocks have played a pivotal role in inflation variations. However, the contribution of the demand shock is negligible in explaining output and inflation variations in Korea.

FOREIGN DIRECT INVESTMENT DETERMINANTS IN THE MANUFACTURING SECTORS IN MALAYSIA

Foreign direct investment (FDI) is a vital driver for economic growth in a country. Hence, FDI determinants should be identified in order to promote FDI. FDI could stimulate economic growth and economic growth could attract FDI. This study examines foreign direct investment (FDI) determinants in the main manufacturing sectors and the impact of FDI on economic growth in Malaysia. Moreover, this study examines the link between FDI and real national income.  The vector error correction model (VECM) is used to estimate FDI determinants and the link between FDI and real national income. The results of the vector VECM show that the coefficients of real exchange rate are found to have positive impact on FDI. The coefficients of real national income, trade openness and real infrastructure are mostly found to have positive impact on FDI whilst the coefficients of real average wage and financial development are mostly found to have negative impact on FDI. Autocracy and polity are found to be significant determinants for many manufacturing sectors in the short run. Inflation is found to influence negatively FDI in the transport equipment sector. The Asian financial crisis, 1997-1998 is found to have influential impact on FDI in the petroleum products sector and the chemical and chemical products sector. These findings reveal that FDI determinants are not exactly the same for all the manufacturing sectors. Therefore, FDI would be attracted through a variety of policies. FDI is found to Granger cause real national income for the basic metal products sector and the chemical and chemical products sector whilst real national income is found to Granger cause FDI for the petroleum products sector. These findings demonstrate that FDI and economic growth are closely related. FDI can sustain economic growth in Malaysia. FDI is crucial for economic growth. &nbsp

Beyond the Chaebol? The Social Purpose of Entrepreneurship Promotion in South Korea

ABSTRACTThe global diffusion of entrepreneurship promotion, motivated by policymakers’ desire to drive innovation, job creation and economic growth, is increasingly ubiquitous. As part of this trend, South Korea, an archetypal developmental state, has provided growing support to entrepreneurial activities in the 20 years since the Asian Financial Crisis. The motivation – and resulting form – of Korea’s policies is nevertheless unique among developmental states. In this article, we explain its distinctiveness by arguing that Korean entrepreneurship promotion is motivated by tripartite social purposes: (permanent) job creation, economic diversification and chaebol competitiveness through the injection of the innovation capacity of start-ups. Making use of interview data and policy document analysis, we show that policymakers design entrepreneurship promotion according to these three social purposes. We conclude with a critical analysis of the policy shift, asserting that start-ups offer a distinct set of social risks when conceptualised as a provider of steady jobs.

Total Factor Productivity Growth: Evidence from West African Economies

Since the 1990s, the economic growth of the West African region has been remarkable, with average GDP growth of 5 per cent annually. In view of that, this article investigates the Total Factor Productivity (TFP) performance for the Economic Community of West African States (ECOWAS) region, which takes into account the recent development on political stability and trade openness. There were also periods when TFP fell sharply, the most significant happened in the late 1990s and 2000s where TFP dropped significantly which might be attributed to the spillover effect of the Asian and global financial crises. Our results showed that TFP was performing well for the region as well as for each member countries for the period of the study. We acknowledged that the estimated TFP in our model captures other factors such as human capital, health and other institutional factors that could affect economic growth. We also estimated the Technical Efficiency (TE) for the ECOWAS region using the Stochastic Frontier Modelling and the result indicates that the TE performance is well below the optimal level of production.

Comparative study on finance‐growth nexus in Malaysia and Indonesia: Role of institutional quality

AbstractThe impact of financial development (FD) on economic growth in the context of Malaysia and Indonesia has been examined in this study regarding the role of the financial crisis and strategic changes in the institutional setup. Autoregressive distributed lags and threshold regression were applied, and time series data were analyzed for the period between 1984 and 2017 revealing that FD promoted the economic growth in both economies during this period. A nonlinear analysis also revealed that FD and economic growth follow an inverted U‐shape relation in the case of Malaysia whereas, in Indonesia, it followed a U‐shape relation. It was discovered that not all measures of FD promote economic growth. For instance, market capitalization was profound in the Malaysian economy while credit to the private sector and money supply was conducive for the Indonesian economy. The analysis demonstrated that the Asian and global financial crisis adversely affected economic growth in the case of Indonesia due to poor institutional quality (IQ), whereas in Malaysia it was relatively safe from the adversity brought about by the financial crisis due to the presence of IQ and good corporate governance. However, a positive change in IQ was found to have a much greater impact on augmenting economic growth rather than playing a mediating role in connection with FD and economic growth in Malaysia. In the context of Indonesia however, IQ was found to impede economic growth but played a positive and significant mediating role in the nexus of FD and economic growth. The spill‐over analysis revealed that Malaysian FD is positively associated with Indonesian economic growth while Indonesian FD is negatively associated with the Malaysian economy. This study provided all economic and anecdotal explanations in supporting the results of this study.

Do Business Groups Help Their Affiliated Firms in Their Performance? : Evidence from the Time of High External Capital Market Frictions

This paper studies the benefit of business group affiliation using the unique dataset of firms that are acquired by Korean chaebols in the aftermath of the 1997 Asian financial crisis. To establish the causality that group affiliation causes changes in performance of affiliated firms, the study employs firms that were once nonchaebol, but later acquired by chaebols and became newly affiliated to chaebols. The analyses focuses on the Asian financial crisis that represents high external capital market frictions to bolster the argument for the group affiliation benefit. Panel regressions show that the acquired firms improve performance after acquisitions. Moreover, to address a potential concern that firm-specific characteristics may explain post-acquisition performance of the acquired firms, I match the acquired firms with nonchaebol firms with respect to pre-acquisition characteristics. The matching estimator shows that the new chaebol firms outperform the control firms after chaebol acquisitions. Cross-sectional tests reveal that the affiliation benefit is more pronounced within larger firms and firms with higher ultimate ownership of the controlling families. Finally, the new firms expand market shares and gain stronger pricing power after being group-affiliated, which sheds light on the bright side of group affiliation such as sharing group reputation and internal capital markets.