What Happened to the Asian Miracle?

1. What Happened to the Asian Miracle?

2. The Asian Tigers • Throughout the 1990s, Asian economies were reporting stellar rates of economic growth • Per Capita income has increased by a factor of ten over the past 30 years. • Asian countries attracted over half of all capital inflows to developing countries

3. The Asian Tigers: GDP Growth

4. The Asian Tigers • Throughout the 1990s, Asian economies were reporting stellar rates of economic growth • Suddenly, however, in the summer of 1997, Thailand devalued the Baht followed by devaluations of the Philippine Peso, the the Malaysian Ringgit, then the Indonesian Rupiah

5. The Asian Tigers

6. The Asian Tigers • Throughout the 1990s, Asian economies were reporting stellar rates of economic growth • Suddenly, however, in the summer of 1999, Thailand devalued the Baht; followed by devaluations of the Philippine peso, the the Malaysian Ringgit, then the Indonesian Rupiah • Following the devaluation, the region suffered a major contraction and persistently lower rates of economic growth.

7. The Asian Tigers: Post Crisis GDP Growth

8. Why did Asia Collapse • Malaysian Prime Minister Mahathir Mohamad has been the wild man of the Asian crisis, blaming all his problems on manipulations by Jewish speculators • Was the Asian Crisis due to irrational speculation or were there real structural problems in Asia?

9. The Good News • On the surface, the Asian economies looked very strong • High rates of economic growth • High labor productivity growth • High rates if investment financed by high domestic savings • Low government deficits

10. Investment Rates (% of GDP)

11. Savings Rates (% of GDP)

12. Labor Productivity Growth

13. Government Deficits/Surplus (% of GDP)

14. More Good News • Asian Stock and Real Estate Markets were booming

15. Stock Market Indices

16. However, underneath the good news…… • Was Asian growth due to “inspiration” or “perspiration”?

17. However, underneath the good news…… • Was Asian growth due to “inspiration” or “perspiration”? • All the Asian countries had very high rated f labor productivity growth, where labor productivity is defined as LP = Y/L (real output per labor hour) • This measure of productivity omits an important input

18. Sources of Economic Growth • Recall, that we assumed three basic inputs to production

19. Sources of Economic Growth • Recall, that we assumed three basic inputs to production • Capital (K) • Labor (L) • Technology (A)

20. Sources of Economic Growth • Recall, that we assumed three basic inputs to production • Capital (K) • Labor (L) • Technology (A) • Growth accounting attempts to separate the growth effects of each input

21. Step 1: Estimate capital/labor share of income K = 30% L = 70% Growth Accounting

22. Step 1: Estimate capital/labor share of income K = 30% L = 70% Step 2: Estimate capital, labor, and output growth %Y = 5 %K = 3 %L = 1 Growth Accounting

23. Step 1: Estimate capital/labor share of income K = 30% L = 70% Step 2: Estimate capital, labor, and output growth %Y = 5 %K = 3 %L = 1 Productivity growth will be the residual output growth after correcting for inputs Growth Accounting

24. Step 1: Estimate capital/labor share of income K = 30% L = 70% Step 2: Estimate capital, labor, and output growth %Y = 5% %K = 3% %L = 1% Productivity growth will be the residual output growth after correcting for inputs %A = %Y – (.3)*(%K) – (.7)*(%L) Growth Accounting

25. Step 1: Estimate capital/labor share of income K = 30% L = 70% Step 2: Estimate capital, labor, and output growth %Y = 5 %K = 3 %L = 1 Productivity growth will be the residual output growth after correcting for inputs %A = %Y – (.3)*(%K) – (.7)*(%L) %A = 5 – (.3)*(3) + (.7)*(1) = 3.4% Growth Accounting

26. Sources of US Growth

27. Productivity Growth in Thailand • Labor productivity growth in Thailand averaged around 15% in the 90’s, but how much of this was technological? • %Y = 8 • %L = 3 • %K = 40

28. Productivity Growth in Thailand • Labor productivity growth in Thailand averaged around 15% in the 90’s, but how much of this was technological? • %Y = 8 • %L = 3 • %K = 40 %A = 8 – (.7)(3) – (.3)(40) = -6

29. The Bad News • The growth in Thailand was attracting lots of foreign investment and was fueling an investment boom. • This boom was largely debt financed • However, without technological improvement, this growth is not sustainable.

30. Bank Lending (% of GDP)

31. Finances of Korean Chaebol (in 100 Million Won)

32. Asian Financing • While these countries did have high domestic savings rates, much of the financing came from overseas

33. Current Account Balance (% of GDP)

34. Foreign Debt (% of GDP)

35. Asian Financing • While these countries did have high domestic savings rates, much of the financing came from overseas • Further, a large fraction of this debt (20-70%) was short term.

36. Asian Financing: Moral Hazard • A further complication was that the Asian governments implicitly backed all private sector loans. This exacerbates the natural moral hazard problem already present in financial markets

37. The Beginning of the End • By the mid nineties, the profitability of Asian companies began to fall

38. Return on Assets by Korean Chaebol

39. The Beginning of the End • By the mid nineties, the profitability of Asian companies began to fall • As profits fell, loan defaults increased

40. Non-Performing Loans (% of Total Loans)

41. To Make Matters Worse • Most countries were pegged to the dollar. As domestic inflation rates rose, they experienced a real appreciation against the US.

42. To Make Matters Worse • Most countries were pegged to the dollar. As domestic inflation rates rose, they experienced a real appreciation against the US. • As the dollar appreciated against the Yen, so did the Baht, Ringgit, etc.

43. To Make Matters Worse • Most countries were pegged to the dollar. As domestic inflation rates rose, they experienced a real appreciation against the US. • As the dollar appreciated against the Yen, so did the Baht, Ringgit, etc. • Japan slid into a recession in the early nineties.

44. Liquidity Problems • With exports falling, there was insufficient cash to refinance short term borrowing • Further, many of these loans were dollar denominated, which put additional strain on dollar reserves (to maintain the peg)

45. Why not float?

46. Why not float? • With many loans denominated in dollars, a currency depreciation raises the value of the loan in domestic currency. • Domestic interest rates would have to be raised to attract capital (interest rates would need to compensate for the currency depreciation)

47. Is maintaining the peg better?

48. Is maintaining the peg better? • Not really…….by maintaining the peg to the dollar, the central bank must continue to buy up domestic currency which contracts the domestic money supply.

49. Enter the IMF • As the Asian debts piled up, the IMF (International Monetary Fund) intervened. The offered emergency loans, but with strings attached.

50. Enter the IMF • As the Asian debts piled up, the IMF (International Monetary Fund) intervened. The offered emergency loans, but with strings attached.