Asia Economic Crisis

1. Asia Economic Crisis

2. IMF and World Bank • IMF: to rescue during emergency • World Bank (International Bank for Reconstruction and Development): to help plan for development • Old boy rules: the US names the president of the World Bank (Paul Wolfowitz, past deputy defense secretary of US), European countries name the head of IMF

3. IMF Articles of Agreement explicitly permitted capital controls • Article VI section 3: Controls of capital transfers: Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payment for current transactions or which will unduly delay transfers of funds in settlement of commitments, …(signed in 1944) • The US, didn’t not remove its most prominent capital controls in 1974.

4. Washington concensus • A term referring to the policy held by the US Treasury, IMF, and World Bank • Privatization, financial liberalization, budget balance • First “successfully” applied in Chile, Argentina, etc. (in a time with rampant inflation, government deficits, etc.) • Should the same be applied to other countries?

5. Type 1 Financial Crisis: “Excessive Lending” • Banks and creditors stop to roll in loans in a massive way and firms are unable to repay • moral hazard, corny capitalism =>seems to suggest Asia countries were rotten and corrupt • But since lending is voluntary, can we say the lenders (foreign banks, the Wall Street, etc.) are equally rotten and corrupt?

6. Type 2 Financial Crisis: Speculative Attacks • Speculators short sell a country’s currency (say, HK$) in a massive way, wishing to force a devaluation/depreciation and gain from it • Time 1: Soros gets US$1B now by short selling HK$7.8B. • Time 2: After devaluation, one US$ is worth HK$15.6. • Time 3: Soros buys HK$7.8B using US$0.5B to complete the deal, gaining US$0.5B.

7. Self Fulfilling Prophecy • Even with sound fundamentals, a country may still be susceptible to self fulfilling prophecy • That is, an outcome may result where a lot of speculators short sell the currency leading to a devaluation • However, the outcome is possible where nobody short sells and no devaluation occurs. • The country, just a victim, should not be blamed. • Bank runs is a related phenomenon

8. What caused the crisis? • Viewpoint 1: Crony capitalism • Viewpoint 2: Capital account liberalization (pushed by IMF) • If these countries have not had capital account liberalization, their firms would not have had excessive loans, neither would speculators have been able to short sell.

9. What caused the crisis? • Asian countries had very high savings rate and capital account liberalization would give little help to them. • IMF pushed them with little evidence that they promoted growth, but ample evidence that they imposed huge risks.

10. Remedies proposed by IMF • Contractionary Policies • In light of looming recession! • High interest rate to defend currency • Leading to distress or bankruptcy of highly indebted firms • Trade balance • Beggar-thy-neighbor: contagion as countries tried to cut down imports in the same time

11. Remedies proposed by IMF • Structural Reforms • Shutting down banks • Tightening controls on banks • Restructuring distressed firms • Fiscal Austerity • Cutting down government subsidies on food, fuel, etc. • The Washington consensus, which cured Latin America, was inadvertently used to cure Asia • But crisis was not caused by structural problems. Pointing out deep structural problems is like crying fire in a theater!

12. A conspiracy theory? • A conspiracy theory like that of EHM? • “I [Stiglitz] believe that there is a simpler set of explanations—the IMF was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community” (GAID, p.130)