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The Asian financial crisis

Crisis, reform and recovery

Shalendra D. Sharma

The Asian financial crisis of 1997-98 shook the foundations of the global economy and what began as a localised currency crisis soon engulfed the entire Asian region. This book explores what went wrong and how did the Asian economies long considered 'miracles' respond, among other things. The combined effects of growing unemployment, rising inflation, and the absence of a meaningful social safety-net system, pushed large numbers of displaced workers and their families into poverty. Resolving Thailand's notorious non-performing loans problem will depend on the fortunes of the country's real economy, and on the success of Thai Asset Management Corporation (TAMC). Under International Monetary Fund's (IMF) oversight, the Indonesian government has also taken steps to deal with the massive debt problem. After Indonesian Debt Restructuring Agency's (INDRA) failure, the Indonesian government passed the Company Bankruptcy and Debt Restructuring and/or Rehabilitation Act to facilitate reorganization of illiquid, but financially viable companies. Economic reforms in Korea were started by Kim Dae-Jung. the partial convertibility of the Renminbi (RMB), not being heavy burdened with short-term debt liabilities, and rapid foreign trade explains China's remarkable immunity to the "Asian flu". The proposed sovereign debt restructuring mechanism (SDRM) (modeled on corporate bankruptcy law) would allow countries to seek legal protection from creditors that stand in the way of restructuring, and in exchange debtors would have to negotiate with their creditors in good faith.

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The domino that did not fall

Why China survived the financial crisis

Shalendra D. Sharma

When the financial crisis unexpectedly hit the high-performing East and Southeast Asian economies in mid-1997, it was widely believed that the People's Republic of China (PRC) would be the next domino to fall. This chapter argues that China's handling of the crisis, and in particular, the country's ability to withstand the crisis, must be understood within the context of its domestic political economy. An important lesson of Mexico's peso crisis of 1994 and the Asian financial crisis was that a sound banking sector is the single most essential element of a healthy financial system. The State Administration for Foreign Exchange (SAFE) approval requirements and the related limitations on foreign participation in PRC equity markets had translated into low levels of portfolio investment. The Chinese authorities significantly intensified the enforcement of exchange and capital controls and moved to reduce circumvention.

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Beyond the Asian crisis

The evolving international financial architecture

Shalendra D. Sharma

This chapter discusses some of the core areas of debate, consensus and disagreements on the new International financial architecture. To critics, the International Monetary Fund (IMF) is a Bretton Woods relic incapable of playing a constructive role in the building of the new International financial architecture. While its harshest critics want the IMF altogether abolished, others are prepared to live with a severely restricted institution with limited powers and resources. Despite the fact that the IMF made mistakes in dealing with the Asian crisis, this should not invalidate the rationale for having a universally representative institution to oversee the implementation of collectively agreed rules. The Asian countries hardest hit by the crisis had all pursued dive. During the height of the Asian crisis, the Malaysian government dramatically challenged the prevailing wisdom and imposed capital controls by bringing the issue to the forefront of economic policy debates.

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Conclusion

Post-crisis Asia – economic recovery, September 11, 2001 and the challenges ahead

Shalendra D. Sharma

In the aftermath of East Asia's spectacular economic collapse in mid-1997, even the most optimistic predictions gave at least a decade before Asia could fully recover. Although it was expected that the growing intra-Asian trade and demand from the European Union would help to fill the void, there was little doubt that Japan's recovery was crucial to the region's recovery. Most Asian countries experienced a sharp economic slowdown beginning in the last quarter of 2000. The problems of a deteriorating external environment due in large part to the downturn in the US economy were exacerbated by the September 11 terrorist attacks. The single greatest push for East Asian regionalism had been the Asian financial crisis. It was clear that the Asian governments agreed that they must reduce their dependence on the G-7 countries and multilateral financial institutions like the International Monetary Fund (IMF) and the World Bank.

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Introduction

Issues, debates and an overview of the crisis

Shalendra D. Sharma

This introduction presents an overview of the key concepts discussed in the subsequent chapters of this book. The book presents the case studies of the individual countries: Thailand, Indonesia, South Korea and the People's Republic of China (PRC). It examines the factors behind the financial crisis and highlights the underlying similarities and the fundamental differences between the individual cases. The book provides a review of the competing perspectives on the new international financial architecture. It explains a number of fundamental issues and its implications for the emerging market economies. The book also presents a more nuanced picture of the International Monetary Fund's (IMF) policies and its socioeconomic impact. It assesses the IMF's efforts to reduce moral hazard. The book also examines the reasons behind Asia's remarkable economic recovery and the challenges that lie ahead.

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Thailand

Crisis, reform and recovery

Shalendra D. Sharma

This chapter argues that the Bank of Thailand (BOT) made two egregious policy blunders. First were the futile and costly defense of the baht during late 1996 and the first half of 1997. Second was the bleeding of the Thai government's Financial Institutions Development Fund (FIDF) to prop up failing financial institutions, while neglecting to take actions to remedy the underlying structural problems in the financial and banking sector. Drawing on the Bank of Thailand's published materials, the chapter suggests that Thailand's long period of economic boom had lulled the technocrats into complacency. Unlike earlier financial crises in the developing world, where governments over-borrowed until they were forced to seek a bailout from the International Monetary Fund (IMF), or a multilateral debt rescheduling from externally-based creditors, the Thai crisis was rooted in the private sector.

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Indonesia

Crisis, reform and recovery

Shalendra D. Sharma

This chapter argues that a more nuanced understanding of Indonesia's economic crisis can be gained by differentiating between the sources of 'vulnerability' and the 'precipitating' factors. The roots of the crisis can be traced back to the mid-1980s, when Indonesia embarked on an ambitious economic reform program. On January 27, 1998, with their backs against the wall, both the International Monetary Fund (IMF) and the Indonesian government took steps to deal with the banking sector problems. In the ensuing weeks, as the embattled Suharto vacillated and stalled, the economic downturn deepened and the Indonesian economy was brought to the brink of total collapse. Liquidity support to the banking sector continued to increase in large part to meet the continuing deposit withdrawals. Moreover, as part of Indonesia's commitments to the IMF, the government took steps to review and strengthen the prudential and regulatory framework of the banking system.

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Korea

Crisis, reform and recovery

Shalendra D. Sharma

This chapter argues that Korea's financial crisis had both long-term and short-term causes. Weaknesses in both the financial and corporate sectors, especially inefficient management and imprudent lending among financial institutions, coupled with over investment and low profitability in the corporate sector, made them vulnerable to external turbulence. The Korean crisis also illustrated the fact that, although the alliance between the government, the chaebols and the banks had been in place since the 1960s, it was no longer compatible with Korea's integration into the global financial market. The Korean form of democratization most closely followed what Samuel Huntington had called 'transplacement', where the sitting government would make a concession and the opposition groups would accept the compromise in order to avoid the political gridlock or civil disorder. The president-elect cooperated with the outgoing government and the ruling party to get legislative backing for several important reform measures.