Globalisation & Development                                 XIMB

                              Term Paper

   Recent Financial Crisis in East Asian Countries:
                     Experiences and Lessons

            Globalisation & Development

     Submitted to:                     Submitted by:
     Prof. C. Shambu Prasad            Awanish Kumar (11)
                                       Santosh Kumar Sharma (39)
                                       PGPRM- II

Globalisation & Development                                                   XIMB

             Recent Financial Crisis in East Asian Countries
                           Experiences and Lessons


The 1990s saw a number of financial crises erupting in many developing countries,
especially those which were boasted as ‘model economies’ by the international
financial institutions. Beginning with the Mexican crisis, the so-called ‘Asian
Tigers” were the next to be affected by the modus operandi of global finance
capital. This term paper analyse the financial crisis in Mexico in 1994-95 and the
Southeast Asian currency crisis in 1997. The impacts of these financial crises on
the real economy and people are described in vivid detail. A critique of policy
responses of government and the politics of bailouts to deal with the financial crises
is presented. In this background, the wider implications of India’s recent moves to
open up its financial markets to global finance are discussed at the end. The present
economic situations of these countries have been given in the annexes.

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                            Table of Contents
                             Content                                  Page No
1. Pre Crisis                                                            4
2. Pattern During the Crisis                                             4
3. Collapse of a Model: The Mexican Crsis                                5
3.1 Impact of the crisis                                                 6
4. The Southeast Asian Currency Turmoil                                  6
4.1 The case of Thailand                                                 6
4.2 Impact of the crisis                                                 8
5. Contagion effect on other Nations                                     8
5.1 South Korea: Victim of heavy commercial borrowings                   8
5.2 Indonesia: The mighty fall of Rupiah                                 9
5.3 Malaysia: Failed to avoid the currency crisis                        9
5.4 The Philippines: Asia’s next tiger                                  10
6. Private Profits, Public losses: The great Asian bailout              10
6.1 Bailouts for whom?                                                  10
6.2 Who benefits from bailout programme?                                11
6.3 Who losses?                                                         11
7. Washington Consensus                                                 12
8. The IMF & its contribution to the crisis                             12
8.1 Contradictory Policies                                              13
9. Globalisation Discontentedly                                         13
9.1 Different countries different strategy                              13
9.2 Nations are very interdependent:                                    13
9.3 Macro economic solutions are needed                                 14
10. Will India go the southeast Asia way?                               14
10.1 Spillover impact of south east Asian currency crisis on Indian     14
10.2 Hot money flows constitute 80% of forex reserves                   15
10.3 Dangers of capital account convertibility                          15
10.4 Should India pursue capital account convertibility                 15
11. Conclusion                                                          17
12. Annexure
12. 1 Mexico current economy an overview 2003                           18
12.2 Thailand current economy an overview 2003                          19
12.3 South Korea current economy an overview 2004                       20
12.4 Indonesia current economy an overview 2004                         21
12.5 Malaysia current economy an overview 2004                          22
12. 6 Philippines current economy an overview 2004                      23
13. References                                                          24

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1. Pre-Crisis
Before the crisis, East Asia had experienced phenomenal growth; indeed, this
economic success is often referred to as the East Asia Miracle. Poverty had decreased,
and governments were more stable, providing more funding to education, and had
strong industrial policies. Governments were vital parts of the economy and
privatization was not reasonable.

2. Patterns During the Crisis

There were two patterns that emerged during the crisis. The first was the devaluation1
of the country's currency; this scenario played out again and again throughout the
region. If a trader believes a currency will devalue, he sells his stocks of that
currency2; this causes the currency to devalue as the supply of money increases but
the demand does not. As the currency devalues, more people sell their currency,
causing its value to drop more. Or, a government spends its foreign currency reserves
to prop up its own currency until it runs out of reserves. Either way, the currency falls
in value. This was the case in Thailand. There was a speculative attack on the
currency in May 1997 and this caused investors to sell off their baht holdings, thus
decreasing its value. By July, the Thai government had run out of foreign currency
reserves and couldn't support its exchange rate any longer; the baht dropped 20 per
cent on the first day of devaluation. The IMF offered to loan Thailand $17 billion in
order to keep the exchange rate3 stable.
The second pattern is one that occurred in South Korea. The U.S. pressured South
Korea to allow domestic firms to borrow from international banks. When the
international banks feared that the South Korean firms would be unable to pay back
its loans or roll the loans over (essentially taking out new loans to pay old loans),
banks stopped lending. As a result, South Korea couldn't roll its loans over and
defaulted on its original loans.

   1.   Devaluation is a reduction in the value of a currency with respect to other monetary units.

   2.   Currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of
        money, where money is defined as a medium of exchange (rather than a store of value).

   3.    In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX
        rate) between two currencies specifies how much one currency is worth in terms of the other.

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3. Collapse of a ‘Model’: The Mexican Financial Crisis
A number of external and internal factors were behind and sudden massive increase in
foreign investments in Mexico. The single major external factor was low interest rates
in the U.S. combined with the recession there and in other countries, which motivated
investors to invest in Mexico and elsewhere for bigger profits. The majorities of these
inflows were short-term and aimed at making quick profits through financial
speculation1 on stocks and other securities2 in the financial markets of Mexico. Only a
small portion of portfolio investments3 was used to create new physical assets, such as
factories or machinery. Thus, the gains from the foreign investments were more
illusory than real.

Moreover, with the increased availability of foreign funds and growing dependency
on them, Mexico was confronted by a sharp fall in the domestic savings. Mexico used
these funds to finance its increasing import consumption. Despite the fact that during
this period the exports from Mexico also peaked up, the import bill rose more rapidly,
leading to a current account deficit4. During 1990 and 1994, portfolio investment
inflow was $71.2 and 72% of it was used by the Mexican authorities to finance the
current account deficit. Considering it a boom period, departmental stores were full of
goods and consumer credit was offered on a generous scale, which increased the
indebtedness of households and banks. Mexico was living beyond its means.

At this point of time two major developments took place, which led to the collapse of
the peso and later of the economy. Firstly, interest rates in the U.S. began rising which
led to sudden flight of portfolio investments and short-term funds from Mexico back
    1.   Speculation involves the buying, holding, and selling of stocks, bonds, commodities,
         currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit
         from fluctuations in its price as opposed to buying it for use or for income via methods such as
         dividends or interest.
    2.   The legal term "security" still means the legal right of the secured party (usually a lender) to
         take the asset that backed the loan to satisfy the debt.

    3.   Portfolio investments- Portfolio investment represents passive holdings of securities such as
         foreign stocks, bonds, or other financial assets, none of which entails active management or
         control of the securities' issuer by the investor

    4.   Current account- The current account of the balance of payments is the sum of the balance of
         trade (exports less imports of goods and services), net factor income (such as interest and
         dividends) and net transfer payments (such as foreign aid).

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to U.S. financial markets. Secondly, Mexico suffered a series of political agitations
during this period which eroded investor confidence. Mexico government announced
a 13 percent peso devaluation which panicked foreign investors and they started
pulling their money out of Mexico. Over the next two days $5 billion fled the country.
The Mexican stock market lost one half of its value over within months of the

3.1 Impact of the crisis:
The financial crisis has led to a deterioration of the Mexican economy as well as the
living conditions of the people, especially the poor. In March 1995, president
announced an austerity plan, which included imposition of higher taxes and cuts in
public spending, especially in the social sectors. In addition, interest rates peaked up
at over 80 percent, which led to further decline in domestic investments by the
Mexican firms. The cumulative impact of the austerity plan were more intense in the
case of the poor people of Mexico, whose livelihood were further threatened by job
loss, fall in real wages1, credit crunch, rise in prices and interest rates, and further
reduction in social sector spending. Apart from poor people, a large section of the
middle class people ahs also been affected by the growing unemployment and lower
real wages. On the other hand, the rich have hardly been affected as they invested
their savings in dollars.

4. The Southeast Asian Currency Turmoil: The case of Thailand
Just two years after Mexico faced currency turmoil, Southeast and East Asian
countries were arrested by a similar crisis in mid 1997. Only a little while back, these
countries were being boasted as ‘models’ by the World Bank and the IMF for other
low income countries to follow.

4.1 Let us begin with the Thai crisis
In the early 1990s, Thailand started short-term borrowing from international banks
and put greater reliance on portfolio flows rather than on FDI2 to finance current

1 The term real wages refers to wages that have been adjusted for inflation.
2. Foreign direct investment (FDI) is defined as a long term investment by a foreign direct investor in
an enterprise resident in an economy other than that in which the foreign direct investor is based.

Globalisation & Development                                                                     XIMB

deficits. The short-term borrowings were largely facilitated by policy changes in
1993, when Thai companies were allowed to borrow from abroad. By August 1997
the composition of Thailand’s foreign debt had become unbalanced. Among the
incentives encouraging borrowings from abroad were the high domestic interest rates
and stable exchange rate policies. Thailand began taking foreign loans in foreign
currencies at the rate of 6-8 percent and started financing domestic companies and
individuals at an interest rate of 14-20 percent in baht. Since the opportunities in
productive sectors of the economy were getting reduced largely due to the stagnation
in exports, the banks and fiancé companies started financing short-term real estate1
businesses which was showing boom in early 1990s. Property related investment was
around 50 percent of the total investment.

By the end of 1996 and in early 1997 the fall in prices of real estate had landed the
majority of financial firms in serious trouble.

In February 1997, Somprasong Land became the first company to default on a Euro-
convertible debenture2. This was followed by the collapse of the largest finance
company in Thailand, Finance One. When it was revealed that around two-third of the
country’s 91 finance companies were in serious trouble, the investors lost confidence.
Both foreign and domestic investors started buying dollars, taking advantage of the
fixed exchange rates. With the FIIs3 heavy selling in the stock markets, the share4
prices dropped to record low levels by 65 percent in May 1997.

   1.   Real estate, or immovable property, is a legal term (in some jurisdictions) that encompasses
        land along with anything permanently affixed to the land, such as buildings

   2.   Convertible debenture- Any type of debenture that can be converted into some other security

   3.   An investor or investment fund that is from or registered in a country outside of the one in
        which it is currently investing. Institutional investors include hedge funds, insurance
        companies, pension funds and mutual funds

   4.   A share is one of a finite number of equal portions in the capital of a company, entitling the
        owner to a proportion of distributed, non-reinvested profits known as dividends and to a
        portion of the value of the company in case of liquidation.

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4.2 Impact of the Crisis
The IMF’s conditions include budget expenditure cuts of about 100 billion baht;
increase in the value-added tax from 7 to 10 percent and further reduction in
subsidies1 and public investments.

In the absence of new capital inflows, the domestic companies are finding it difficult
to meet the liquidity2 crunch. Many companies have announced cost reduction
measures, which largely include layoffs besides sharp cuts in wages and benefits.

In rural areas, the small farmers have been affected by the increased cost of
production because price of agricultural inputs such as chemical fertilizers, seeds,
insecticides, etc. have risen by over 30 percent, while prices of agricultural produce
have not correspondingly risen.

5. Contagion Effect on South Korea, Indonesia, Malaysia and
5.1 South Korea: Victim of Heavy Commercial Borrowings
When the Korean won faced the worst decline in recent history, it surprised many.
The fall in the won was so dramatic that it depreciated over 50 percent between July
1997 and January 1998. The real problem confronting South Koreas was not the
unproductive investments in real estate and other speculative businesses, but the
heavy shout-term borrowings by the private sector financial institutions from foreign
commercial banks.

The IMF insistence to increase the interest rates in South Korea has led to a rise in
interest rates at 19-20 percent, nearly 15 percent above the inflation rate. This move
has made more companies bankrupt. With the Korean domestic industry in deep

   1.   In economics, a subsidy is generally a monetary grant given by a government to lower the
        price faced by producers or consumers of a good, generally because it is considered to be in
        the public interest.

   2.   Market liquidity is a business or economics term that refers to the ability to quickly buy or
        sell a particular item without causing a significant movement in the price. The term is usually
        shortened to liquidity

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trouble after the stock market1 crash coupled with high interest rates and deflationary
pressures, many companies have very little option but to sell their stakes to foreign
investors at throwaway prices. Within one month of October and November 1997,
more than 100000 people became jobless.

5.2 Indonesia: The Mighty Fall of Rupiah
As in the South Korean case, a number of Indonesian companies had piled up
substantial foreign debt before the advent of the Southeast Asian currency crisis, and a
major part of this debt had a maturity of less than one year. In 1997, Indonesian
companies had $55 billion outstanding in foreign debt, 59 percent of which was in the
short-term category. The rupiah lost 58 percent of its value against the dollar in 1997
as Indonesian companies with heavy foreign borrowings rushed to buy the currency.
With the fall of the rupiah and the increase in the domestic rate of interest to prevent
capital outflows2, the domestic firms that had borrowed heavily from abroad incurred
heavy losses. The cost of repaying those loans has now more than doubled in rupiah
terms, leaving many companies with debt they simply cannot pay.

The devaluation of the rupiah has led to sharp rise in inflation thereby increasing the
living expenses of the majority of the population. The shrinking economy had led to
layoffs of thousands of workers.

5.3 Malaysia: Failed to avoid the Currency Crisis
As compared to earlier years, when the majority of inflows were in the form of FDI,
the majority of private capital inflows to Malaysia in the mid 1990s were in the form
of short-term loans and portfolio investments. The shout-term loans supplemented the
domestic investments in the unproductive sectors such as consumer and property
finance. The property sector loans grew faster than those in the manufacturing or
other sectors.

   1.    A stock market is a market for the trading of company stock, and derivatives of same; both
        of these are securities listed on a stock exchange as well as those only traded privately.

   2.   Capital outflow is an economic term describing capital flowing out of (or leaving) a
        particular economy. Outflowing capital can be caused by any number of economic or political
        reasons but can often originate from instability in either sphere.

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Anticipating an oversupply in the real estate business due to overcapacity and default
on short-term borrowings, the speculative attacks on the ringgit began which seriously
weakened it. Anticipating further weakening of the ringgit, the investors started taking
out their investments from the stock markets which led to a steep fall in stock prices.

5.4 The Philippines: Asia’s Next ‘Tiger’
When the Thai property and bank sectors began to shake, tremors immediately hit
Manila. Many investors predicted that the Philippines bubble would be the next to
bust, within days, the currency, peso, and stocks in Manila faced a sharp decline. The
peso fell by nearly 35 percent against the dollar during July-December 1997. The
weakened peso had led to increase in import costs, besides creating difficulties in the
repayment of the $45 billion foreign debt.

6. Private Profits, Public Losses: The Great Asian Bailout
6.1 Bailouts for Whom?
The currency crisis, especially in South Korea and Thailand, arose not from weak
economic fundamentals, but from shout-term capital flows and, therefore, the blame
lies primarily with investors and commercial banks, who were flooding the money in
short-term capital and portfolio flows in these countries. When the crisis occurred
they were the first ones to move out.
However, the bailout programmes were based on the wrong assumption that it was
primarily the domestic borrowers who were responsible because of their heavy
borrowings from abroad. The role of the lenders in the creation of this crisis was
ignored. In fact, the lenders are more to blame because individual corporate borrowers
cannot be expected to consider the total maturity pattern of the country’s external debt
in their decision making. In any international debt transaction, the lenders are
supposed to analyse the commercial as well as political risks along with the maturity
distribution of the country’s external debt. They are supposed to properly assess
transfer risks. If they commit business mistakes, they should bear the cost like any
other investor. Thus, the crisis of excessive borrowings was created as much by the
creditors as by the debtors. But under the bailout programmes the discipline was
imposed primarily on the debtor.

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Wherever the bailout programmes were started, it was due to the reason that private
investors and financial institutions of U.S. were to loose most from the crisis and
bailed out by the U.S. government and the IMF. Thus the argument that there should
be no government interventions in the private sector’s borrowings holds little ground
in the light of bailouts. Under the bailout programmes, the foreign banks alone are
given huge subsidies so that they do not have to suffer for their mistakes, while local
banks and companies were forded to go under. Furthermore, the bailout programmes
encouraged commercial banks to continue risky lending as they know that the IMF
and national governments are ever there to bail them out if a crisis occurs.

6.2 Who Benefits from Bailout Programmes?
When the crisis occurred, some Trans National Corporations (TNC) operating in the
region suffered shout-term losses. But in the long run, TNCs have emerged as the net
gainers because labour costs and assets in dollar terms have sharply declined in the
wake of currency depreciation in these countries.

To facilitate foreign ownership and takeover of domestic companies in these
countries, the IMF has imposed conditions which ask for greater accessibility and
ownership rights to foreign companies.

6.3 Who Loses?
The public at large had suffered under the impact of the bailout programmes as public
spending had been slashed and taxes had been increased. Among the major sufferers,
the workers are the worst affected. The conditions stipulated in the programmes
include the cutting of jobs in order to provide more freedom to companies. As per the
programme, financial institutions in the region are being closed down or suspended
leading to the loss of thousands of jobs. Countries such as Thailand, Indonesia and
South Korea have also launched massive privatization programmes to meet the IMF
conditions under the bailout programme. In order to invite foreign capital to buy these
public sector units, the governments had to first shed ‘excess’ workforce. These
factors have significantly contributed to the depression of wages and the weakening of
the bargaining power of labour unions.

Globalisation & Development                                                                XIMB

7. Washington Consensus
According to the Washington Consensus, growth occurs through liberalization,
"freeing up" markets. Privatization, liberalization, and macro stability are supposed to
create a climate to attract investment, including from abroad. This investment creates
growth. Foreign business brings with it technical expertise and access to foreign
markets, creating new employment opportunities. Foreign companies also have access
to sources of finance, especially important in those developing countries where local
financial institutions are weak. The Washington Consensus is the IMF's standard

8. The IMF and its Contributions to the Crisis
The most important contributing factor to the crisis was capital account1 liberalization,
the removal of restrictions relating to the flow of capital, in this case, currency. The
Western world encouraged East Asian countries to allow foreign investors easier
access to the Asian markets. Hot money2 flowed into the region rapidly but many of
these countries did not have regulations in place to ensure foreign investment could
not be pulled out without penalty. When negative speculation occurred, this money
flowed out of the region as fast as it was initially invested.

The IMF did several things during the crisis that prolonged the situation. For instance,
it refused to lend money to East Asian nations unless they undertook certain economic
reforms. Among these reforms:

     Increased interest rates, sometimes as high as 25 per cent.
     Decreased government spending. Indonesia's government had to eliminate food
      and fuel subsidies in April 1998.
     Countries had to close poorly performing domestic banks.
     South Korea had to enact financial reforms and allow international firms to
      participate in its domestic markets.
     Mass layoffs were experienced in many countries.

 1.   The capital account is the net change in foreign ownership of domestic assets.

 2. Hot money refers to funds which flow into a country to take advantage of a favourable interest
 rate, and therefore obtain higher returns

Globalisation & Development                                                                   XIMB

The IMF also demanded political reforms, like increased government transparency
and openness.

8.1 Contradictory Policies

A key way to get out of a recession is to maintain government spending. People are
reluctant to invest when there is a downturn in the economy but investment is still
required; governments are the best group to maintain investment as they are generally
the only ones with money in a recession. In times of recession running a deficit was
acceptable as long as the spending was stimulating the economy. This type of policy
was part of the IMF's original mandate but during the East Asia Crisis, the IMF
pushed for tight monetary1 and fiscal policies2, which only served to encourage

9. Globalization Discontentedly

9.1 Different countries require different economic strategies: What works for one
country doesn't necessarily work for another. Each country has a different history,
climate, social order, government, religion, and culture. All of these factors need to be
considered when deciding economic policy. The Washington Consensus, the standard
economic policy followed by the IMF, was originally designed for Latin America;
however, the IMF tried to solve the problems of Asia with these policies. It seems
obvious that the Washington Consensus could not adequately address the problems in
such a disparate area.

9.2 Nations are very interdependent: With trade linking every nation has become
interdependent on other countries in terms of labour, raw material etc. So what affects
one country will affect others. The IMF was sure that it could prevent subsequent

   1.   Monetary policy is the government or central bank process of managing money supply to
        achieve specific goals—such as constraining inflation, maintaining an exchange rate,
        achieving full employment or economic growth.

   2.   Fiscal policy' is the economic term which describes the actions of a government in setting the
        level of public expenditure and how that expenditure is funded.

   3.   A recession is usually defined in macroeconomics as a fall of a country's real Gross Domestic
        Product (GDP) in two or more successive quarters of a year.

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recessions after Thailand experienced such a downturn, but it failed. One of the most
significant aspects of the East Asia Crisis was its effect on Russia. Once the Asian
economies entered into recessions, demand for oil in the area dropped. Russia, a main
exporter of oil to the region, lost these markets for its oil and saw its revenues drop.
This significantly contributed to the resulting recession in the former superpower.

9.3 Macroeconomic solutions are needed in order to reduce the harm of
globalization: Right now, multinational corporations have too much influence,
especially on developing nations. Governments need to reform their economic
policies and corporations need to incorporate social costs when evaluating costs and
benefits. Stricter regulations on capital flows would reduce the negative effects of
speculation. For instance, Malaysia had a strong central bank which, in September
1998, restricted "transfers of capital abroad by residents of Malaysia," prevented
foreign investors from pulling out their money for 12 months, and placed a large exit
tax on anyone who wished to take money out of the country. These short term
measures were seen as a bad idea to the IMF as they felt this would discourage long-
term investment. However, Malaysia's efforts prevented a mass of capital from
leaving the country and it remained more stable than other countries in the region.

10. Will India go the Southeast Asian Way?
As it is clear from the above analysis and discussion that the Mexican and Southeast
Asian crises had very little to do with the economic base or the economic
fundamentals of these countries. These crises are the outcome of the huge mobility of
short-term capital flows.
However India has attempted to integrate its financial markets with the rest of the
world, its chances of getting affected by the development in the rest of the world have
increased considerably. Moreover, the financial liberalisation of Indian markets with
heavy reliance on hot money flows will have serious implications for the financing of
current account deficit.

10.1 Spillover impact of Southeast Asian Currency Crisis on Indian Rupee
Fears of a fresh fall in the rupee’s exchange rage with the U.S. dollar experienced
immediately after the Thai devaluation. A strong lobby, largely consisting of

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exporters and corporate houses, demanded depreciation of the rupee. It was argued
that this would boost India’s exports which have become uncompetitive due to the
devaluation of the currencies of many Southeast Asian countries and that of the
Pakistani rupee. The process of competitive devaluation can go on endlessly as
Pakistan, or any other neighbouring country, can keep devaluing its currency to
remain competitive.

10.2 Hot Money Flows Constitute 80 percent of Forex Reserves
Over the years, the proportion of hot money flows to forex reserves of India is
steadily increasing. The stock of potentially hot money can be arrived at by adding the
stock of short-term debt, investments by FIIs, issuance of GDRs, and offshore funds.
The inflows of foreign portfolio investments through Foreign Institutional Investors
and Euroissues have had a strong impact on the Indian securities market. Volatility of
stock prices has increased with the entry of FIIs in the capital markets1. With the
policy-makers still relying on the investments by FIIs, it is ignored that these
investments are not reliable and sustainable.

10.3 Dangers of Capital Account Convertibility
The government’s keenness to introduce full Capital Account Convertibility (CAC)2
in India will have serious implications on the outflows of hot money. The Southeast
Asian crisis should serve as a lesson to policy-makers to rethink about the
introduction of full CAC in India.

10.4 Should India pursue capital account convertibility?
Tarapore Committee (1997) defines CAC as "the freedom to convert local financial
assets into foreign financial assets and vice-versa at market determined rates of
exchange". In other words, CAC implies complete mobility of capital across
countries. The rationale behind full capital account convertibility is efficient

   1.   Capital market (securities markets) is the market for securities, where companies and the
        government can raise long-term funds. The capital market includes the stock market and the
        bond market.

   2.   The freedom to convert local financial assets into foreign financial assets and vice-versa at
        market determined rates of exchange". In other words, CAC implies complete mobility of
        capital across countries

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allocation of global capital which not only equalises the rates of return of capital
across countries but also increases the level of output and equitable distribution of
level of income. However, it is not immediately possible to:
       Give unlimited access to short-term external borrowings, and
       Give unrestricted freedom to domestic residents to convert their domestic bank
        deposits and idle assets in response to market developments or exchange rate

Such liberalisation would cause extreme domestic financial vulnerability as the Asian
crisis taught us. It should be realised that free mobility of capital has affected many
countries, including Mexico, East Asia, Russia and so on. However strong the
economic fundamentals of developing countries, free flow of global capital inevitably
sow the seeds of financial crises.

Full capital account convertibility may encourage arbitrage operation1. It is so because
banks, non-banking financial institutions and individual borrowers will prefer to
borrow global capital cheap which would not only increase the external debt burden
of the country but also encourage the functioning of the "black economy"2 and
financial instability because of the heavy investment in physical and financial assets.
Foreign capital is neither necessary nor desirable for India. It is so because the
voluntary savings in India generated according to the time preference of the economic
agents is mostly sufficient for the gross domestic investment and growth. The high
real rates of interest promotes both financial and total savings and private sector
capital formation by facilitating the accumulation of finance necessary for
undertaking investments.

   1.   Arbitrage is the practice of taking advantage of a state of imbalance between two or more
        markets: combinations of matching deals are struck that capitalize upon the imbalance, the
        profit being the difference between the market prices.

   2.   The black market or underground market is the part of economic activity involving illegal
        dealings, typically the buying and selling of merchandise or services (for example sexual
        services in many countries) illegally.

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11. Conclusion

The East Asian crises illustrate the dangers of over reliance on volatile, short-term
capital flows to finance unsustainable current account deficits. These private capital
flows are no substitute for domestic savings and, at best, can only supplement
domestic resources. A country can reduce its exposure to the volatility of external
capital by increasing its national savings. Financial liberalisation policies are less
likely to succeed in the absence of a sound macro-economic situation.

Globalisation & Development                                                                         XIMB

12. Annexure
12.1 Annex A: Mexico current economy, an overview (2003 Est.)
Mexico has a free market economy1 with a mixture of modern and outmoded industry
and agriculture, increasingly dominated by the private sector. Recent administrations
have expanded competition in seaports, railroads, telecommunications, electricity
generation, natural gas distribution, and airports. Per capita income2 is one-fourth that
of the US; income distribution remains highly unequal. Trade with the US and Canada
has tripled since the implementation of NAFTA3 in 1994. Real GDP growth was a
weak -0.3% in 2001, 0.9% in 2002, and 1.2% in 2003, with the US slowdown the
principal cause. Mexico implemented free trade agreements with Guatemala,
Honduras, El Salvador, and the European Free Trade Area in 2001, putting more than
90% of trade under free trade agreements. The government is cognizant of the need to
upgrade infrastructure, modernize the tax system and labor laws, and provide
incentives to invest in the energy sector, but progress is slow.
GDP4                                                  $941.2 billion
GDP growth rate                                       1.3%
GDP composition by sectors                            Agri: 4%, Ind: 26.4%, Ser: 69.6%
Investment (gross fixed)                              19.3%
Population below poverty line                         40%
Inflation rate5                                       4.5%
Unemployment rate                                     4.5% + 25% underemployed
Public debt                                           23.1% of GDP
Current account balance                               $-9.15 billion
Debt, external                                        $159.8 billion

    1.   A free market is a market where price is determined by the lack of government regulation in
         the interchange of supply and demand.

    2.   The per capita income for a group of people may be defined as their total personal income,
         divided by the total population.

    3.   NAFTA- The North American Free Trade Agreement is a free trade agreement among
         Canada, the United States, and Mexico. NAFTA went into effect on January 1, 1994.

    4.   GDP of a country is defined as the market value of all final goods and services produced
         within a country in a given period of time.

    5.   Inflation is a rise in the general level of prices, as measured against some baseline of
         purchasing power

Globalisation & Development                                                   XIMB

12.2 Annex B: Thailand’s current economy, an overview (2003 Est.)
Thailand has a free-enterprise economy and welcomes foreign investment. Exports
feature textiles and footwear, fishery products, rice, rubber, jewelry, automobiles,
computers and electrical appliances. Thailand has recovered from the 1997-98 Asian
Financial Crisis and was one of East Asia's best performers in 2002. Increased
consumption and investment spending and strong export growth pushed GDP growth
up to 6.3% in 2003 despite a sluggish global economy. The highly popular
government has pushed an expansionist policy, including major support of village
economic development.

GDP                                        $475.7 billion
GDP growth rate                            6.3%
GDP composition by sectors                 Agri: 9.8%, Ind: 44%, Ser: 46.3%
Investment (gross fixed)                   25.5% of GDP
Population below poverty line              10.4%
Inflation rate                             1.8%
Unemployment rate                          2.2%
Public debt                                46.6% of GDP
Current account balance                    $9.44 billion
Debt, external                             $53.75 billion

Globalisation & Development                                                                    XIMB

12.3 Annex C: South Korea current economy, an overview (2004 Est.)
Since the early 1960s, South Korea has achieved an incredible record of growth and
integration into the high-tech modern world economy. Four decades ago GDP per
capita was comparable with levels in the poorer countries of Africa and Asia. Today
its GDP per capita is 18 times North Korea's and equal to the lesser economies of the
European Union. This success through the late 1980s was achieved by a system of
close government/business ties, including directed credit, import restrictions,
sponsorship of specific industries, and a strong labor effort. The government
promoted the import of raw materials and technology at the expense of consumer
goods and encouraged savings and investment over consumption. The Asian financial
crisis of 1997-99 exposed longstanding weaknesses in South Korea's development
model, including high debt/equity ratios1, massive foreign borrowing, and an
undisciplined financial sector. Growth plunged to a negative 6.6% in 1998, then
strongly recovered to 10.8% in 1999 and 9.2% in 2000. Growth fell back to 3.3% in
2001 because of the slowing global economy, falling exports, and the perception that
much-needed corporate and financial reforms had stalled. Led by consumer spending
and exports, growth in 2002 was an impressive 6.2%, despite anemic global growth,
followed by moderate 2.8% growth in 2003. In 2003 the National Assembly approved
legislation reducing the six-day work week to five days.
GDP                                                  $857.8 billion
GDP growth rate                                      3.1%
GDP composition by sectors                           Agri: 3.6%, Ind: 36.4%, Ser: 60%
Investment (gross fixed)                             29.6% of GDP
Population below poverty line                        4%
Inflation rate                                       3.6%
Unemployment rate                                    3.4%
Public debt                                          13.8% of GDP
Current account balance                              $12.32 billion
Debt, external                                       $130.3 billion

    1.   Debt/equity ratio- It is used to calculate a company's "financial leverage" and indicates what
         proportion of equity and debt the company is using to finance its assets.

Globalisation & Development                                                                XIMB

12.4 Annex D: Indonesia current economy, an overview (2004 Est.)
Indonesia, a vast polyglot nation, faces economic development problems stemming
from recent acts of terrorism, unequal resource distribution among regions, endemic
corruption, lack of reliable legal recourse in contract disputes, weaknesses in the
banking system, and a generally poor climate for foreign investment. Indonesia
withdrew from its IMF program at the end of 2003, but issued a "White Paper"1 that
commits the government to maintaining fundamentally sound macroeconomic
policies previously established under IMF guidelines. Investors, however, continued
to face a host of on-the-ground microeconomic problems and an inadequate judicial
system. Keys to future growth remain internal reform, building up the confidence of
international and domestic investors, and strong global economic growth.

GDP                                                 $758.8 billion
GDP growth rate                                     4.1%
GDP composition by sectors                          Agri: 16.6%, Ind: 43.6%, Ser: 39.9%
Investment (gross fixed)                            19.7% of GDP
Population below poverty line                       27%
Inflation rate                                      6.6%
Unemployment rate                                   8.7%
Public debt                                         72.9% of GDP
Current account balance                             $7.336 billion
Debt, external                                      $135.7 billion

    1. A white paper is an authoritative report; a government report outlining policy; or a document
    whose purpose is to educate industry customers or collect leads for a company.

Globalisation & Development                                                   XIMB

    12.5 Annex E: Malaysia current economy, an overview (2004 Est.)

    Malaysia, a middle-income country, transformed itself from 1971 through the late
    1990s from a producer of raw materials into an emerging multi-sector economy.
    Growth was almost exclusively driven by exports - particularly of electronics. As
    a result Malaysia was hard hit by the global economic downturn and the slump in
    the information technology (IT) sector in 2001 and 2002. GDP in 2001 grew only
    0.5% due to an estimated 11% contraction in exports, but a substantial fiscal
    stimulus package equal to US $1.9 billion mitigated the worst of the recession and
    the economy rebounded in 2002 with a 4.1% increase. The economy grew 4.9% in
    2003, notwithstanding a difficult first half, when external pressures from SARS
    and the Iraq War led to caution in the business community. Healthy foreign
    exchange reserves and a relatively small external debt make it unlikely that
    Malaysia will experience a crisis similar to the one in 1997, but the economy
    remains vulnerable to a more protracted slowdown in Japan and the US, top
    export destinations and key sources of foreign investment. The Malaysian ringgit
    is pegged to the dollar, and the Japanese central bank continues to intervene and
    prop up the yen against the dollar.

GDP                                         $207.8 billion
GDP growth rate                             5.2%
GDP composition by sectors                  Agri: 7.3%, Ind: 33.5%, Ser: 59.1%
Investment (gross fixed)                    22.2% of GDP
Population below poverty line               8%
Inflation rate                              1.1%
Unemployment rate                           3.6%
Public debt                                 45.5% of GDP
Current account balance                     $13.38 billion
Debt, external                              $48.84 billion

Globalisation & Development                                                               XIMB

    12.6 Annex F: Philippines current economy, an overview (2004 Est.)
    The Philippines was less severely affected by the Asian financial crisis of 1998
    than its neighbors, aided in part by annual remittances of $6-7 billion from
    overseas workers. From a 0.6% decline in 1998, GDP expanded by 2.4% in 1999,
    and 4.4% in 2000, but slowed to 3.2% in 2001 in the context of a global economic
    slowdown, an export slump, and political and security concerns. GDP growth
    accelerated to 4.4% in 2002 and 4.2% in 2003, reflecting the continued resilience
    of the service sector, gains in industrial output, and improved exports.
    Nonetheless, it will take a higher, sustained growth path to make appreciable
    progress in poverty alleviation given the Philippines' high annual population
    growth rate and unequal distribution of income. The MACAPAGAL-ARROYO
    Administration has promised to continue economic reforms to help the Philippines
    match the pace of development in the newly industrialized countries of East Asia.
    The strategy includes improving the infrastructure, strengthening tax collection to
    bolster government revenues, furthering deregulation1 and privatization of the
    economy, enhancing the viability of the financial system, and increasing trade
    integration with the region. Prospects for 2004 will depend on the economic
    performance of two major trading partners, the US and Japan, and on increased
    confidence on the part of the international investment community.
GDP                                                     $390.7 billion

GDP growth rate                                         4.5%
GDP composition by sectors                              Agri: 14.5%, Ind: 32.3%, Ser: 53.2%
Investment (gross fixed)                                18.1% of GDP
Population below poverty line                           40%
Inflation rate                                          3.1%
Unemployment rate                                       11.4%
Public debt                                             77% of GDP
Current account balance                                 $3.349 billion
Debt, external                                          $57.96 billion

1. Deregulation is the process by which governments remove restrictions on business in order to (in
theory) encourage the efficient operation of markets.

Globalisation & Development                                                     XIMB

13. References:

Main source
A citizen’s guide to the globalization of finance: Kavaljit Singh, 1998

Supplementary sources
1. East & South East Asia: An Annotated Directory of Internet Resources
2. RGE Monitor: A Roubini Global Economic Service
3. Implications of the East Asian Crisis for Debt Management: John Williamson
4. The East Asian Crisis: A Retrospective Look: Lawrence J. Lau, Department of
   Economics; Stanford University
5. The Financial Crisis in East Asia: A Background Note by UNCTAD Secretariat
6. Lessons of the Asia Crisis: By Joseph Stiglitz Financial Times December 4, 1998
7. The Asian Crisis and the Future of the International Architecture: Joseph Stiglitz
September, 1998, Article for World Economic Affairs Magazine
8. The Asian Economic Crisis: Points of View
9. The East Asia Crisis: How IMF Policies Brought the World to the Verge of a
   Global Meltdown
10. Background to the East Asian crisis: By Martin Khor, Director, Third World

Globalisation & Development                                               XIMB

11. What Caused East Asia’s Financial Crisis? FRBSF Economic letter- August 7,
13. East Asian financial crisis: Wikipedia, the free encyclopedia
14. On crisis prevention: lessons from Mexico and East Asia, NBER paper 7233
15. Lesson from the Asian crisis, NBER working paper 7102
16. East Asia in the aftermath, was there a crunch? IMF wp/99/38


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