Indice
1.
Introduction
2. Bibliography
For quite an extensive period Indonesia, Korea, Malaysia
and Thailand had a stable growth and their economic data such as
inflation, fiscal
position, and increase in exports showed solid perspectives to
the foreign investors. Consequently, it would be accurate to
state that not many economic agents anticipated the financial
Asian crisis to
occur.
Moreover, it is relevant to understand what the causes of the
Asian economic currency and financial crises of 1997-1998 were?
To address this question, we will have to acknowledge two main
factors that were taking place prior the crises. These were a
lack of transparency, which made the investors and economical
agents assume an Asian financial stability, and mislead
structural and economic policies, which did not attempt to solve
deficits in the balance of payments and debt tribulations.
The following will rely on four main proposals of what should
have been done by the policy makers in each stage of the
financial crisis. The four proposals are: tax for outflow of
shot-term capital, a
fixed spread for the financial institutions that will apply only
in the short term, a dirty exchange rate that will apply only the
short term as well and an improvement of financial
transparency.
The Asian financial crisis took place in 1997, which had an
evolution that started mainly in the 90’s in countries such
as South Korea, Thailand, Indonesia and Malaysia. These countries
experienced a rapid international debt boost, due to shorter
payments dead line. Thus, the international debt of North Korea,
for instance, increased from 31.699 million dollars in 1990 to
164.345 million at the end of 1996. Thailand increased from
28.088 million dollar debt to 90.622 million in the same period.
The short-debt represented 31% of the total debt in 1990 for
South Korea, yet in 1996 it represented 67% (world bank report).
Most parts of this debt was involved in the private sector.
Without a doubt, this short-term debt represented one of the main
reasons, which led to the financial crisis to occur. Furthermore
it would be precise to say that Lawrence, Lincoln, Furman and
Stiglitz agree that this factor was one of the main causes of the
crises.
This high short-term debt occurred because the Asian private
entities offered a high short-term interest rate, which made the
investor locate their capital in those institutions, due to the
high return of investment. The second reason was that the
exchange rate responded to a fixed system, meaning that the
investors would not lose any funds in the conversion of one
currency to another, as they withdraw their funds and take them
back to their own country. This situation made the banks
experience a deficit balance, which reflected high payouts to the
investors and not enough assets to make the accounts balance. In
addition the stabilization agencies were not aware of the
financial condition of the banks, which enable them to decrease
the magnitude of the crisis.
Therefore, it seems clear that the financial system needed
resources, which could provide them some oxygen until they could
achieve to equalize their liabilities and assets. It also seems
clear that the Asian banks needed a longer period to reimburse
their liabilities. Yet, in order to achieve this task, the first
approach that comes to mind is an increased in interest rates for
long-term investments and a decrease in interest rates for
short–term. Nevertheless, this strategy was already
applied, but it did not bring the results that were expected. The
explanation of this fact is that once the interest rates change,
another factors such as exchange rate, money supply, and exports
change as well. Additionally, several actors such as the Central
Bank, the government and the market determine the interest rates,
which makes the transition from a lower interest rates to a
higher interest rates complicated because these entities would
have to agree with each other.
Moreover, if the interest rates go up the market will suspect a
weakening in the financial system. According to Furman and
Stiglitz an increase in the interest rates represents "a signal
of lack of confidence". The consequences of this mechanism (an
increase in interest rates) could be even more striking than
staying with the same interest rates, because the investors would
not be willing to deposit funds in an institution that might not
be capable to make give them back. At the same time, some
investors might be prepared to withdraw the deposits that are
already in the Asians accounts. Once this situation occurs the
Asian financial entities would not even have shot-term capital.
Because of these reasons, the International Monetary Fund
proposal to increase the interest rates violates the first rule
of medicine: Do not harm the patient.
A possible solution to this matter could have been a tax creation
for short-term capital outflow. This way the investors could have
been attracted to invest in long-term and the market would not
been affected (the interest rates stayed the same).
Another advantage of this approach is that, it could have been
easy to apply, since the government has the complete faculty to
create taxes.
However this strategy would have been difficult to control, because
money does not have to pass customs. Furthermore, the investor
does not even have to see the money; he or she could change
accounts electronically. That is one of the reasons, why the
creation of a regulation entity is very important. It would
analyze the accounting and financial situation of every Asian
bank in each country and exposed that information constantly. Let
us remember that one of the major reasons for the crisis was the
lack of transparency. In addition, this regulation entity should
have complete autonomy from the rest of the government; this way
this entity would provide reports and analyses, which would not
be influence by any political tendency and interest.
On the other hand, we have to acknowledge the fact there are two
interest rates, with which a bank does a business. It is not
enough for a Bank to have solvency (from investment) it also
needs creditors to give that solvency. Without creditors the
banks would be in bankrupt sooner or later. In the Asian case,
several Asians individuals were borrowing capital abroad, due to
the higher interest rate. This situation represents another
problem to the Asian financial system. In spite, of the fact
(with new tax policy) that the capital will stay in Asia for a longer
period. We can be positive about this argument, because the Banks
will still have to respond to their lenders sooner or later.
Additionally, the government could not impose taxes on borrows
even if they are made in foreign countries (Asia needs to wake up
the economy).
Once again we find ourselves in the same dilemma, how could we
promote the domestic investor to stay in the domestic financial
system? We have seen that an increase in the interest rate would
cause repercussions in other economical readings, which would
lead to a vicious cycle. Applying a monetary policy through the
interest rate, involves numerous actors and policy makers, which
probably would not agree with each other in several aspects.
A convenient mechanism could be that the government would set a
mandatory low spread for the banks. In other words, the banks
would be obligated to reduce their profits due to the difference
between lending and borrowing interest rates. For instance, two
or three percentage. This method would encourage local
individuals to search for domestic funds, and at the same time
the interest rates would fluctuate according to the market. We
also have to admit that this mechanism goes against the golden
rules of market economy, which is fixing the prices. However this
mechanism would apply for a short period until the economy
activates again.
Another problem that the Asian countries faced was the
consequence of the fixed exchange rate. As it was mentioned
before, many investors found the Asian market attractive, because
they did not have the risk of losing investment in the conversion
of one currency to the other due to the fixed exchange rate
system. But, once the crisis occurred the Asian central banks no
longer had reserves to keep the currency fixed. The only option
that these countries could use was to let the exchange rate
float. However, if the currency stops being fixed the investors
might decide to invest somewhere else. This is, because they are
no longer gaining from the fixed exchange rate. This situation
will imply other problems for the banks, because they would not
have the funds that they desperately need.
Additionally, the citizen will abandoned the local currency due
to the lack of credibility in their governments, as a result the
currency will depreciate. Thus, the debtors could no longer pay
their creditors, because they borrowed foreign currency from
offshore institutions (less interest rates) while their income in
local currency was not rising at the same level. Additionally,
this country will experience inflation. A logical solution to
this problem could be to borrow capital from foreign institutions
to maintain a fixed currency (the central banks did not have
enough reserves to do so).
However, Asian countries were facing another immense problem, a
reduction in their exports, which made the crisis even worst.
Exports are the engine of growth in many Asian countries, because
they represent an important part of their economy. For instance,
in South Korea and Thailand exports are 40% of the GDP. Needless
to say, if the exports decrease the economies find themselves in
serious budgets difficulties. Besides, the exporters are left
without funds to pay their debts. Why did the exports decreased?
The main reason is that the exchange rate was fixed to the value
of the dollar, but once the dollar started to appreciate the
Asian countries started to lose competitiveness.
The trade theory tells us that a deficit in the current account
could be solved with a depreciation of the currency. This
technique would improve the countries competitiveness by making
the exports products cheaper.
In order to depreciate the currency, the Central Bank would have
to let the exchange rate float (they run out of reserves), as an
effect the citizens will abandon the local currency making the
currency depreciate. However, this method in Asian countries
would bring the negative consequences that we mentioned
before.
Consequently, we will have to measure if the benefits exceed the
negative outcomes. But, according to other countries experience,
such as the Latin Americans, the inflation was so brutal that the
exports could not compensate it. It is also my belief that the
Asian countries were on the same path.
Because of this reason, the Asian countries should have
depreciate the currency to increase the exports until the
benefits would be more numerous than the disadvantages of
inflation and debt payments difficulties. Sequentially the Asian
countries will to maintain the exchange rate fixed until a limit,
where the negative consequences will discourage the economy. At
this point the role of the IMF has great relevance, because it
could lend dollars to the Asian countries, which had a great
reduction in their reserves, to sustain this dirty float. Of
course this strategy would only apply in the short term until the
Asian governments would gain its credibility back. This proposal
would have applied for a period, in which the Asian governments
would have gained the trust and credibility of the Asians
citizens and international investors. Once these goals are
achieved,
the golden rules of the market would be established again.
As it was mentioned before, the Asian financial market showed a
lack of transparency, for example it has long been known that
financial intermediaries whose liabilities are guaranteed by the
government pose a serious problem of moral hazard.
For instance, the U.S savings and loan debacle is the classic
example: because depositors in thrifts were guaranteed by the
FSLIC, they had no incentive to police the lending of
institutions in which they placed their money; "since the owners
of thrifts did need to put much of their own money at risk, they
had every incentive to play a game of heads I win, tails the
taxpayers loses" (Paul Krugman)
The Asian situation was more complicated. In general, creditors
of financial institutions did not receive explicit guarantees
from the governments. However, it seems that the governments had
some connections with they main financial institutions and the
main companies. (The Asian model, the miracle, the crisis and the
fund. Jeffrey A. Frankel.) Because of this reason, the companies
did not care about the financial situation of the entities, in
which they were investing. The financial institutions did not
care about the financial conditions of their creditors either.
There was no reason to bother, if the creditors are no longer in
the capability of paying their debts, the government would
compensate them. Nevertheless, the government never had the
resources to "help" these institutions when the crisis occurred
and this situation made the crisis even more dramatic.
The Asian countries needed institutions, which could have been
controlling the financial entities constantly. These
regulations
entities would not have let the financial institutions lend
funds, without a previous study of the creditors. These entities
would have also publicized the financial conditions of each
entity constantly. This way the market would stabilized itself
avoiding a crisis to occur.
Finally, institutions such as the IMF and prestigious economists
do not seem to coincide on several politics, which the Asian
states should have applied. Yet, the only argument on which they
agree is the fact that Asian countries needed transparency,
truthful entities and credibility. Therefore, if nations do not
want to go through a crisis of this magnitude they will be
obligated to involve these concepts in every day
transactions.
Furman and Stiglitz. Economic Papers
IMF. Monthly reports
Paul Krugman. "pop internalism"
World Bank monthly reports.
Lincoln. Article. The Economics. "Miracle or crisis"
Lawrence. Article. Wall street Journal. "Causes and
problems.
Autor:
Andrés Vergara