NIRA Research Report No. 19990126
A Study on Global Economy and Finance in East Asia
Triggered by a depreciation of Thai bahts, a crisis heavily hit five east Asian economies, Thailand, Indonesia, Malaysia, the Philippines, and Korea. This currency and then financial crisis affected seriously not only economic but political situations in these countries, so that they have been not yet completely out of instability caused by the crisis. Also, the impact of the crisis went far beyond the countries, spreading to East Asia as a whole, and then beyond the region, to Russia and even to Latin America.
In the early 1990s, a slowdown in economic growth, especially in Japan and Europe, depressed investment and its expected rate of return in industrial countries. Despite this business cycle, global financial integration proceeded so that surplus funds from developed economies spilled over to selected developing economies called as emerging markets. With the benefit of hindsight, these markets were not ready for accepting these huge capital inflows. Therefore, once a currency crisis broke out in Thailand in 1997, following its bubble bust in the previous year, international investors' confidence on emerging markets in general was lost so that foreign capital, particularly bank loans and portfolio investment, abruptly ran out of these markets.
Nevertheless, macroeconomic indicators in the crisis-hit economies in East Asia began to show recovery except for Indonesia in 1999, supported by their competitive exchange rates and robust demand in their export markets. Sustained capital inflow, mainly foreign direct investment, also helped make room for expansionary policies.
Alternately, this recovery of these economies itself recovered general confidence on them, along with their efforts in structural reforms. As to a macroeconomic recovery process, Korea is a top runner, where the economy has been led by demand expansion through monetary and fiscal measures as well as exports and private consumption since late 1998. Malaysia, where they returned to a dollar-peg exchange rate system with capital controls in 1998 in order to pursue expansionary monetary policy, has seen improvement in exports and private consumption since early 1999. This is also the case in Thailand where expansionary monetary and fiscal stances have been adopted. As to a progress of structural reforms, which was regarded as preconditions for economic recovery, we have not seen any remarkable progress, though financial reforms are said to have progressed more or less faster than corporate reforms.
In contrast, China did not show such a significant economic downturn as in the crisis-hit economies. Yet, their currency depreciation and economic slowdown began to affect china through trade and capital flows in 1998, although with a help of large-scale fiscal expansion China realized nearly 8 percent of economic growth that year. Thereafter, even with renminbi overvaluation somewhat relaxed, China has been put into a deflationary situation where domestic demand, both private consumption and investment, is weak with large unemployment and possible danger of capital outflow. Structural reforms in financial as well as corporate sectors have become more serious and urgent in China than elsewhere in East Asia.
Eventually, it is well-established macroeconomic fundamentals that helped realized the recovery in East Asia. We are not saying, however, that we can neglect structural vulnerabilities in their financial as well as corporate sectors. As far as both domestic and international capital markets are not free from structural vulnerabilities, similar crisis would without doubt occur again and it would become more important for us to prepare for coping with these from microeconomic perspectives.
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