The East Asian Currency Crisis:
A Retrospective Look
Lawrence J. Lau
Kwoh-Ting Li Professor of Economic Development
Department of Economics
Stanford University
Stanford, CA 94305-6072, U.S.A.
January 2000
Phone: 1-650-723-3708; Fax: 1-650-723-7145
Email: [email protected]; Website: http://www.stanford.edu/~ljlau
50
50
Lawrence J. Lau, Stanford University
12/1/99
12/14/99
10/29/99
11/10/99
9/28/99
10/7/99
HK$
H
K$
RM
R
M
NT$
N
T$
8/26/99
9/3/99
7/26/99
8/2/99
6/23/99
6/29/99
5/21/99
5/26/99
C.
Yuan
C
. Y
uan
Won
KK.
. W
on
SS$
$
Yen
JJapan
apan Y
en
4/20/99
4/22/99
3/19/99
3/18/99
2/15/99
2/15/99
600
600
1/12/99
1/13/99
650
650
12/9/98
12/11/98
11/5/98
11/10/98
10/2/98
10/8/98
8/31/98
9/7/98
7/28/98
8/5/98
6/24/98
7/3/98
7/15/97
7/23/97
8/15/97
8/26/97
9/17/97
9/29/97
10/20/97
10/31/97
11/20/97
12/4/97
12/23/97
1/7/98
1/23/98
2/10/98
2/25/98
3/16/98
3/30/98
4/17/98
4/30/98
5/21/98
6/2/98
6/12/97
6/19/97
5/12/97
5/16/97
4/9/97
4/14/97
3/7/97
3/11/97
2/4/97
2/5/97
1/2/97
1/2/97
1/2/97=100
1/2/97=100
Indexes of East Asian Exchange Rates:
Local Currency per US$ (January 2, 1997=100)
IIndices
n d i c e s of
o f East
E a s t Asian
A s i a n Exchange
E x c h a n g e Rates
Rates
(Local
(Local Currency
Currency per
per U.S. Dollar, 1/2/97=100)
1/2/97=100)
700
700
Rupiah
I.I. Rupiah
P. Peso
Peso
P.
Baht
TT.. B
aht
550
550
500
500
450
450
400
400
350
350
300
300
250
250
200
200
150
150
100
100
2
80
80
Lawrence J. Lau, Stanford University
C
. Y
uan
C.
Yuan
H
K$
HK$
KK.
. W
on
Won
R
M
RM
P.
P. Peso
Peso
SS$
$
N
NT$
T$
TT.. B
Baht
aht
JJapan
apan Y
Yen
en
12/1/99
12/14/99
10/29/99
11/10/99
9/28/99
10/7/99
8/26/99
9/3/99
7/26/99
8/2/99
6/23/99
6/29/99
5/21/99
5/26/99
4/20/99
4/22/99
3/19/99
3/18/99
2/15/99
2/15/99
1/12/99
1/13/99
220
220
12/9/98
12/11/98
11/5/98
11/10/98
10/2/98
10/8/98
8/31/98
9/7/98
7/28/98
8/5/98
6/24/98
7/3/98
7/15/97
7/23/97
8/15/97
8/26/97
9/17/97
9/29/97
10/20/97
10/31/97
11/20/97
12/4/97
12/23/97
1/7/98
1/23/98
2/10/98
2/25/98
3/16/98
3/30/98
4/17/98
4/30/98
5/21/98
6/2/98
6/12/97
6/19/97
5/12/97
5/16/97
4/9/97
4/14/97
3/7/97
3/11/97
2/4/97
2/5/97
1/2/97
1/2/97
1/2/97=100
1/2/97=100
Indexes of East Asian Exchange Rates:
Local Currency per US$ (January 2, 1997=100)
IIndices
n d i c e s of
o f East
E a s t Asian
A s i a n Exchange
E x c h a n g e Rates
Rates
(Local
(Local Currency
Currency per
per U.S. Dollar, 1/2/97=100)
1/2/97=100)
240
240
200
200
180
180
160
160
140
140
120
120
100
100
3
Indexes of East Asian Exchange Rates:
Local Currency per US$ (April 1, 1995=100)
Indexes of Selected East Asian Exchange Rates (March 31, 1995 = 1.0)
2.6
2.4
2.2
Chinese Yuan
Japanese Yen
South Korean Won
2
1.8
Thai Baht
1.6
1.4
1.2
Lawrence J. Lau, Stanford University
12/8/99
10/21/99
9/3/99
7/19/99
6/1/99
4/14/99
2/25/99
1/8/99
11/17/98
9/25/98
8/7/98
6/18/98
4/30/98
3/12/98
1/23/98
12/3/97
10/15/97
8/26/97
7/8/97
5/20/97
4/1/97
2/11/97
12/20/96
11/1/96
9/13/96
7/25/96
6/7/96
4/22/96
3/5/96
1/17/96
11/28/95
10/11/95
8/22/95
7/5/95
5/18/95
0.8
3/31/95
1
4
The Basic Questions
u
u
u
u
u
What were the causes of the crisis?
Is a real recovery in sight?
What lessons can be drawn?
What measures can be adopted to minimize the probability of a
recurrence?
What are the prospects of future economic growth?
Lawrence J. Lau, Stanford University
5
Early Warning Signals
u
u
u
u
u
L. J. Lau and and J. S. Park, “Is There a Next Mexico in East Asia?,”
Project LINK World Meeting, Pretoria, South Africa, Sept., 1995
Lau and Park, “Is There a Next Mexico in East Asia?,” Beijing,
China, 1996
Thailand and Philippines were identified as the most likely
candidates as the next Mexico, followed by S. Korea and Indonesia
China, Hong Kong, Singapore and Taiwan were identified as the
least likely candidates as the next Mexico
Indicators of potential vulnerability, e.g.
u
u
u
stock of short-term liabilities (including portfolio investment) relative to
reserves
Interest rate differential between domestic and foreign currency-denominated
loans
Indicators of economic performance, e.g.
u
Lawrence
Lau, Stanfordefficiency
University
Level and rate of change
of theJ. marginal
of capital (rate of return)6
Fundamental Macroeconomic Causes
of the East Asian Currency Crisis
u
u
Savings-investment imbalance--also reflected as current account
imbalance
Dependence on short-term foreign capital (portfolio investment-both equity and debt instruments--and loans) by private investors
u
u
u
u
u
u
u
Equity is better than debt
Direct investment is better than portfolio investment
Insolvency caused by the revaluation of foreign-currency denominated debts
and the rise in the rate of interest
Domino effects of insolvency and bankruptcy
Problems magnified by high leverage (or high debt to equity ratio)
Inadequacy of foreign exchange reserves (working capital of a
country) for supporting imports, debt service, and (potential) net
short-term capital outflows
Real exchange rate appreciation (loss of competitiveness) due to a
domestic rate of inflation
higher
than the
U.S. rate of inflation
Lawrence
J. Lau, Stanford
University
7
The Savings Rates
of Selected East Asian Economies
The Savings Rate as a Percent of GDP
50
40
1998
1997
1996
1995
1994
1993
1992
1991
1990
1988
1987
1986
1985
Mexico
1984
Thailand
1983
Taiwan
1982
Philippines
Singapore
1981
Malaysia
1980
Korea, Republic of
1979
Indonesia
1978
Hong Kong
1977
1976
1975
1974
1973
1972
1971
1970
1969
1968
1967
0
1966
10
China
1989
20
1965
Percent
30
-10
Lawrence J. Lau, Stanford University
8
The Savings-Investment Gap
Selected East Asian Economies
The Savings-Investment Gap as a Percent of GDP
25
20
15
China
Hong Kong
Indonesia
Korea, Republic of
Malaysia
Philippines
Singapore
Taiwan
Thailand
Mexico
Percent
10
5
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-5
-10
-15
Lawrence J. Lau, Stanford University
9
Current Account Surplus (Deficit)
as a Percent of GDP
The Current Account Surplus as a Percent of GDP
25
China
Hong Kong
Indonesia
Korea, Rep. of
Malaysia
Philippines
Singapore
Taiwan
Thailand
20
Mexico
15
Percent
10
5
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
-5
-10
Lawrence J. Lau, Stanford University
10
Composition of Foreign Investment:
Thailand (Quarterly Data)
Composition of Foreign Investment: Thailand
4200
Foreign Portfolio Investment
Foreign Direct Investment
2200
1200
Foreign Portfolio Investment
1
Q
3
19
99
Q
1
Q
98
19
19
98
Q
1
19
97
Q
3
19
97
Q
1
19
96
Q
3
19
96
Q
1
19
95
Q
3
19
95
Q
1
19
94
Q
3
19
94
Q
1
19
93
Q
3
19
93
Q
1
19
92
Q
3
19
92
Q
1
19
91
Q
3
19
91
Q
1
19
90
Q
3
19
90
Q
1
19
89
Q
3
19
89
Q
1
19
88
Q
3
19
88
Q
1
19
87
Q
3
19
87
Q
1
86
Q
19
86
3
Foreign Direct Investment
200
19
Million US$
3200
-800
Lawrence J. Lau, Stanford University
11
Composition of External Debt
Thailand
Stock of External Debt: Thailand
120
100
Long-term
Billion U.S.$
80
Short-term
60
40
20
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Lawrence J. Lau, Stanford University
1993
1994
1995
1996
1997
1998
12
External Debt and Foreign Exchange Reserves
Thailand
Thailand's External Debt vs. Foreign Exchange Reserves
120
100
Total external debt
Foreign exchange reserves
Billion US$
80
60
40
20
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Lawrence J. Lau, Stanford University
1993
1994
1995
1996
1997
1998
1999
13
Composition of Foreign Investment:
South Korea (Quarterly Data)
Composition of Foreign Investment: Republic of Korea
8000
7000
6000
Foreign Direct Investment
Foreign Portfolio Investment
5000
3000
2000
1000
Foreign Portfolio Investment
Q
1
Q
3
19
99
Q
1
19
98
Q
3
19
98
Q
1
19
97
Q
3
19
97
Q
1
19
96
Q
3
19
96
Q
1
19
95
Q
3
19
95
Q
1
19
94
Q
3
19
94
Q
1
19
93
Q
3
19
93
19
92
Q
3
19
92
Q
1
19
91
Q
3
19
91
Q
1
19
90
Q
3
19
90
Q
1
19
89
Q
3
19
89
Q
1
19
88
Q
3
19
88
Q
1
19
87
Q
3
19
87
Q
1
19
86
-1000
Q
1
Foreign Direct Investment
0
19
86
Million US$
4000
-2000
-3000
Lawrence J. Lau, Stanford University
14
Composition of External Debt
South Korea
Stock of External Debt: Korea
180
160
140
Long-term
Billion U.S.$
120
Short-term
100
80
60
40
20
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Lawrence J. Lau, Stanford University
1993
1994
1995
1996
1997
1998
15
External Debt and Foreign Exchange Reserves
South Korea
Korea's External Debt vs. Foreign Exchange Reserves
180
160
140
Total external debt
Foreign exchange reserves
Billion US$
120
100
80
60
40
20
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Lawrence J. Lau, Stanford University
1993
1994
1995
1996
1997
1998
1999
16
Composition of Foreign Investment:
China
Composition of Foreign Investment, China
60
50
Foreign Portfolio Investment
Foreign Direct Investment
Billion US$
40
30
20
10
0
1980
1983
1986
1989
1992
1995
1998
Year
Lawrence J. Lau, Stanford University
17
Composition of Foreign Investment:
China (Quarterly Data)
Composition of Foreign Investment: China
18
Foreign Direct Investment
Foreign Portfolio Investment
Foreign Portfolio Investment
Billion US$
13
8
Foreign Direct Investment
3
1996 Q1 1996 Q2 1996 Q3 1996 Q4 1997 Q1 1997 Q2 1997 Q3 1997 Q4 1998 Q1 1998 Q2 1998 Q3 1998 Q4 1999 Q1 1999 Q2 1999 Q3
-2
Lawrence J. Lau, Stanford University
18
Composition of External Debt
China
140,000
Stock of External Debt: China
Bank for International Settlements Data
120,000
Million U.S.$
100,000
80,000
Long-term
Short-term
60,000
40,000
20,000
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Lawrence J. Lau, Stanford University
19
External Debt and Foreign Exchange Reserves
China
China's External Debt vs Foreign Exchange Reserves
180
160
Total external debt
Foreign exchange reserves
140
Billion US$
120
100
80
60
40
20
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Year
Lawrence J. Lau, Stanford University
20
Composition of Foreign Investment:
Japan (Quarterly Data)
Composition of Foreign Investment:Japan
70
Foreign Portfolio Investment
Foreign Direct Investment
50
Billion US$
30
1
Q
3
19
99
Q
1
19
98
Q
3
19
98
Q
1
19
97
Q
3
19
97
Q
1
19
96
Q
3
19
96
Q
1
19
95
Q
3
19
95
Q
1
19
94
Q
3
19
94
Q
1
19
93
Q
3
19
93
Q
1
19
92
Q
3
19
92
Q
1
19
91
Q
3
19
91
Q
1
19
90
Q
3
19
90
Q
1
19
89
Q
3
19
89
Q
1
19
88
Q
3
19
88
Q
1
Q
3
Q
87
87
19
-10
19
86
19
19
86
Q
1
10
-30
Lawrence J. Lau, Stanford University
21
Inadequacy of Foreign Exchange Reserves
u
u
u
u
u
Traditional yardstick of 3-6 months of imports no longer adequate
for some countries because of the magnitudes of potential
movements in the capital accounts (foreign direct and portfolio
investment, short- and long-term loans)
International Monetary Fund still lists 13 weeks of imports as a
standard
Potential disruptions in the foreign exchange and capital markets
caused by the quick inflows and outflows of large pools of hot
money
Insolvency caused by illiquidity
Simulations by Lau, Li and Qian (1999) suggest that foreign
exchange reserves can be considered adequate (in the absence of
capital controls) only if it is approximately equal to 10 months of
imports
Lawrence J. Lau, Stanford University
22
Foreign Exchange Reserves
as a Percent of Annual Imports
Foreign Exchange Reserves as a Percent of Imports
250
200
China
Hong Kong
Indonesia
Korea, Rep. of
Malaysia
Philippines
Singapore
Taiwan
Thailand
Mexico
Percent
150
100
50
0
1986
1987
1988
1989
1990
1991
1992
1993
Lawrence J. Lau, Stanford University
1994
1995
1996
1997
23
Real Exchange Rate Movements
u
u
A real exchange rate is defined as the number of constant-price local
currency units per unit of constant-price U.S. dollar
Example
u
u
u
u
u
In 1990 , the Thai Baht/US Dollar exchange rate = 25.6; in 1996, it was 25.3,
virtually unchanged
During the same period, the GDP deflator increased by 17% in the United
States and 33% in Thailand
Thus, while 1 US$ could purchase 25.6 1990 Baht worth of goods in 1990, it
could only purchase 19.0 (=25.3/1.33) 1990 Baht worth of goods in 1996 (Thai
goods have thus become more expensive!)
Finally, 1 1990 US$ is worth more than 1 current US$ in 1996 because of
inflation in the U.S., thus, 1 1990 US$ could buy 22.3 (=25.3/1.33*1.17) 1990
Baht worth of goods in 1996
We conclude the real exchange rate of the Thai Baht has appreciated (The
same U.S. good can be exchanged for less Thai good)
Lawrence J. Lau, Stanford University
24
Rates of Inflation Relative to the United States
Rates of Inflation Relative to the United States (percent p.a.)
80
70
60
Percent p.a.
50
40
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
30
20
10
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-10
-20
Lawrence J. Lau, Stanford University
25
Rates of Inflation Relative to the United States
(without Indonesia)
Rates of Inflation Relative to the United States (percent p.a.)
20
China
Hong Kong
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
15
Percent p.a.
10
5
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-5
-10
-15
Lawrence J. Lau, Stanford University
26
Real Exchange Rate Movements
Indexes of East Asian Real Exchange Rates
(Local Currency per U.S.$, 1986=100)
275
250
225
Percent
200
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
175
150
125
100
75
50
1986
1987
1988
1989
1990
1991
1992
1993
1994
Lawrence J. Lau, Stanford University
1995
1996
1997
1998
27
Real Exchange Rate Movements
175
Indexes of East Asian Real Exchange Rates (without Indonesia)
(Local Currency per U.S.$, 1986=100)
150
China
Hong Kong
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Percent
125
100
75
50
1986
1987
1988
1989
1990
1991
1992
1993
1994
Lawrence J. Lau, Stanford University
1995
1996
1997
1998
28
Fundamental Microeconomic Causes:Borrowing
Too Much, Short-Term and in Wrong Currency
u
u
Maturity mismatch--borrowing short and investing (lending) long
Currency mismatch--revenue and cost (liability) in different
currencies
u
u
u
u
Moral hazard on the parts of both lenders and borrowers
u
u
u
Vulnerability magnified by high debt to equity ratio
Insolvency caused directly or indirectly by declines in the exchange rates
Oversold currencies create unnecessary bankruptcies and discourage recapitalization and re-structuring
Past bailouts (Latin American loans, Mexican loans) of developed country
lenders encourage moral hazard on the part of lenders
Implicit guarantee of banks and enterprises “too big to fail” by governments
encourage moral hazard on the part of borrowers
“Herd mentality”--too much money chasing too few good projects
leading to mis-pricing by developed country investors and lenders (it
is better to make the same
mistake as everyone else)
Lawrence J. Lau, Stanford University
29
What is New?
(1) New Channels for Contagion!
u
u
u
The speculative attacks on the New Taiwan Dollar (10/17/97) and
the Hong Kong Dollar (10/23/97) show that even ECONOMIES
WITH SOUND FUNDAMENTALS ARE NOT IMMUNE!
Spread to South Korea, Latin America, and Russia
Traditional Channels for Contagion (through trade)
u
u
u
Competitive devaluation
Nervous domestic traders and investors (rational panic)
New Channels for Contagion (through short-term capital flows)
u
u
u
Predatory speculation by hedge funds
Domino effect of cross-country lending and re-lending
The confidence factor--withdrawals by indiscriminate investors of developing
(emerging) countries equity and debt; reduction of outstanding credit by
multinational banks
Lawrence J. Lau, Stanford University
30
Predatory Speculation (1)
u
u
u
u
u
Large pools of hot money (3,000-4,000 hedge funds with aggregate
capital of US$300 billion+) that can move (small) markets
Formulae for almost risk-free profits, especially in economies that
are expected to defend their exchange rates (transactions must be
large enough to be a credible threat to the exchange rates)
(Short) Sales of large quantities of local currency induce purchases
by local central bank or monetary authority
Such purchases by the central bank or monetary authority cause the
local money supply to contract and liquidity to tighten, sending the
short-term rate of interest up
The local central bank or monetary authority may also raise the rate
of interest directly to discourage the conversion of local currencydenominated assets into foreign currency-denominated assets
Lawrence J. Lau, Stanford University
31
Predatory Speculation (2)
u
For example:
u
u
u
u
u
u
u
Simultaneous shorting of currency and going long on interest rate futures
(Attack on the British Pound, 1992)
Simultaneous shorting of currency and stock (or stock index futures), in either
spot or forward markets or both (Attacks on Hong Kong)
Shorting the stock market and then selling the domestic currency proceeds for
U.S. dollars
Simultaneous longing of currency and stock or stock market index
Predatory speculation can occur and succeed independently of the
economic fundamentals if the resources of the speculators are
sufficiently large relative to the size of the market
Short sales of forward contracts in the local currency will have the
same effect through arbitrage (Buyers of forward contracts will sell
short in the spot market)
Depresses the exchange
rate J.and
increases
its volatility, and hence32
Lawrence
Lau, Stanford
University
the interest rate risk premium
An Example:
Hong Kong
Relationship between Exchange Rate, Stock Market Index and Interest Rate,
Hong Kong
140
45
Exchange Rate Index, 1/2/97=100
40
Stock Market Index, 1/2/97=100
120
Interest Rate (right scale)
35
100
30
80
25
20
60
15
40
10
20
Lawrence J. Lau, Stanford University
12/27/99
11/26/99
10/28/99
9/29/99
8/31/99
8/2/99
7/2/99
6/3/99
5/5/99
4/6/99
3/8/99
2/5/99
1/7/99
12/9/98
11/10/98
10/12/98
9/11/98
8/13/98
7/15/98
6/16/98
5/18/98
4/17/98
3/19/98
2/18/98
1/20/98
12/22/97
11/21/97
10/23/97
9/24/97
8/26/97
7/28/97
6/27/97
5/29/97
4/30/97
4/1/97
3/3/97
1/31/97
0
1/2/97
5
0
33
0
Lawrence J. Lau, Stanford University
12/27/99
11/26/99
10/28/99
9/29/99
8/31/99
8/2/99
7/2/99
6/3/99
5/5/99
4/6/99
3/8/99
200
2/5/99
1/7/99
12/9/98
11/10/98
10/12/98
9/11/98
8/13/98
7/15/98
6/16/98
5/18/98
4/17/98
3/19/98
2/18/98
1/20/98
12/22/97
11/21/97
10/23/97
9/24/97
8/26/97
7/28/97
6/27/97
5/29/97
4/30/97
4/1/97
3/3/97
1/31/97
1/2/97
Thailand
Relationship between Exchange Rate, Stock Market Index and Interest Rate,
Thailand
250
Exchange Rate Index, 1/2/97=100
16
Stock Market Index, 1/2/97=100
Interest Rate (right scale)
14
12
150
10
8
100
6
50
4
2
34
0
What is New? (2) Contagion Leading to
Synchronization of Down Turns
u
u
u
Over the last decade, the proportions of East Asian exports to other
East Asian economies have been increasing rapidly
By the late 1990s, approximately 50% of the exports of the East
Asian economies are destined for other East Asian economies
All East Asian economies, with the exception of China and Taiwan,
experienced rises in the rate of interest and downturns in economic
activities at the same time, which in turn caused significant
reductions in the demands for one another’s exports, further
exacerbating their recessions
Lawrence J. Lau, Stanford University
35
Was “Crony Capitalism” or the Primitive
Financial System the Culprit?
u
u
u
u
u
The real mistake was to borrow too much short-term and in the
wrong currency
Even a perfectly efficient enterprise cannot withstand the increase in
debt servicing required due to the massive exchange rate devaluation
Japan, despite its massive devaluation between 1995 and mid-1998,
has been able to muddle through because its firms have little net
foreign debt
Hong Kong, Singapore and Taiwan have also escaped relatively
unscathed because they did not and do not have significant net
foreign debt, especially short-term debt, relative to their foreign
exchange reserves
China has not been significantly affected because it retains capital
control and its foreign debt is mostly medium to long-term
Lawrence J. Lau, Stanford University
36
Was “Crony Capitalism” or the Primitive
Financial System the Culprit?
u
The financial systems collapsed in the affected countries because of
the currency crisis--whatever weaknesses they might have had were
not the direct causes of the crisis
Lawrence J. Lau, Stanford University
37
Leading Indicators of Recovery
u
Stabilization of the exchange rate
u
u
u
u
u
u
u
u
u
u
Capital controls have been instituted in Malaysia
Hedge funds are no longer active
Decline in the rate of interest
Rise in the stock market
Improvement in the balance of payments
Rise in the official foreign exchange reserves
Deceleration in the rate of decline of real GDP
Leveling of the unemployment rate
Narrowing of yield spread on U.S. dollar-denominated sovereign
debt relative to U.S. Treasury securities
Upgrading of credit ratings by rating agencies such as Moody’s,
Standard & Poor and Fitch IBCA
Lawrence J. Lau, Stanford University
38
Prospects for Recovery
u
u
u
u
u
u
u
For most of the East Asian economies, the bottom has been reached
(0% rate of growth) in 2Q/1999
The recovery is most tentative in Indonesia, with its political
problems
In quantity terms, exports have been growing very rapidly
Foreign exchange reserves have been largely replenished
Inflation caused by the devaluation has largely subsided
The stock markets have recovered
The recovery has been much stronger than expected because of
synchronization across the East Asian economies
Lawrence J. Lau, Stanford University
39
00
Lawrence J. Lau, Stanford University
12/31/99
12/31/99
11/30/99
11/30/99
10/28/99
10/28/99
09/27/99
09/27/99
08/25/99
08/25/99
07/23/99
07/23/99
6/22/99
6/22/99
5/20/99
5/20/99
4/19/99
4/19/99
3/17/99
3/17/99
2/12/99
2/12/99
1/12/99
1/12/99
12/10/98
12/10/98
11/9/98
11/9/98
10/7/98
10/7/98
9/4/98
9/4/98
8/4/98
8/4/98
JAPAN
JAPAN
7/2/98
7/2/98
TAIWAN
TAIWAN
THAILAND
THAILAND
6/1/98
6/1/98
SINGAPORE
SINGAPORE
4/29/98
4/29/98
KOREA
KOREA
PHILIPPINES
PHILIPPINES
3/27/98
3/27/98
HONG
H O N G KONG
KONG
INDONESIA
INDONESIA
MALAYSIA
MALAYSIA
2/24/98
2/24/98
CHINA
CHINA
1/22/98
1/22/98
12/22/97
12/22/97
11/19/97
11/19/97
10/17/97
10/17/97
9/16/97
9/16/97
8/14/97
8/14/97
7/14/97
7/14/97
6/11/97
6/11/97
50
5/9/97
5/9/97
60
4/8/97
4/8/97
3/6/97
3/6/97
2/3/97
2/3/97
1/1/97
1/1/97
Percent
per
annum
Percent per
annum
Short-Term Rates of Interest
Short-Term Rates
Rates of
of Interest, Selected
Short-Term
Selected East
East Asian
Asian Countries
Countries
(percent
(percent p.a.)
70
40
30
20
10
40
Short-Term Rates of Interest
(without Indonesia)
Short-Term Rates
Rates of
of Interest, Selected
Short-Term
Selected East
East Asian
Asian Countries
Countries
(percent
(percent p.a.)
45
40
35
35
CHINA
CHINA
KOREA
KOREA
PHILIPPINES
HONG KONG
HONG KONG
MALAYSIA
MALAYSIA
SINGAPORE
30
30
PHILIPPINES
TAIWAN
TAIWAN
JAPAN
SINGAPORE
THAILAND
THAILAND
JAPAN
25
25
20
20
15
15
10
10
Lawrence J. Lau, Stanford University
12/31/99
10/28/99
11/30/99
10/28/99
09/27/99
08/25/99
6/22/99
07/23/99
6/22/99
5/20/99
4/19/99
2/12/99
3/17/99
2/12/99
1/12/99
12/10/98
10/7/98
11/9/98
10/7/98
9/4/98
8/4/98
6/1/98
7/2/98
6/1/98
4/29/98
3/27/98
1/22/98
2/24/98
1/22/98
12/22/97
9/16/97
11/19/97
10/17/97
9/16/97
8/14/97
5/9/97
7/14/97
6/11/97
5/9/97
4/8/97
0
1/1/97
3/6/97
0
2/3/97
5
5
1/1/97
Percent
annum
Percent
per per
annum
40
41
Quarterly Rates of Growth of Exports
30.00
Year-over-Year Quarterly Rates of Growth of Exports in U.S. Dollars
(Percent)
Percent p.a.
20.00
10.00
0.00
Q1 97
-10.00
Q2 97
China
Indonesia
Malaysia
Singapore
Thailand
Q3 97
Q4 97
Q1 98
Q2 98
Q3 98
Q4 98
Q1 99
Q2 99
Q3 99
Q4 99
Hong Kong
South Korea
Philippines
Taiwan
Japan
-20.00
Lawrence J. Lau, Stanford University
42
Quarterly Rates of Growth of Imports
Year-over-Year Quarterly Rates of Growth of Imports in U.S. Dollars
(Percent)
40.00
China
Indonesia
Malaysia
Singapore
Thailand
30.00
20.00
Hong Kong
South Korea
Philippines
Taiwan
Japan
Percent p.a.
10.00
0.00
1997Q1
1997Q2
1997Q3
1997Q4
1998Q1
1998Q2
1998Q3
1998Q4
1999Q1
1999Q2
1999Q3
1999Q4
-10.00
-20.00
-30.00
-40.00
-50.00
Lawrence J. Lau, Stanford University
43
The Current Account Balance
The Current Account Balance, Billion US$
40
30
China
Hong Kong
Indonesia
Korea, Rep. of
Malaysia
Philippines
Singapore
Taiwan
Thailand
Mexico
20
Billion US$
10
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-10
-20
-30
-40
Lawrence J. Lau, Stanford University
44
Quarterly Rates of Growth of Real GDP
Selected East Asian Economies
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
15.0
Annualized Rates in Percent
10.0
5.0
0.0
1996Q1
-5.0
-10.0
1996Q2
1996Q3
1996Q4
1997Q1
1997Q2
1997Q3
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thialand
1997Q4
1998Q1
1998Q2
1998Q3
1998Q4
1999Q1
1999Q2
1999Q3
1999Q4
Japan
-15.0
Quarter
Lawrence J. Lau, Stanford University
45
Rate of Inflation
(Consumer Price Index)
Rate of Change of the Consumer Price Index (Year-over-Year)
80.00
70.00
50.00
HONG KONG
INDONESIA
JAPAN
KOREA
MALAYSIA
PHILIPPINES
SINGAPORE
TAIWAN
THAILAND
40.00
30.00
20.00
10.00
3
Q
1
19
99
Q
3
19
99
Q
1
19
98
Q
3
19
19
98
Q
1
Lawrence J. Lau, Stanford University
97
Q
3
19
97
Q
1
19
96
Q
3
96
19
95
Q
1
19
95
Q
3
19
94
Q
1
19
19
94
Q
3
Q
1
19
93
Q
3
19
93
Q
1
19
92
Q
3
19
92
Q
1
19
91
Q
3
91
90
Q
19
-10.00
19
90
Q
1
0.00
19
Percent per annum
60.00
CHINA
46
Rate of Inflation (Consumer Price Index)-without Indonesia
Rate of Change of the Consumer Price Index (Year-over-Year)
30.00
CHINA
JAPAN
MALAYSIA
SINGAPORE
THAILAND
25.00
HONG KONG
KOREA
PHILIPPINES
TAIWAN
15.00
10.00
5.00
3
Q
1
19
99
Q
3
19
99
Q
1
19
98
Q
3
19
98
Q
1
19
97
Q
3
19
97
Q
1
19
96
Q
3
96
19
95
Q
1
19
95
Q
3
19
94
Q
1
19
19
94
Q
3
Q
1
19
93
Q
3
19
93
Q
1
19
92
Q
3
19
92
Q
1
19
91
Q
3
91
90
Q
19
-5.00
19
90
Q
1
0.00
19
Percent per annum
20.00
-10.00
Lawrence J. Lau, Stanford University
47
Inflation Relative to the United States
Rates of Inflation Relative to the United States (percent p.a.)
80
70
60
Percent p.a.
50
40
China
Hong Kong
Indonesia
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
30
20
10
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
-10
-20
Lawrence J. Lau, Stanford University
48
Inflation Relative to the United States
Rates of Inflation Relative to the United States (percent p.a.)
(without Indonesia)
20
15
Percent p.a.
10
5
0
1986
-5
-10
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
China
Hong Kong
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
1998
-15
Lawrence J. Lau, Stanford University
49
Indexes of East Asian Stock Market Indexes:
Local Currency (January 2, 1997=100)
Indexes of East Asian Stock Exchange Indexes
(Local Currency, 1/2/97=100)
China
Korea
Singapore
Japan
180
Hong Kong
Malaysia
Taiwan
Indonesia
Philippines
Thailand
160
1/2/97=100
140
120
100
80
60
40
20
1/1/97
5/9/97
9/16/97
1/22/98
6/1/98
10/7/98
Lawrence J. Lau, Stanford University
2/12/99
6/22/99
10/28/99
50
How Robust is the Recovery?
External environment
u
u
u
u
Since 3Q/1998, hedge funds had a “credit crunch” due to losses, net
redemption and curtailment of available credit lines in the third
quarter of 1998--the collapse of the Russian ruble and the “LongTerm Capital Management” crisis
The U.S. economy has been exceptionally strong but an asset-price
bubble appears to be in the making and the economy may be heading
towards a slowdown
The recovery of the Japanese economy is not imminent and likely to
take some time; however, the Yen has recovered from its low of
almost 150 Yen/US$ to stabilize around 100 Yen/US$
The Chinese economy grew 7.8% in 1998 and 7.1% in 1999.
Chinese exports have resumed its growth. The Renminbi should not
need to be devalued
Lawrence J. Lau, Stanford University
51
Prospects for Recovery?
What Needs to be Done (1)
u
u
u
u
The recovery is supported by the growth in public investment and in
exports
Private consumption demand has gradually revived because of lower
rates of interest and stabilization of unemployment
Domestic fiscal stimulus necessary because of weak domestic
investment demand--International Monetary Fund conditions
notwithstanding (IMF position on deficit financing by the affected
East Asian countries has changed), e.g., South Korea, Thailand
Turning around expectations and providing incentives are the keys to
stimulating private consumption and new private investment
Lawrence J. Lau, Stanford University
52
Prospects for Recovery?
What Needs to be Done (2)
u
Recapitalizing the domestic banks so that new loans to new projects
are possible
u
u
u
Bailing out of old failed projects should be avoided
Recapitalization by the government should require capital contribution and
risk-sharing by new or existing shareholders to avoid moral hazard
Maintaining domestic political and social stability
Lawrence J. Lau, Stanford University
53
Prospects for Recovery?
u
u
u
The real devaluation in the East Asian currencies present new
opportunities for profitable investments once they are stabilized
The real risk is excessive tightness--the East Asian central banks
must walk a tight rope between not bailing out bad projects and
choking off new projects
The political economy--who will bear the costs--may prove to be the
most difficult problem
Lawrence J. Lau, Stanford University
54
Prospects for Recovery?
Lessons from the Mexican Experience
u
u
u
u
u
u
u
Recovery took 24 months
Nominal exchange rate permanently lowered; real exchange rate not
significantly changed
Additional risk premium on the rate of interest
Decisive action necessary for stabilization and for maintenance of
domestic confidence
Selective loosening of credit essential for facilitating recovery
A strong, united government is better suited for crisis management
Advantages and disadvantages of East Asia relative to Mexico-proximity to and relations with U.S. (NAFTA), savings rate,
educational level, degree of domestic price and wage rate rigidity,
degree of union power
Lawrence J. Lau, Stanford University
55
Prospects for Recovery?
Possible Enhancements
u
Simultaneous coordinated fiscal expansions by East Asian
economies
u
u
u
Utilization of excess idle capacity to produce real output
A signal to the non-state sector that it is time for undertaking new investments
An East Asian currency stabilization fund
u
u
u
u
As the market maker of the last resort (maintaining an orderly market)
Providing a smoothing function (reduction of volatility rather than flexibility)
Preventing excessive overshooting in both the upward and the downward
directions
As a partial deterrent to predatory speculation
Lawrence J. Lau, Stanford University
56
Lessons:
A Currency Crisis Inducing a Financial Crisis
u
u
u
u
u
The problem arose from insufficient liquidity in terms of foreign
exchange
Unexpected outflow of short-term capital caused the exchange rate to
plunge
A “bank run” on foreign exchange ensued
Financial insolvency caused by the resulting revaluation of the
foreign-currency denominated debt and the rise in the rate of interest
(due to expected further devaluation and increased volatility of the
exchange rate)
Domino effect of insolvency and bankruptcies
Lawrence J. Lau, Stanford University
57
Lessons:
The Hazards of Short-Term Foreign Capital
u
u
u
u
u
u
Over-dependence on foreign capital, especially short-term foreign
capital, makes an economy and its exchange rate vulnerable
Foreign direct investment is better than foreign portfolio investment
or loans because it is less mobile
Long-term loans is better than short-term loans because they are not
subject to immediate withdrawal
Currency and maturity mismatch by domestic borrowers aggravates
the problem
Short-term foreign-currency denominated loans should be carefully
monitored and controlled in order to avoid the compounding of
currency mismatch by maturity mismatch
Short-term foreign funds are inherently different from short-term
domestic funds because the former is much more likely to leave at
the first sign of real orLawrence
imagined
trouble
J. Lau, Stanford
University
58
Lessons: Foreign Exchange Reserves and
Real Exchange Rate Appreciation
u
u
An adequate level of foreign exchange reserves should be maintained
(10 months of imports)
A fixed exchange rate and chronically higher relative inflation
cannot be compatible in the long run
Lawrence J. Lau, Stanford University
59
Lessons:
Excessive Leverage Should be Discouraged
u
u
u
u
u
Excessive leverage of enterprises magnifies the effects of a sharp
devaluation and the resulting rise in the rate of interest
Excessive leverage encourages moral hazard (recklessness) on the
part of the borrowers
The domino effect of excessive leverage on the financial system
Excessive leverage also enables the hedge funds to engage in
predatory speculation on a large scale
Globalization of accounting standards and disclosure requirements
u
u
insistence of financially responsible auditors by lenders
Global credit reporting system for large borrowers
u
voluntary reporting by lenders of large credit transactions of large borrowers
(say, transactions exceeding $500 million each) to a central bureau operated by
a consortium of global lenders
Lawrence J. Lau, Stanford University
60
Lessons:
Containing Contagion
u
u
Predatory speculation by hedge funds should be monitored and
controlled --through disclosure and margin requirements
Worldwide or region-wide currency stabilization facility
Lawrence J. Lau, Stanford University
61
Lessons:
Post-Crisis Options for Exchange Rate Regimes
u
Large and deep individual markets--United States, Japan
u
u
Currency areas--The Euro
u
u
Stabilization of a freely-floating currency is difficult unless it has a large and
deep market relative to the short-term capital flows
Even before the Euro there was the EMS “snake” pegged to the DM (German
Mark)--evidence that small and shallow markets for individual currencies can
be too volatile even for developed economies such as Austria, Belgium and the
Netherlands
Capital control--Japan before 1980, China, Malaysia
u
Current account convertibility, long-term capital convertibility, limited shortterm capital convertibility
Lawrence J. Lau, Stanford University
62
Post-Crisis Options for Exchange Rate Regimes
u
True dollarization (Panama) and quasi-dollarization (Hong Kong,
Argentina)
u
u
u
u
u
True dollarization implies that the U.S. dollar will be legal tender for all
obligations and contracts can be denominated in U.S. dollars
Hong Kong and Argentina with a fixed U.S.$ peg are not quite truly dollarized
but is very close to being so
Benefits:
u Insulation from exchange rate volatility
u Promotes long-term FDI as well as foreign portfolio investment
u The rate of interest and the rate of inflation will be at U.S. levels if credible
u Facilitates foreign trade
Costs:
u No more monetary policy (neither money supply nor interest rate can be
independently controlled)
u Fiscal policy constrained by the ability to issue US$ denominated
government notes and
bonds
Lawrence J. Lau, Stanford University
63
The U.S. benefits from seignoirage, both direct and indirect
Problems of a Flexible Exchange Rate
for a Small Economy
u
u
u
u
A thin market--total volume small relative to the size of hedge funds
and other pools of hot money
Possibility of market manipulation due to lack of regulation and
transparency
Central bank has to assume the role of market-maker
A credibly adequate level of foreign reserves (and/or standby
commitment from an international or regional stabilization facility) is
required
Lawrence J. Lau, Stanford University
64
The Size of the Global Foreign Exchange
Market
u
u
u
u
u
According to the Bank for International Settlements data, London is
the largest foreign exchange market in the world with average daily
turnover of approximately $650 billion in 1998
London is larger than the New York and Tokyo markets combined
There are between 3,000 and 4,000 hedge funds, at a conservative
estimate of US$100 million of equity capital each, with an estimate
of aggregate capital of between US$300-400 billion
Large and well known funds such as Quantum Fund (Soros) and
Tiger Fund have approximately US$20 billion worth of capital
With leverage, the hedge funds can collectively undertake
transactions as high as US$10 trillion (Total U.S. stock market
capitalization is US$12.5 trillion)
Lawrence J. Lau, Stanford University
65
Could the East Asian Currency Crisis be
Averted?
u
u
u
The currency crises in some countries (e.g. Thailand and South
Korea) probably could not be averted
However, the severity of the crisis in certain countries could
probably have been reduced if the exchange rate could have been
stabilized sooner, that is, if the exchange rate had not overshot by so
much (most East Asian currencies had recovered approximately half
of their losses at the troughs)
Implicit are the assumptions that multiple self-fulfilling rational
expectations equilibria are possible and that some such equilibria are
better than others
Lawrence J. Lau, Stanford University
66
Can a Recurrence be Prevented?
Possible Near-Term Measures (1)
u
Reduction of unpredictability of portfolio capital flows
u
u
u
Use of Global or American Depository Receipts (GDRs and ADRs) and
(Home) Country Depository Receipts (CDRs)
Elimination of subsidies for short-term capital inflows, if any
A Tobin-like tax to encourage lengthening of maturities on foreign
currency-denominated loans
u
u
u
u
A fixed fee (e.g., 0.5%) on foreign currency loans without underlying trade or
direct investment activities to encourage longer and staggered maturities
The fee is payable to the central bank/monetary authority and such a loan is
said to be “registered”--this also ensures proper disclosure of the loan
Such foreign currency loans will be accorded special priority in the event of
unforeseen circumstances such as another currency crisis
The fees can be maintained in a reserve for the financing of “penalty” rates of
interest in the event the IMF Contingent Credit Line has to be drawn down
Lawrence J. Lau, Stanford University
67
Possible Near-Term Measures (2)
u
Protecting the interests of long-term investors (both domestic and
foreign)
u
u
Standby instruments for sterilization of short-term capital flows
u
u
u
u
Provision of low-cost, non-transferable “natural” exchange rate hedges
Open-market/discount window operations
Changes in reserve requirements for different types of assets
Direct (Central Bank) and indirect (non-Central Bank) government purchases
and sales of foreign and domestic currencies
Maintenance of higher levels of foreign exchange reserves
Lawrence J. Lau, Stanford University
68
Possible Near-Term Measures (3)
u
Prevention of moral hazard on the part of the foreign lenders
u
u
u
u
Disavowal of implicit guarantee of private loans
Partial debt-equity swap in settlement of existing liabilities
Lenders from developed economies should have their loan portfolios in
developing countries risk-rated by their supervisory institutions
Prevention of moral hazard on the part of the domestic borrowers
and lenders--reduction of leverage
u
u
u
u
u
New disclosure rules on the beneficial ownership, sales and purchases, and
hypothecation of shares on principal officers and shareholders (e.g. 5% or US$
10 million) of publicly listed enterprises
Setting of maximum leverage ceilings
Disavowal of implicit guarantee of private loans or the doctrine of “too big to
fail”
Intensification of domestic prudential regulation of financial institutions
Rethinking of comprehensive implicit deposit insurance (perhaps with a ceiling
on the size of deposits)Lawrence J. Lau, Stanford University
69
Possible Near-Term Measures (4)
u
Credible pre-commitment to a stable monetary policy
u
u
E.g., an inflation target, or a marginal currency board rule
Encouragement of better disclosure
u
u
Imposition by lenders of a requirement of certification of financial statements
by acceptable auditors, e.g., the “Big Five”
Adoption and enforcement of generally accepted accounting principles
Lawrence J. Lau, Stanford University
70
Possible Near-Term Measures (5)
u
Regulation of the foreign exchange, stock and futures markets to
reduce leverage, prevent manipulation, and discourage predatory
speculation
u
u
u
u
u
u
u
u
Flexible margins, in the form of local currency, on foreign exchange spot and
forward purchases and sales in the absence of underlying real transactions
Regulation of non-deliverable forward (NDF) trading by residents
High margin requirements, in the form of local currency on stock, stock
futures, stock index futures, and options on stocks and futures purchases and
short sales
Regulation on borrowing and lending of stocks and short sales of stocks (e.g.
the uptick rule, the “married put option”, etc.)
Transparency and disclosure requirements (for large positions)
Institution of “circuit breakers” in the stock and future exchanges
Enforcement of timely settlement and clearing regulations (e.g., in Hong Kong,
settlement date is t+2)
Merging the stock and Lawrence
stock options
and futures
J. Lau, Stanford
Universityexchanges to facilitate market
71
clearing
Possible Long-Term Measures:
Individual Economies
u
u
u
Re-examination of the costs and benefits, as well as the timing, of
full capital account convertibility for developing economies
Capital control--current-account and long-term capital-account
convertibility but controls on short-term capital flows
True or virtual “Dollarization” (with a currency board)
u
u
u
“Dollarization” with a fixed peg and a currency board, e.g. Hong Kong,
Argentina
“Dollarization” a la Panama
Monetary union with the United States
Lawrence J. Lau, Stanford University
72
Possible Long-Term Measures:
Collective
u
Augmenting the foreign exchange reserves potentially available for
the stabilization of the exchange rate in face of speculation
u
u
u
Mutual aid arrangements (e.g. direct repurchase agreements among central
banks to be exercised in tandem)
Direct settlements among East Asian countries in the currencies of the
respective countries
An East Asia-wide currency stabilization facility
u
u
u
As the market maker of the last resort (maintaining an orderly market)
Providing a smoothing function (reduction of volatility rather than flexibility)
Preventing excessive overshooting in both the upward and the downward
directions
Lawrence J. Lau, Stanford University
73
Possible Long-Term Measures:
Collective
u
The Group-of-Seven Plan for solving or averting crises
u
u
u
u
Contingent Credit Line from the International Monetary Fund (lender of last
resort) as a source of additional liquidity
u Pre-approved unlimited facility conditional on economic conditions and
policies (e.g., debt-management, transparency, corporate governance,
financial sector solidity)
u A last-minute review
u Rate of interest 3 percentage points higher than standard IMF loans, rising
to 5 percentage points by 1/2 percentage point increments every 6 months
Bilateral loans
Guarantees of developing country bonds by the World Bank, Asian
Development Bank, and individual countries (e.g., Japan)
Contribution by private sector (e.g., international commercial banks)
Lawrence J. Lau, Stanford University
74
Possible Long-Term Measures:
Collective
u
Preventing future crises through better information
u
u
u
u
u
Global accounting standards
Greater disclosure of government and central bank finance
Global credit reporting system on large borrowers to prevent excessive
leverage on the part of both developing country borrowers and speculators,
including hedge funds
Coordination of stock and futures market regulations on margin
requirements, investor and firm disclosure, and short sales, across
countries
“Currency Area” options
u
u
u
An Asian “snake”?
A system of linked currency boards?
A role for the Japanese Yen, the Chinese Yuan?
Lawrence J. Lau, Stanford University
75
The Major Uncertainties
u
u
u
u
u
The movements of the Yen-Dollar and Yuan-Dollar exchange rates
The rates of growth of the U.S. and Japanese economies
The U.S. rate of interest (one instrument, two targets--the prices of
goods and the prices of assets)
The possibility of a bursting of the U.S. asset prices bubble (Could
the reliance on an accommodative easing by the Federal Reserve
Board after such an event create its own moral hazard?)
The return of the hedge funds (are bubbles building in the East Asian
stock markets again?)
Lawrence J. Lau, Stanford University
76
Rates of Growth of Inputs & Outputs of the
East Asian Developing & the G-7 Countries
Table 3.1: Average Annual Rates of Growth of Real GDP, Capital, Labor and Human Capital (percent)
(Extended sample period)
Average
Capital
Utilized
Labor
Human
Human
Country
Period
GDP
Stock
Capital Employment Hours
Capital
Capital
Hong Kong
66-95
7.4
8.8
8.6
2.6
2.4
4.8
2.1
S. Korea
60-95
8.5
12.3
12.3
3.1
3.3
6.2
4.0
Singapore
64-95
8.8
10.3
10.3
4.3
4.7
5.9
3.5
Taiwan
53-95
8.4
11.8
11.8
2.7
2.3
5.3
2.8
Indonesia
70-94
6.7
8.9
9.8
3.1
3.1
9.6
7.7
Malaysia
70-95
7.3
11.8
11.8
3.7
3.7
7.7
4.9
Philippines
66-95
4.0
5.8
5.9
3.2
3.2
10.8
8.5
Thailand
66-94
7.6
9.1
9.4
2.8
2.8
8.5
5.8
China
65-95
8.4
10.3
10.3
3.0
3.0
5.9
3.3
Japan
57-94
5.9
8.1
8.0
1.1
0.6
2.1
0.9
Canada
57-94
3.8
4.8
4.7
2.3
1.9
3.0
1.1
France
57-94
3.3
3.9
3.9
0.4
-0.2
2.0
1.1
W. Germany
57-94
3.2
3.3
3.1
0.1
-0.3
1.5
1.0
Italy
59-94
3.5
5.2
5.3
0.0
-0.3
1.8
1.3
UK
57-94
2.4
3.9
3.8
0.2
-0.1
1.2
0.8
US
49-94
3.1
3.0
3.3
1.7
1.3
2.1
0.8
Lawrence J. Lau, Stanford University
77
Is East Asian Economic Growth Sustainable?
u
Neither miracle nor a mere bubble
u
u
u
u
u
u
u
u
Economic growth experience replicated in different East Asian economies
Sustained economic growth over decades
Recent crisis due to many factors, of which “irrational exuberance” is only one
Economic fundamentals remain sound--high savings rates, investment in
human capital
Past economic growth attributable to growth in inputs, particularly
the efficient and rapid accumulation of physical capital
Considerable room for continuation of rapid tangible inputs-driven
economic growth--tangible capital per unit labor still lags behind the
developed economies
Intangible capital per unit labor lags even further behind
Because of its complementarity with tangible capital, investments in
intangible capital can retard the decline in the marginal productivity
Lawrence J. Lau, Stanford University
78
of tangible capital