Economic Dynamics and Integration in Eastern Europe and Asia Lecture Winter semester 2017/18 Chair for Macroeconomic Theory and Politics Schumpeter School of Business and Economics Bergische Universität Wuppertal
Prof. Paul J.J. Welfens Office: M-12.08 Email: welfens@wiwi.uni-wuppertal.de Office hours: Monday 12:00-13:00 (During Semester) Thursday 11:00-12:00 (During Semester break) at EIIW Chair for Macroeconomic Theory and Politics: https://welfens.wiwi.uni-wuppertal.de/index.php?id=3314&l=0 11. 12. 2017 2
David Hanrahan Office: M-12.10 Email: hanrahan@wiwi.uni-wuppertal.de Office hours: by appointment Chair for Macroeconomic Theory and Politics: https://welfens.wiwi.uni-wuppertal.de/index.php?id=6194 11. 12. 2017 3
Tian Xiong Office: M-12.11 Email: xiong@wiwi.uni-wuppertal.de Office hours: Tuesday 14:00-15:00 Chair for Macroeconomic Theory and Politics: https://welfens.wiwi.uni-wuppertal.de/index.php?id=6011 11. 12. 2017 4
Content Introduction of Asia Economic Dynamics of Asia 11. 12. 2017 5
11. 12. 2017 Source: geology.com 6
Asia 11. 12. 2017 Source: https://en.wikipedia.org/wiki/asia 7
Global shares of income, 2015 11. 12. 2017 Notes: Weights are based on gross national income in current US dollars, Atlasmethod. Source: ADB estimates using data from World Development Indicators online database 8
Asian Economies: Highlights 11. 12. 2017 Source: IMF World Economic Outlook, 2017 9
Real GDP Growth 11. 12. 2017 Source: IMF World Economic Outlook, 2017 10
Real GDP Growth 11. 12. 2017 Source: IMF World Economic Outlook, 2017 11
Demand-side contributions to growth 11. 12. 2017 Source: Haver Analytics; CEIC Data Company (accessed 26 August 2017). 12
Inflation 11. 12. 2017 Source: IMF World Economic Outlook, 2017 13
Unemployment 11. 12. 2017 Source: IMF World Economic Outlook, 2017 14
Current Account Balance, Developing Asia 11. 12. 2017 Source: Asian Development Outlook database. 15
Foreign Direct Investment FDI inflows, global and by group of economies, 2005-2016 (Billions of dollars and percent) 11. 12. 2017 Source: UNCTAD, FDI/MNE database 16
Foreign Direct Investment FDI inflows, top 20 host economies, 2015-2016 (Billions of dollars) 11. 12. 2017 Source: UNCTAD, FDI/MNE database 17
Foreign Direct Investment FDI outflows, top 20 home economies, 2015-2016 (Billions of dollars) 11. 12. 2017 Source: UNCTAD, FDI/MNE database 18
Foreign Direct Investment 11. 12. 2017 Source: FDI Markets. The Financial Times; ADB estimates 19
Growth in Exports and Imports value 11. 12. 2017 Source: CEIC Data Company and Haver Analytics accessed 15 September 2017; ADB estimates 20
Trade Openness indicator 11. 12. 2017 Note: Note: Major industrial economies refer to US, euro area, and Japan. Trade openness is defined as the sum of exports and imports of goods and services in US dollars. Source: Haver Analytics and Netherlands Bureau for Economic Policy Analysis, accessed 15 September 2017; ADB estimates 21
International Trade pattern Japan first adopted export-oriented manufacturing as a growth strategy in the 1960s. Japan itself recorded double-digit real rates of growth from 1960 up until the first oil shock of 1973. During this period of rapid growth, industrial structure also changed as exports shifted away from labour-intensive to more sophisticated products. Japan s movement into higher technology exports opened the way for the NIEs to themselves adopt an export-oriented manufacturing growth strategy. These economies were able to expand production and exports in labour-intensive industries such as apparel and footwear in the 1960s and then to develop more capital-intensive industries following Japan in the 1970s and 1980s. 11. 12. 2017 22
International Trade pattern A third wave of trade-led industrial growth then began to take hold as Southeast Asian economies adopted export-oriented policies in the mid-1970s and early 1980s, with rapid growth in exports of labourintensive manufactures. By the mid-1980s, the ASEAN countries started exporting electrical and nonelectrical machinery and other more sophisticated products. Finally, the PRC and Viet Nam emerged as fast-growing exporters of labour-intensive manufactures in the late 1980s and early 1990s. International trade provided an environment conducive to rapid industrial growth and transformation of the predominantly agricultural economies of East and Southeast Asia into modern industrial economies in a remarkably short period of time by historical standards. The East and Southeast Asian region shows a remarkable concentration in machinery sectors over 1995 2004. 11. 12. 2017 23
Asian Financial Crisis It was started by the collapse of the Thai baht in July 1997 due to speculative attacks. Thailand was forced to let its currency float on 2nd July 1997. Months later, the problem spread throughout Southeast Asia including Republic of Korea mainly on equity markets and currencies. Indonesia, Korea, Malaysia, Philippines, and Thailand suffered the most severe adverse impacts as a result of the Asian Financial Crisis. 11. 12. 2017 24
Asian Financial Crisis External Financing of Five Asian Countries, 1994-98 a A huge, sudden reversal of capital flows Private net capital flows to Indonesia, Korea, Malaysia, Philippines, and Thailand increased from USD 40.5 billion in 1994 to USD 93 billion in 1996. In 1997, suddenly reversed to minus USD 12.1 billion. 11. 12. 2017 Source: Radelet and Sachs, 1998 25
Asian Financial Crisis The Effects of the Crisis The crisis forced sharp depreciation of all major Southeast Asian currencies in the short term. The collapse of the monetary system and stock markets in Southeast Asia and the heavy losses suffered by investors all forecasted their stop-loss. A large number of foreign capital withdrawal and domestic inflation suffered tremendous stress. A large number of enterprises in Asian countries went bankrupt, bank failures, stock market collapses, real estate falls, the exchange rate depreciation, the unemployment rate rise, people's lives are seriously affected. The economy suffered a serious blow, causing economic recession, social unrest and political instability, and as a result, some countries have plunged into long-term chaos. 11. 12. 2017 26
Asian Financial Crisis The Effects of the Crisis 11. 12. 2017 Source: WDI 27
Asian Financial Crisis The Effects of the Crisis 11. 12. 2017 Source: WDI 28
Asian Financial Crisis The Causes of the Crisis Radelet and Sachs (1998): Macroeconomic policy-induced crisis: A BOP crisis (currency depreciation; loss of foreign exchange reserves; collapse of a pegged exchange rate) arises when domestic credit expansion by the central bank is inconsistent with the pegged exchange rate. Often, the credit expansion results from the monetisation of budget deficits. Financial panic: A financial panic is a case of multiple equilibria in the financial markets. A panic is an adverse equilibrium outcome in which short-term creditors suddenly withdraw their loans from the solvent borrower. 11. 12. 2017 29
Asian Financial Crisis The Causes of the Crisis Radelet and Sachs (1998): Bubble collapse: A stochastic financial bubble occurs when speculators purchase a financial asset at a price above its fundamental value in the expectation of a subsequent capital gain. Moral-Hazard crisis: A moral hazard crisis arises because banks are able to borrow funds on the basis of implicit or explicit public guarantees of bank liabilities. If banks are undercapitalized or under-regulated, they may use these funds for overly risky or even criminal activities. 11. 12. 2017 30
Asian Financial Crisis The Causes of the Crisis Lane (1999) - Financial fragility: Many financial institutions and corporations in the countries affected had borrowed in foreign currencies without adequate hedging, making them vulnerable to currency depreciation. Much of the debt was short-term while assets were longer-term, creating the possibility of a liquidity attack, the effect of which would be similar to that of a bank run. Prices in these countries equity and real estate markets had risen substantially before the crisis, increasing the likelihood of a sharp deflation in asset prices. Credit was often poorly allocated, contributing to increasingly visible problems at banks and other financial institutions before the crisis hit 11. 12. 2017 31
Asian Financial Crisis The Causes of the Crisis The East Asian crisis differs from previous crises in several key respects (Rana and Lim, 2000) It is a crisis of confidence, a capital-account crisis, not a traditional current-account crisis. Unlike other previous crises of confidence of the 1980s and 1990s, its root causes are structural-premature financial liberalization (liberalization of financial markets without adequate supervision and regulation), crony capitalism, and policy mistakes in managing private capital flows, it is a liquidity risk (currency crises are the outcome of self- fulfilling prophecies and financial panic, and include bank runs, fickle investors, and hot money), not a solvency risk (a currency crisis results from weak macroeconomic fundamental) 11. 12. 2017 32
Asian Financial Crisis The Causes of the Crisis Weisbrot (2007): 1.IMF failed to act as a lender of the last resort, when such a lender was most needed. Financial liberalization which was strongly promoted by the IMF was the main cause of the crisis. In South Korea: the removal of a number of restrictions on foreign ownership of domestic stocks and bonds, residents' ownership of foreign assets, and overseas borrowing by domestic financial and non-financial institutions. Korea's foreign debt nearly tripled from $44 billion in 1993 to $120 billion in September 1997. This was not a very large debt burden for an economy of Korea's size, but the short-term percentage was high at 67.9 percent by mid-1997. 11. 12. 2017 33
Asian Financial Crisis The Causes of the Crisis Weisbrot (2007): For comparison, the average ratio of short-term to total debt for non-opec less developed countries at the time of the 1980s debt crisis (1980-82) was 20 percent. Thailand created the Bangkok International Banking Facility in 1992, which greatly expanded both the number and scope of financial institutions that could borrow and lend in international markets. Indonesian non-financial corporations borrowed directly from foreign capital markets, pilling up $39.7 billion of debt by mid 1997, 87 percent of which was short-term. 11. 12. 2017 34
Asian Financial Crisis The Causes of the Crisis Weisbrot (2007): 2.The IMF recommended a series of policies that appear to have worsened the crisis: high interest rates and a tightening of domestic credit to slow economic growth; fiscal tightening, including cuts in food and energy subsidies in Indonesia (later rescinded there after rioting broke out); further liberalization of international capital flows. the closing of sixteen Indonesian banks, a move that the IMF thought would help restore confidence in the banking system. Instead it led to panic withdrawals by depositors at remaining banks, further destabilizing the financial system. 11. 12. 2017 35
Asian Financial Crisis The Causes of the Crisis Weisbrot (2007): 3. The amounts of funds dispersed were too little and too late to slow the damage In Indonesia, only $3 billion had been disbursed by March 1998, as compared to a $40 billion commitment. The IMF Letter of Intent (LoI) was signed in January 1998 by the Government of Indonesia. 11. 12. 2017 36
References Lane, T. (1999). The Asian financial crisis: what have we learned?. Finance and Development, 36(3), 44. Radelet, S., & Sachs, J. (1998). The onset of the East Asian financial crisis (No. w6680). National bureau of economic research. Rana, P. B., & Lim, J. A. Y. (2000). The East Asian crisis: Macroeconomic policy design and sequencing issues. Rising to the Challenge inasia: A Study of Financial Markets, 1. Sally, R. (2010). Regional economic integration in Asia: the track record and prospects. ECIPE Occasional paper, 2, 2010. Weisbrot, M. (2007). Ten years after: the lasting impact of the Asian financial crisis. Center for Economic and Policy Research, 2. 11. 12. 2017 37
Thank You for Your Attention! 11. 12. 2017 38