A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Sharma, Shalendra D. Book — Published Version The Asian financial crisis: Crisis, reform and recovery Provided in Cooperation with: Manchester University Press Suggested Citation: Sharma, Shalendra D. (2003) : The Asian financial crisis: Crisis, reform and recovery, ISBN 0-7190-6603-4, Manchester University Press, Manchester, http://dx.doi.org/10.7765/9781526137685 This Version is available at: http://hdl.handle.net/10419/181916 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. 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Sharma Manchester University Press Manchester and New York distributed exclusively in the USA by Palgrave iii Copyright © Shalendra D. Sharma 2003 The right of Shalendra D. Sharma to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988. Published by Manchester University Press Oxford Road, Manchester M13 9NR, UK and Room 400, 175 Fifth Avenue, New York, NY 10010, USA www.manchesteruniversitypress.co.uk Distributed exclusively in the USA by Palgrave, 175 Fifth Avenue, New York, NY 10010, USA Distributed exclusively in Canada by UBC Press, University of British Columbia, 2029 West Mall, Vancouver, BC, Canada V6T 1Z2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data applied for ISBN 0 7190 6602 6 hardback 0 7190 6603 4 paperback First published 2003 11 10 09 08 07 06 05 04 03 10 9 8 7 6 5 4 3 2 1 Typeset in 10/12 pt Times by Graphicraft Limited, Hong Kong Printed in Great Britain by Bookcraft (Bath) Ltd, Midsomer Norton iv Contents List of tables and figures page vi Acknowledgements vii 1 Introduction: issues, debates and an overview of the crisis 1 2 Thailand: crisis, reform and recovery 66 3 Indonesia: crisis, reform and recovery 123 4 Korea: crisis, reform and recovery 180 5 The domino that did not fall: why China survived the financial crisis 252 6 Beyond the Asian crisis: the evolving international financial architecture 284 7 Conclusion: post-crisis Asia – economic recovery, September 11, 2001 and the challenges ahead 340 Bibliography 354 Index 392 v List of tables and figures Tables 1.1 Rate of currency depreciation 1997–98 page 1 1.2 Changes in real GDP (%) 4 1.3 Asia’s foreign bank borrowing as of June 1997 19 1.4 Short-term external debt and international reserves pre-crisis: 2nd quarter of 1997 32 1.5 Domestic credit and growth-rates 33 2.1 Capital inflows 73 2.2 Structure of Thai exports, 1981–93 73 4.1 Debt/equity ratio of the top 20 chaebols 209 6.1 Official exchange-rate regimes in selected Asian countries 327 Figures 4.1 Major financial liberalization measures in Korea 204 5.1 Structure of China’s banking system 261 6.1 Major exchange-rate regimes 324 vi Acknowledgements This project has incurred debts of gratitude too numerous to mention. Nevertheless, I would like to thank a number of colleagues who graciously took time from their busy schedules to comment on the whole manuscript or the various chapters. All these individuals have made indelible impressions on this study and improved this work immeasurably. I wish to express my appreciation to Barbara Bundy, Rudiger Dornbusch, Barry Eichengreen, Hartmut Fischer, Tetteh Kofi, Richard Kozicki, Michael Lehmann, Man Lui-Lau, Charles N’Cho, Bruce Wydick and numerous colleagues at the IMF, the World Bank, and the Asian Development Bank, and also to the anonymous reviewers for Manchester University Press. Colleagues and friends at Bank Indonesia, the Bank of Thailand, the Reserve Bank of India, Bank Negara Malaysia and the Singapore Monetary Authority opened doors for my research and provided me with many useful contacts and logistical support. None of these indi- viduals bear any responsibility for the flaws in my analysis, albeit they deserve much of the credit for that which proves useful. I would also like to acknowledge the inspiring leadership of Stanley Nel, Dean of College and Arts and Sciences at the University of San Francisco. Dean Nel has not only single-handedly established a supportive environment for excellence in research and teaching at the college; his guidance, stern encouragement and mentoring has made an invaluable contribution to my professional and intellectual development. I could not have completed this project without his consistent support. Thanks also to Tony Mason, Richard Delahunty and the entire team at Manchester University Press for their professionalism and high standards and for shepherding the manu- script into a book. The fact that this book is published by the distinguished Man- chester University Press makes my many months of toil on this project worthwhile. My profound thanks also to my mother, sister and brothers for the boundless sup- port and encouragement they have given me over the years. Regretfully, my father, who made a lifetime of sacrifices for his children’s education did not live to see this book. My greatest debt, however, is to my wife Vivian and our son Krishan. They have seen this book’s long journey from the beginning to the end. However, they never wavered once in their support. It is safe to say that without their support and love this book would never have been written. I dedicate this book to them. vii viii Introduction: issues, debates and overview 1 Introduction: issues, debates and an overview of the crisis In his celebrated Manias, Panics and Crashes, Charles Kindleberger (1978) predicted a historical average of at least one financial crisis per decade. Yet, in Gerard Caprio’s (1997, 79) memorable phrase, the 1990s have been a period of boom in busts. A financial crisis every twenty-four months – beginning in 1992–93 with the speculative attacks against several currencies in the Exchange Rate Mechanism (ERM) of the European Monetary Sys- tem, followed by the sudden collapse of the Mexican peso in December 1994, and more recently, the Asian financial crisis that was set off when the Bank of Thailand devalued the baht on July 2, 1997.1 The unexpected meltdown of the Thai economy and the contagion (the so-called Asian flu) spread with unprecedented ferocity, and, by the end of August 1997, the currencies of three of Thailand’s neighbors, Malaysia, Indonesia and the Philippines, had all been devalued substantially (see Table 1.1), despite vigorous efforts by these governments to stop their currencies from falling.2 During September and October, the currencies of Taiwan and Singa- pore came under intense pressure. While both countries managed to avoid Table 1.1 Rate of currency depreciation 1997–98 (local currency per US dollar) Rate of dep. (%) 2 July 1997 End Sept. 1998 July 1997–Sept. 1998 Philippine peso 26.38 43.80 66.10 Indonesian rupiah 2,341.92 10,638.30 354.30 Thai baht 24.40 38.99 59.80 Malaysian ringgit 2.57 3.80 47.80 Korean won 885.74 1,369.86 54.70 Source: OECD (1999, 249). 1 The Asian financial crisis full-blown financial crises, both were, nevertheless, forced to engage in com- petitive devaluations by floating their currencies rather than losing reserves by trying to stabilize the exchange rate.3 Nevertheless, Singapore, in spite of its strong economic fundamentals (huge foreign exchange and fiscal reserves, and a solid financial sector), saw its currency depreciate by 15 per cent and its stock market fall by 13 per cent. Similarly, Taiwan, despite its strong economic fundamentals (consistent current account surpluses and large for- eign reserves), saw its currency, the New Taiwan dollar, come up against strong speculative attack. Between 1989 and July 1997, Taiwan had pursued a de facto pegging of the New Taiwan Dollar to the American dollar, with the exchange rate being held within a narrow range of NT$26–27 to US$1. After the crisis broke, Taiwan’s central bank initially widened the band to about 28.7, with occasional interventions in the foreign exchange market to keep the rate steady. Yet, in the face of unrelenting battering, the Taiwanese central bank was forced to intervene extensively in the currency markets – spending some US$5 billion defending the value of the currency. However, the New Taiwan Dollar was abruptly floated on October 17, 1997 – after which it depreciated by 7 per cent. By October 20, the US dollar had broken through the NT$30 barrier for the first time in ten years. Taiwan’s depreciation led to speculation that the Hong Kong SAR dollar would be devalued as well – since Taiwan and Hong Kong are competitors in export markets.4 Moreover, speculators reasoned that if Taiwan, with its enormous foreign reserves (about US$90 billion at the time), could not defend its de facto peg, neither could Hong Kong.