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June 1998 Insights Issue #26In search of the truth about ThailandWas the East Asian crisis just a creditor panic with a mad scramble for liquidity that brought the banking system to its knees and the region's much-vaunted 'economic miracle' to a standstill? Or were fundamental problems hiding beneath the surface? Each of these views has its supporters. Some claim the miracle was a myth, that the magical mix of business, bankers and bureaucrats had created a giant bubble that had to burst, as inevitably as nemesis follows hubris. In the opposite camp are stalwart defenders of the miracle, led quixotically by Jeffrey Sachs of Harvard University. For them the crisis is a classic bank-run and the IMF is to blame for mishandling it - lending too little, too late and at extortionate rates of interest. So where does the real truth lie? Beyond question, there was a creditor panic. But it arose because creditors suspected that all was not well, that the capital that had poured into Thailand was ending up in empty office blocks. They also grew aware that the funds funnelled through Korean banks were feeding the many-headed hydra of the Chaebol and that Indonesia's Suharto family was pocketing the odd $40bn rake-off. How could this happen? And for how long could it go on before it was noticed? It was possible because a combination of weak regulation and implicit deposit guarantees meant local bankers were free to gamble with the money that global capital markets poured into their parlours. They reckoned that they could gain on the upside and leave the government to cover the downside, and the depositors wouldn't mind so long as the guarantee lasted. The party ended when foreign depositors realised that there were not enough dollar reserves left for the guarantee to be credible. As this account (championed most notably by Paul Krugman of MIT) involves both factors, it is shown in the middle of the accompanying diagram, which visualises the contrasting views noted above, the burst bubble theorem to the right and the bank-run version of events to the left. The Krugman hypothesis stands where the two circles overlap. It helps to explain why the IMF was unwilling simply to throw money at the problem: theirs was the unwillingness of would-be rescuers to get themselves drowned!
Granted, there were flaws in the East Asian fundamentals - over-investment, overvaluation and under-regulation. But no country is perfect and the punishment meted out to these emerging markets by global capital markets is out of all proportion - whether measured by the fall in their currencies, or in their stockmarkets or in output. They have been taught a bitter lesson. What of global capital markets? Are there reforms to the international monetary system that might help prevent a repeat performance? Here are some practical suggestions:
Lastly, be warned: if nothing is done, another crisis could soon be showing in a country near you! Marcus MillerDepartment of Economics and Centre for Globalisation University of Warwick Coventry CV4 7AL UK T: +44 (0)1203 523048 F: +44 (0)1203 523032 Email: marcus.miller@warwick.ac.uk Based on Financial crisis in East Asia: bank runs, asset bubbles and antidotes, a paper written for the Clare group, due to appear in the September 1998 issue of the National Institute Economic Review. The paper is jointly authored by Pongsak Luangaram T:+44 (0)117 928 9006 Email: p.luangaram@bristol.ac.uk |
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