The Asian Economic Crisis: Causes and Impact
Leffern, Ed von, Cheng, K. Y., The Journal of Lending & Credit Risk Management
This article presents the economic models behind and causes of the Asian financial crisis and discusses remedies as well as implications for Western bankers.
There is daily media coverage about the collapsing economies in Asia, where stock markets fell by 28% in 1997, and predictions about their impact on the U.S. Because volatility such as that found in Asia erodes confidence, decisions concerning credit, stock market, and foreign exchange can actually aggravate the situation. A typical "flight to quality" can make more difficult the corrections to enhance stability. This economic crisis has had a contagious effect on Thailand, Indonesia, South Korea, and Malaysia and has resulted in more than $100 billion in assistance from the International Monetary Fund (IMF). All Asian countries were adversely affected to varying degrees. An understanding of the economic models and actions behind the Asian crisis holds lessons not only for banks currently conducting business in Asian countries but also for any lenders looking to expand their banks' business into unfamiliar territory.
Japan's Economic Development Model
In varying degrees, Japan's export-driven model for economic success was adopted by other newly industrial Asian countries. Basically, in this model, government policy and keiretsu groups of companies combined to maximize exports, gross domestic product growth, and employment while controlling inflation. Public policy encouraged a high savings rate and low cost capital while restricting alternative foreign investment by consumers.
The all-powerful Ministry of Finance (MOF) is responsible for planning and administrating macroeconomic policies. The Ministry of International Trade & Industry (MITI) handles microeconomic matters. Banks are expected to funnel funds into the economy with MOF or MITI assistance as to how funds will be used. Banks obediently provided financing for industries targeted under centrally organized five-year plans. (Banks are the center of specific industrial groups, but the financial sector now needs reform.) Massive consumer savings are deposited into banks or the post office and channeled by both into investment, promoting specific industries and technologies. This was without serious misallocations until the mid-1980s. Those plans focus on export, growth, and inflation targets, but not profitability; although there was the assumption that the government would not allow a large firm to fail.
Some other characteristics of the Japanese model:
1. MITI and MOF attract top-quality personnel who have skills to plan and implement economic policies.
2. Majority ownership of stock is controlled by keiretsu - meeting growth and market share targets are more important than short-term profits.
3. There are problems with properly disclosing information. The stock market does not require GAAP accounting policies although large Japanese public firms now consolidate financials. Banks are not allowed tax deductions on loan losses until a borrower declares bankruptcy, and they don't benefit from timely recognition of non-performing loans or charge-offs.
4. Labor unions are organized by company, not industry. Layoffs are almost unheard of at large firms and employee loyalty is "family-like."
5. Imports are informally restricted through complex distribution/import systems and protected industries. Obviously, this is vastly different from the American capitalist system and more culturally acceptable to Asian populations.
From 1950-73, Japan averaged 10% growth per annum in gross domestic product (GDP). From 1973-90, with less public direction, it averaged 4% per annum, still
higher than any other developed country. Asian "tigers" averaged GDP growth rates of 7.2% between 1985-95, a rate that exceeded America's highest GDP growth rate at any year in its history. Asia's share of the world's GDP rose from 6.7% in 1965 to 20% in 1989. …