Soc850 Class U Stiglitz, The East Asian Economic Crisis

Transcription

1 Soc850 Class U Stiglitz, The East Asian Economic Crisis Ted Mouw tedmouw@ .unc.edu Department of Sociology University of North Carolina, Chapel Hill November 7, 2007

2 Outline Overview Basic Questions nancial panic Discussion questions currency attack

3 Basic Questions Basic point **. Stiglitz, Globalization and its Discontents, Chapter 4 The East Asia Crisis (pp ) Key point: it is complicated Interconnected economies at the global level share a heightened risk of volatility

4 Basic Questions How IMF policies brought the world to the verge of a global meltdown p.89 IMF policies made things worse IMF was founded to avert and deal with crises of this kind Just before the crisis, the IMF had forecast strong growth

5 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92)

6 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92) Washington consensus = Friedman's golden straitjacket

7 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92) Washington consensus = Friedman's golden straitjacket >nancial market liberalization, privatization of govt. companies

8 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92) Washington consensus = Friedman's golden straitjacket >nancial market liberalization, privatization of govt. companies >free trade, no government protection for industries

9 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92) Washington consensus = Friedman's golden straitjacket >nancial market liberalization, privatization of govt. companies >free trade, no government protection for industries >limited role of government

10 Basic Questions Washington Consensus 1. What does Stiglitz mean when he talks about the Washington Consensus? (p.91-92) Washington consensus = Friedman's golden straitjacket >nancial market liberalization, privatization of govt. companies >free trade, no government protection for industries >limited role of government >macro economic stability record levels of economic growth in Asia The Asian economies had done so well because they had not followed the dictates of the Washington consensus

11 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle?

12 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus

13 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus >high savings rate, good investment

14 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus >high savings rate, good investment >low inequality and high growth

15 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus >high savings rate, good investment >low inequality and high growth >investment in public education

16 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus >high savings rate, good investment >low inequality and high growth >investment in public education >export oriented growth

17 Basic Questions East Asian Miracle **2. In general terms, what were the dening features of the East Asian economic miracle? >contrast to the Washington consensus >high savings rate, good investment >low inequality and high growth >investment in public education >export oriented growth >government helped shape and direct markets

18 nancial panic Discussion questions currency attack East Asian Crisis The Asian economic crisis: Two patterns: 1) Korea

19 nancial panic Discussion questions currency attack East Asian Crisis The Asian economic crisis: Two patterns: 1) Korea domestic rms had borrowed large amounts abroad and had to pay back the loans at

20 nancial panic Discussion questions currency attack East Asian Crisis The Asian economic crisis: Two patterns: 1) Korea domestic rms had borrowed large amounts abroad and had to pay back the loans at high rates after the currency fell 2) Thailand

21 nancial panic Discussion questions currency attack East Asian Crisis The Asian economic crisis: Two patterns: 1) Korea domestic rms had borrowed large amounts abroad and had to pay back the loans at high rates after the currency fell 2) Thailand self-fullling prophecy of a speculative attack on the currency (p.93) Basic story:

22 nancial panic Discussion questions currency attack East Asian Crisis The Asian economic crisis: Two patterns: 1) Korea domestic rms had borrowed large amounts abroad and had to pay back the loans at high rates after the currency fell 2) Thailand self-fullling prophecy of a speculative attack on the currency (p.93) Basic story: premature nancial liberalization > speculative bubble, downturn + IMF policies > economic crisis

23 nancial panic Discussion questions currency attack Group Discussion questions 3. How would a pyramid scheme eventually lead to a panicked collapse? 4. How might a real estate boom lead to a speculative bubble and a collapse?

24 nancial panic Discussion questions currency attack Premature nancial market liberalization **5. Why does Stiglitz argue that nancial market liberalization contributed to the Asian economic crisis? Animal spirits speculative bubble (example of a real estate boom and bust) capital ows are pro-cyclical

25 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93)

26 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p.95

27 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht

28 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar

29 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion).

30 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion). 5. In a week, the exchange rate falls to 40 baht = $1

31 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion). 5. In a week, the exchange rate falls to 40 baht = $1 6. Take $600 million and reconvert it back into Baht = $24 billion baht

32 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion). 5. In a week, the exchange rate falls to 40 baht = $1 6. Take $600 million and reconvert it back into Baht = $24 billion baht 7. Pay o the $24 billion baht loan.

33 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion). 5. In a week, the exchange rate falls to 40 baht = $1 6. Take $600 million and reconvert it back into Baht = $24 billion baht 7. Pay o the $24 billion baht loan. 8. Keep the other $400m as prot.

34 nancial panic Discussion questions currency attack Currency Attack 6. How can a speculative attack on a country's currency, such as Thailand in 1997, become a self-fullling prophecy? (p.93) 1. Let's take Stiglitz' example from page p Bet against the baht 3. Starting exchange rate: 24 baht to the dollar 4. Borrow 24 billion baht and convert it into dollars (= 1 bilion). 5. In a week, the exchange rate falls to 40 baht = $1 6. Take $600 million and reconvert it back into Baht = $24 billion baht 7. Pay o the $24 billion baht loan. 8. Keep the other $400m as prot. Key point: if a lot of people make this same bet (against the baht) at the same time, how does it help to make it come true?

35 Eect on local companies 7. If you are a Thai company and you have borrowed money in dollars, how are you hurt by a sudden fall in the value of the Baht? In the long run, would a low value of your currency help you or hurt you?

36 Eect on local companies 7. If you are a Thai company and you have borrowed money in dollars, how are you hurt by a sudden fall in the value of the Baht? In the long run, would a low value of your currency help you or hurt you? >you have to repay your money at a worse exchange rate.

37 Eect on local companies 7. If you are a Thai company and you have borrowed money in dollars, how are you hurt by a sudden fall in the value of the Baht? In the long run, would a low value of your currency help you or hurt you? >you have to repay your money at a worse exchange rate. > it would help you... by making your products cheaper in foreign markets.

38 Hooverite policies **8. In pages , why does Stiglitz argue that IMF policies were reminiscent of the kind of economic policies that brought us the Great Depression of the 1930s? Fiscal austerity, balance the budget, stop ination with high interest rates IMF money used to prop up the currency p.95 how did this actually help rich people in these countries?

39 Hooverite policies **8. In pages , why does Stiglitz argue that IMF policies were reminiscent of the kind of economic policies that brought us the Great Depression of the 1930s? Fiscal austerity, balance the budget, stop ination with high interest rates IMF money used to prop up the currency p.95 how did this actually help rich people in these countries? > they used the window of opportunity to take their money out of the country, further exacerbating the crisis.

40 p.102 growth in Korea had been based on domestic savings p.104 the dierence between East Asian and Latin America

41 p.102 growth in Korea had been based on domestic savings p.104 the dierence between East Asian and Latin America >Latin America: loose money, high decits and ination Why did the IMF want countries to raise interest rates?

42 p.102 growth in Korea had been based on domestic savings p.104 the dierence between East Asian and Latin America >Latin America: loose money, high decits and ination Why did the IMF want countries to raise interest rates? >to attract investors, pulling money back into the country (actual eect was the opposite) What eect will excessively high interest rates have on an economy?

43 p.102 growth in Korea had been based on domestic savings p.104 the dierence between East Asian and Latin America >Latin America: loose money, high decits and ination Why did the IMF want countries to raise interest rates? >to attract investors, pulling money back into the country (actual eect was the opposite) What eect will excessively high interest rates have on an economy? >prevent companies from borrowing money >bankrupt companies with debt

44 restructuring 9. On pages , why does Stiglitz argue that the IMF mismanaged the restructuring of the nancial and banking system?

45 restructuring 9. On pages , why does Stiglitz argue that the IMF mismanaged the restructuring of the nancial and banking system? >IMF wants to shut down weak banks immediately

46 restructuring 9. On pages , why does Stiglitz argue that the IMF mismanaged the restructuring of the nancial and banking system? >IMF wants to shut down weak banks immediately > better strategy is to move gradually, because of domino eect

47 restructuring 9. On pages , why does Stiglitz argue that the IMF mismanaged the restructuring of the nancial and banking system? >IMF wants to shut down weak banks immediately > better strategy is to move gradually, because of domino eect >inducing a bank run

48 turmoil 10. What kind of social and political turmoil happened in Indonesia in the aftermath of the nancial crisis? 11. What do you think would happen if the U.S. experienced a recession on a similar scale to that of Indonesia (-14% GDP, still was -5% 4 years later)

49 Malaysia and China **12. How does the contrast of Malaysia and China with the rest of SE and East Asia provide evidence of alternatives to the IMF's policies? (p )

50 Malaysia and China **12. How does the contrast of Malaysia and China with the rest of SE and East Asia provide evidence of alternatives to the IMF's policies? (p ) >Malaysia's central bank prevented exposure to foreign currency

51 Malaysia and China **12. How does the contrast of Malaysia and China with the rest of SE and East Asia provide evidence of alternatives to the IMF's policies? (p ) >Malaysia's central bank prevented exposure to foreign currency > Malaysia imposed capital controls to restrict hot money

52 Malaysia and China **12. How does the contrast of Malaysia and China with the rest of SE and East Asia provide evidence of alternatives to the IMF's policies? (p ) >Malaysia's central bank prevented exposure to foreign currency > Malaysia imposed capital controls to restrict hot money >India and China (8%) kept growing during the crisis >China: govt. investment in infrastructure

53 Malaysia and China **12. How does the contrast of Malaysia and China with the rest of SE and East Asia provide evidence of alternatives to the IMF's policies? (p ) >Malaysia's central bank prevented exposure to foreign currency > Malaysia imposed capital controls to restrict hot money >India and China (8%) kept growing during the crisis >China: govt. investment in infrastructure >huge foreign reserves (resistant to speculator attack)

54 maintaining stability 13. Based on this chapter, what would Stiglitz say to those who argue that the government should have minimal involvement in economic aairs?