Hall Peter A. Huber Evelyne Stephens John D.
The Asian financial crisis: Lessons learned and unlearned
Development and crisis of the welfare state: Parties and policies in global markets Chicago University of Chicago Press. Kasza Gregory J. Mares Isabela Hall Peter A. Milly Deborah J. Ramesh M. Schoppa Leonard J. Son Ek A. Author: Gyu-Jin Hwang 1. Keywords: East Asia ; Korea ; Japan ; Taiwan ; labour market ; economy ; social policy ; welfare regime.
Restricted Access. Add to Cart. Have an Access Token? Enter your access token to activate and access content online. Please login and go to your personal user account to enter your access token. The events in Thailand prompted investors to reassess and test the robustness of currency pegs and financial systems in the region.
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The result was a wave of currency depreciations and stock market declines, first affecting Southeast Asia, then spreading to the rest of the region. Disruptions in bank and borrower balance sheets have led to widespread bankruptcies and an interruption in credit flows in the most severely affected economies. As a result, short-term economic activity has slowed or contracted severely in the most affected economies. Some argue that these runs reflected a classic financial panic that did not reflect poor economic policies or institutional arrangements. As is well known, even well-managed banks or financial intermediaries are vulnerable to panics, because they traditionally engage in maturity transformation.
That is, banks accept deposits with short maturities say, three months to finance loans with longer maturities say, a year or longer.
Maturity transformation is beneficial because it can make more funds available to productive long-term investors than they would otherwise receive. Under normal conditions, banks have no problem managing their portfolios to meet expected withdrawals.
However, if all depositors decided to withdraw their funds from a given bank at the same time, as in the case of a panic, the bank would not have enough liquid assets to meet its obligations, threatening the viability of an otherwise solvent financial institution. As pointed out by Radelet and Sachs , East Asian financial institutions had incurred a significant amount of external liquid liabilities that were not entirely backed by liquid assets, making them vulnerable to panics. As a result of this maturity transformation, some otherwise solvent financial institutions may indeed have been rendered insolvent because they were unable to deal with the sudden interruption in the international flow of funds.
However, it is apparent that this is not the entire story, as the impact of the crisis varied significantly across economies. In particular, as investors tested currency pegs and financial systems in the region, those economies with the most vulnerable financial sectors Indonesia, South Korea, and Thailand have experienced the most severe crises.
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In contrast, economies with more robust and well-capitalized financial institutions such as Singapore have not experienced similar disruptions, in spite of slowing economic activity and declining asset values. Indeed the collapse of the Thai baht in July and of the Korean won in the last quarter of were preceded by signs of significant weaknesses in the domestic financial sector, notably an inability by domestic borrowers to service their debts.
In Indonesia, it became apparent after the crisis that domestic lenders could not monitor adequately the financial condition of their borrowers, a situation that worsened the severity of the crisis. This suggests that understanding what factors contributed to weaknesses in the financial sectors of the most affected economies may help make them less vulnerable to financial crises in the future.
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Two characteristics common in countries that have experienced financial crises were present in a number of East Asian economies. First , financial intermediaries were not always free to use business criteria in allocating credit. In some cases, well-connected borrowers could not be refused credit; in others, poorly managed firms could obtain loans to meet some government policy objective.
Hindsight reveals that the cumulative effect of this type of credit allocation can produce massive losses. Second, financial intermediaries or their owners were not expected to bear the full costs of failure , reducing the incentive to manage risk effectively. Krugman points out that such guarantees can trigger asset price inflation, reduce economic welfare, and ultimately make the financial system vulnerable to collapse. The importance of implicit government guarantees in the most affected economies is highlighted by the generous support given to financial institutions experiencing difficulties.
This was confirmed by events in , when the government encouraged banks to extend emergency loans to some troubled conglomerates which were having difficulties servicing their debts and supplied special loans to weak banks. Although these transformations generated pressure to reform existing welfare systems, economic performance and welfare legacies exerted a more profound influence. The authors show how exclusionary welfare systems and economic crisis in Latin America created incentives to adopt liberal social-policy reforms, while social entitlements from the communist era limited the scope of liberal reforms in the new democracies of Eastern Europe.
In East Asia, high growth and permissive fiscal conditions provided opportunities to broaden social entitlements in the new democracies. This book highlights the importance of placing the contemporary effects of democratization and globalization into a broader historical context.
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Robert R. Kaufman is professor of political science at Rutgers University. Teaching Professors : To request a print examination copy for course consideration, please visit: Ingram Academic. Inspection copies are only available to verified university faculty. Some restrictions apply. To request an electronic inspection copy for course use consideration, please visit one of the following services to submit your digital examination request online:. Home Development, Democracy, and Welfare States.
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