Woo Says: The Asian Financial Crisis: Markets, Myths, and Meltdowns

AWANI

Mini-Series: Lessons from the Asian Financial Crisis  In this episode of #WooSays Professor Emeritus Datuk Woo Wing Thye and Melisa Idris kick off a new mini-series on the Asian Financial Crisis (1997-98). Part 1 looks at The Big Picture: why did it happen, and what were the consequences? Professor Woo unpacks the competing explanations — from claims of “crony capitalism” to the overlooked role of financial markets, panics, and “irrational exuberance”. This is the first of a series revisiting the crisis that reshaped Asia’s economies, and the lessons it still holds for the region today.

Transcript

00:00hello folks welcome to another episode of wu says this is where we get serious and get real about

00:17the us china and everywhere and everything in between it's two superpowers one global story

00:22this week we're going to travel back in time a little bit a couple decades more than more than

00:28a couple 1997 to be exact the asian financial crisis of 1997 1998 i don't know whether you

00:36remember it but it brought down governments it weakened currencies and it changed southeast

00:43asia forever even the world i would say maybe and it sparked sweeping reforms around the countries

00:52in the region indonesia south korea malaysia it widened the economic and political rift that

01:00shaped malays that still shapes malaysia today i would argue and the question is what really

01:06happened during that crisis and what can today's leaders learn from that moment in times i'm elissa

01:15idris join me on the show and with me to unpack this is professor wu wing tai who during the height

01:24of the crisis served as the special economic advisor to u.s treasury secretary robert rubin who

01:32in 1997 was under the clinton administration profu let's rewind time a little bit we'll go to the very

01:42start um of before it even became a crisis take us back to 1997 um what would you say in the better

01:53with the lens of the 2020 lens and goggles of hindsight what would you say triggered the asian financial crisis

02:03well at the time when it happened there were a number of competing explanations

02:09the word that was most commonly heard in the corridors of power in washington dc was that crony capitalism

02:19brought southeast asia down basically there was so much corruption and the corruption led to wrong

02:28investments that meant that the these countries were making products that ultimately failed to meet the

02:36market test so because of crony capitalism these economies collapsed that was the common explanation

02:47but with hindsight we i would describe the these three main competing explanations this way think of an

03:00an island where a huge typhoon hurricane tornado has swept through and at the end of it there are all these bodies lying on the beach

03:12so the question is what did they die from and uh you'll find three classes of of deaths

03:21deaths the goal is which class was the dominant uh class of death for example some people died

03:32because they were in very bad health they were suffering from obesity and had their very weak heart

03:41and when the heavy winds blow they got scared they got a heart attack and they died so that is bad health

03:51is responsible for the death if in other words even if a branch had fallen off a tree on the and found

03:58their head it would have scared them and they would have a heart failure and they would have died in any case

04:03the second one would be the coconut tree fell on them he was running away he was in perfectly good health

04:13but the tree fell on him so that is just bad luck and the third one would be the ambulance came

04:23and said come we would you we'll take you away faster they went on to the ambulance but the ambulance

04:30instead of giving them oxygen gave them nitrogen and so they died so that is bad doctorate

04:38so these are the three explanations one is bad health in other words these economies had done so many

04:50wrong economic policies that they basically had it coming they deserved what they got crony capitalism

04:59the second explanation would be that financial markets are vulnerable to boots of over optimism

05:09and periods of over pessimism so when you think of financial speculative bubbles

05:17which means that the price goes up because people are very gung-ho about the future which turns out to be wrong

05:25and when they are so you have got the bubble but once they realized they were optimistic they became over pessimistic

05:34and you got a big crash so that would be panics and panic and crashes so that would be market panic would be the second

05:47explanation in other words smart money for uh felt scared and they ran and because all of them ran collectively

05:59so much money was pulled out that the economies collapsed because you must understand that in since the beginning of the 1990s

06:12east asia east asia especially asia had very good press because of the success of the tiger economies

06:24korea japan singapore hong kong taiwan but in the 1980s people were expecting this to be the time of the rise of southeast asia

06:37so if you remember there were lots of books written about the pacific sanctuary

06:43and the economists even had a picture of dragons flying the air snorting fire and with the subtitle

06:55asia asia unleashed this was 1993 and the same year 1993 the world bank published a report called the east

07:06asian miracle in other words asian will soon join the tigers of the 1980s

07:13so if you were an investor especially institutional investor who cannot tell the difference between

07:21thailand malaysia indonesia they are just little blobs on the map when you hear all of this positive press

07:29money just flowed into the region in fact the money that flowed in the region was so overwhelming

07:36that uh the in fact the growth rate of malaysia from 1990 to 1997 was almost nine percent a year

07:48and the lowest growth rate in the 1990 to 1997 period the lowest growth rate in that year was 7.7

07:58the average was nine and the the lowest was 7.7 you could see there was certainly good times

08:05in that time when you have such exuberance that is the and people put more and more money into

08:12southeast asia they also get more and more nervous and if for some reason mr a sees mr b taking money

08:24out mr a must say mr b must know something i don't know they'll be careful i'll take my money out too

08:31and mr c who sees them say they must know something i don't know so they all took their money out

08:36in fact if you look at the outflow of money during the financial crisis the financial crisis was prompted

08:44by an outflow of funds and that was mostly funds that were called up call back by the banks especially

08:54japanese banks because interest rate in japan was zero since interest rate in japan was zero

09:03and the exchange rates of most of southeast asian countries have been very stable since 1984 like

09:09for example the thai baht stayed in the range of 24 baht per dollar 24 26 baht per dollar from 1984 up to 1996

09:22so given that stability and the zero interest rate in thailand you would certainly borrow money from

09:29from zero interest rate in japan sorry i misspoke so he borrowed money from japan the money floated in

09:35the economies boom and when the japanese bankers panicked they pulled the money out well the exchange

09:43rate collapsed so that's the second one so that was a panic but what could have what made the panic

09:49really severe was that the imf came along and say these countries have been badly mismanaged that's why they

10:03have this collapse in their markets and the moment the imf said that this country's been badly managed

10:13it's almost like someone shouting fire in a crowded theater everybody rushed for the entrance so what

10:20happened you could say the imf converted a small panic to a large-scale panic so uh of these three

10:32explanations there's one was bad health it is true there was chronic capitalism in all these countries there was

10:40corruption it's also true that there was definitely a panic by the banks they took their money out

10:49and the third case the imf made things worse wow so what all right so if i just i'm just gonna jump in

10:58here and get you to elaborate on some of the things what caused the banks to panic and why did imf say that

11:08these countries are badly managed what was the reason for them making that justification and causing even

11:17more panic making the crisis spread well this comes from two let's talk of the imf attitude

11:29the 1980s was a time that the prevailing economic paradigm the model that the imf uses to think about

11:42the world is based on what we call the washington consensus the washington consensus is basically says

11:52there's three components one is free market is good for you and me and for everybody and so if there's

12:01bad economic performance it is bad economic policy of suppressing the market so we need to have the

12:09market work b and second we got to keep a tight budget so that you don't print money to finance government

12:20deficit so that is macroeconomic uh uh orthodoxy the third one is the belief that the fight of all the

12:33markets that are in existence the most efficient markets are the financial markets because of the all

12:43do you know why people make so much money the financial markets because they are really smart people

12:48because they are so smart that's why they are making so much money and because they are smart we know

12:55that if there is anything wrong they would quickly correct it so that was first this belief in the

13:03very strong belief in the invisible hand that the market is the right uh mechanism to allocate money and the

13:10the second thing is the financial markets is the best of of the bunch of markets you could see in the

13:20economics uh literature that is uh the efficient markets hypothesis which basically say you cannot make money on

13:29wall street because wall street is full of smart people the moment uh uh money opportunity appears someone would take

13:36advantage of advantage of it and it disappears this is of course a big sell by wall street in order to

13:42persuade the government not to regulate them so wall street finance lots of economics research especially at the

13:52national bureau of economic research to sink the praise of financial markets and that was of course the time of

14:02alan greenspan who was a believer in this now this belief that the imf had they thought was completely verified

14:15by what they were doing in the 1990 period onwards because the 1990 was when the centrally planned economies

14:28switch to market economies and the reason they switched was because central planning doesn't work and the market was the

14:38solution so it simply reinforced the mutant friedman uh view of economics that if there's a bad economic outcome look no

14:53further than your government and your government has to stand aside and let the market work that in general is not bad policy

15:04but the only thing that it forgets is that financial markets are vulnerable to occasional periods of over optimism

15:14and over pessimism and over pessimism and when this kind of periods appear the government has a role

15:23to play a very important role and the the the refusal to recognize this can be seen in that

15:33alan greenspan coined the term irrational exuberance to describe the booming markets of the u.s in the 1990s

15:43no he used the word irrational exuberance but he said it but he didn't do anything about it because

15:52basically he didn't believe in it he was thinking of it as an academic possibility but seriously it could not be true

16:05true now that particular uh attitude background which imf comes which was they were rebuilding the eastern european

16:18economies which we had said in a previous episode the russian and the polish economies had too many heavy

16:27industries they invested in the wrong stuff and because they invested in the wrong stuff

16:33what happens is you got to move the workers away from the wrong occupations to what the country has

16:44competitive advantage in now moving people takes time which means that the recovery will only occur

16:54after after a couple of years so uh if you want to talk about a mental picture of how gnp is like gnp would follow a u-shape

17:07it is a certain level right at the end of the central planning period but that was unsustainable because they were

17:18producing lots of iron that were not being put to use so once they stopped producing iron the gdp collapsed

17:26then people start moving to the other industries they now make a dishwasher uh clothes shoes toys

17:36and then output goes up so you you have a u-shape that is what happens if it is explanation number one

17:46that it was bad that it was bad health if you died because of bad health then to prevent yourself from

17:52dying the bad health fellows should start uh building up they are they are they are their body to be

18:00resistant again now what if it were a panic what a panic would be is that the uh when a panic happens

18:13the banks are not letting up money because they are scared and when the banks don't let up money

18:19business cannot produce because they need working capital to buy inputs so the output will immediately

18:27collapse but once the panic is over when the banks realize they were being silly being so cautious and money

18:35flows again output just jumps back up so if it is a panic the gnp path is a v-shape instead of a u-shape

18:48a u-shape where you drag out over time before recovering a v-shape is there was a panic things drop

18:56and after you pull yourself together you produce exactly the same thing as you used to produce before

19:03only that this time you could get the working capital from the banks to do it if you look at the recovery

19:11path of malaysia thailand and korea what you see was is a big we there was no u in fact if you look at the

19:24imf reports of the imf reports of the period they predicted that recovery would not come

19:30for three years at least two years and what how and our recovery came just the next year after the

19:39collapse 98 we hit bottom 99 we were growing like nobody's business so what in retrospect it was quite

19:49clear that it was a panic and what the imf recommendation make the panic worse because the

19:58imf saw the banks as having lent to all the wrong industries in the first place so what did the

20:07imf do they close all the banks in other words these were the culprits that caused the collapse it's true

20:16because they panic they caused the collapse but then to close them that means that they cannot resume

20:22operation when the panic is over so the imf action just made it a lot worse

20:29a lot worse the imf now admits that it had failed to take into account the phenomena of speculative bubbles

20:46and financial crashes financial panics just that's this uh that that is why the economics profession

20:56in most parts of the world except possibly in the united kingdom and the united states began to have

21:05a much more cautious view towards economic management after the crisis but the good the important

21:15development was after the 2008 global financial crisis when layman brothers went splat on the ground

21:24and melted the world the americans now are also aware that financial markets could misbehave and when they

21:37do misbehave the consequences are exceedingly serious can we talk about that sorry um did you want to finish

21:46your thoughts well one thing i'd like to say is when you look at the collapse in 2008 in the united states

21:59which was foreshadowed by the 1997-98 asian financial crisis when it happened in asia they all say you know

22:08it's crony capitalism that was instinctive uh reaction basically it's like if bad things happen to you you must

22:15have seen because you've got what's coming to you but when it happened to themselves they recognize the

22:22financial markets could misbehave and when my financial markets could be misbehave the right

22:29solution is to undertake reforms especially putting in of regulations but in the case of the united states in the

22:40the 208 financial crisis there have been no reforms the reason is because unlike the 1929 crisis in the

22:501929 crisis all the big banks went bankrupt a lot of big financiers committed suicide by jumping off you

23:01know they there's this horrible account of someone walking out of wall street at night and all this

23:07is what is splitting down from the upper floors oh no but in 208 no such thing happened basically

23:15the governments realized to make a quick recovery the banks have to be saved and they saved all the

23:23bankers along with the banks the trouble with they should have let the banks go back they should save the

23:31banks but not the bankers like goldman sachs was in financial trouble it was treasury that saved

23:36goldman sachs and all the financial houses because they survived they are able to resist any

23:45regulation of their activities and now that they have bankrolled the election of donald trump

23:54he is removing whatever puny regulations that have been put in after 2008 so the lesson of the asian

24:03financial crisis is clear is clear but what have we done about it in the u.s unfortunately nothing

24:13because wall street we because we bail out the bankers unlike 1929 then the bankers are alive to resist any

24:24reform so i mean that's really kind of bitter pill to swallow the fact that the lessons of the asian

24:33financial crisis haven't we we haven't actually acted enough on them in the u.s and i want to ask you

24:39about here in the region so talk to me about the consequences of the afc in asia what happened in asia that

24:50um in hindsight now you you see uh did we learn the lessons here in this region okay two last two sets of

25:01lessons one is on the economic side and the other side big change or in the region is on the political

25:11side let us start with the economic side first one thing we do know is that in a time of trouble

25:25the only reliable source of help is self-help in other words no one's going to come build you up

25:34unless unless you are an important political ally of a big power for example if uh that's why sohato

25:48when indonesia got into trouble sohato expected the americans to mobilize japan and the imf

25:58to bail out the indonesian banks and saved him because that would not be the first time the sohato was

26:07bailed out by the americans the americans bailed him out in 1966 they bailed him out during the

26:16pretemina crisis of the 1970s and they bailed him out in the 1980s when there when there was a global

26:26slowdown so sohato knew that the u.s had his back but what he did not realize was that 1997

26:37was no longer 1983 or 1990 1966 it's because

26:47the cold war was over they no longer needed indonesia to be a staunch ally against the communists

26:59that is number one and number two sohato was very old he was by about 80 years old and so the americans

27:11could see that his days were numbered so they would rather support his successor than to delay the

27:19political transition so they told sohato well we are not going to bail you out this time

27:27and when he heard this sohato said if that is true i'll be gone in three months and he was right he was

27:35gone in three months so in other words if the political if the global geopolitical

27:47situation changed for a big important country like indonesia that changed the end of the soviet union

27:58and of competing ideology meant that the u.s don't have to spend money to bail out its friends

28:06because there's no so web union who's going to come and take over that friend

28:13and but what happened is the aftermath of this crisis is that every country started building up

28:21its foreign exchange reserves they all want to increase their dollar holding holdings

28:27but then they realized this is irrational if we are able to

28:35pull our individual reserves

28:38and lend it to any one of us who's in trouble

28:41then we then we then we don't have to each uh have to keep so much reserves because keeping so much

28:49reserves is costly yeah so they did so we have we we have uh started the

28:58chiang mai initiative which is a pooling of foreign exchange reserves

29:03but on this account i'd like to tell you about the uh brilliant japanese proposal

29:12in september 1997 that was made during the imf meeting in hong kong

29:17which you attended profu you were with um secretary uh u.s treasury secretary uh ruben there in that

29:28meeting in hong kong with the imf yes i was uh i was the fly on the wall

29:37yeah i was a small fly

29:38let's let's tell us what the fly saw well i didn't see was reported to me um the japanese

29:49proposed to set up an asian monetary fund basically the japanese say we will put in the money

29:57to build up these southeast asian countries and that the japanese uh when the japanese said that

30:08that basically makes the americans felt quite insecure because that meant that uh the united states

30:20that the imf would no longer be the monopoly policeman of the world and the imf is only three blocks away

30:29from the u.s treasury and and the chief that the deputy uh the deputy the imf has always

30:38been an american and in this case it was stanley fisher at that time and basically the americans

30:46control the policy of the imf and so the americans could see that if asian monetary fund

30:56it will no longer be able to have such a strong control over the economies the other economies in the

31:06world so it was well it wasn't as it wasn't enthusiastic of the japanese uh proposal because

31:13saying that it could undermine the work of the imf it could lead to duplicative efforts but the big

31:21mistake of the japanese was that they did they had not done their homework they did not

31:28raise this idea of the asian monetary fund to china so china was caught by surprise too that this big

31:39proposal of forming an asian monetary fund and we who are going to be the biggest boys in the block in

31:45the next 10 years you know so china uh did not support the asian monetary fund so basically the asian

31:58monetary fund idea was killed but in retrospect we all know it's a mistake the chinese knows

32:07they should have supported it but basically uh the what we have now in uh singapore what's that's called

32:17the asian monetary emerald a asian monetary research office i think asian macro macroeconomic research

32:27office emerald is that is the embryo of what may become an asian monetary fund in the future

32:35so as as asia becomes more important we are we have the money to set up our own fire station whereas

32:49africa cannot afford to set up its own fire station that is basically what an asian monetary fund is

32:57and uh that is a lesson we have learned and we are go in the middle of uh building that up but

33:11with the beginning of the cold war if that that and if there is a split in age age the coalition in asia

33:21future then the asian monetary fund may not come about after all right so i think we should leave it

33:32here for now and come back and zoom in on specific countries i mean the asian financial crisis was so

33:40big and so layered um to do it justice in just one episode so let's come back and look at what happened

33:47in um the different countries today we covered why it happened what were some of the consequences that

33:53were felt around the world and what lessons did we take from that or did not take from that um and

34:00we'll come back and focus zoom in on malaysia we'll zoom in on indonesia and also uh south korea and

34:07thailand so uh that's it for this episode of wu says where we get real about the us china and

34:14everywhere and everything in between i'm melissa idris signing off i will see you in the next one bye folks

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