Econ of Asia Final Exam New Material

1. In Lim's trinity growth model, what is EGOIN used for?

2. In Lim's trinity growth model, what does each EGOIN stand for?

3. Which factor is at the top of the triangle?

1. EGOIN: capacity endowment; key determinant for economic development

   • Low: poor & underdeveloped

   • High: Higher income, more developed?

2. E: entrepreneurship (drives econ success); G: head of state or gov (provides incentives for entrepreneurs to be efficient); O: ordinary workers or labors (interact with E to produce g&s, G provides them education); I: physical capital; N: natural resources, including access to water & shipping routes

3. G (with E and O on other points)

How did Lim classify Asian economies, in Lim’s S curve?

With GDP per capita & growth rate of GDP per capita

• y-axis: EGOIN per capita/GDP per capita

• x-axis: Development stage/Time

In Lim’s S curve, what are the 3 types of economies and what are the characteristics of each type?

1. Turtle - small, poor, stagnant

   • Low GDP per capita

   • Low GDP per capita growth rate

   • Low EGOIN

   • Low consumption

   • High population growth rate

   • Low S&I rates

   • Low knowledge-base

   • Pre-industrialization

2. Horse - lean, fast

   • Middle GDP per capita

   • High GDP per capita growth rate

   • Middle EGOIN

   • Medium consumption

   • Transition population growth rate (birth rates dec with family planning)

   • High S&I rates

   • Advancing knowledge-base

   • Industrializing

3. Elephant - large, slow

   • High GDP per capita

   • Low GDP per capita growth rate

   • High EGOIN

   • High consumption

   • Low population growth rate (aging pops)

   • Low S&I rates

   • High knowledge-base

   • Post-industrialized

   • Diminishing returns to capital - stagnates std of living without tech advance

1. According to Lim’s (1996), what is “the low-level equilibrium trap”?

2. How would a turtle economy break away from this trap?

1. Cycle: Low income → low saving → low investment → low econ growth →

   • Poor, low EGOIN, no $ to spare to invest in infra, educ, etc., can’t accum capital stock/human capital, inefficient production, dec of growth of national income

2. Increase domestic saving by giving up current consumption; accumulate capital stock through FDI, aid, or borrowing; rising output growth & well-managed family planning to avoid pop growth

What is “Neo-Malthusian Trap”?

Low income per capita → Low domestic saving → high investment → high growth rate of output → high population growth → back to low income per capita

• Economy trapped in low-level equilibrium output when Y rises but N also rises

• Need to increase S & I while managing population growth

In Akamatsu’s flying geese hypothesis, which country was the dominant leading goose of the region?

Japan

What are three patterns of Flying Geese formation? Explain each pattern.

1. Product cycle

   • Consistent with convergence hypothesis - catch up until no tech gap between countries

   • Development pattern:

     1. Import manufactured goods from advanced econs & export primary products

     2. Domestic production of consumer goods (import substitution to prevent foreign competition)

     3. Export manufactured goods, still import capital goods

     4. Export lower-end capital goods; catching up with advanced econs

2. Inter-industry sequencing

   • 3 stages:

     1. Labor intensive industry (food, textiles)

     2. Capital-intensive industry (heavy machinery, steel, auto)

     3. Tech-intensive industry (telecom, electronics)

3. Intra-regional catching up

   • Alignment of economies along different stages of development

     • Rely on each other’s markets as destinations for exports

   • Ex: Japan = leading goose, 4 Tigers next, then ASEAN, then China & India

     • Lead geese provide FDI to following geese, following geese provide labor-intensive exports to lead geese

1. How did top down catching up process start in Asia?

2. What factor was the key factor that boosted the regional catching up process?

1. Manufacturing of consumer goods shifted to less advanced countries with lower unskilled wages (outsourcing)

2. Key factor: Pro-trade oriented FDI

   1. Countries specialize on what they have comparative advantage in & then invest into other countries

   2. Positive sentiment toward FDI & regional cooperation

What is market failure?

A situation when an individual best outcome under a free market does not yield society’s optimal outcome.

• Does not maximize social benefit, markets fail to allocate resources efficiently

• Common types: externalities, public good, coordination failure

What are 2 major properties of a public good?

1. Nonrival in consumption: consumption by 1 person does not diminish amount available to others

2. Nonexcludable: Provider can’t prevent others from enjoying the good, even if they don’t pay

   • Causes free rifers

What is coordination failure?

Industries that depend on each other fail to develop because they’re waiting on each other. Only make profits if they develop at the same time, no one wants to be first mover.

• Market failure: no one starts

• Gov intervention justified because they can coordinate & encourage simultaneous investments

How can government improve efficiency when market failure exists? 3 ways.

Explain market-friendly interventionism & its suggested policies.

1. Neoclassical: increase in free market, gov focuses on creating stable macroeconomy instead of intervention

   • Keep exchange rates stable, encourage competition, open to international trade, etc.

2. Revisionist: strong gov intervention, guide resource allocation in early development stages

   • Import controls, heavy subsidies, export promotion, tech development, picking winners

3. Market-friendly interventionism: gov intervenes where market is inefficient, works with market to promote competition without distorting prices

   • Fix market failures & coordination problems, provide infrastructure, share info, create & enforce legal frameworks, foster competition & entrepreneurship

What are government policies that gear toward sound fundamentals (according to the World Bank)?

1. Stable macroeconomy

2. High human capital

3. Healthy financial system

4. Limit price distortions

5. Open to trade & foreign tech

6. Develop rural & ag. sectors

What are selective intervention policies that the HPAEs used?

1. Export push: govs encourage exports by providing incentives to exporting manufacturers; encourage production of internationally-competitive products

2. Credit market interventions/Direct lending: govs provide indirect subsidized loans with low interest rates to selected industries

3. Selective promotion: gov chooses to promote a specific sector (industrial targeting), use incentives/restrictions to guide resources to those industries

Why is cooperation between business and governments important in East Asia?

Economic development would be impossible without cooperation.

• Requires coordination of investments & info sharing that the market alone can’t provide

• Helps industries grow together & overcome coordination failure

What are the differences between market-based competition and contest-based competition?

• Market-based competition: like a free market where many firms compete with little gov interference

  • Gov mainly acts as rule enforcer to make sure competition fair

• Contest-based competition: gov chooses certain industries/firms to compete, sets clear performance goals, & rewards winners

  • Gov acts as referee, monitoring performance & promoting successful firms

  • Japan & South Korea

  • Participation is not mandatory, want evenly-matched firms & small # of firms, rewards are big & attractive, rules are clear-cut & enforced

Has there been any change in the role of Asian governments since the 1997 Asian Financial Crisis?

Yes, shift towards greater role for markets & less gov control (privatization)

• After moral hazard problems causing Crisis

1. What did the World Bank conclude about the relationship between GDP per capita and agriculture’s share in output in the HPAEs?

   • What was the trend of agriculture’s share in total output for the ASEANs & China?

2. What about the relationship between GDP per capita and agricultural employment?

   • What was the trend of agricultural employment for the ASEANs & China?

3. What about the trend in agricultural exports for the ASEANs & China?

1. Higher GDP per capita = less share of agriculture in GDP

   • Largest ag. sector, rapid decline in share of ag. in GDP starting in 1960s

2. Higher GDP = less employment in agriculture

   • Fell in half

3. Decline in ag exports; SE Asia no longer reliant on primary product exports as major source of income

Which country has the highest share of population living in rural areas in 2020?

Thailand (50%)

What are the problems in rural development/traditional farming?

1. Low productivity (obsolete tech, slow changes, weather-dependent)

2. Limited access to credit/financial market (high-risk, high interest rates, lack of collateral, no way to invest)

3. Instability of income (seasonal employment, lots of labor, uncontrolled factors)

4. Instability of prices (fluctuating supply & demand which are inelastic - any change leads to larger changes in price)

How do Asian governments try to alleviate such problems in rural economy? Give examples of agricultural development policies (7).

1. Support food security

2. Increase access to infrastructure

   • Improve productivity, lower distribution costs, connects farmers to markets, lowers P

3. Increase access to credit markets

4. Provide modern technology

5. Provide land access

6. Promote rural nonfarm activities

7. Ensure price stabilization

What is food security?

When all people, at all times, have physical & economic access to sufficient, safe, & nutritious food that meets their dietary needs & food preferences for an active & healthy life

• Threats: global food shocks, local supply shocks, income shocks, disruptions of domestic & international trade

Why is having access to credit markets a major problem in rural development?

• Banks perceive smallholders as high-risk & don’t want to give them loans

• Their productions are not as profitable so less able to repay loans - income is also unpredictable

• Usually have few assets to use as collateral to take out loan

• Informal lenders charge excessively high interest rates on loans

Create: rural credit program, small enterprise program, microfinancing from NGOs

What is Green Revolution?

• 1965-85, increase in productivity of ag.

• Development & diffusion of a series of short-statured, early-maturing, & fertilizer-responsive, high-yielding crops

• Adoption of high-yield crops, fertilizer, & irrigation

• Transformed ag. yields & well-being of people in Asia

What is land reform?

Redistribution & redefinition of property rights over farming land to landless, tenant farmers

• Incentivizes them to invest in land, end exploitation, promote rural development, increase social & economic equality

What are village and township enterprises?

Rural businesses in China created as part of rural economic reforms to diversify the rural econ beyond ag.

• Helped absorb surplus of ag. labor, create non-farm employment, increase rural income, promote ag. modernization, etc.

How does the buffer stock work?

• Gov purchases & stockpiles a commodity when prices are low & sells it when prices are high (bring prices back down, reduce shortage pressure)

  • Used to stabilize prices, support food security, & protect farmers from sudden income shock

Asian industrialization began with ____ in the 1960s, followed by ____ in the 1970s, & then ____ in the 1980s.

Japan, 4 Tigers, 3 ASEANs & then China

1. What is global value chain?

2. What is Factory Asia?

3. How is GVC related to Asia's industrialization?

1. The supply chain of entire production process is divided into activities produced by different companies in different locations. Involves extensive coordination & cross-border production networks.

2. Factory Asia: factories in different Asia economies producing parts that are assembled & shipped to advanced economies.

3. Dec in communication & transport costs made it cheaper & faster to move parts across borders; trade liberalization made it cheaper to go across borders multiple times (ASEAN Free Trade Area - AFTA); many parts standardized & can fit into many final products

Why is the manufacturing sector important to economic growth?

1. Higher rate of technological change than agriculture → more capital accumulation & economies of scale

2. Develops food & backward linkages among industries. Expansion of 1 industry fuels rest of economy

3. Diversifies export possibilities & reduces dependence on agriculture along with more stable prices.

1. What is industrial policy?

2. Why do East Asian governments use industrial policies? What would be justifications for such interventions?

1. Any type of selective interventions that attempt to alter production towards sectors with better prospect for econ growth (rather than relying on market)

2. Governments use them to alter their country’s comparative advantage. Overcome market failures.

1. What is ISI?

2. What are weaknesses of ISI policy?

1. Import-substituting industrialization: inward orientation focusing on production of domestic consumer goods to replace imports. Trade restrictions used to protect domestic producers & allow them to charge higher prices.

2. Weaknesses:

   1. Moral hazard: domestic producers have no incentive to be efficient & continue to seek protection

   2. More rent-seeking, lobbying, inefficient allocation than perfect competition

   3. Inc in imports to supply industries that rely on foreign material, reducing balance of payment

What is infant industry argument?

New domestic industry in developing countries may need temporary protection from foreign competition because they start out less efficient than established firms

• Can lower costs through learning & scale over time but may fail before that

• Lenders face high risk since industry may not succeed, leading to high interest rates & unprofitability & underinvestment

• Government support

What is industry targeting?

Governments face uncertainty about which industries are most competitive & markets may not allocate investments efficiently across sectors.

• By selectively supporting certain industries, govs can experiment to discover which will succeed, develop comparative advantage, & drive econ growth

• Justified to overcome info constraints

What are information externalities?

Early investors create valuable info about whether new industry is profitable but can’t capture all benefits.

• Other firms observe & enter later without bearing same risks/costs

• Firms reluctant to be 1st movers - underinvest

• Justifies government acting as first investor, revealing info

1. What is Chaebol?

2. What is Keiretsu?

1. Form of large business in S. Korea.

   • Conglomerate consisting of many companies centered around parent company

   • Family controlled with strong ties & assistance from gov

   • Founder has highest power

   • Cross-shareholding among firms in network - own large shares of e/o

   • Prohibited from owning private banks - gets gov loans

   • Horizontally diversified (wide range of businesses)

   • Ex: Hyundai, Samsung, Daewoo

2. Japan

   1. Large cluster of independent companies with long-term contractual relationships, financed by single central bank.

   2. Shared power; bank has main influence over decisions

   3. Vertical & horizontal relationships

      1. Vertical: cross-shareholding to strengthen relationship

      2. Horizontal: Diversified, linked through financial relationships & support rather than ownership

   4. Ex: Mitsui Group, Mitsubishi Group, Toyota

How does Asian-style capitalism differ from Western-style capitalism?

Property rights:

• West: private, enforced by law

• Asian: private, but gov overrides law at times

Corporate governance:

• West: outsider control (investors/shareholders)

• Asian: insider control (founder fam, managers, employees)

Business-gov interaction:

• West: independent, rule-based

• Asian: close interaction, strong coordination

Industrial organization:

• West: decentralized, competitive markets, antitrust enforcement

• Asian: chaebol, keiretsu, many gov-linked firms

Financial system:

• West: deregulated, free entry, supervision through regulatory oversight

• Asian: bank-based, restricted entry, heavy gov control, direct lending, weak regulations

Labor market:

• West: decentralized, flexible - easy to hire/fire

• Asian: lifetime employment in core enterprises, strong labor unions

Public ownership:

• West: none in productive sector

• Asian: plenty in upstream industries, many gov-linked firms

1. What is import substitution/inward-oriented strategy?

2. What is export promotion/outward-oriented strategy?

1. Focus on domestic production of consumer goods to substitute for imports; protect domestic production & jobs for econ growth

   • Infant industry motivation

   • Policies: import tariffs & quotas

2. Embraces global competition & encourages free trade & free movement of capital, labor, enterprises, knowledge rather than protecting domestic firms from competition

   • Policies: export subsidies, tax incentives, direct lending, export processing zones

1. What is an import tariff & its purpose?

2. How does import tariff work?

3. Who gains and who loses?

4. What happens to domestic price after the tariff?

1. Tax on imports to give domestic producers an advantage over foreign producers by blocking competition, & to generate gov. revenue

2. Below S & D crossing

   • Raises price of items coming in, so domestic producers raise price too b/c they can

   • Increases domestic production

   • Decreases domestic consumption

   • Imports = gap between Q supplied & Q demanded (D>S); imports dec but still there

   • Tariff revenues: import Q (Qd - Qs) times tariff amount per unit

   • Inc PS, Dec CS, Inc gov revenue, lowers country’'s net welfare from DWL (2 right triangles on either side of revenue under new price) - country worse off in terms of econ welfare

3. Hurts domestic consumers (P inc), helps domestic producers (blocks competition)

4. Domestic P increases, world price stays same

1. What is a cash export subsidy & its purpose?

2. How does a cash export subsidy work?

3. Who gains and who loses?

4. What happens to domestic price after the cash export subsidy?

1. Gov provides direct payment to producers for each exported unit to encourage domestic production

2. Above S & D crossing

   • Raises price for domestic consumers since producers can now earn more from exporting

   • Increases domestic production (Qs1 → Qs2)

   • Decreases domestic consumption (Qd1 → Qd2)

   • Exports = gap between Q supplied & Q demanded (S>D); exports inc

   • Subsidy/gov expense: export Q (Qs - Qd) times subsidy amount per unit

   • Inc PS, Dec CS, Gov spending Inc, lowers country’'s net welfare from DWL (2 right triangles on either side of S & D curves under new price, portions of gov expense) - country worse off in terms of econ welfare

3. Hurts domestic consumers (P inc), helps domestic producers (more $ from exports)

4. Domestic P increases, world price stays same

1. What is a cost export subsidy & its purpose?

2. How does a cost export subsidy work?

3. Who gains and who loses?

4. What happens to domestic price after the cost export subsidy?

1. Gov pays part of production cost to producers (tax break/incentive, R&D subsidy, etc.) to encourage domestic production

2. S curve shifts right & down (lower cost of production so produce more)

   • No change of domestic P

   • No change of domestic consumption (Qd1 same where it crosses horiz. Price line)

   • Increase of domestic production (Qs1 → Qs2, where new S curve crosses horiz. P line)

   • Exports = gap between Q supplied & Q demanded (S>D); exports inc

   • Subsidy/gov expense: all area between new & old S curves

   • Inc PS, No change in CS, Gov spending Inc by gap between S curves, lowers country’'s net welfare from DWL (small triangle above price & between S curves) - country worse off in terms of econ welfare

3. Does not affect domestic consumers (P stays same), helps domestic producers (lowers their costs)

4. Domestic P stays same, world price stays same

1. If the U.S. exchange rate goes from $1.50/euro to $1.52/euro, did it appreciate or depreciate?

2. What about it it goes from 30 Thai baht per US $ to 36 baht per US $?

1. Depreciate (need more $ to buy euro now)

2. Appreciate (need more baht to buy $ now)

1. When a home currency depreciates, what will happen to trade balance (exports – imports)?

2. What about when a home currency appreciates?

1. If home currency depreciates, trade balance will inc because US g&s became less expensive to foreigners, causing exports to inc & US $ is less powerful so imports dec.

2. If home currency appreciates, trade balance will dec because US g&s became more expensive to foreigners, causing exports to dec & US $ is more powerful so imports inc.

From the trade flow model for exchange rate determination:

1. What are shifts in local currency demand driven by? What are shifts in local currency supply driven by?

2. If American consumers want to buy more Chinese goods, what will happen to dollar price of yuan under floating currency? Will it appreciate or depreciate?

3. If Chinese consumers want more US goods, what will happen to dollar price of yuan under floating currency? Will it appreciate or depreciate?

1. Shifts in D: foreign preferences; Shifts in S: domestic preferences

2. Demand for yuan increases, yuan appreciates against dollar (exchange rate of yuan per dollar dec)

3. Supply of yuan increases, yuan depreciates against dollar (exchange rate of yuan per dollar inc)

How can a central bank intervene in foreign exchange market to peg the home currency?

1. What should it do if the home currency is undervalued? Is this vulnerable to a speculative attack?

2. What should it do if the home currency is overvalued? Is this vulnerable to a speculative attack?

1. If home currency is undervalued at the peg price: people want to buy it, which will inc its price. Central bank should sell home currency & buy foreign reserves (reserves inc)

   • Not vulnerable because can always print more home currency if needed & reserves are increasing

2. If home currency is overvalued at the peg price: people want to sell it, which will dec its price. Central bank should buy home currency to prop price & sell foreign reserves (reserves dec)

   • Vulnerable because investors know reserves can run out, so currency may eventually plummet → can lead to currency crisis

Explain what each exchange rate arrangement is, from more fixed (pegged) to floating (flexible):

1. Dollarization

2. Currency board - which HPAE uses?

3. Conventional peg arrangement - which HPAEs use?

4. Managed floating - which HPAEs use?

5. Free floating - which HPAE uses?

1. Dollarization: adoption of another country’s currency rather than issuing its own

   • Ex: members of EU using euro

2. Currency board: extreme form of pegged exchange rate where management of exchange rate & money supply are taken away from central bank; every unit of domestic currency is backed with foreign currency

   • Hong Kong with $

3. Conventional peg: domestic currency fixed at a single rate to other currency; central bank maintains rate via intervention; minimal movement in narrow margins; peg not adjusted regularly

   • Singapore, Indonesia

4. Managed floating: largely market determined without predictable path; govs may intervene directly or indirectly to prevent excessive fluctuations

   • Taiwan, Thailand, Malaysia, S. Korea

5. Free floating: Purely market determined; intervention rare & extremely limited.

   • Japan

Why fix the exchange rate? List pros and cons of a fixed exchange rate regime.

Pros:

• Limit fluctuations of exchange rate, encouraging trade & FDI

• Provide price stability & reduce chance of hyperinflation

Cons:

• Lose control of domestic monetary policy. Can’t be used to combat recessions

• Could lead to currency crisis under speculative attacks

Why float the exchange rate? List pros and cons of a floating exchange rate regime.

Pros:

• Automatically correct disequilibrium in balance of payments through change in exchange rate

• Currency crisis avoidance

• Monetary policy independence

Cons:

• Excessive exchange rate volatility (harder for trade & FDI)

1. What types of countries tend to adopt the floating exchange rate regime?

2. What types of countries tend to adopt the fixed exchange rate regime?

1. Advanced countries, large economies, closed economies to trade, diversified trade, divergent inflation rates, prudent domestic policies

2. Developing countries, small economies, open economies with lots of trade, highly concentrated trade partners, harmonious inflation rates (to country they peg with)

1. What is the law of one price (LOOP)?

2. Under which situations does LOOP fail?

1. Identical goods should be sold for the same price (when expressed in same currency) throughout the world if trade were free & frictionless

2. Real world issues: transaction costs, taxes, different tastes/preferences, labor costs, P of raw materials, different inflation rates, different purchasing power of local currency, gov restrictions like tariffs or quotas

How can we use the Big Mac Index to calculate the PPP-theoretical value of a currency?

• Ex:

  • Big Mac Price in US = $3.50

  • Big Mac Price in Japan: 280 Yen

  • Actual dollar exchange rate (for 1 US$) = 122 Yen

1. What would be the implied PPP exchange rate of Japanese yen (theoretical exchange rate)?

2. Is the Japanese yen over or undervalued?

3. By how many percent?

1. Theoretical exchange rate: 280 Yen/$3.50 = 80 Yen per 1 USD

2. Yen is undervalued in real life (122 Yen/$1 instead of 80 Yen/$1);

3. (122-80)/122 = 34.43% undervalued

What is SDRs?

Special drawing rights.

• Artificial international reserve asset whose value is based on a basket of major currencies

• Exist as bookkeeping entries held mainly by central banks at the IMF & can be exchanged for hard currencies to help settle international transactions

• Issued by IMF to provide liquidity & supplement reserves during crises

What are the common patterns that countries tend to experience before a financial crisis?

1. Asset & price bubbles

2. Credit booms - inc nonperforming loans which trigger defaults, panics, & crisis

3. Risky financial instruments

4. Poorly designed financial liberalization & ineffective supervision - encourages over-lending & riskier loans

1. Prior to the Asian Financial crisis, did Asian economies have weak macroeconomic fundamentals?

2. Prior to the Asian Financial crisis, were there warning signs of rising vulnerability in the financial sector?

1. No! - good GDP growth, inflation rate, fiscal balance, saving, investment, but slightly large current account deficits (imports > exports, sign of chronic borrowing)

2. Yes; inc then dec in net private capital flow, net direct investment, net portfolio investment, signs of credit boom, increasing short term debt to foreign reserve ratio

Who were the crisis-ridden countries during the 1997-98 Asian Crisis?

Indonesia, Thailand, S. Korea, Malaysia, Hong Kong, Japan

What is financial panic?

Investors rapidly withdraw or sell assets due to fear & uncertainty, often because of information asymmetry & herd behavior, causing falling asset prices, bankruptcies, & bank insolvency

1. What is the sudden stop?

2. How does it relate to Asian Crisis?

1. Sudden stop in capital inflows from abroad to finance domestic investment & economic growth. Often triggered by rising global interest rates, financial panic, concerns about country’s economic stability.

2. Increased capital inflows appreciated domestic currency. Lead to inflationary pressures on a less-developed financial system. Large short-term foreign debts to finance low-quality investments. Sudden stop = capital exists rapidly, currency depreciates, crisis where repayment is impossible.

How severe were the effects of the crisis?

1. On exchange rate

2. On stock market

3. On economic output

1. Exchange rate: Indonesia = deepest depreciation, all currencies depreciated except Hong Kong (pegged to $)

2. Stock market: S. Korea = deepest decline, all markets crashed

3. Econ output: recession for all except China, all had negative output growth for multiple quarters (~2 year recovery, with S. Korea recovering first), Indonesia had sharpest decline

What are the causes of Asian Crisis? 

1. Dependence on massive capital inflow

2. Short-term foreign debts were used for long-term investments

3. Chronic current account deficits (imports > exports)

4. Fixed exchange rate system

5. Poor corporate governance

6. Weak financial sector

1. What is mismatch maturity of banks’ lending and borrowing?

2. How does it relate to Asian Crisis?

1. Situations when a firm/bank’s short-term liabilities exceed short term assets (using short-term debts for long-term projects). Inc risk of insolvency

2. This is what happened in Financial Crisis. Currency depreciated, money tied up in long-term projects, couldn’t repay debts

1. What is moral hazard-induced lending?

2. How does it relate to Asian Crisis?

1. Incentive to take on risky options because cost of failure is borne by someone else (usually the gov)

2. Banks were instructed by govs to lend to selected firms/projects & ignored costs & risks b/c they expected gov support; assumed govs would bail them out if loans failed; loans based on connections over profit

1. Which Asian countries accepted the IMF's loans?

2. Which country refused the IMF's assistance?

1. Thailand, Indonesia, S. Korea

2. Malaysia

1. What is IMF conditionality?

2. What is their domestic absorption approach?

1. Set of policy suggestions that the recipient country is expected to follow to ensure it will overcome its payment problems & be able to repay back the funds

2. Domestic absorption: C + I + G

   • Focus on decreasing absorption to improve trade deficit (imports being > exports)

   • Raise consumption taxes, raise interest rates, lower wages, cut subsidies, reduce gov spending

What are six elements of IMF conditionality imposed on Asian economies? 

1. Contractionary fiscal policy (raise tax revenue, cut gov spending)

2. Bank closures (contain banking loss, start reform)

3. Enforcement of capital adequacy standards (banks raise capital)

4. Tight credits (dec money supply, inc interest rates, discourage investment & slow capital flight)

5. Debt repayments (pay foreign debts in full)

6. Nonfinancial structural changes (reduce corporate connections to gov, trade liberalization)

Did the IMF bailout the Asian economies? Why are there controversies?

Some economists thought that high interest rates would bankrupt more highly leveraged banks faster & create more panic in the system - believe IMF measures exacerbated recession

But loans did bail out economies sort of