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Singapore Hong Kong
Singapore & Hong Kong• Area• Singapore: 697 km2
• Hong Kong: 1,104 km2
• Population• Singapore: 4.7 million• median age 40• Hong Kong: 7.1 million• median age 43
Singapore and Hong Kong• Each is separated from the mainland by a narrow
waterway• Singapore’s relationship with Malaysia has been
volatile• brief merge in 1963-1965• disputes about water delivery, islands, etc.
• Hong Kong benefits from mainland China’s cheap labor and market
Singapore and Hong Kong• Both are mostly ethnic Chinese societies• Singapore: 77%• Hong Kong: 95%
• both had over 100 years of British rule• Singapore: 1819 - 1959• Hong Kong: 1841 - 1997
• both were occupied by Japan• 1942 - 1945
GDP (purchasing power parity)• Singapore:• Around US$240 billion• Ranked 45th in the world• per capita 8th in the world
• Hong Kong:• Around US$300 billion• Ranked 38th in the world• per capita 15th in the world
GDP Growth Rates (% ) of Singapore (red bars) and Hong Kong (blue bars)
-6
0
6
12
18
Singapore and Hong Kong• Both are newly industrialized economies• GDP composition:• Sector Singapore Hong Kong• agriculture 0% 0.1%• industry 28% 8%• service 72% 91.9%
Singapore and Hong Kong• Exports:• Singapore: 13th in the world• Hong Kong: 11th in the world• 51% to mainland China
• Imports:• Singapore: 15th in the world• Hong Kong: 9th in the world• 46% from mainland China
Economic development• Singapore and Hong Kong• have achieved similar economic success• through very different economic approaches
• path of economic development diverged after World War II• similar experience under British colonial rule• divergent political development after WWII• divergent economic models after 1960s
Colonial legacies• Both became entry ports to mainland• both benefited from British management and
technological expertise• both attracted inflow of Chinese emigrants• Chinese population in Singapore doubled in 1820s• Chinese population in Hong Kong quadrupled between the
two World Wars
Divergent paths after WWII• Singapore gained independence (1959)• Lee Kuan Yew’s People’s Action Party
• economy grew at a slow pace in 1950s• still based on intermediary trade• boosted by the Korean War of 1950 - 1953
Divergent paths after WWII• Hong Kong restructured its economy• population quadrupled 1945 - 1955• large-scale relocation of capital, entrepreneurs, and assets
from mainland China• trade embargo against mainland China after Korean War
broke out actually benefited HK
• relative political stability• popular political apathy
Divergent development model• Singapore’s People’s Action Party• faced severe internal and external conflicts in 1960s• PAP became a elitist and paternalistic party• neo-Confucianism?
• government intervention in the economy• drew up a state development plan
Singapore’s development 1960s• New institutions• Economic Development Board• promote industrial development
• Housing and Development Board• develop industrial estates
• Development Bank of Singapore• provide industrial financing
• Jurong Town Corporation• acquire, develop, and manage development sites
Singapore’s development 1960s• Restructured from trading port to manufacturing
base• government intervention to attract foreign
investment• in labor market• in providing public housing• in improving educational facilities• in developing a social security system
Singapore’s development 1960s• produced phenomenal economic growth• achieved full employment by early 1970s• ventured into high-tech, capital-intensive
industries and high value-added services
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1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Singapore's GDP 1960-1984 (in constant local currency)
Hong Kong’s development• Hong Kong also enjoyed phenomenal economic
success• rapid expansion in manufacturing in 1960s• industrial diversification in 1970s
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1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
Hong Kong's GDP 1960-1984 (in constant local currency)
Hong Kong’s development• government’s laissez-faire principle• reactive, selective, & reluctant intervention• development of public housing• provide lower-middle-income families with access to home
ownership• social expenditure & community development• development of human resources
• intervention to maintain competitiveness
Convergence since 1980s?• Singapore reconsidered its development strategy• economy diversified from manufacturing to financial and
professional services• aims to surpass Hong Kong as an international center of
finance & business HQ• government relaxed intervention in economy• free capital flows and foreign investment even after Asian
Financial Crisis of 1997
Convergence since 1980s?• Hong Kong government moved in the opposite
direction• became more interventionist• to cope with the political uncertainty during the
negotiations between PRC and UK• intervened in stock and currency market• has linked HK$ to US$ since 1983
Convergence after crisis?
Asian Crisis
The Asia Crisis
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• Who are the Asian Tigers?
• Mid-1990s we spoke of the “Asian Tigers” with awe.
• Heavy savings and investment
• rapid development. • Activist, statist
economic planning
Countries Affected in the Contagion• Thailand• July, 1997
• Indonesia• June to August, 1997
• Korea• July, 1997
• Japan had already been through its own crisis earlier and was in an economic depression
• Russia, Brazil, Mexico followed a little later with crises of their own.
Three mistakes of Asian Lenders • The countries involved usually had some
international indebtedness, • Asian banks and borrowers used short-term
credits to finance long-term loans.• Asian borrowers (banks and firms) borrowed in
foreign currencies and loaned in local currency. • No hedging to counter foreign exchange risk.
Three mistakes of Asian Lenders• Asian bankers often did not ask to see
consolidated balance sheets. • They didn’t monitor the total assets and liabilities
of the borrowers.• IMF paid the bills for such banks, finance
ministries and countries. • Moral hazard problems• Investors should pay for bad decisions.
Economic success• Annual GDP growth in the ASEAN-5 (Indonesia,
Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8% over the decade before the crisis
• Almost half of total capital inflows to developing countries• nearly $100 billion in 1996
• inflation & unemployment rates both low
Ramifications• Negative consequences• Environmental degradation• growing inequality between rich and poor• rampant corruption• social malaise
• Significant and real benefits• great majority of the people’s living standard• have not been erased by the crisis
Asian Weakness• Three weaknesses in the Asian economies’
structures became apparent with the 1997 financial crisis:• Productivity• Rapid growth of production inputs but little increase in
the output per unit of input• Banking regulation• Poor state of banking regulation
• Legal framework• Lack of a good legal framework for dealing with
companies in trouble
Weaknesses in financial system• Inadequate financial sector supervision• Poor assessment and management of financial
risk• Growth of bad loans• State-directed lending
• Relatively fixed exchange rates• Violent asset price cycles• Property boom bubbles
Weaknesses in financial system
• Large amounts of short-term international capital, denominated in foreign currency
The Asian Crisis: Finance and the Bubble• Only modest returns
needed with interest rates very low.
• Emphasis on market share and growth, not on profits in Japan.
• Japan was the governance model for “statist” Asian economies.
Bangkok, Thailand
The Asian Crisis: Finance and the Bubble
• Bad debts accrue. • Investors look for larger returns, but
these have higher risks.• “Keep the Finance Ministry off our
case.”• Non-Functioning Loans fill bank
portfolios.
Asian Crisis: The Finance Problem• Ultimately, long- and short-term investors notice
the lack of returns. Then the crisis begins. How?• With capital mobile, flight can occur with any
provocation. (Modern version of a run on the bank.)
Asian Crisis: The Finance Problem• Stock values plummet as they are sold off.• Currency values?
• They drop precipitously as funds are sold off then the yield is exchanged for the investors’ currencies.
Asian Crisis: The Finance Problem• Import prices (for productive materials and parts
and for consumption goods) skyrocket.• Severe recession begins• Consumption and production expenditures falter
and prompt layoffs.• Foreign exchange is now so costly that needed
production inputs and consumer goods cannot be afforded.
Corruption• Transparency International’s 1999 survey of
corruption
• Singapore 7th• Malaysia 31st• South Korea 50th• Philippines 54th crisis countries• Thailand 68th• Indonesia 96th
Diary of the crisis: I
Diary of the crisis: II
The Asian Crisis: BOOM AND BUST• First Phase: • Currency undervalued to promote exports. • Government picks and promotes “winners” • (major projects and firms).
The Asian Crisis: BOOM AND BUST• Second Phase:
• Export successes produce large earnings. • Heavy investment inflows by the early 1990s.
•Available – a plethora of capital.
The Asian Crisis: BOOM AND BUST• Inflation should have produced some currency
devaluations in these countries, • currencies were tied to US Dollar, which was
appreciating at the time.
The Asian Crisis: BOOM AND BUST• Currencies were then overvalued..• A bubble starts to develop•Banks not monitored.•Real estate craze starts to develop
The Asian Crisis: Finance and the Bubble• Japanese rice
subsidies: • inflate the value of land
to promote the real estate bubble.
• Real estate inflation and subsequent collapse.
• Japan fight depression making Japanese interest rates zero.
The cause of capital outflows• Bank failure in Thailand• Corporate failure in Korea• Political uncertainty due to the potential for a
change in government in Korea, Thailand, the Philippines, and Indonesia
• net outflow of $105b from Thailand, Malaysia, South Korea, and the Philippines between 1996 and 1997
The cause of capital outflows
• Contagion effects hit Malaysia, the Philippines and Indonesia
• The IMF’s intervention actually helped to incite panic
Causes of financial crisis• macroeconomic imbalances• structural deficiencies in financial sector• loss of market confidence• rising political risk
By the number
Real GDP Growth (%)
Inflation rate (%)
GDP growth rate (%)
Impact on Japan
Impact on World
Impact of Currency Devaluation: Indonesian Example
After devaluation of Rph
PhilipinesIndonesiaThailandGermanyFranceKoreaJapan
SingaporeMalaysia
USAHK
Consequences
IMF's immediate response• Help Indonesia, Korea, and Thailand arrange
programs of economic stabilization and reform • Approve IMF financial support for reform programs
in Indonesia, Korea, and Thailand
IMF’s immediate response
• Consult with other members that needed to take policy steps toward off the contagion effect
Asian programs• comprehensive reform of financial systems• closure of unviable financial institutions• associated write down of shareholders' capital
• recapitalization of undercapitalized institutions• close supervision of weak institutions• increased potential for foreign participation in
domestic financial systems
When the Bubble Burst• What happened when the bubble burst?• Worldwide, foreign direct investment is far and
away the largest part of net financial flows to the developing economies.
When the Bubble Burst• These are highly concentrated and nearly 75%
flowed to the ten largest recipients in Asia and Latin America
• The onset of the crisis for 22 countries of South and East Asia in 1997 made itself manifest with an outflow of approximately $92 billion in short-term borrowing, stock market net flows, and net outflows of funds from domestic residents.
When the Bubble Burst
• Stock markets crashed, national currencies collapsed, and imports and production shriveled up miserably.
Reforms in governance• break the close links
between business and governments
• ensure that the integration of the national economy with international financial markets is properly segmented
Three schools of thought
Three schools of thought• Revisionist: “developmental state”• Market must be mediated, regulated and guided by the
state
• Culturalist• “Asian values”• Culture context of East Asia explains the miracle
Recovery from the Crisis
Lessons from the Crisis• Better information• Regulation and restraint • Controlling capital flows
International Organizations• Authority vis-à-vis sovereign governments• Access to information• Risk of ``creating” a crisis• Globalization and interdependence