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LinkedInIn 1998, oil collapsed. In 2006, oil soars.
In 1998, Russia defaulted after Treasury Secretary Robert Rubin refused to throw good money after bad, and blocked NSC pressure to continue disburse more than $5b of the IMF's $15b credit line to Russia. In 2006, Russia added over $100b to its reserves even as it repaid almost $25b of debt to Germany and a host of other official creditors.
In 1998, credit spreads blew out. Volatility went crazy too. In 2006, credit spreads collapsed. Volatility fell to record low — some would say crazy low — levels.
In 1998, private capital flowed out of emerging economies in a big way. In 2006, private capital flowed into emerging economies in an even bigger way. Into emerging market funds. But also into emerging economies — and specifically into the coffers of emerging market central banks.
In 1998, an Asian emerging economy facing responded to pressure on its currency by imposing draconian capital controls. Well, that hasn't changed. In 2006, another Asian emerging economy responded to pressure on its currency by imposing draconian capital controls.
Back in 1998, Malaysia was worried that speculative pressure was driving the ringgit down too far and too fast. Thailand, by contrast, is currently worried that speculative pressure is driving the baht up too far and too fast.
A sign of the times.
Ben Bernanke and Paulson Clueless in China
by James K Galbraith
http://commentisfree.guardian.co.uk/james_k_galbraith/2006/12/clueless_in_china.html
Paulson’s China policy is easily understood. In the United States government the Treasury represents the interests of Wall Street, as Joe Stiglitz has written eloquently from direct observation. An alumnus of Goldman Sachs, Secretary Paulson is ideally suited to his job.
And what Wall Street wants from China is what Wall Street always wants: the freedom to speculate (excuse me, invest) in currency, corporate stocks and bonds, and real estate. Wall Street loves risk, uncertainty and volatility. The Chinese don’t. This is a conflict.
Paulson made a power play, based on a threat: open up or we’ll shoot. More precisely, it was a power play based on a bluff. Since the bluff was transparent, the Chinese called it. And when they did, the US side folded. The Chinese then completed the hand by giving back a few symbolic concessions, so that Paulson’s team would not have to admit to the obvious fact, that the trip had accomplished nothing at all.
Dr. Galbraith is, along with Dr. Stiglitz, a supporter of China’s peg. But I would be curious to know why he thinks the RMB’s value not just v. the $ but also v. host of other currencies has no impact on China’s balance of payments.
Why, I would ask, does he think China’s current account surplus has soared recently? It isn’t because household savings have soared. And it sure seems like a lagged response to the RMB’s post 2002 depreciation, which radically increased Chinese export growth. Like Dean Baker (usually an intellectual ally of Galbraith, incidentally) I am amazed by the number of economists who think relative prices have no impact on trade flows!
Hey, I stray most from neoliberal orthodoxy when I say that capital controls have their uses. If foreign investors are really interested in long-term investing as they often claim, then I don’t see why it’s so “draconian” for them to put their money where their mouth is (and keep it there for a while).
Malaysia was least affected among the Southeast Asian countries hit by the crisis despite predictions of Armageddon by the international finance community. Heck, China has done pretty well for itself with these “draconian” capital controls. And the second-fastest growing country in the world, Vietnam, also features, guess what–capital controls.
Even IMF research is becoming more ambivalent towards capital controls, especially in countries with undeveloped financial institutions.
The powerful baht? The times they are a-changin’.
IMF orthodoxy on capital controls also may be changing as you have noted — let’s see what the IMF says now.
I think Malaysia got off light largely because it didn’t have much short-term debt (v. its reserves) not becuase of its outflow controls. But I have long been sympathetic to Chilean style inflow controls — and one reason why Malaysia (and india) didn’t have much short-term external debt is that they had controls on that as well, though not Chilean style controls.
Whatever happens, don’t blame the generals, it’s those stop-loss orders. Will need to monitor the pucker factors as SGD/THB approaches 25.
I am not sure of the magnitudes but I imagine that the Thai bhat market is a lot thinner than is the yuan market. That means there is a lot bigger possibility for non-fundamentals related volatility and hence more justification for capital controls. However, I am with you on controls being better to have on inflows than outflows.
And yes, relative prices actually do matter. Real exchange rates actually have a demonstrably strong relationship with net exports. There is too much data to deny it.
that was me – somethign strange going on with the comments
Steve — Congrats by the way on joining the angry bear blogging fraternity. I intend to take up some of the issues you have raised there soon.
Brad,
The key characteristics I see in Asia this year are oil prices and the third year in a row of strong growth in global trade. We haven’t seen three in a row on trade at this level since 1978-80, and it really shows.
Emmanuel,
In some ways, Malaysia was among the least affected by the 1997-98 meltdown. But, it came at a price which included a political purge that deeply divided the nation and an equally deep cynical exploitation of anti-Semitism.
As for the economy, after a 35% devaluation by end-1997, Malaysia’s data for 1998 vs. 1997:
CAP -46.9%, PCE -10.7%, imports -19.8%, manufacturing -14.8%, construction -26.5%
And, after nine years in a row of a current-account deficits averaging 5.2% of GDP, a nice 13.2% surplus in 1997, 15.9% in 1998 and averaging 11.8% in 1999-2005 with nary a deficit in sight.
Least affected it may have been, but it wasn’t pretty, not by a long shot.
And the result of the capital controls? The average FDI in the last seven years was 19.9% lower than in the seven years to end-1996, second worst performance after Indonesia. The Philippines and Thailand were up 50.1% and 87.8%, respectively while Korea was up 287.8%.
[Source: http://www.adb.org/Documents/Books/Key_Indicators/2006/xls/MAL.xls
.
Interesting comparison between 1998 and 2006. 1998 was the “bottom” for the stock market which then went on another leg up to the 2000 high.
If 2006 is the reverse of 1998, then maybe 2006 is the blowout top for the stock market.
DOR–this is a topic that means a lot to me as I am from Southeast Asia. Most of us look up to the example of Malaysia, believe it or not:
(1) The Chinese diaspora controls a lot of the business in Southeast Asia, whether it be in the Philippines, Malaysia, Indonesia, Thailand, etc. Malaysia is hardly unique in this regard;
(2) “Mr.Clean” PM Abdullah Badawi doesn’t do anti-Semitism. Also, he did not quarrel with the overturning of the sham Anwar Ibrahim verdict;
(2) Many of us would gladly substitute our rinky-dink governments and teenie-weenie FX reserves for those of Malaysia. By our standards, Malaysia is quite stable;
(3) Aspiring to be a “high human development” country is something, too. Yes, Brunei and Singapore score higher, but they are comparatively tiny;
(4) It’s great that the Philippines and Thailand are attracting FDI, but IMF research has since concluded that FDI doesn’t really help growth. In any event, those two countries are well behind Malaysia in terms of human development or GDP per capita.
Malaysia faces its own challenges, but overall, I’ll stand by the argument that–the special case of Singapore aside–it’s the best sorted ASEAN nation, capital controls and all.
I think you mean then 1998 is just like 2007, or did you mean that 1997 looked like 2006 ?
Hi Brad,
We disagree on a number of economic issues including the Chinese yuan’s monetary valuation. Along with your colleague Nouriel, I am most concerned about the coming housing bubble burst. We all know that since Bush has taken over office, the economy in this country didn’t really improve: war in Iraq, the quality of jobs, education and “real” income all have been deteriorating year by year, but why has the stock market performed so well since 2003 and why are US consumers spending like crazy? Where did all that money come from? Equity extraction from their homes because of the housing market bubble, that is a far bigger time bomb than the dollar devaluation versus the Chinese yuan.
Regards,
In 1998 economists talked about “free trade” but forgot to tell people that restriction to worker movement and intellectual property are the most formidable form of protectionism.
In 2006, no change.
“…”The risk of contagion is small,” said Dimitri Chatzoudis, who manages about $1 billion in emerging markets at ABN Amro Holding NV in Amsterdam. “Thailand in any case represents a tiny part of emerging markets.” Thailand accounts for about 2.5 percent of the market value of the MSCI Emerging Markets Index. Bank of Thailand Assistant Governor Nitaya Pibulratanagit today told reporters in Bangkok new measures may be announced “to help the stock market.”…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aHofWy6X2Yqw&refer=home
re: “”real” income all have been deteriorating year by year”
and why has that been happening?
Brad, DOR and Emmanuel–Malaysia introduced a capital outflow control (in reality, tax on capital outflow) in September 1998, i.e., one year after the Asian currency crisis broke out, and scrapped it one or two years later. Although it contributed somewhat to avoiding the worst kind of currency crisis, it did not appear to have been the most decisive factor. More crucial were much better macroeconomic conditions and a better controled financial sector.
Ten years after the crisis, the Malaysian economy is booming, partly because of high oil prices and fast growing islamic banking. Yet, the future of the economy is not so certain. Let me enumerate a few uncertainties.
1) The current prime minister, Abdullah Badawi, is far less clean than the former prime minister Mahathir.
2) High oil prices and severe competition from China have made Malaysia’s industry uncompetitive. Proton is going nowhere.
3) Fast growing islamic banking and large number of tourists from middle east are making Malaysia more and more Muslim, even closer to fundamentalist.
re: “”real” income all have been deteriorating year by year” and why has that been happening? – Guest
It is because US consumption has grown so far out of proportion to production that America is having a fiasco in employment and income growth. Americans don’t even realize how ridiculous and absurd their debt-driven overspending habits are. At least Asians try to impose fiscal limits on ourselves and have difficulty keeping them under control, which is understandable. I find it unbelievable that Ben Bernanke blames the Chinese for what he calls a “global savings glut.” Why isn’t he, instead, urging Americans to save and to invest?
Egad! Here’s the fallout from the Thai move -
(1) Regional stocks fall bigtime after the implementation of capital controls:
The [Thai] junta, however, may have overstepped the mark by seeking to rein in the baht with the Thai benchmark index plunging nearly 20.0 percent after the Stock Exchange of Thailand (SET) reopened following a trading suspension.
By the close the composite index had nosedived almost 15 percent or 108.41 points to 622.14, off a low of 587.92. It was the biggest one day fall in the 31-year history of the exchange.
Among Thailand’s closest neighbours, Kuala Lumpur was down 1.96 percent, Jakarta slumped 2.85 percent, Singapore was off 2.2 percent while Mumbai shed 2.54 percent as Hong Kong closed down 1.19 percent.
(2) Malaysia decides not to follow Thailand in imposing capital controls.
————————————
HK: You can’t have it both ways, LOL. Proton was Mahathir’s pet project, not Badawi’s. Dr. Badawi is trying to deal with it, but his options are limited as Mahathir still has a lot of influence.
Violence from Muslim extremists is not much of an issue in Malaysia, unlike in Indonesia (Jemaah Islamiyah), the Philippines (Abu Sayyaf) or Thailand (restive south). They don’t have fun habits of kidnapping and shooting tourists and businessmen in Malaysia.
Thailand Reverses Plans to Lock Up Stock Investments After Markets Plunge: Pridiyathorn said the rules would remain in effect on other investments, including bonds and property.
From Business Week magazine:
“Housing booms are short. are short and exciting. Housing busts, on the other hand, are long and painful. So don’t put much faith in those oft-heard assertions that the worst is already over. Prices are likely to fall further in many markets in 2007.”
“A BusinessWeek analysis of the past three decades shows that if history repeats itself, it’s likely to take 15 years or more for many parts of the country to get back to their inflation-adjusted peaks.”
“It is essential that folks understand the past, in order to prepare for what lies ahead. That the Fed was able to precipitate a housing bubble to bail out the equity bubble was a miracle. But there is no next bubble to bail out the housing bubble.”
“The fact that the economic strength of the past few years was powered by a housing mania, an unstable, unsustainable engine of growth, is what one needs to understand to realize that the ramifications of the housing bubble’s unwinding will be brutal.”
The Generals learned their immediate lesson in 24 hours in Thailand and eased off moves to restrict repatriations of foreign equity capital. I’m thinking the continuation of controls on bond buyers may force Thai interest rates upward, which cannot be very good for business, altho may help incipient inflation. Thai businessmen had been complaining about the rising value of the Bhat, sort of an immediate response to potential falling margins. But the real reason for the Generals’ response and the complaints in the business community stem, IMHO, from one thing: China’s exchange rate policy and interventions to keep the Yuan low. Thailand and every other Asian country are concerned about losing business to China, as well they should be. In this competitive atmosphere, and with failed Paulson mission last week, they may all be tempted to take action to compete with China.
Unwinding global imbalances usually start with a triggering event, don’t they?
old vet — well said. i doubt this is the trigger. but it is one sign of a system under growing strain.
have to wonder if the upward range estimate of $22 trillion of ‘foreign owned’ US assets includes housing – and how much equity may have been withdrawn against the value of those properties.
“…An artificially low yuan is bad for other developing countries as well, which cannot compete with China…”
http://business.guardian.co.uk/comment/story/0,,1974756,00.html
If a 2006/2007 version Asian crisis occurs, where the safehavens may be this time around – or if it prompts an increase in the flow of remittances from North America to Asia, whether that takes another bite out of ‘U.S.’ consumer spending and household savings.
Guest — sorry, but there aren’t $22 trillion in foreign owned assets in the US. The US data isn’t perfect, but it isn’t that far off. Add $1.5 trillion to the end 2005 NIIP data and you have a decent estimate — i think about $14 trillion. and only $5-6 trillion of that is in equities. And if foreigner takes out a loan against their us equities and then moves the dolllars so raised out of the country, that is a capital outflow the from the US (a US financial institution makes a loan to a foreign entity — tis a rise in us claims on foreigners). sorry to be a stickler on this, but these flows are just not that important unles the data is way, way off.
Do we have any way of tracking how much North American real estate is ‘foreign owned’ – or how those properties are financed?
CHICAGO and LONDON, September 13, 2006 – “Jones Lang LaSalle’s latest global real estate capital report, “Record Volumes, Record Globalisation,” records global direct real estate investment of $290 billion in the first half of 2006, up 30% over the same period in 2005. The Americas, Europe and Asia Pacific have all seen unprecedented levels of transactions…” http://www.us.am.joneslanglasalle.com/en-US/news/2006/Global+Direct+Real+Estate+Investment+Reaches+Record+290bn+in+First+Half+2006.htm
foreign investment in properties is a form of foreign direct investment in the BOP data. and it is financed either by taking out a mortgage or with cash … don’t see the issue here. Yes, there are some Gulf purchases of trophy properties/ investments in other US real estate. Some asian too — but flows are small v. financial flows.
foreign purchases of REITS = portfolio inflows in bop data.
it may be undercounted, but it isn’t that big.
HK,
Malaysia booming? 5.8% growth is only average on this side of the water. And, Malaysia hasn’t been doing nearly as well as others since the Asian Financial Crisis (AFC).
Or, was that someone else’s comment to which you responded?
In the 3-1/2 years running up to the AFC, Malaysia’s economy grew an average of 9.5% in real terms. In the most recent 14 quarters, the average was 6%. Aside from Korea (down from 7.9% to 4.2% over the same period), that makes the difference between Malaysia’s pre- and post-AFC growth rates the worst in East Asia, north or south.
Emmanuel’s right: Violence in Malaysia, Muslim or otherwise, is less of a problem (hardly at all) than in the other three large economies down there.
DOR and Emmanuel–You cannot have it both ways. If you insist that the Malaysian economy was so much better during the Mahathir era than it is currently, you cannot criticise Mahathir or Proton and praise Badawi. My point are quite simple.
1) As a middle income country with per capita income of around $6,000, Malaysia’s growth rate of 6-7% after the crisis is respectable. Before the crisis, the Malaysian economy was, like many economies in the region, overheating and overstretched.
2) And yet, the Malaysian economy will face great difficulty in coming years, including severe competition from China and high oil prices making its industry uncompetitive.
3) Almost everyone knows that Badawi is much more corrupt than Mahathir, and nepotism is lampant now. I have a serious doubt whether he can survive another few years.
4) Muslim culture and fundamentalist mood are strengthenng every year. You can feel it if you have visited the county every year in the last ten years.
Dave, in case you’re still reading, high dollar means high financing by the chinese and high financing leads to ever higher asset bubbles globally and especially in the USA, so you can’t say the housing bubble is a bigger problem than the low RMB, they are related somewhere.
What you can say is that the global growth of the debt stock and the global rise in profits relative to wages, that global imbalances are a bigger problem than international imbalances
Whoa, HK!
I wasn’t arguing that Malaysia was doing much better pre-AFC, nor that Mahathir, Proton or Badawi deserve praise or criticism.
All I said was that Malaysia’s growth had failed to pick up as much as other economies. If everyone was overheated pre-AFC, then they should all have fairly similar rates of recovery. Those recovering less well deserve attention, too.
And, I’ve visited the country every (other) year for the past 20+ years.
.