The financial unraveling of southeast Asia

It is now well underway.  The stock market is Indonesia had several big loss days in a row, with some daily drops over five percent, and their credit-driven economic expansion seems to be over.  Weaknesses in commodity markets will hurt them and they did not use their boom to invest sufficiently in future productive capacity, instead preferring to ride upon the glories of higher resource prices and growing credit.  The central bank is burning reserves and starting to worry about an eventual crisis scenario.

I am puzzled by Krugman’s take on the rupee.  I would not argue that the weaker rupee is bad per se, but rather it is a symptom that an earlier overvaluation of India’s economic prospects is now over.  The country is, sorry to say, the “sick man of Asia,” economically speaking that is.  (Or more literally in terms of public health, for that matter.)  Here is my May 2012 column on India, which I think has held up very well.  One can only hope that this financial crisis will bring reforms comparable to those of the early 1990s; otherwise the momentum for better policies appears to have been exhausted.  Right now the country has about the worst legal system in the world (North Korea and a few other outliers aside) and the ten-year yield has been popping over ten percent.  It is shifting from a better multiple equilibrium to a worse one and foreigners are having second and third thoughts about further investing.

The Thai economy has shrunk for two consecutive quarters and total debt (public and private) to gdp ratio is now about 180 percent.  Malaysia also has serious debt problems.  The uncertainty coming out of China is not helping either.

Singapore is doing fine.

I don’t expect these crises to have serious “knock on” problems for the developed nations, but hundreds of millions of vulnerable individuals now face a much worse economic future, at least in the short to medium term.

Addendum: There is also mounting evidence that QE has been to some extent responsible for southeast Asian financial bubbles, market monetarist evidence one might say, if I may be allowed to needle Scott.  Call it Austro-Indonesian business cycle theory.


"I don’t expect these crises to have serious “knock on” problems for the developed nations, but hundreds of millions of vulnerable individuals now face a much worse economic future, at least in the short to medium term."

If a future government were interested in altering global monetary rules or modernizing existing institutions, and the unraveling continues, this incident would be fresh in the mind of delegates from emerging markets. This should not influence Bernanke's decision in any way – he has done his part in maintaining international stability, nor is that his primary mandate – but is still an important point to discuss.

It's not like foreign bureaucrats – or, worse, foreign electorates – are not already confused about American monetary policy.

Ashok - What "global monetary rules" do you have in mind? Doesn't it seem improbable that Raghu Rajan would, hypothetically, start shrinking the monetary base in India? Or institute a currency peg? In 1936, that might have appeared likely... But (at the risk of being optimistic) it does seem like we're past this.

We're on a pretty dramatic swing of de-liberalization of world economies. It's the economies that haven't modernized that have been punished by international markets. Increasingly, bureaucrats and electorates have jointly realized this... And competent management of central banks appears possible in places like Mexico. 20 years ago, that would have seemed extremely unlikely.

I mean, I agree that countries might make some poor political poor policy choices in the short-term. But very often these days, political choices have immediate and obvious market responses. In the long-run, Bernanke might not have have to worry about those foreign bureaucrats/electorates at all.

G, I'm really not sure what exactly Raghuram Rajan will do – I can speculate on the questions going through his mind. I will note that he has expressed interest in reducing the captive demand for liquidity via Indian bonds by lowering the reserve ratio. This would increase money base while lighting an upward pressure on already rising yields. He will have to wait on this, I'm sure.

I'm not sure whether Bernanke will have to worry about consequences of QE. But neither am I an expert of the politics of international finance (or anything, for that matter, really). I feel it is important, and would be interested in more discussion to this effect; I could learn a lot.

I'm not sure I would say there's a "dramatic swing of deliberalization". Certainly not in India. If anything capital outflows will hopefully quell the panic about foreign ownership of retail and financial outlets.

Remember, 1991 was a pretty horrible year for India.

Hmmm - So I agree that I don't really know what will happen either. I do think India is much better off today - even with lots of crummy institutions remaining.

QE3 may have artificially increased the demand for investments in emerging markets. The unwind will reverse that trend. The best way for Indonesia, India, et. al. to re-boost the demand for their investments is to adopt stable legal rules/regimes and sound economic policies... and NOT to enact trade barriers or worse. My guess (and it's strictly a guess) is that bureaucrats will be forced to internalize this - perhaps not in the short-term, but definitely in the long-term.


Sorry, Ashok but how can you say that Ben and the Fed have done their part for international financial stability if QE was responsible for inappropriate credit expansion and overvaluation in the whole of SE Asia? And if mere threats of tapering leads to a collapse of such bubble?

Again, this proves that, free market ideology be damned, sometimes, capital controls (on the way IN more than on the way OUT, if I had a hand in designing the system) are not necessarily pure evil communist fascist totalitarian tool of the Devil...

I don't get the bit about capital controls. Nations ought to shun investment due to the fear that at some later point in time investors might get scared and flee?

You can't lose what you never had? Sounds pretty ascetic to me.

There's a very strange time-gap between me typing a comment and it getting posted? Are comments now vetted on MR?

@Rahul: It's not about asceticism; it's about the fact that over-investment can be unproductive or create misallocations or inappropriate sectorial shifts. If, on top, that malinvestment is debt-fuelled then the deflating of the bubble/the over-investment phase is likely to have system-wide repercussions.

Remember when people were saying that the subprime issue was contained and that even a housing hard landing in the US couldn't possibly trigger a world-wide catastrophe? How's that working for us?

Same remark about bubbles. I think the idea that CBs ought to let them inflate coz, one, it's hard to tell whether it's a bubble or not and, two, we can always mop up afterwards is now officially out-dated thinking.

Take this case of India: What sectors were "over-invested" in? How does one tell which of foreign capital is "malinvestment" and which not?

"Remember when people were saying that the subprime issue was contained and that even a housing hard landing in the US couldn’t possibly trigger a world-wide catastrophe? How’s that working for us?

Same remark about bubbles. I think the idea that...we can always mop up afterwards is now officially out-dated thinking."

Actually, isn't the most updated, updated thinking that we could have avoided the Great Recession, or at least made it not so Great, had the central banks not engaged in over-tight monetary policy? Ditto for the Great Depression? See Scott Sumner for full explanation.

"The momentum for better policies appears to have been exhausted"

How does one arrive at such a conclusion? Everywhere people are worrying about reforms!

Raghu Rajan has shown an excellent sense of timing.....

It seems like India is a body shop and will remain one, based on this posting.

For any US staff workers in IT, a poor India has meant a lower standard of living for us.

My imperfect model of Scott Sumner replies, "No, the Fed's irresponsible threats to withdraw QE are responsible for this improper dollar strengthening! According to what you _just described_, the damage is obviously being done by US money being too tight, not too loose!" Disclaimer: I am not Scott Sumner.

Lol. +1.

But to give credit to Scott, the fact that threats of 'tapering' collapses emerging markets prove that QE is effective at the ZLB... :)

It just doesn't do much that is worthwhile, unless you find credit-fuelled capital markets' bubbles worthwhile...

My model of Scott Sumner replies, "Was Indonesia's NGDP growing above trend? Then their central bank should have moderated it, and that was the problem. Is Indonesia's NGDP dropping below trend? Then they should have printed money. Does their central bank lack the power to credibly print money, and was their NGDP not above trend? Then there was no bubble and the US Fed just trashed Indonesia." Though I'm stretching my Sumner-model here.

Who the hell still believes that QE is not effective at the ZLB? Besides loony elites.

Has Krugman forgotten to update his priors again?

What a useless, primitive and rude comment!

SE Asia is not that much different com China in terms of their development - cleptocratic "cooperation" between business and government elites has brought about just a fraction of what could have been had those places had a free economy. Socialism/fascism sucks.

(Disc: I'm not Indian).

"Right now the country has about the worst legal system in the world "

With all Indian courts' faults, that's still a strong statement. e.g. How do you compare India's system with China's or Indonesia's? Or Phillipines? Or Saudi Arabia? Or any one of the many developing nations on the sub-continent, Africa, middle east etc.?

India's sure isn't the best legal system, but in some ways (through all the Indian messes) its hard to say whether the courts are a drag or some semblance of stability. Remember, it's one of the rare nations without a bloody military coup or massive civil unrest in its first 50 years.

Of all the ills that ail India, the courts are only a part and probably not even the worst part. If you've to fall all the way to N Korea to compare India's legal system, I think you are missing the picture.

There are going to be serious knock on problems for developed markets when this entire cycle finishes. The dollar will become extremely overvalued, U.S. debt burden will soar relative to global GDP. SE Asia is about to hit the reset button again and emerge debt free with, in some cases, gold backed currencies.

For the longest amount of time, the great pride of India was being a democracy from day one and remaining united despite many pressures. More and more it looks like democracy from day one, without going through a technocractic period, was a bad idea.

India needs a lot of reforms that require a lot of unglamorous and strenuous work. The leaders of the party that is running the current government don't want to actually take up any governing posts since they want to be "above criticism" when they go to the polls. The english media equates the leader of the state government that has delivered on promises (the leader of the opposition party) with a "never had a real job in his life" leader of the current party. The greatest absurdist satire pales in front of the reality that is India.

In the larger picture, the difference between the current government and any realistic challengers is extremely small, I feel. Unlikely that any one party is more receptive to "unglamorous and strenuous work" than the others.

This is a confusing statement -- India went through several decades of virtual dictatorship, and at one point legal dictatorship under Indira Ghandi. India's inability to implement basic educational reforms -- China in 1960 had a higher literacy rate than India and they were in the middle of the cultural revolution! -- and a completely useless agricultural sector whose yield per hectar also lags China -- the place that actually went through collectivization!

India's technocrats just chose poorly and China's -- despite a political leadership that was hellbent on destroying the country -- didn't.

I agree that India's technocrats chose wrongly.

But considering your username, please refer to the history of the swatantra party of Rajaji. India had a classic liberal party that was marginalised at the voting booth, and with it the last chance for sensible economic policy, until the 91 crisis.

It is indeed a populous region, and one hopes the downturn will be short-lived.

Indonesia's per capita GDP (PPP basis) is about $5300, Thailand's about $10,000, and Malaysia's about $18,000. All solidly middle income countries and Malaysia can perhaps be called upper income. For context, Mexico's per capita GDP is about $15,000.

In the 1990s, we heard a lot about the high-growth rates of newly industrializing countries such as Thailand. Is Thailand in a middle-income trap?

The poorest country in the EU is Bulgaria, which has a per capita GDP of about $15,000.

We live in a globalized world. If one economy does badly, it causes a ripple effect on other countries. In the past five to seven years, countries such as the U.S., U.K. and the leading economies in the Euro-zone have taken a serious blow on their finances. The symptoms of a global meltdown are showing up

I think most Asia economies with high foreign exchange reserve with low external debts will have no problems. The effect of fund outflow in Asia may not be bad after Asia central banks start to move money from US and EU back to support their own economies. Many Asia have accumulated liquidity for long from currency manipulation.

In case of Indonesia and India, they have current account deficits and their currencies need depreciation to improve balances but Thailand and Malaysia have current account surplus; therefore, at end some Asia countries will have strong recover in exports from currency depreciation and no liquidity problem.

My concern is if Asia decide to move money back to support their own countries and US decide to taper QE. US will face liquidity drop with higher long bond yields and maybe US will face economic slowdown again. The best solution for US is to reduce interest rate on reserve balance (IOR) to unleash the excess reserve at 1.8 Trn. to solve liquidity decline from Asia central banks fund outflow.

What if India's is facing a US 1970s inflation in which their wages have hit the "IT/Call Center Lewis Point"? They need have slower real wage growth and inflation is their poison. (As the real wages in the US of the 1970s were too high compared to Middle East, Japan and Germany and picked inflation until Carter hired Volcker.) And is not true that India is (or really wants to) importing a lot of gold and ruppee gold prices are not falling. Probably the reason fall this year.

I wonder if India is the first BRIC to go because it has a relatively high birth rate for a developed nation.

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