LIST OF CONTRIBUTORS Zafar U. Ahmed Ilan Alon Professor of Marketing and International Business, Office # East Hall 245, College of Business, Sacred Heart University, Fairfield, Connecticut 06432-1000, USA. Fax: 203-365-7538. E-mail: ahmedz @ sacredheart.edu Assistant Professor of International Business, Department of Economics and Business, 221 Netzer Administration Building, State University of New York College at Oneonta, Oneonta, NY 13820, USA. Fax: (607) 436-2543; E-mail: aloni@oneonta.edu Frank L. Bartels Anindya K. Bhattacharya Christopher Bilson Deputy Director, MBA Program in Intemational Business, Nanyang Technological University, Singapore. Fax: 65-791-3697; E-mail: aflbartels @ntu.edu.sg Assistant Professor of Business, Department of Economics, Brookly College, The City University of New York, 2900 Bedford Avenue, Brooklyn, New York 11210, USA. Fax: 718-951-4867; E-mail: abhattao @ stern.nyu.edu Assistant Professor, Faculty of Economics and Commerce, the Australian National University, Canberra 0200, Australia. Fax: 61 2 6 249 5005; E-mail: Chris.Bilston @ anu.edu.au ix S. J. Chang Tung-lung Chang Woon- Youl Choi Young Back Choi James W. Dean John R. M. Gordon Vince Hooper Professor of Finance, College of Business, Campus Box 5480, Illinois State University, Normal, IL 61790-5480, USA. Fax: 309-438-5510; E-mail: sjchang@ilstu.edu Assistant Professor of Management, School of Business, Long Island University, 720 Northern Boulevard, Brookville, NY 11548, USA. E-mail: tchang@titan.liu.edu President, Korea Securities Research Institute, 33 Yoido-Dong, Youngdungpo-Ku, Seoul, Korea, 150-010. Fax: 822-786-6154; E-mail: ksril @ksri.org Associate Professor of Economics, Department of Economics and Finance, St. John's University, 8000 Utopia Parkway, Jamaica, NY 11439, USA. Fax: 718-990-1868; E-mail: choiyb@stjohns.edu Professor of Economics, Simon Fraser University (since 1969) and Kaiser Professor of International Business, Western Washington University, Bellingham, WA 98225-917, USA. E-mail: James.Dean@wwu.edu Professor and Alcon/NSERC/SSHRC Chair in Management and Technology, Queens School of Business, Queens University, Kingston, Ontario, Canada K7L 3N6. Fax: 613-549-5679; E-mail: gordonj @qucdn.queensu.ca Senior Lecturer, School of Banking and Finance, University of New South Wales, Kensington, Sydney, Australia. Fax: 61 2 9385 6730; E-mail: V.Hooper@unsw.edu.au M. Faizul Islam Martin Jaugietis Sung-Hee Jwa Hisanori Kataoka Edmund A. Kellerman Daesik Kim Phil Sang Lee xi Adjunct Associate Professor, Department of Management Studies, Southeastern University, 500 1 Street, S.W. Washington, D.C. 20024, USA. Fax: (202) 488-8093 Financial Analyst, Towers Perrin, Level 10, 101 Collins Street, Melbourne, Australia. Fax: 61 3 9270 8199; E-mail: jaugiem@towers.com President of Korea Economic Research Institute, FKI Building, 28-1, Yoido-dong, Youngdeungpo-ku, Seoul, Korea, 150-756. Fax: 82-2-785-0270/1. Researcher, Columbia University's APEC Study Center, 3-16-19-303 Naka-cho, Musashino-shi, Tokyo 180-0006, Japan. Fax: 81-422-60-2828; E-mail: kataoka @ qg7.so-net.ne.jp Lecturer in Speech Communication, William and Grace Dial Center for Written and Oral Communication, Rolfs Hall 414, P.O. Box 113072, The University of Florida, Gainesville, FL 32611. Fax: (352) 392-5420; E-mail: ekeller@cwoc.ufl.edu Professor of Finance, Department of Business and Economics, Hanyang University, Seongdong-Ku Haengdang-Dong 17, Seoul, 133-791, Korea. Fax: (822) 2296-9587; E-mail: daeskim@netssgo.com Professor, School of Business Administration, Korea University, 5-1 Anam-dong, Sungbuk- ku, Seoul, Korea 136-701. Fax: 822-922-7220; E-mail: phillee @kuccnx.korea.ac.kr xii Ungki Lim Professor of Corporate Finance & Securities, Department of Business Administration, Yonsei University, Seoul, Korea 120-749. Fax: 2-2648-0314; E-mail: ungkilim @ base.yonsei.ac.kr Christopher Lingle Professor of Economics, Universidad Francisco Marroqufn, Apartado Postal 632-A, Guatemala 01010. Fax: (502) 334-6896; E-mail: CLingle@ufm.edu.gt ReuvenMondejar City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong Jaeha Park Associate Professor, Department of Marketing, Korea Institute of Finance, Myung-Dong 1 Ga 4-1, Chung-ku, Seoul, 100-021, Korea. Fax: 82-2-3705-6304; E-mail: jhpark @ sun.kif.re.kr Kyung Suh Park Associate Professor, School of Business Administation, Korea University, 5-1 Anam- dong, Sungbuk-ku, Seoul, Korea 136-701. Fax: 822-3290-1950; E-mail: kspark @ kuccnx.korea.ac.kr Peter Ping Li Assistant Professor of Management, School of Business Administration, California State University, Stanislaus, 801 West Monte Vista Avenue, Turlock, CA 95382, USA. Fax: (209) 667-3020; E-mail: ptpli@toto.csustan.edu Jung-Hwan Seo Research Fellow, Korea Economic Research Institute. Fax: 82-2-785-0273; E-mail: jhseo@keri.org. Tan Teng-Kee Nanyang Business School, Nanyang Technological University, Singapore xiii Yeong-Ho Woo Vice President, Korea Securities Research Institute, 33 Yoido-Dong, Youngdungpo-Ku, Seoul, Korea, 150-010. Fax: 822-786-6154; E-mail: ksri2@ksri.org Jiawen Yang Associate Professor of International Business, School of Business and Public Management, The George Washington University, 2023 G Street, N.W. Washington, D.C. 20052, USA. Fax: (202) 994-7422; E-mail: jwyang@gwu.edu ABOUT THE EDITOR J. (Jongmoo) Jay Choi is Laura H. Camell Professor of Finance and International Business at Temple University. He is a graduate of Seoul National University (BBA) and New York University (MBA, Ph.D.). Previously on the faculty of Columbia Business School, and an international economist at Chase Manhattan Bank. Visiting faculty at Pennsylvania (Wharton), NYU (Stem), Korea Advanced Institute of Science and Technology, and International University of Japan. He teaches corporate finance, capital markets, and international finance, and is a doctoral director of international business and a former chair of finance at Temple. He is a recipient of Musser Aaward for Excellence for Leadership, a former president of Korea-America Finance Association, and a trustee of Multinational Finance Society. He has over fifty books and articles in major journals. In addition to his work as a series editor of International Finance Review (JAI/Elsevier), he is a section editor of Journal of Economics and Business, and is on editorial boards of six journals. Listed in Harvard Business School Directory of International Business Scholars, and others. XV EDITORIAL ADVISORY BOARD Michael Adler, Columbia University Warren Bailey, Cornell University Ian Cooper, London Business School John Doukas, Old Dominion University/European Financial Management Gunter Dufey, University of Michigan Vihang Errunza, McGill University Robert Grosse, Thunderbird Business School Campbell R. Harvey, Duke University Yasushi Hamao, University of Southern California Robert Hawkins, Georgia Institute of Technology James E. Hodder, University of Wisconsin, Madison Maurice Levi, University of British Columbia Dennis E. Logue, Dartmouth College James Lothian, Fordham University/Journal of International Money and Finance Richard Marston, University of Pennsylvania Richard Roll, University of California at Los Angeles Anthony Saunders, New York University Richard Sweeney, Georgetown University xvii THE ASIAN FINANCIAL CRISIS" MORAL HAZARD IN MORE WAYS THAN ONE Jongmoo Jay Choi The Asian financial crisis of 1997 jolted the world economy like no other economic event since the World War II. The effect of the crisis was both deep and broad. Countries used to decades of 8-10% positive annual real economic growth saw their growth plunge up to a negative 15% (Table 1). Hundreds of Table 1. Economic Growth of Asian Countries (% Real GDP Growth Rates) Country t995 1996 1997 1998 Indonesia 8.2 8.0 4.6 -15.3 Korea 8.9 7.1 5.5 -5.8 Thailand 8.8 5.5 -0.4 -8.0 Malaysia 9.5 8.6 7.8 -7.5 Philippines 4.8 5.7 5.1 -0.5 Singapore 8.7 6.9 7.8 1.5 Hong Kong 3.9 4.6 5.3 -5.1 Taiwan 8.0 5.7 6.9 4.0 China 10.5 9.6 8.6 7.8 Japan 2.4 1.7 0.9 -2.9 USA 2.3 3.4 3.9 3.5 Source: IME International Financial Statistics; Hong Kong Monetary Authority; CEPD for Taiwan Asian Financial Crisis, Volume 1, pages 3-14. 2000 by Elsevier Science Inc. ISBN: 0-7623-0686-6 4 JONGMOO JAY CHOI Table 2. Devaluation in Stocks and Currencies: Asian Financial Crisis 1997 Country Stock Currency Indonesia -44.7% -69.3% Korea -33.3% -44.7% Thailand -35.4% -51.9% Hong Kong -42.8% 0.0% Japan -16.7% -10.9% Source: Institute of International Finance, Inc. firms and factories closed shops and millions of people lost their jobs. Stock prices as well as currency values plunged by half within days after the crisis (Table 2). Thus a minor currency crisis that started with an attack on the Thai Baht in July 1997 quickly consumed the entire country and precipitated a global contagion not only in Asia but also well beyond. There is an ongoing debate as to the role of finance in both economics and business. The literature on macroeconomic policy, for instance, relegates the role of financial markets to the background on the ground that only real factors matter. Similarly there is a tendency in business literature to afford a predominant role to operational or strategic factors, with finance playing only a subordinate role. Ironically, the Asian financial crisis is an incident that 'proves' that such a view is wrong and that finance is essential for country as well as for business. To describe the crisis, a popular magazine has carried a cover page containing a picture of people demonstrating in the street of Bangkok, carrying a banner of 'finance closed', 'industry closed', and 'country closed'. The banner succinctly summarizes the nature of the crisis: it started as a financial crisis but became of a crisis of industry and country as a whole in no time. In Korea, the economic planning minister pronounced, as late as November 1997 - several months after Southeast Asia has already fallen and less than a month before Korea had to seek assistance from the IMF - that Korea would not fall because of strong macroeconomic 'fundamentals'. Confident in the apparent relative strength of such traditional fundamentals such as growth or inflation, he did not take such financial or liquidity indicators as high short- term borrowing and dwindling international reserve assets seriously. In a peculiar way, this episode suggests an important lesson that just like a firm squeezed by cash flow problem, nations should ignore finance at their own peril. The Asian Financial Crisis: Moral Hazard in More Ways Than One 5 The crisis was as unpredictable as it was painful. Government officials could not imagine how their own tiger economies could not simply ride out any of the problems that may come in their path of continued high growth and economic success. Or perhaps that was the reason. The over-confidence and complacency brought about by success may have caused them to be blind to what is actually going on in the outside world and thus they were unable to innovate and change even when the world market environments are fundamentally changing because of globalization and technology. MULTI-FACETED REASONS FOR THE CRISIS Given the scarcity of an international finance specialist with an Asian background, I was asked to speak on this topic on various occasions. One question I almost never fail to get is: since there are so many smart (Western- trained) people in these countries, how did they all fail to see it coming and how come did they all let it happen? In answering the question, I often refer to a case of a firm that shows positive earnings yet went into bankruptcy (See Fig. 1). Despite positive earnings and equity, a firm can go under if it does not have cash flows to meet upcoming debt "Profitable" + Bankruptcy Transparency I Liquidity/ Cash Flow I FX Reserves ST Debt St~al Ri~dityl Fundamental Factors Fig. 1. [...]... removed from mark-to-market accounting To sum, there is no shortage of suggestions for the reasons of the Asian financial crisis In the spirit of David Letterman's top 10 - or should it be 21 quizzes since there are so many: Reasons for the Asian Financial Crisis (1) (2) (3) (4) (5) (6) (7) (8) (9) (10 ) (11 ) (12 ) (13 ) (14 ) (15 ) (16 ) (17 ) (18 ) (19 ) (20) ( 21) Victims to international speculative capital... Asian financial crisis Consistent with the previous list of 21 questions regarding the causes of the Asian financial crisis, here goes another 21 regarding the potential research issues pertaining to the Asian financial crisis Research Questions on the Asian Financial Crisis (1) Was the Asian financial crisis predictable? (2) How did the crisis spread? (3) Is the pattern of internal or external transmission... untenable with domestic and external financial constraints they faced JONGMOO JAY CHOI 10 Table 5 Country Indonesia Korea Thailand Malaysia Philippines Singapore Hong Kong Taiwan China Japan Financial Constraints of Asian Countries, 19 96 Current account (% GDP) -3 .4 -4 .8 -7 .9 -4 .9 -4 .7 15 .0 -2 .5 3.8 0.9 1. 4 Government budget (% GDP) 0.0 ~).2 2.3 0.7 0.3 13 .9 1. 5 1. 6 ~.8 -3 .9 External e b t d (% GDP) International... international? (13 ) Was the cause of the crisis transitory or permanent? (14 ) What role did the Asian business model play in the crisis? (15 ) Who bore the burden of the crisis? (16 ) Was the IMF policy prescription appropriate? (17 ) Could the currency board have worked in Asia? (18 ) Could they have recovered without the IMF assistance? (19 ) How do you prevent and cure moral hazard problem without letting the country... capitalism Asian Financial Crisis, Volume 1, pages 15 43 Copyright © 2000 by Elsevier Science Inc All rights of reproduction in any form reserved ISBN: 0-7 62 3-0 68 6-6 15 16 JAMES W DEAN the victim In short, where some see a failure of Asian capitalism, others see a failure of Western capitalism 2 The collapse in currency values suffered by half-a-dozen Asian economies between July and December 19 97 was... what extent is the contagion motivated by economics or psychology? The Asian Financial Crisis: Moral Hazard in More Ways Than One 13 (5) How is the Asian financial crisis similar or different from other financial crises such as the Latin American crisis (or the U.S savings and loan crisis)? (6) What differentiates the crisis-stricken Asian countries from non-crisis countries? (7) Could the crisis have... based on open-economy macroeconomics more or less did do the job for the Mexican crisis of 19 9 5-6 When Cline (19 95, p 13 ) stated that "[t]he Mexican mixture of the sheer scale of the currentaccount imbalance, the short-term nature of the debt, and quasi-fixed exchange rate was unique," he was correct in that none of the Asian crisis economies exhibited these factors in combination on quite the scale as... late 19 97 and early 19 98, Krugman (19 97, 19 98a, b) was the first to articulate a revision of the conventional view, which could be characterized as the Asian- failure view, and which I will characterize later in this essay more generally as the government-failure view Krugman suggested that the missing piece in our ex ante analysis of the Asian economies was their internal financial intermediation Asian. .. both the Asianfailure and Western-failure versions of events In Part 3, the chapter proceeds to assess the above chronology twice, first through an Asian- or government-failure lens, and then through a Western- or market-failure lens Part 4 addresses a critical policy quandary - whether or not to re-regulate capital flows - that arises directly from the two conflicting views, and Part 5 reports the. .. (months of imports) 38.9 11 .2 19 .8 28.8 50.9* N/A N/A 0 .1 15.0 N/A 6 .1 2.8 6.6 4.3 4.4 7.0 10 .9 10 .3 9 .1 8.5 N/A =not applicable * 19 95 figure Source: Hong Kong Monetary Authority; CEPD for Taiwan, APEC At the micro level, many Asian firms borrowed heavily from home and abroad The debt ratios of major industrial firms are often several times higher than either the norm in the U.S or any calculation . 2 8 -1 , Yoido-dong, Youngdeungpo-ku, Seoul, Korea, 15 0-7 56. Fax: 8 2-2 -7 8 5-0 270 /1. Researcher, Columbia University's APEC Study Center, 3 -1 6 -1 9-3 03 Naka-cho, Musashino-shi, Tokyo 18 0-0 006,. and Currencies: Asian Financial Crisis 19 97 Country Stock Currency Indonesia -4 4.7% -6 9.3% Korea -3 3.3% -4 4.7% Thailand -3 5.4% -5 1. 9% Hong Kong -4 2.8% 0.0% Japan -1 6.7% -1 0.9% Source: Institute. pertaining to the Asian financial crisis. Research Questions on the Asian Financial Crisis ( 1) Was the Asian financial crisis predictable? ( 2) How did the crisis spread? ( 3) Is the pattern