Beginning in 1997, a set of rapidly changing macroeconomic conditions, referred to as the Asian crisis, were felt through out the economies of East Asia. The most dramatic turnarounds were seen in 4 countries: Indonesia, Korea, Malaysia and Thailand. In this section, we examine similar features of the economic events in the latter three countries. Along many dimensions, Indonesia faced the most severe changes in conditions. However, Indonesia also experienced a dramatic change in government subsequent to the crisis and much of the macroeconomic outcomes in Indonesia may be due to the chaos associated with that political upheaval. As reported by the Bank of International Settlements, one condition shared by all three economies at the onset of the crisis was a large outstanding external debt. A measure of the outstanding stock of debt to OECD\ banks was US$103.1 billion in Korea, US$28.5 Billion in Malaysia and US$96.7 billion in Thailand. Each of these debt levels was a substantial fraction of GDP. Converting the debt into won at market rates, the Korean debt was 83.2% of Korean second quarter 1997 GDP; the Malaysian debt was 106.6% of Malaysian second quarter 1997 GDP; the Thai debt was 220.9% of second quarter 1997 GDP. During the second half of 1997, there was a dramatic reduction in the stock of these loans. In Figure 1, I show a time series showing the outstanding stock of foreign bank debt in these countries relative to their size in the second quarter of 1997. By the third quarter of 1998, Korean external debt levels had fallen by 38%; Malaysian debt levels had fallen by 29%; and Thai levels had fallen by 41.1% of the pre-crisis levels. That these drops in bank debt on net represent dramatic capital outflows can be seen from the second panel of Figure 1 which shows the response of the trade balance concurrent with the drop in bank debt. In the second quarter of 1997, Malaysia had a trade deficit of 4.4% of GDP; one year subsequent the trade balance was in a surplus of 20.9% of GDP. Similarly dramatic turnarounds were seen in Korea and Thailand. The second quarter 1997 trade surplus in Korea was -2.2% of GDP; one year subsequent it was 13.8% of GDP. The second quarter 1997 trade surplus in Thaliand was -2.2% of GDP; one year subsequent it was 16% of GDP.
In addition to the sudden drop in foreign debt levels and dramatic current account turnaround, the events of 1997-1998 share similar features for all three countries. In each country, there was a large reduction in production levels, a larger reduction the private components of absorbtion, and a depreciation in the exchange rate, both nominal and real. We use a simple event study analysis to measure these impacts. We will measure the ``effects'' of the crisis on various macroeconomic variables as the differences in their outcomes from a deterministic forecast based on their trend growth path from the earliest available measure after 1990:1 until 1997:2. The reported series are the difference between the logarithm of a time series and the linear trend path of the logarithm of the series. We refer to a log difference between the actual realization of the series and the trend path of -.x as x% below trend.
In Figure 1, we show the response of domestic production and expenditure to the Asian crisis. Both Korea and Malaysia were near their recent trend growth path at the second quarter of 1997; Thailand was already somewhat below the growth path. In each country, output begins to fall sharply in the second half of 1997. Output continues to fall through 1998 reaching a trough in either the 3rd or 4th quarter. The fall below trend is sharpest in Thailand where output reaches a nadir of 28.1% below previous trend. Output falls by 23.4% below trend in Malaysia and 15.9% in Korea. In percentage terms consumption falls by more than output in each country. The peak fall in consumption below trend in Korea is 20.5%; in Malaysia is 27.7% and in Thailand is 30.4%. The largest relative decline is in investment. Investment falls at peak 40% below trend in Korea; 69% below trend in Thailand; and, 98% below trend in Malaysia Prior to 1997: some of the real effects of the crisis. The collapse in lending led to a collapse in the major elements of absorption as real consumption falls by more than 25% below trend and investment falls close to 100% below the previous trend. Simultaneously, real gross domestic product also falls by close to 25% below the previous trend. The fall in absorption exceeds the fall in output. The current account as a % of GDP rises by 25 percentage points above its previous share. Though output and consumption do show some small signs of reverting to trend in the most recent period (1999:2), consumption, investment and GDP remain near the trough of the recession.
One of the most noticeable aspects of the crisis was the sharp decline in the value of the Korean won, Malaysian ringit, and Thai baht versus the US dollar. Each currency had depreciated by at least 40% off trend by the first quarter of 1991. Both the won and the baht substantially overshot their long run levels. This rise in the currency was reflected in the real exchange rate. Define the real exchange rate as the product of the nomianl exchange rate and the ratio of the US and respective domestic GDP deflators. In each case, the real exchange rate reached levels nearly 40% above trend by the first quarter of 1998. This decline in the real exchange rate has persisted to the current period in all cases. An examination of the response of the GDP deflators of the various countries to the shock shows a distinct but temporary rise in the price level in all countries. In each case, this rise in the aggregate price index is less than 10% at peak. Finally, we show the response of the nominal domestic country prime lending rate. In each case, the capital account turn around led to a temporary rise in nominal interest rates.