International economic impacts on Australia in the 1990s and 2000s Flashcards
(29 cards)
1
Q
Why were capital flows volatile in the 1990s and what effects did this have?
A
- Floating exchange rates led to deregulation of financial markets
- Removal of capital constraints meant that money could move freely around
- With the financial market deregulations, governments lost control over these sources of policy action
- This means that in times of economic crisis governments did not have access o the usual tools of fiscal and monetary austerity to dampen or stimulate the economy
- Furthermore, whereas under capital constraints economic crises were transmitted through the current account deficit, now economic crises can be transmitted purely through capital flows (in/outflux of capital investment)
2
Q
Give an overview of the business cycles between the early 90s and 2000s
A
- OECD wide recession in early 1990s until 1993
- Growth thereafter until 2000
- But lower growth rates than recovery in 80s
- Subsequent growth in 2000s lower than that of the 90s
3
Q
What was the growth/inflation/unemployment equilibrium like throughout the 90s and 2000s?
A
- Governments were weary of inviting the higher inflation rates of the 1980s and hence kept growth at subdued rates
- Due to restricted growth, unemployment took longer to come down
- By 2007 OECD unemployment was 5.7%, the lowest in 28 years
- Slower increases in living standards and higher unemployment helped combat inflation
4
Q
What caused the recession in the early 90s?
A
- OECD countries struggled during the 80s to reduce inflation and unemployment and to control growth
- In an attempt to reign in inflation, governments tightened monetary policy in 1990, leading to a recession and stock and property market downturns
- As we now expect, the asset market downturns were transmitted into the real economies
- Governments, corporations and households were carrying high levels of debt based on devalued assets, this restricted their abilities to borrow and to make new loans
5
Q
What was different about the early 90s recession?
A
- Monetarism and rational expectations theory dominated economic thinking at this time and therefore fiscal policy was not used for fear of its impacts on inflation
6
Q
What worsened the early 90s recession?
A
- Cuts to government spending made the recession worse
- Declines in output in former Eastern block countries contributed to the recession
- The financial markets made the recession worse as they would punish any country they believed was following the wrong polciies
- Financial deregulation cost governments the use of monetary policy
7
Q
Describe the culmination of and recovery from the early 90s recession
A
- By 1992 the recession had worsened, 15 OECD countries had suffered at least one year of negative growth
- The recession led to a prolonged banking crisis
- The USA, Canada, UK, Australia and NX began to recover first
- Although growth rates recovered somewhat, unemployment response sluggishly
- Expansionary fiscal policy in Japan failed to have an impact on consumer spending
- Recovery was underway in almost all countries by 1995 (except Japan) but growth rates were lower than those of the 80s
8
Q
What ended the recovery from the early 90s recession?
A
Recovery was short lived as the East Asian financial crisis hit in 1997
9
Q
What were the two major characteristics of world trade in the 90s?
A
- Strong growth: East and South-East Asia
* Protectionism and regionalism in world trade
10
Q
What happened during the recovery form the early 90s recession?
A
- The recessions in the OECD countries had less impact on world trade than earlier recessions
- During the recovery world trade grew substantially faster than world output growth - 10.5% vs 2.9%
- The growth was driven by East, Asian Tigers and China were growing rapidly despite the recession in OECD
- And trade between them was growing rapidly as well
- The increase in Asia’s importance in world trade was beneficial to Australia
11
Q
What occurred in regards to protectionism in the 90s?
A
- The 1980s and 1990s were decades of increased protectionism of agricultural commodities and manufactures
- GATT stalled and countries went ahead with their own trade policies
- The US protected its trade against countries with whom it had continuous trade deficits
12
Q
What financial crises’s occurred in the 90s?
A
- Latin American financial crisis
* `Asian Financial Crisis
13
Q
What started the Latin American financial crisis?
A
- Mexico
- In a period of poor economic growth, savings and investment declined
- The peso was pegged to the US dollar which caused it to be overvalued relative to its trading perforamcne
- Imports were too cheap and exports were too expensive
- The government devalued the peso
- The international money markets responded by selling off the peso at which point the government was no longer able to maintain the value of the exchange rate
- The peso depreciated by 40% despite extensive use of Mexico’s foreign reserved
- The government ran out of foreign reserves and the market began to fear a Mexian debt default
- The IMF, BIS and USA stepped in with a ‘rescue package’
14
Q
How was the initial crisis in Mexico worsened?
A
- The Mexican government made drastic cuts to public expenditure which slowed economic growth
- The tighter monetary policy led to higher interest rates which discouraged investment and made existing loan repayments expensive
15
Q
How did the Latin American financial crisis spread?
A
- The crisis in Mexico led to concern about other Latin American countries
- Argentina had also pegged its peso to the US dollar
- As the Baring crisis in 1891 in Argentina resulted in less capital inflow to Australia, the Mexican crisis reduced capital inflow to Argentinia
- And a balance of payments crisis followed (as in Aus 100 years before)
- This caused a reduction in foreign reserves which caused a reduction in the domestic money supply
- And a contraction of the domestic economy
- To try to increase capital inflow the government embarked on contractionary fiscal policy, further contracting the domestic economy.
16
Q
What lesson should have been immediately learned from the Latin American financial crisis?
A
that a fixed exchange rate is vulnerable if the trade balance does not support it and that a crisis in one country can easily spread to another
17
Q
What was the situation in East Asian economies prior to the Economic Crisis?
A
- Some of these economies had been growing strongly for over a decade
- They specialised in manufactures rather than primary products
- They have low ratios of external debt to GDP
- Government debt was low
- Governments often ran budget surpluses
18
Q
Describe the early days of the Asian Financial crisis
A
- From 1996 economic growth in the region slowed due to inflation and balance of payments problems in South Korea, Singapore, Indonesia,Malaysia and Thailand
- Some of the countries had rather large current account deficits, Thailand’s deficit stood at 8% of GDP in 1995/96. Malaysia, Korea, Indonesia, the Philippines, Vietnam and Hong Kong also experienced current account deficits in mid 90s
- Money supply was increasing suggesting not enough attention was paid to the risks associated with investment in the region
- Scope for increased exports was limited because of the decline in Japanese growth and the depreciation on the yen while these countries were pegged to the appreciating US dollar
- What they might have wanted to do was depreciate but their attractiveness as an investment destination forced their exchange rates to appreciate
- All these countries tightened monetary policy and raised interest rates
19
Q
What was true about solving the Asian Financial crisis?
A
Solving the crisis was complicated by the intensity of capital mobility resulting from the deregulation of financial markets
20
Q
How did financial markets compound the issues facing Asian during the 90s Financial Crisis?
A
- Banks began to play less of a role relative to newer types of financial intermediaries
- Investment funds grew rapidly and invested in developing countries for the first time in 1990s
- Investors forgot the usual cyclical downturn of an economy following a period of high growth
- They continued to bet on expansion in these economies and for a time continued to make high returns
- Capital flows were also short term ‘hot money’ - money looking for the highest return and quick to relocate if the return should fall
21
Q
Describe the climax of the Asian Financial Crisis
A
- Investors finally began to worry about the financial and
macroeconomic environments in Thailand (and Korea) from early 1996 - The Thai stock market index moved down
- Capital left Thailand putting pressure on the Thai Baht. Speculation against the Baht did not help
- The monetary authorities were unable to withstand the speculative attacks and devalued the currency
- Investors began to look around the region and found other problem economies and regional stock market indexes began to decline
22
Q
Describe what events followed the climax of the Asian Financial Crisis
A
- Contagion
- Only China, Vietnam and Hong Kong managed to maintain their currencies’ fixed rate to the US dollar, all other countries in the region were forced to devalue or to float their exchange rates
- Investors realised they didn’t really understand how the SE Asian economies worked anyway and decided to withdraw their funds from the region
- Much of the SE Asian country’s trade was with another in the region, thus an economic crisis in one spread rapidly to it’s trading partners
23
Q
Describe how the Asian Financial Crisis became a worldwide issue
A
- Investors looked around to see where else their funds might be at risk
- China, Russia and Brazil were the next targets
- Russia devalued the rouble spreading the crisis to Europe and the US since it was their banks that had financed Russian debt
- Japan became infected by the crisis both because it was a market for SE Asian exports and also became Japanese capital had played a large role in SE Asian finance
- Japan had still not overcome its own domestic banking crisis
24
Q
What was the USA’s prime concern regarding the Asian Financial Crisis and what ended up happening?
A
- The US worried that the large amount of Japanese funds in the US would be reptriated in order to fund its recovery and rebuild its financial sector causing the US to suffer a balance of payments crisis which would cause a worldwide depression
- In the end, worldwide depression was avoided through the use of IMF help and the implementation of stabilisation policies in many affected countries
25
Describe the GFC
- Asset price bubble grew during 2000s particularly property prices in the United States and a few other countries
- In 2007 US housing market crashed and exposed the sub prime mortgage crisis
- The complicated relationship of financial assets to sub prime mortgages led to a series of bank failures
- Leading to a credit crunch (banks increase i/r) and ultimately to recession
26
What were the main financial instruments of the GFC?
- Collateral debt obligation
- Credit default swaps
- Mortage backed securities
27
What consequences did the GFC have on Trade?
- Decline in imports in developed countries
- Capital outflow from developing countries
- World trade down by 2010 by about 8% of annual world GP
28
What was the policy response to the GFC?
- Pump liquid into the banking system
- At first ad hoc in response to imminent collapse
- Then, co-ordianted recapitalisation through public funding
29
What, internationally, were the policy repossess to the GFC?
- IMF and world bank given larger resources
| - G20 Countries agree to avoid protectionism and ‘beggar thy neighbour’ practices
