Remarks to the US-Korean Twenty-First Century Council

Joseph E. Stiglitz

Senior Vice President and Chief Economist, Development Economics

The World Bank

May 15, 1998

Outline of the Talk

1. What happened in Korea?

2. Why did it happen?

3. What are the most important issues looking forward?

Forecasts for 1998 GDP Growth

-3

-2

-1

0

1

2

3

4

5

6

7Ju

l-97

Aug

-97

Sep-

97

Oct

-97

Nov

-97

Dec

-97

Jan-

98

Feb-

98

Mar

-98

Apr

-98

May

-98P

erce

nt G

DP

Gro

wth

IMFConsensus

SOURCE: IMF Reports and Consensus Forecasts

Unemployment Rate

0

1

2

3

4

5

6

7

SOURCE: Bank of Korea: AAG2 and AAG3; Bloomberg (March 1998)

Key Aspects of the East Asian Crisis

1. Not public sector profligacy, but private sector borrowing.

2. Not overall indebtedness, but the type of borrowing and use of funds.

3. International investors share responsibility.

Public Sector Balances: Latin America versus East Asia

-6

-5

-4

-3

-2

-1

0

1

2

3

Arg

en

tin

a

Bo

livia

Bra

zil

Ch

ile

Co

lom

bia

Ven

ezu

ela

Ind

on

esia

Ko

rea

Mal

ays

ia

Ph

ilip

pin

es

Th

aila

nd

Latin America (1982) East Asia (1996)

Percent of GDP

Inflation: Latin America versus East Asia

-50

50

150

250

350

450

550

650

1980 1982 1984 1986 1988 1990 1992 1994 1996

Latin America

East Asia

Average inflation (GDP deflator)

Total External Debt-Exports Ratio in 1996

0

50

100

150

200

250

300

Uni

ted

Sta

tes

Arg

entin

a

Bra

zil

Mex

ico

Indo

nesi

a

Tha

iland

Phili

ppin

es

Kor

ea

Mal

aysi

a

Percent

Short-term Debt-Exports Ratio in 1996

0

20

40

60

Arg

ent

ina

Bra

zil

Me

xico

Ind

on

esia

Th

aila

nd

Ph

ilipp

ine

s

Ko

rea

Ma

lays

ia

Percent

Office Vacancy Rates, 1996(% of space vacant)

-1

4

9

14

19

24

Bangkok Jakarta Kuala Lumpur Manila Hong Kong Tokyo

SOURCE: JP Morgan Data and Estimates

1996

1997-99 (projected)

Non-Performing Loans (as a % of total loans)

0

5

10

15

20

Uni

ted

Sta

tes

Indo

nesi

a

Tha

ilan

d

Mal

aysi

a

Phi

lippi

nes

Percent

Spreads on Brady Bonds & U.S. High-Yield Bonds

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-95 Jan-96 Jan-97 Jan-98

basis points

US High-Yield Bond spread

Brady Bond spread

Foreign Currency Debt Ratings

Country

June

1996

June

1997

March

1998

Indonesia BBB BBB B

Korea AA- AA- BB+

Malaysia A+ A+ A+

Philippines BB BB+ BB+

Thailand A A BBB-

Source: Standard and Poor’s

Usable Reserves

0

5

10

15

20

25

30

35

Dec-9

6

Feb-9

7

Apr-97

Jun-9

7

Aug-97

Oct-9

7

Dec-9

7

Feb-9

8

Apr-98

US$

Bil

lion

s

SOURCE: Bank of KoreaNOTE: Data refers to "official usable foreign reserves", which includes forward contracts.

Bankruptcies

0

500

1000

1500

2000

2500

3000

3500

4000Ju

l-97

Aug

-97

Sep-

97

Oct

-97

Nov

-97

Dec

-97

Jan-

98

Feb-

98

Mar

-98

SOURCE: Bank of Korea

Stock Market and Exchange Rate

0

500

1000

1500

2000

2500

Exc

han

ge

Rat

e (w

/$)

0

100

200

300

400

500

600

700

800

900

Sto

ck M

arke

t In

dex

Exchange Rate Stock Market Index

SOURCE: Bloomberg

Exports

0

2

4

6

8

10

12

14

Jun-

96

Aug-96

Oct-9

6

Dec-96

Feb-97

Apr-97

Jun-

97

Aug-97

Oct-9

7

Dec-97

Feb-98

Apr-98

US$

Bil

lion

s

0

20

40

60

80

100

120

140

160

180

200

Vol

ume

(Jul

y 19

96=

100)

Value (US$ Billions)

Volume (July 1996 =100)

SOURCES: Bank of Korea, Bloomberg (April 1998), IMF International Financial Statistics

Monthly Earnings of Regular Employees

0

200

400

600

800

1000

1200

1400

1600

1800

Jun-

96

Sep-

96

Dec

-96

Mar

-97

Jun-

97

Sep-

97

Dec

-97

Th

ousa

nds

of

Won

SOURCE: Bank of Korea

Overnight Interest Rates

0

5

10

15

20

25

30

35

40

Jun-

96

Sep-

96

Dec

-96

Mar

-97

Jun-

97

Sep-

97

Dec

-97

Mar

-98

Nominal Real

SOURCE: Bloomberg