Thursday, January 17, 2013

Investment In ASEAN post-AFC: Explaining The Drop

One of the policy problems after the recovery from the Asian Financial Crisis, was the steep drop in private sector investment relative to GDP. There have been not a few papers on the subject, with multiple explanations put forward.

This new one under the IMF working paper series offers a fresh take on the issue (abstract):

Explaining ASEAN-3’s Investment Puzzle A Tale of Two Sectors
Zhou, Yong Sarah

Summary: The prolonged investment decline in post-Asian crisis emerging Asia, in contrast to the swift recovery of economic growth, has remained a puzzle. This paper shows that the post-crisis investment recession has been mainly concentrated in the nontradable sector, and hypothesizes that the slowdown is because firms operating in that sector are financially constrained. Empirical results based on macro and firm-level data from Indonesia, Malaysia, and Thailand (ASEAN-3) support this hypothesis.

I like the methodology, and I find the results persuasive – but your mileage may vary depending on how you view the problem.

In short, this is the narrative based on the findings in the paper:

  1. Investment before the AFC was high across both  tradeable and nontradeable sectors.
  2. When the crisis hit, sales and bank lending dried up, leading to a credit crunch.
  3. Firms in the tradeable sector recovered faster, because of two reasons – access to external credit, and devalued currencies which made their output more competitive.
  4. So while tradeable sector firms managed to maintain and even increase their sales and investment levels, firms in the nontradeable sectors continued to face a credit crunch and become more sensitive to their own ability to generate cash.

The dataset focussed on listed firms, which by their nature tend to be larger, so the findings should be even further magnified for smaller, unlisted firms.

In Malaysia’s case, some of the recommended policies have already been done – BNM’s Credit Bureau got a favourable mention, as did Malaysia’s development of a broad and deep capital market. In our case, too, some of the positive policy moves might have been dampened by a concerted push by the banks into the household sector post-AFC, which only started tapering off after the Great Recession.

Indonesia and Thailand of course, benefited from higher levels of foreign investment which helped boost their investment levels past Malaysia’s, but what really matters here is total investment from both domestic and foreign sources.

The recent surge in Malaysian private investment over the past year might be a signal that the nontradeable sector credit crunch might finally be over and might even be more sustainable than I thought.

Technical Notes

Zhou, Yong Sarah, "Explaining ASEAN-3’s Investment Puzzle A Tale of Two Sectors", International Monetary Fund Working Paper No. 13/13, January 2013


  1. Sorry to digresss, but this web page Below seem to show that Malaysian GDP contracted in the first quarter and only between 2.8-3.3 percent in 2nd and 3rd quarter.
    Are these figures correct?

    1. Yes they are correct...but those are quarter on quarter percentage changes, not annual. Malaysia has a very strong seasonal component to GDP, and it's always negative growth in the first quarter, and increasing thereafter. That's one reason why the official growth numbers are always annual percentage change e.g. 4Q:2012 over 4Q:2011, instead of 4Q:2012 over 3Q:2012. The GDP annual growth rate that quotes are the ones that conform to the official numbers.