The Imf Worsened The East Asian Crisis

If there is flu in the air, who will catch it and who will not, depends to a very large extent on how well a person has looked after himself, plus luck. This, broadly, is the message contained in a paper* on corporate performance in the East Asian crisis by Stijn Claessens, Simeon Djankov and Lixin Colin Xu of the World Bank. The authors start off by saying that because of paucity of data most of the diagnoses of the crisis so far have tended to be qualitative in nature. They then take up a sample of publicly traded firms in Indonesia, Malaysia, Korea, Thailand, Hong Kong and Singapore. The objective, they say, is to analyse the individual performance of companies with a view to ascertaining whether firm-specific reasons or general reasons were more important in determining the behaviour of firms during and after the crisis. After reviewing the major theories that have been adduced so far to explain the crisis, they conclude that, first, idiosyncratic shocks "" a euphemism for the IMF's policies, doubtless "" were the most important factors in the sharp deterioration in corporate performance. Equally important were firm-specific non-financial characteristics and the overall industry and institutional environment. Using data from the Worldscope database, the authors have used profit margins on sales of 857 firms from the region as the key measure of performance. They define profit margin on sales as the earnings before interest and taxes plus depreciation and amortisation. The advantage of this method they say is that, as a cash-flow measure, it is not influenced by the liability structure of the firm. This makes it possible to study the effects of real and financial shocks on the operations of the firms. One important feature to emerge from the analysis that, although insider control and connected lending have been blamed for many of the ills, firms exhibiting a high degree of such characteristics did no worse in managing the crisis than firms with a lower degree of such characteristics. If nothing else, this ought to make Indian family-owned firms, especially those which have been under pressure to professionalise and become more transparent, feel much better. Another important finding is that firm-size had little bearing on the ability to cope with the crisis. Large firms were equally likely to do badly as small firms were. This, say the authors, might have something to do with underlying prior weaknesses in the firms and these were many. However, from the point of view the financial markets, altogether the most important conclusion is the confirmation of the hypothesis that firms that had higher volumes of short-term debt (as in Korea) fared worse than those with lower volumes of such debt. The question as to why lenders were not more careful is answered obliquely via the suggestion that the balance sheets might have been doctored along with the projections of sales and cash-flow. But the extraordinary thing is that, contrary to popular belief, there was actually no great build-up in short-term debt of East Asian firms until 1996. In fact, the share of short debt in overall debt went up only for Japan. This indicates that although there may have been some hiccups in debt-servicing. It also underscores the point that had the IMF not pulled the plug with its policies, the crisis could have been far less severe. The lessons from this for India are obvious and it might be useful if the RBI commissioned a study for applying the same method to find out, should a crisis of confidence similar to the one in East Asian occur here, which Indian firms might be most vulnerable. The answers may come as a complete surprise. Corporate Performance in the East Asian Financial Crisis