The Decline of Investment in East Asia since the Asian Financial Crisis: An Overview and Empirical Examination

Publication | December 2009

The decline of investment in the five hardest-hit East Asian countries can be best explained by overinvestment prior to the Asian crisis and, hence, a return to more or less appropriate investment rates since the crisis.

A key legacy of the Asian financial crisis of 1997–1998 is a sustained drop-off in the investment rates of East Asian countries that were hardest hit by the crisis. This paper first reviews the stylized facts of investment in these countries, and then explores and evaluates the various possible explanations for the decline in investment. Using empirical analysis, which expands upon Park and Shin (2009) by updating the data to include 2005-2008, the paper investigates the extent to which the investment rates of Asian countries can be explained by the underlying fundamental determinants of investment such as gross domestic product (GDP) growth and demographic variables.

It also empirically revisits the various hypotheses put forth to explain the investment drop-off, in particular competitive pressures from the People's Republic of China and heightened risk and uncertainty. Its analysis yields two main findings: (i) some evidence of overinvestment in the precrisis period but (ii) very little evidence of underinvestment in the postcrisis period. The results suggest that investment rates are currently more or less at appropriate levels despite their postcrisis decline. The salient policy implication is that quantitatively boosting investment may be less important for future growth than enhancing the investment climate.

Contents 

  • Abstract
  • Introduction
  • Stylized Facts of Investment in Asia
  • Why Has Investment Declined?
  • Is There Underinvestment? Data and Empirical Framework
  • Empirical Results
  • Concluding Observations
  • Appendix: Description of Variable and Data Sources
  • References

Additional Details

Authors
Type
Series
Subjects
  • Economics
  • Finance sector development
ISSN
  • 1655-5252 (Print)

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