The Asian Financial Crises - Essay Example

The Asian Financial Crises The Asian financial crises were caused by sudden increase in the amount of capital from Asian countries which did not have an ample system of sensible regulations, and its foreign exchange rate was also proved to be disastrously brittle. The Asian crisis was so distinctive in its extraordinary severity of problems that faced the banking sector and the corporate distress, and its speed in recovering from the crisis. It was mainly caused by contagion and panic. ‘When capital flows waned in late 1996 and early 1997, a financial panic erupted following a series of missteps by the Asian governments, market participants, the IMF, and the international community. The result was a much deeper Crisis than was necessary or inevitable ( Radelet and Sachs, 1998, p 12). ” Asian financial crises led to the development of technology or psychology. Also the availability of credit led to the creation of a leveraged economic environment, and led to increase in the prices of assets to a level which the Asian countries could not sustain. The increase in asset prices at last collapsed, making companies and individuals to fail to meet their debt obligations. If it could not be for the collapsing of the companies and organizations, the Asian countries would be far ahead with developments. The withdrawal of loans by the lenders also played a major role in development in Asian countries. The government of these countries had to implement new strategies that would not lead to declining of the standards of living of the people. They sought to borrow from the IMF and to refund at a certain interest. In addition, the exchange markets were engulfed with foreign currencies, hence depreciation on their currencies. In order to prevent loss of value of their currencies the Asian country's government raised their interest rates so that they could attract foreign investors. These governments also intervened in the exchange markets by buying the excess currencies in the market at a fixed rate though neither of all these policies was sustained for long. Without the panic and contagion the Asian countries were so stable and they were to be amongst the leading developed countries in the world. ‘‘ In fact a socially irrational response in the sense that, without the panic, the situation was reasonably stable - the debt could have been repaid on plausible assumptions about the economic performance of companies, banks, and economies (Wade, 1998, p 2). ” The Asian financial crisis was caused by several factors. The main factor was the investment boom; the wealth generated from export steered growth which led to an investment boom in residential and commercial property, infrastructure and industrial assets. The Asian region was an attractive destination for capital and it also had high returns on investments. At the same time the purchasing power and standards of living improved rapidly due to the growth of economies. An added factor was the excess capacity; most of the investments increased rapidly during 1990s because of the incentives the government provided. Their qualities also declined significantly as they were made on the basis predictions of future demands which could not be met because they were so unrealistic. There are also other factors that led to the Asian financial crises and these include; the debt bomb, panic and contagion, macroeconomic fundamentals and increase in risk aversion. There are several significances of the Asian Economic Crisis of 1997 – 1998on the question of development. Though the economic storm that occurred in Asia in 1997 has now decreased, the loss that the Asian countries suffered will take many years to be repaired. Asia has lost many years of economic progress because of getting involved in huge debts that led to crash of its progressive economies. The Asian country governments they were ton use several reforms to cater for its developments. The reform of interest rate policies, and the development of the money and capital markets were two key areas of focus at the time (Peart, 1995, P7). Despite the crisis a number of fundamental policies had been raised about the sustainability of the role of IMF in development. These policies included; virtues of fixed rates and floating rates and the Asian economic model. The crisis also had significant implication for businesses. The investors had invested their billions of money in the region assuming that the rapid economic growth would be sustained and the country will have developed. Now that the economic growth has come to halt what are the implications of the Asian crisis on development? These implications are; Significance of exchange rate policy on development Most Asian countries pegged their currencies against the dollars. They tried to intervene selectively in order to support the value of their currency in the financial market so that they would sustain the expected development. They used managed float so that they could gain some of the benefits linked to the fixed exchange rate mechanism. Critics argue that a policy like this is exposed to speculative pressure. The value of Indonesia, Korean, Malaysian and Thailand currencies collapsed in the remarkable fashion, and not just only did it lost its value to US Dollars. The loss of value of the currency of Asian countries limited all the expectations the investors had and the rate of development reduced drastically. Up to date they have not recovered from the loss they incurred during that time and they still lag behind in development. The role of the financial crisis in development in this case plays a major role when it comes to choosing the type of exchange rate to use in a country. Significance for the business in development The Asian financial crisis tosses the risks accompanying carrying out business in a developing country. Most of the multinational companies at the time of mid 1990s viewed Asia as it was to be a development powerhouse in the future, and they invested accordingly. Their view had certain foundation. The jubilant view was shattered rudely by what happened in 1997-1998. The great development they thought they were going to make it did not bear any fruits. For anyone to conclude that the results of doing your business in the Asian region will be negative it could be wrong because nobody could believe in you. On the negative side about this region, the Asian crisis , the where no doubt that it was so painful for the investors and companies which had major activities in this region. For instance ABB was so hurt when the Malaysian government cancelled their 5 US Dollars on the agreement they had about the hydro- electric dam project. ABB was a large European engineering firm and it was the main contractor on the project. Many Asian companies will lack markets in their home countries and they will export their goods and services. This may lead to flooding of exports to other countries lowering the rate of development of that country. For example the European and US steel companies are looking for ways to deal with impact on prices and demand for their products in their home markets due to the availability of cheap steel from south Korea. On the other hand, companies that outsourced their raw materials from the Asian countries they have enjoyed fully on steep drop in the prices and has made them to enjoy the extra profits. This leads to quick development in these countries because of the availability of raw materials at a low cost. Furthermore, many companies are taking advantage over the changing situation in Asia to raise their investment rate in the region. Dropping stock markets within the region has made many firms in Asia to trade at prices that are even lower than their break up value. The IMF has required Korea, Indonesia and Thailand remove restrictions on foreign direct investments. Due to the above factors it is most likely to get foreign investors buying the assets of the troubled Asian firms at a low cost. Finally, it is worthy to emphasize on the long run outcome of the crisis which may be good. If the Asian countries could be given the incentives so that they could reform their economies, they may be able to attain maintaining economic growth and development. Significance of the International Monetary Fund on developing The main aim of the IMF was to give loans on their member countries which were not able to keep the value of their currencies stable and also those who were faced by the problem of balance of payments. The main agenda was to provide short term loans to their member countries. Therefore, loans has conditions to fulfill. These conditions require the troubled country to reduce government spending and increase the interest rates so that inflation and monetary growth are reduced. During he Asian crisis he IMF realized it was committing over 110 US Dollars on three countries; that is Korea, Thailand and Indonesia. The Asian countries had to follow keenly the conditions attached to the aid package though their political leaders resisted them at first. These conditions were; reduction in government spending, deregulation of all sectors that were protected by the foreign and domestic competition and lastly they were supposed to increase interest rates. "To reverse (currency depreciation), countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this (hurts) weak banks and corporations." ( Michel, 1998, p. 46) The IMF policies towards Asian governments have faced so many criticisms from western people. One criticism is that macroeconomic policies are not suitable for those countries which are not facing inflation and excessive public spending but those ones suffering deflationary undertones from a private sector debt crisis. For IMF, its main role is to rebuild confidence in the Asian countries and ensure that their currencies appreciate. The second criticism is the problem though economists call it moral hazard. Moral hazard occurs when an individual acts carelessly because they know that someone will lend their hand in times of problems. In the case of the Asian crisis, the critics argue that many western banks were not willing to lend them money. Last criticism argues out that the IMF should be too authoritative to institutions that lack any device for accountability. Also the Asian financial crisis has several implications in the world, IMF manager plays an important role in development. Though the IMF seemed to be unable to handle the Asian financial crisis during that time of globalization. Financial liberalization in economies which are developing should be tried only after attaining macroeconomic stability, solid financial systems and trade liberalization. It Should also be sensitive and phased. References Agenor, P. (1999). The Asian financial crisis: causes, contagion and consequences. Cambridge university press. and Debt Deflation in the Asian Crisis”. IDS Workshop, University of Sussex. Blustein, P. (2001). The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF. Public Affairs. Desai, V. & Potter, R. (2008). The Companion to Development Studies, 2nd edition. Hodder. Economic Studies. Haggard, S. (2000). The political economy of the Asian financial crisis. Institute for International Economics. Jao, Y. (2001). The Asian financial crisis and the ordeal Hong Kong. Quoram Books. Kaufman, G., Krueger, T., Hunter, W. (1999). The Asian Financial Crisis: Origins, Implications and Solutions. Springer. Michel, C. (1998). " Doctor Knows Best?" Asiaweek. Peart, K. (1995). ‘Financial reform and financial sector development’, Social and Pempel, T. (1999). The Politics of the Asian Economic Crisis. Ithaca, NY: Cornell University Press. Radelet, S., & Sachs, J. (1998). “The Onset of the Asian Financial Crisis,” Mimeo. Harvard Sharma, S. (2003). The Asian financial crisis: crisis, reform, and recovery. Manchester university press. Tran, V. (1999). The causes and the impact of the Asian financial crisis. Macmillan. Wade, R. (1998). “From Miracle to Meltdown: Vulnerabilities, Moral Hazard, Panic Read More