The Asian Financial Crisis and Economic Growth - Essay Example

ASIAN STUDY (school) Asian Study Introduction The Asian financial crisis which begun in July of 1997 caused muchworries and concern for Asia and many countries around the globe. This financial crisis was potentially seen as a disaster for Asia, one which would have major repercussions for many countries. In fact, this disaster clearly had major financial effects for most of Asia and for other developed countries. This paper shall discuss why the Asian financial crisis, which began in Southeast Asia, had such a dramatic impact on Japan and South Korea. It shall first briefly discuss how this crisis started and then discuss in detail how this crisis affected Asia, other countries, more particularly Japan and South Korea. Discussion In 1997, this financial crisis first manifested itself in Thailand, and it soon affected different countries in the region. This regional crisis then caused rapid contractions in the economies of these countries. Their real output was actually significantly damaged (Beamish, 2009). This crisis which came after more than two decades of strong economic growth was a major blow to the Asian economic progress. It also startled international organizations which were operating in Asia as they did not expect that a crisis of such proportions would occur in the region. This crisis presents with several features. Firstly, there was a shortage of foreign exchange, and this caused the currencies in Thailand, Indonesia, South Korea and other Asian countries to fall significantly; and secondly, the financial sectors and mechanisms in capital allocation in struggling Asian countries were inadequately developed (Nanto, 1998). This crisis also impacted on the US and on other developed countries. Moreover, the role and function of the IMF was significant in the unfolding of this crisis (Nanto, 1998). This crisis was caused by two currency depreciations which prevailed in 1997. The first round was seen with the unexpected decrease in the value of the Thai baht, the Malaysian ringgit, the Philippine peso, and the Indonesian rupiah (Nanto, 1998). When these currencies eventually stabilized, a second drop was seen with the pressures on the Taiwan dollar, the South Korean won, the Brazilian real, the Singaporean dollar, and the Hong Kong dollar (Nanto, 1998). In order to reduce the impact of these currency drops, the governments sold their foreign exchange reserves and increased their interest rates. These moves however slowed down their economic progress and presented unfavorable pictures for other investors. These issues on currencies also revealed major issues in the banking and financial sectors of these affected economies (Nanto, 1998). In South Korea, their economic foundations were considered favorable, however their banking sector was burdened with the non-performing loans; their large multicorporations were actually financing the major economic expansions (Kaufman, et.al., 1999). At this time, most of the efforts were in the building of conglomerates competing in the larger global arena. Many of the businesses eventually failed to secure profits. The South Korean corporations and investors were mostly controlled by the government authorities, were prompted to absorb more capital investments. In the long run, the significant debts caused much failure and takeovers in many Korean companies. As a mark of the financial difficulties which the companies were going through, Kia, one of Korea’s largest car manufacturers was prompted to ask for emergency loans from the government (Kaufman, et.al., 1999). With the 1997 financial crisis, Moody’s Corporation decreased the credit rating of South Korea from A1 to A3; and a few months after that, it was again decreased to B2. More declines in South Korean stocks were seen during this time (Kaufman, et.al., 1999). The Seoul stock exchange dropped by 4% on the 7th of November, 1997, the following day it dropped further by 7%. This drop continued through November. Hyundai Motors took over Kia Motors in 1998 and Samsung’s billion dollar endeavor fell through because of the crisis. In the midst of this crisis, Daewoo Motors was also sold to General Motors (Kaufman, et.al., 1999). The South Korean won weakened to about 1700 a dollar from 800 – more than double its amount. However, even with this financial crisis, South Korea still managed to triple its per capita GDP in dollar (Kaufman, et.al., 1999). Since then, it has now become one of the fastest growing economies in the world. However, the South Korean government bore the brunt of the crisis with its national debts now double its amount. For Korea, just as it was slowly starting to emerge as a globally competitive economy, its fragility manifested strongly while it was still negotiating its position with the OECD. Its GDP deficit actually increased from 2% to 5% and the growth rate of its exports plunged from 31% to 15% (Pont, 1998, p. 13). Its foreign debt with the US also increased. Its GDP went down from 5.9% at the start of 1997 to 0.9% by the end of the year. The first sign of major economic trouble in Korea was seen when Hanbo Steel declared bankruptcy with over $6 billion debts. And for the first time, the Korean government suspended its assistance to big business groups; in effect, it wanted the market economy to have its full impact on these corporations (Pont, 1998, p. 13). South Korean corporations also continued to default on their debts, and many more corporations filed for bankruptcy. When Kia declared its major losses and its financial crisis, this signaled a major economic dilemma for Korea. The government’s efforts to assist Kia in its economic stabilization were exercises in futility (Pont, et.al., 1998, p. 13). Uncertainties in the rest of East Asia caused further devaluations for Korea and more problems in its financing and economic status. As for Japan, although its economy did not buckle under the Asian financial crisis, it still suffered considerably because of this crisis. Japan’s economy was affected because of the size and the prominence of its economy in Asia (Ries, 2000). Most Asian nations have a trade deficit with Japan because the Japanese economy is about twice the size of all Asian countries put together. About 40% of exports actually are directed towards Japan. As a result of the crisis, the Japanese yen plunged in value; and massive selling was seen at this point (Ries, 2000). However, Japan was at that time, considered the largest holder of currency reserves. The massive selling of the yen was eventually resolved and the yen immediately recovered. Japan’s GDP real growth decreased in 1997 from 5% to 1.6% and it actually entered a period of recession in 1998 (Ries, 2000). This crisis also caused the bankruptcy of many companies in Japan. Since Japan had major trading relations with many East Asian countries, Japan suffered significantly during the Asian economic crisis in 1997-1999. The crisis caused the reduction of sales in exports, and although Japan tried to make up for its losses by trading heavily with the US and Europe, the lost Asian markets were still irreplaceable for Japan (Pont, et.al., 1998, p. 3). Experts estimate that exports for Japan declined by 4.7% as a result of the 1997 Asian crisis. The manufacturing companies in Japan suffered as well, and lower investments in manufacturing were made due to the decrease in export demands. The financial crisis also worsened the banking problem which already existed in Japan at that time. Banks were forced to reduce risks and reduce their losses by refusing to discard existing loans and calling on loans which were falling due (Pont, et.al., 1998, p. 4). This caused a period of illiquidity, which led to insolvency, and reduced net worth assets for Japanese creditors. This also made the credit and financial crisis worse, as banks sought to balance their financial positions. Conclusion The Asian financial crisis significantly impacted on most of the East Asian countries, devaluing their currencies and slowing down their economic growth. Japan and South Korea were also significantly impacted by this crisis. Japan was impacted because of the significant reduction in its trade with these East Asian countries. Korea felt the impact of the crisis the loss of its company profits through trade and through the devaluation of its currency as well. All in all, the economic crisis impacted on these countries in terms of the normal processes of economic trade and global financing. With such impacts, the interconnected nature of the global economy has become clearly apparent, establishing that what affects a small part of the world, can affect most of the world’s economies. Works Cited Beamish, P. (2009), Lessons from the 1997 Asian economic crisis, Features, viewed 19 September 2011 from http://www.ft.com/cms/s/0/686d4956-e8b8-11dd-a4d0-0000779fd2ac.html#axzz1Yagc1JLu Nanto, D. (1998), The 1997-1998 Asian Financial Crisis, viewed 19 September 2011 from http://www.fas.org/man/crs/crs-asia2.htm Pont, B., Lan, L., Garcia-Blanch, F., Garcia, C., & Olivie, I. (1998), The financial crises in East Asia: The cases of Japan, China, South Korea, and Southeast Asia, Asia and Argentina, viewed 19 September 2011 from http://www.rrojasdatabank.info/221-financial.pdf Kaufman, GG., Krueger, TH., Hunter, WC. (1999), The Asian Financial Crisis: Origins, Implications and Solutions, New York: Springer Ries, Philippe. (2000), The Asian Storm: Asias Economic Crisis Examined, California: Tuttle Publishing. Read More