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Asian economic crisis: the initial stages of the crisis and the major causes of it - Essay Example

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This paper talks about the initial stages of the Asian Economic Crisis and analyzes the major causes of it. Several structural weaknesses in the economies of South East Asia are identified as the causes of the crisis. Active IMF’s intervention helped to stabilize the situation in the region…
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Asian economic crisis: the initial stages of the crisis and the major causes of it
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Download file to see previous pages Initial contagion was from Thailand to Indonesia. The other countries followed. It is argued that investors in Malaysia and the Philippines had irrational reactions since they acted to reflect that they grouped South East Asia countries alike without detecting the differentials in these economies (University of Hong Kong, 6-7). Underlying Causes of the Crisis The following topic looks into several structural weaknesses in the economies of South East Asia. These are: current account deficit, over-inflated asset prices, excess lending, corruption and macroeconomic policy mistakes. A. International Capital Flow and Excessive Monetary Growth Asia’s fast economic development in the 90’s coincided with and was attributed to capital flows to emerging markets during that period. The following table shows the Net Private Capital Flows to East Asia between 1994 to 1996 adapted from World Bank Global Development Finance, 1998. Source: International Financial Statistics, January and December 1999, IMF, Instead of letting their currencies to appreciate, some countries which operated a managed or a pegged exchange rate system like Thailand and Malaysia formed domestic liquidity to absorb the effects of the increasing large capital inflows. These led to unsustainable monetary growth. Credit and money growth rates shot to about 30% annually. This was one of the major mistakes of the East Asia economies that led to problematic shock that caused the economic and financial crisis of Asia (IMF, 56). B. Weaknesses in the Economies Susceptibility of Asian countries to the crisis was heightened by several structural weaknesses in their economies that were aggravated by massive capital inflow and excessive monetary growth in the region. 1) Moral Hazard, and...
This paper is the best example of analysis of the major causes of the Asian Economic Crisis, which lasted from 1996 to 1998. Not only the causes of the crisis and its chronological development are being considered, the paper also captures some of the policies put in place, first of all by IMF, to counter the effects of the crisis and bring back the economies affected into their initial state.
Asian financial crisis developed rapidly into a global financial and economic crisis from mere initial speculations of currencies. With the developments in the financial market in Thailand, there arose spillover effects to other financial markets around Thailand. Investors reassessed risk factors and began to take actions in a bid to mitigate effects of such happenings as those in Thailand. Initial contagion was from Thailand to Indonesia. It is argued that investors in Malaysia and the Philippines had irrational reactions since they acted to reflect that they grouped South East Asia countries alike without detecting the differentials in these economies
One of the major causes of the crisis was the international capital flow which flooded the financial markets of these regions. Several structural weaknesses in the economies of South East Asia, such as current account deficit, over-inflated asset prices, excess lending, corruption and macroeconomic policy mistakes, led to the rapid unfolding of the negative events.
The fall of equity markets was followed by the depreciation of the currencies and severe contractions in the real economies of the region. IMF stepped in by offering financial assistance, formulating agreements, regarding policy changes and addressing structural weaknesses through restructuring of various sectors.
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