Asian Pacific Region in the Asian Financial Crisis 1997 and Global Financial Crisis 2008 - Literature review Example

Asian Financial Crisis By [Student’s Name] [Code + Course Name] [Name of Tutor] [Name of University] [City, State] [Date of Submission] Table of Contents Introduction 3 Causes, Effects of Asian Financial Crisis and Global Financial Crisis of 2008 and how Korea and Thailand Responded to it 3 Causes of the financial crisis in Thailand 3 Causes of the Financial Crisis in Korea 4 Effects of Asian Financial Crisis of 1997-1998 and Global Financial Crisis of 2008 on Korea and Thailand 6 Response from the Thailand Government in dealing with these crises 7 Response from the Korean Government in dealing with these crises 8 Conclusion 9 Reference list 10 Introduction In 1997-1998, the Asian economy plunged into crisis when Thailand decided to protect her currency, that is, the Baht from further depreciation. Although this move was aimed at protecting her economy, it became catastrophic and spread to other countries like Japan, Indonesia, South Korea, and Singapore. Within the two years, the economies of these countries stagnated making the IMF and the world bank to step in and help them recover. However, the bail out process was just a drop in the ocean because the amount offered to the affected countries was so little to help them recover fully. As a result, these countries had to find their alternative means to get out of those problems. This essay considers the manner in which countries of the Asian Pacific region were affected by and responded to the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008. Specifically, the essay focuses on Korea and Thailand. Causes, Effects of Asian Financial Crisis and Global Financial Crisis of 2008 and how Korea and Thailand Responded to it Causes of the financial crisis in Thailand Many economic scholars believe that Asian Financial Crisis began in Thailand before spreading to other Asian countries. Some of the main It has been observed that Thailand had poor domestic macroeconomic fundamentals coupled with many years of low account deficit of less than ten percent of Gross Domestic Product (GDP). This was occasioned by the appreciation of her currency and an increase in peoples’ earnings. However, Baht came under speculative attack that made the government spend billion of dollars trying to protect it from depreciation and the collapse of her economy (Gup 2010). Secondly, the political parties contributed to this financial crisis. Political parties took large chunks of money to fund their operations. Due to weak policies in the banking sector, these parties defaulted resulting in huge loss of money by the financial institutions. In addition, politicians demanded money from business people to fund their campaigns a situation that hurt many of them. Politicians were also able to source for financial assistance beyond Thailand through unregulated means. As a result, money was readily available to the electorate making it difficult for the Central Bank of Thailand to regulate the flow of money in her economy (Pempe 1999). Corruption has over the years remained a major challenge in subsequent Thai governments. There existed a belief amongst business people and the politicians that ‘gifts of good will’ were good for the country’s economic growth (Sutthirak 2012). However, (Inomat 2011) laments that gift of good will amounts to corruption. According to him, the gifts of good led to the deregulation of the financial policies in Thailand. This is because the government could not control the incoming capital from outside the country. Causes of the Financial Crisis in Korea South Korea has experienced two financial crises between 1997-1998 and 2008-2009. According to (Liu 2011), in the early 1990s, the government accounts balance began to go down as a result of high inflation rate, appreciation of her currency, and the slump of the world economy. He observed that, in 1991 for instance, her current account had a shortfall of 9 billion dollars compared to 1990, when the deficit was about 2 billion dollars. This prompted the government to look elsewhere to finance this deficit. As a result, Foreign Exchange Management Act was amended that stimulated and improved capital inflows in the country.Iny 1993, the Korean government had a master plan of liberalizing her financial institutions. However, this master plan was not implemented immediately, and therefore, some of her financial institutions experienced foreign currency debts (Ries 2000). In addition, (Gonjanar 2012) has noted that this move by the government was seen as a way of minimizing borrowing. This is because all companies were required to give an account of how they would spend the money borrowed before the government gave a go ahead. According to him, the Korean financial crisis was brought about by fluctuation of the United States dollar. According to him, many companies that were investing in Korea were doing so hoping that the dollar would be weak. However, this did not last for long because in 1995 when Robert Rubin was appointed to head the US Treasury, he introduced changes meant to strengthen the dollar. He has noted that, with the strengthening of the dollar, the Korean won remained strong unlike the Japanese yen that lost its value against the dollar a lot. According to (Akyuz (2000), with the when the dollar appreciated, Korea experienced trade deficit in the international market resulting in reduced profits. As a result, many businesses that had invested in the export business experienced financial difficulties. The depreciation of the Japanese yen meant that Japanese investors could not invest in Korea and other Asian countries. This was a big blow to Korea as there had been a booming business between the two countries (Ries 2000). The other cause of the financial crisis in Korea was the associated with the bankruptcy of the big companies in the land. According to (Kihwan 2006), companies such as Hanbo group, Sammi and Jinro experienced financial difficulties around 1997. He has observed that since these companies had huge investments in the country, it was expected that the government would chip in and bail them out. However, due to the prevailing economic conditions, the government was unable to offer any help to them. As a result, this marked the beginning of bankruptcy proceedings for these companies. Furthermore, international and domestic issues contributed to the financial crisis in Korea. In addition, the currency crisis in other Asian countries affected the performance of the Korean economy. In October 1997 for instance, Hong Kong stock market performance declined as a result of speculative attacks on her currency. The attacks on Hong Kong dollar forced foreign banks to hold on to their loans to banks in Korea. As a result, the country foreign reserves reduced to dangerous levels (Lee 2002). With regard to the 2008-2009 global financial crises, various factors have been cited as the main causes of this economic depression. According to (Inomat 2011), people and companies took more debts that they could not service. He says that there were many loan defaulters which became a big blow to the financial institutions. There were no stringent measures to punish those who default an idea that motivated many to default their loans. There was also ineffective use of existing authorities by bank regulators. He says that the government did little to coerce well established financial institutions to reinforce their risk management to nub loan defaulters. Effects of Asian Financial Crisis of 1997-1998 and Global Financial Crisis of 2008 on Korea and Thailand The aftermath of the Asian Financial Crisis and Global Financial Crisis of 2008 were severe on the Korean and Thailand economies. First, there was widespread unemployment in these countries. Following the closure of firms many people were rendered jobless. The inflation rate went up making the prices of basic goods rise beyond the reach of many ordinary citizens (Kazuyuki 2009). In addition, there was a drop in stock prices which affected the exchange rate of these currencies against world major currencies such as the dollar and the Sterling Pound. Furthermore, their external debts went up because there was high dependence on foreign capital. As a result, investors lacked confidence in these economies as a result of depreciation of their currencies (Lee 2002). According to (Gonjanar 2012), many insolvent financial institutions collapsed while those that withstood this storm suffered from financial panic. He says that the two governments could do nothing to save these institutions because they were also suffering. Furthermore, the number of non-performing loans increased as many people defaulted their loans. Response from the Thailand Government in dealing with these crises Following the financial crisis, the Thailand Government turned to the International Monetary Fund (IMF) for financial assistance. The International Monetary Fund decided to offer a financial support of about 17.2 billion dollars. This money was meant to help the country stabilize her currency and cushion it from further depreciation (Corsetti 1999). In addition, (Lee 2008) points out that the IMF wanted to help the government put to an end more capital outflows so that the stock market would regain investors’ confidence during that period. In addition, this money was meant help the country regain its foreign reserve spent trying to protect her currency. Under the terms of this bail out, the government was required to liquidate all the insolvent financial institutions. Moreover, the IMF required the government to issue Baht 500 billion in bonds to finance the just formed Financial Institution Development Fund (FIDF). The government was also mandated to make sure that there were strict rules that regulated the banking sector. IMF wanted the government to make an undertaking that all monies deposited in the financial institutions would be safe in case such an eventuality happened again. This policy was meant to reinforce the banking sector so that all possible loopholes are sealed. The government decided to bail out her ailing financial institutions on conditions that the banks would introduce stringent measures to reduce non-performing loans. According to (Korhonen 2010), financial institutions were partly blamed for causing this crisis. As a result, the government began monitoring the activities of banks suspected to trigger this crisis with an aim of pinning down the culprits. Response from the Korean Government in dealing with these crises The Korean government responded to these crises in a similar manner to that of the Thai’s government. Moreover, (Katada 2012) says that the International Monetary Fund bailed out Korea with $58.4 billion although this amount was perceived to be very little to help her recover. However, with IMF bail out in place, she initiated her own policies to make sure she does not go through such scenarios again. According to (Curt 1999), the country strengthened her legal and regulatory infrastructure and introduced a supervisory authority to monitor the activities of her financial institution. Secondly, there was the rehabilitation of the financial institutions. He says that many banks were on the verge of collapsing, and therefore, the government decided to step in and bail them out. This move was important because signaled brighter days ahead in terms of economic recovery. He says that the bail out process by the government also involved insurance companies, leasing companies, and credit unions. Their companies were also required to initiate restructuring programs to promote efficiency and productivity. The government introduced stringent measures on who should qualify for a credit from banks and other financial institutions. People with poor track records of servicing their loans were not to be allowed to borrow money from banks. This policy was meant to reduce non-performing loans that contributed to the financial crisis. In addition, the government decided to allow foreigners to own and become bank officials. This move was geared towards strengthening and promoting good governance of the financial institutions (Savona 2011). Conclusion It is evident from the above discussion that the Asian Financial Crisis of 1997-1998 and the Global Financial Crisis of 2008-2009 had adverse effects on both Koreas’ and Thailand’s’ economic well-being. Thus, each country should have a strong, efficient and consistent financial system. It is important to note that, although these two countries enjoyed steady economic growths, they ran into financial difficulties within a short time. This should be a wake up call to the government to make sure that all financial activities in a country are closely monitored to minimize such occurrences. It is important to note that although the two countries turned to the International Monetary Fund for assistance, the amount they received was very little. As a result, they did not meet their goals within their set time. This means that a country has to look for alternative ways to source for capital other than depend on the IMF and the World Bank. Furthermore, Asian Financial Crisis should be a lesson to all people that when one country is experiencing financial difficulty, the same problem is likely to affect them within a short time. In order to overcome such challenges, the affected countries should initiate recovery programs that are orderly and gradual. This will help them tackle such issues holistically rather than rush them and discover loopholes later thereafter when it is too late to make amendments. 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