The Asian Financial and Economic Crisis of 1998 - Essay Example

INTRODUCTION There may have been various causes of the Asian financial and economic crises of 1998.The enormity of the crises was such that currencies were devalued ,stocks markets were affected along with other asset prices in the economies within this region.Earlier on in 1994 an economist with Princeton university(formerly MIT) Paul Krugman had given a hint about the superficial nature of the supposed Asian economic miracle. According to Krugman a long term prosperity can only be ensured by a growth in total factor productivity as opposed to the growth in productivity brought about by capital investment. The Mexican Peso crises may lend credence to this argument with the after effect being the loss of confidence in Asian securities and subsequent withdrawal of capital by foreign investors. Prior to the crises ,about half of the overall capital inflow to developing countries was directed towards Asia. This was precipitated by high interest rates that made these economies attractive to foreign investors with attendant increase in asset prices. the economies of Malaysia, Indonesia and Thailand particularly experienced high growth rates of between 8 and 12 per cent in the late 1980's and early 1990's.This feat was lauded far and near by economic institution of repute the IMF and World Bank Inclusive. One of the reasons advanced for these crises was recovery of the U.S economy from a recession it had suffered in the early 1990's.To checkmate inflation ,the U.S through its federal reserve bank at the time began to raise interest rates. This move naturally attracted lots of investors to the detriment of the fledging Asian economies. This move also grew the value of the dollar against which the currencies of these economies were pegged .This caused a slow down in the export activities of the Asian economies as it became less competitive. These situations brought about reactionary measures from the affected countries in the form of policy responses to stem the tide. MALAYSIA Malaysia witnessed a transition from its traditional mining and agriculture driven economy to manufacturing in the 1970's with assistance coming from Japan and western countries .The result of this was the establishment of heavy industries that became the economic driving force with concentration on exportation .There had been fluctuations in the country's current GDP per capita over time that rose to 59% in the 1990's courtesy of the export-oriented industries .However following the massive pull-out of capital by foreign investors in 1997.A chain reaction was set-off that caused major changes within the economy, particularly the substantial depreciation of the country's currency-the Ringgit from its MYR2.50 per USD to levels of up to MYR4.80 per USD,loosing about half its value within the period. The composite index of the country's market fell drastically within a few weeks. There was a 7.5% drop in GDP in 1998.The government responded by pegging the ringgit at MYR3.80 per USD.While also implementing a capital control regime. Unlike its Asian neighbours Indonesia ,Thailand and other Malaysia rejected a relief package in the form of economic aid from International Monetary Fund(IMF) because of the attached austere lending conditions .This singular act differentiated Malaysia and the rest of its Asian neighbors in the sense that the rest of its neighbours were affected to a larger degree than Malaysia .Furthermore in the quest to revive the economy, the government kept injecting funds into it which resulted in budget deficit for a number of years, in addition it has maintained a low interest rate policy through the country's central bank. In terms of the its post-crises economy, it has enjoyed a faster economic recovery compared to its neighbours ,with a strong exports sector with the United States as its principal trade and investment partner. In 1999 the country's GDP grew by 5.6% with analyst predicting an 8% -and- above growth for the year 2000.A managed floating system replaced the fixed exchange rate regime in July 2005 with an observed 1% appreciation of the Ringgit against many major currencies, no further appreciation of the ringgit has been witnessed as at December 2005 and its foreign reserves is experiencing a sharp drop despite large positive current account surplus with over USD10 billion capital flight. INDONESIA Current GDP per capital in the 1980's and 1990's were 20% and 13% respectively in Indonesia .By 1996 the per capita GDP had risen to over a $1000 from a GDP of $70.Inflation was kept in check within the range of 5%-10% via the implementation of Prudent monetary and fiscal policies thus making the rupiah stable and predictable. Domestic budget deficits were not considered in the government spending schemes, it was deliberately avoided. Between the years 1987-1997 Indonesia annual real GDP growth was at an average of nearly 7% and was recognized by most analysts as a fledging and industrializing economy with potentials to be a major market. However major structural defects in the Indonesian Economy were hidden by the high level economic growth experienced between 1987-1997.The economy was distorted by reason of a very weak legal system with the inability to enforce contracts ,collect debts or sue for bankruptcy .Beauracratic bottlenecks and widespread corruption were all factors that characterized the Indonesian economy .The spillover effects of the regions financial problems were felt in Indonesia in late 1997 in the form of economic and political crises. As a check the government responded by tighter fiscal policy ,domestic interest rates increment and floating of the rupiah.Unlike its Malaysian counterpart, Indonesia accepted the International Monetary Funds(IMF) economic aid package along with its austere conditions. Damaging economic policies of the government were jettisoned to pave way for macroeconomic stability via an economic reform program. Following the inability of the rupiah (Indonesian Currency) to stabilize for a significant period of time the IMF and Indonesia once more signed an Extended Fund Facility (EFF) in August 1998 with a significant amount of structural reform and governance targets. The GDP fell by 13.7% in 1998 with the worst scenario witnessed in mid 1999 with a meager 0.3% real GDP growth. Inflation was as high as 77% in 1998 but slowed to 20% two years later in 1999.From its rates of RP2400/USD1 in 1997 the rupiah skyrocketed to RP17000/USD1 at the peak of the crises in 1998.It however fell to RP6500-8000/USD1 in late 1998.With significant volatility the rupiah has traded within the range of RP6500-9000/USD1.Massive fuel subsidies were removed with resultant double-digit inflation of 17% as at January 2006.A significant first in the life of Indonesian is an offer of one-time subsidies to eligible citizens in the form of a government funded social security benefit scheme. An acceleration of 5.1% economic growth was in experienced in 2004 reaching 5.6% in 2005.Once more attaining the pre-crises level of the Real Per Capita income. Domestic consumption is the main driver of the economy's growth. The economic outlook was quite positive as at early 2006. THAILAND Despite growing at an average of 9% between 1985 and 1995 the economy of Thailand could do nothing to stop the speculative attacks that hit the baht, the local currency. The back was eventually devalued and like Indonesia it accepted the international monetary funds (IMF) economic aid package together with the austere measure it came with. The total of about 19.9 billion Dollars was unveiled by the IMF as a rescue package with the baht reaching its pre-crises highs of 36.5 to the dollar. REFERENCES 1. Michael Pettis, The volatility machine: Emerging Economics and the threat of Financial collapse Oxford University Press 2001 2. Paul Bhistein, The chastening: Inside the crisis that Rocked the Global Financial System and Humbled the IMF Public Affairs 2001. 3. Twari, Rajmish (2003): Post-Crisis Exchange Rate Regimes in Southeast Asia, Seminar Paper, University of Hamburg (PDF) 4. Ngian Kee Jin, coping with the Asian Financial crisis: The Singapore experience 5. Read More