A Financial Crisis in the East Asian Economies - Essay Example

What Contributed To The East Asia Miracle And What Caused The East Asian Crisis? What Lessons Should We Draw From Their Development Experience? Tableof Contents Introduction 3 East Asian Miracle from 1960s to 1990s: The Contributing Factors 4 East Asian Crisis: The Causing Factors 6 Conclusion: The Key Lessons Learnt 8 Works Cited 9 Introduction The East Asian economies, such as Malaysia, Hong Kong, China, Singapore, South Korea, Philippines, Taiwan, Thailand and Indonesia witnessed significant growth prior to the economic crisis of 1997-98 witnessed in the region. The growth attained by these economies in terms of education, industry, and similar sectors during the period from 1960s to 1990s have been termed as a miraculous impact of the strategies adopted. However, subsequent to the growth in this period, the East Asian economies had to face a financial crisis in the fiscal year 1997-98 that caused significant impacts on the economic growth strategies implemented by them (the economies) (Karunatilleka, “The Asian Economic Crisis”; Radelet, “Economic Growth in Asia”). Hereby, the discussion in this paper shall be focused on the identification of the contributing factors to the miraculous growth attained by the East Asian economies prior to the financial crisis of 1997-98. The paper will also intend to recognize the causing factors of the crisis that would further reveal the key lessons learnt from the event regarding the implications of the economic growth theories from a long-run perspective. East Asian Miracle from 1960s to 1990s: The Contributing Factors The rapid growth of the emerging economies in the East Asian region during 1960s to early 1990s attracted various analysts towards the strategic implementations of these nations. The studies conducted regarding this issue apparently revealed that the growth strategies adopted by the economies were fundamentally based on the pillars of knowledge and human capital (McMahon, “Education and Growth in East Asia”). The East Asian economies were observed to implement a variety of growth models in their practice with prime focus on the human capital and the knowledge distribution. These implications were related to various growth models such as the Harrod-Domar growth model and the Solow model. It was prior to 1980s that a new growth model was introduced titled as “endogenous growth model” which described the policy implications of these economies in a comprehensive way (McMahon, “Education and Growth in East Asia”). According to the theories of endogenous growth, human resource or labor force in an economy is considered to be a vital aspect for raising the capital (K) investment of the nation. Similarly, knowledge based labor force is also considered as a significant contributor to the overall growth of the economy (Ickes, “Endogenous Growth Models”). As per the endogenous growth theories, population growth and effective growth in the education sector of an economy, in turn raises the prospect of investment from internal as well as external agents of the nation. This contributes to the overall economic growth (Boucekkine, “Vintage Human Capital, Demographic Trends, and Endogenous Growth”). From an in-depth point of view, the sole consideration of the East Asian economies was provided to the human capital formation with due consideration to the distribution of knowledge. During the 1980s and the early 1990s, these economies witnessed considerable changes in their demographic constructions in terms of population growth. This was further supported by the governmental policies to foster knowledge in the economies that resulted in augmented exports in these nations and enhanced income per capita (McMahon, “Education and Growth in East Asia”). In attaining this miraculous growth the East Asian economies adopted a few quite significant measures that intended to increase the exports of the nations from an endogenous perspective, i.e. with the growth of educated labor force. Along with the socio-economic policies to augment education in the labor force, these economies also focused on the effective allocation of capital through monetary as well as fiscal policies in a conservative way. This in turn enhanced the infrastructural investment and resulted into overall development of these nations (Krueger, “East Asian Experience and Endogenous Growth Theory”). Promoting technologies were also one of the prime concerns of these nations (Stiglitz, “Some Lessons from the East Asian Miracle”). Therefore, the contributory factors to the East Asian miracle can be recognized as the stable population growth which was accompanied by the governmental policies in relation to infrastructural investments, educational growth, and overall augmentation of exports through conventional monetary as well as fiscal policies (McMahon, “Education and Growth in East Asia”). East Asian Crisis: The Causing Factors It is of no doubt that the growth attained by the eight East Asian economies, i.e. Hong Kong, Japan, Indonesia, Korea, Singapore, Malaysia, Thailand and China was quite miraculous that provided the phase with the title “East Asian Miracle” (Stiglitz, “Some Lessons from the East Asian Miracle”). However, there were significant faults that caused the financial crisis in East Asian region during the 1997-98. With highly open capital market, these nations became more open to currency fluctuations in the external environment. Moreover, the financial institutions in East Asia became open to western investors and allowed them loans at low interest rates and insufficiently amounted collaterals. This attracted large amount of foreign capital inflows that made the financial system in these economies too vulnerable to external market shocks and panic (Radelet & Sachs, “The Onset of the East Asian Financial Crisis”). Another major contributor to the financial crisis was the continuously rising inflationary rates in these nations. For instance, the Consumer Pricing Index (CPI) was considered as the main indicator of prices for these nations in comparison to the currency rates of US$. Thus, a fall in the CPI trend was considered as an appreciation for the US$ that in turn significantly affected the exchange rates in the East Asian economies. This further led to the fall in stock market hampering the real GDP growth of these nations. The economies that were most considerably affected by this fall or exchange rate fluctuation were Thailand, Korea and Indonesia (McKibbin & Martin, “The East Asian Crisis: Investigating Causes and Policy Responses”). Furthermore, with the purpose of augmenting internal investments, employment opportunities, and exports through effective production function, these economies focused on liberalization of private sector to a large extent. In most of the instances these economies implemented monetary and fiscal policies to provide complete support to the private sector, even in cases that involved high risk of ‘bail-out’. With currency fluctuations and fall in the stock market, the private sector failed to reimburse the amount which further contributed to the financial crisis (Corsetti & Et. Al., “What Caused the Asian Currency and Financial Crisis”). Therefore, the causing factors of the financial crisis in the East Asian economies during 1997-98 can be observed as the ineffective fiscal and monetary policies as implemented by the nations. Overexposure to currency rate fluctuations causing slackened capital inflow, liberalized fiscal policies for the private sector as well as ineffective legalization of the financial system resulted into financial and currency crisis in these economies. Conclusion: The Key Lessons Learnt The event was indeed quite effective in teaching a few but significant lessons to the global economies in order to avoid financial and currency crisis. A key lesson learnt from this event was that overexposure to the currency rate fluctuations through ineffective monetary policies will increase the volatility of the stock market and exchange rate risks in the home country. Furthermore, liberalization should be accompanied with strict legal norms in the financial sector of the nation to avoid ‘bail-outs’ and thus attain sustainable growth in the long-run as can be learnt from the financial and currency crisis of the East Asian economies. In the similar context, from the ‘East Asian miracle’ it can be learnt that augmenting education through proper distribution of knowledge in the labor force of the economy along with investments in the infrastructure and technology sector shall result in accelerated economic productivity. This in turn is likely to cause effective changes in the production function and result to overall economic growth. Works Cited Boucekkine, Raouf. & Et. Al. “Vintage Human Capital, Demographic Trends, and Endogenous Growth” Journal of Economic Theory 104 (2002): pp. 340–375, Elsevier Science. Chowdhury, Abdur R. “The Asian Currency Crisis: Origins, Lessons, and Future Outlook” WIDER Research for Action Series 47 (1999), Economics Faculty Research and Publications. Corsetti, Giancarlo. & Et. Al. “What Caused the Asian Currency and Financial Crisis” Japan and the World Economy (1999), Federal Reserve Bank of New York. Ickes, Barry W. “Endogenous Growth Models” Department of Economics (1996), Penn State University. Karunatilleka, Eshan. “The Asian Economic Crisis” Economic Policy and Statistics Section 14 (1999), House of Commons Library. Krueger, Anne O. “East Asian Experience and Endogenous Growth Theory” Growth Theories in Light of the East Asian Experience 4 (1995): pp. 9 – 36, University of Chicago Press. McKibbin, Warwick & Martin, Will. “The East Asian Crisis: Investigating Causes and Policy Responses” Policy Research Working Paper (1999), The World Bank. McMahon, Water W. “Education and Growth in East Asia” Economics of Education Review 17 (1998): pp. 159-172, Elsevier Science Ltd. Radelet, Steven. “Economic Growth in Asia” Emerging Asia: Changes and Challenges (1997), Harvard Institute for International Development. Radelet, Steven. & Sachs, Jeffrey. “The Onset of the East Asian Financial Crisis” Harvard Institute for International Development (1998), Colombia University. Stiglitz, Joseph E. “Some Lessons from the East Asian Miracle” The World Bank Research Observer 11 (1996): pp. 151-77, The International Bank for Reconstruction and Development. Read More