The East Asian Financial Crisis - Essay Example

The East Asian Financial Crisis: This paper provides an analysis of the east asian financial crisis. the asian financial crisis began in 1997, and it affected most countries that are found in east asia. this crisis was ablee to raise fears that an economic crisis would hit the world, because of thee importance of the east asian countries in the global economy (Hunter, 11). This crisis took place between the periods of june 1997, and the year january 1998, and it affected mostly the tiger economies of east asian nations. these tiger economies are, Hong Kong, South Korea, Malaysia, Thailand, and Singapore. The East Asian Financial crisis was a major economic condition, that affected the tiger economies, and it was unexpected. This is majorly because of the economic growth of these economies. the economies of these countries were expanding by a margin of about 6 to 9 percent, every year, and this was an large percentage of growth (Pempel, 77). However, this expansion came to an abrupt end in the year 1997, when the stock market, and the local currencies of these countries was able to fail. for instance, by the year 1998, the value of the stock market in these countries was able to fall by a margin of 70% (Pempel, 68). Furthermore, the strenght of the currencies of these countries against the dollar was able to depreciate by more than 50%. because of this financial crisis, the east Asian Nations had to compromise thier national values which was against using external funds for development, and hence using seeking out for bailout from the world bank, and the international monetary fund (IMF) (Yu and Dianqing, 29). There are three major issues or problems that arose because of the east asian finacial crisis. one issue is in regard to the shortage of foreign currency. This had an impact in reducing the value of the currencies in these states, and it was difficult for these countries to attract any major foreign investment in their teerritory. another issue that emerged was an inadequate method of allocating capital, and a poorly developed financial sector. this made it difficult for enterpreneurs to access capital, hence limiting the growth of their economies, and failing to produce enough jobs that could help to increase the gdp of these economies (Hunter, 26). Another issue that emerged is the effect that this crisis had in the world. these countries heavily invested in the manufacturing industry, and they were experiencing some elements of growth in it. The financial crisis had an impact in limiting their potential to increase exports, which were basically machineries. this in turn affected the supply chain of these materials, increasing their overall prices, because of limited supply. furthermore, because of this crisis, east asian multinational companies such as Samsung were not able to raise enough money that could be used for expansion purposes (Yu and Dianqing, 33). Another issue that emerged was the role of the International Monetary Fund, and the World Bank, in stabilizing the economies of these states. the world bank and the imf played a significant role in containing this crisis, majorly because they were able to provide loans and capital to these countries, so that they could be stabilized. It is the money that these countries got from these bretton woods instituions, that was used for purposes of bailing out their economies, thus their recovery in the year 1998 (Pempel, 73). This crisis began in Thailand, and this is after the collapse of the thai currency, reffered to as baht. the collapse of thai baht, did not only affect the east asian nations, but it also had an effect on countries such as Japan, whose economy has not recovered, since the devaluation of the thai baht in 1997. The devaluation of the thai baht came because of a slump in economic development and growth, which was brought about, due to an excessive consumption of imported products, leading to the depreciation of their foreign currencies, hence making the baht to lose value against the dollar, which was a global trading currency. Furthermore, the failure of the banking system played an influential role in the destruction of the thai economy in 1997 (Saw and John, 50). The banking organizations were beginning to make loses, and operating under debts. these organizations were unable to balance their accounting records, and this is because of the losses that they were making. The effect of this, is that banking organizations began to recall their assets, inckudding martages, triggering a collapse of the economic system of thailand, and the baht. This was the triggering factor, of the East Asian Financial crisis, as it had a spill over effect, affecting the economies of the so called called tiger nations, and that of Japan (Pempel, 53). The most affected countriees during this crissis were Thailand, indonesia, and south korea. however, countries such as China, Vietnam, Malaysia, Hong kong, and Laos did not sufffer much from this crisis. The worst hit country was south korea, which saw its debts rise by approximately 40%. this is a very high figure, and it is an indication that south korea was using debts to finance its economy during this period of time. The debts a country incurs is always an indication of the economic perfomance of the country. countries that relies on debts to finance their economic development have very low gdp, and their rates of unemployement are always high. for instances, third world countries such as Zimbabwe, Haiti, etc normally financee a large percentage of their budgets, by use of debts. Based on this fact, the economy of South Korea was adversely hit, because of the use of debts to finance its operations. Thailand is another country that heavily suffered because of this financial crisis. before the crisis, the economy of Thailand was experiencing a growth of approximately 9% per annum. this is within the years of 1985, to the year 1996 (Pempel, 41). This perfomance was consistent, resulting to the emergence of thailand, as an economic powerhouse in east asia. the reasons why thailand was able to maingtain a high economioc growth rate, was basically because it managed to contain inflation, and increase the rates of employment within the state. Furthermore, Thailand had created a financial system, that made it easy for poeple to access credit, so that they may use it for buildingh homes and starting small scale business organizations (Pempel, 41). It is important to explain that one of the major indicatyors of a thriving economy, is the ability of the economy to create jobs, and encourage the growth of small and medium enterprises. This is because the SMEs, have the capability of increasing the rates of employment within a country, and the ability of the government to collect revenue through taxation. however, with the emergence of the financial crisis, it is the financial instituions of the country that were first hit. This includes the banking organizations, and the insurance sector. Banks decided to recall their loans, and sale off their assets, resulting to the crisis in Thailand (Yu and Dianqing, 112). This situation is similar to the sub-prime crisis of 2007/2008, whereby banking organizations were on near collapse, and this forced them to begin recalling their mortages and selling off some of their financial securities, leading to arise in the sub-prime crisis. The only difference emanates on the time period, of the occurence. Between 1985, to the year 1996, Thailand had managed to keep the rates of inflatioon as low as 3.4%, with the baht, perfoming strongly against the american dollar (Masuyama, Donna and Siow, 38). 25 bahts was an equivalent to 1 american dollar. This was a very strong perfomance, majorly because this value was consistent, and this is an indication that the internatioonal trade that was happening in thailand, was balanced, hence depictinmg some sense of economic growth and development. the emergence of the financial crisis changed all this. This is majorly because the value of the baht, was able to fall by more than 50%, and failure by the thai government to initiate policies aimed at defending the baht, led to the near collapse of the thai economy. for example, the baht was able to fall to 56 bahts, to 1 dollar, in 1998 january (Hunter, 22). This was a very massive drop, and it was an indication of a fall in the economy of thailand. apart from the financial sector, the industries that suffered most were the real estate industry, and the manufacturing sector. The real estate industry suffered because of the lack of capital to finance constructions, and failure by the banks to issue out mortage loans. Furthermore, during this period in time, there was a massive loss of employment, with an estimated figure standing at more than 600,000 people (Liou, 203). This is a massive number of people, and it can contribute to a fall in the GDP of a country. the economy of thailand was rescued by an imf package, which stood at approximately 17 billion dollars. This money was given to the thai government, but after it had satisfied some conditions, and these includes initiating policiers aimed at strongly regulating the thai financial laws, and strict laws concerning bankrupticies (Liou, 211). The IMF was mostly concerned with the financial system of thailand, because it was the major cause of the financial crisis, hence there was a need of initiating tough laws aimed at regulating the activitiesm of the banking industry, and the financial sector of thailand. This approach is similar, to the approach of united states in solving the sub-prime crisis. The United States was able to initiate laws aimed at protecting consumers, and increasing the capital requirements needed for banking and financial organizations to engages in offering of the financial services. For purposes of protecting and preventing the Thai economy from collapsing, the International Monetary Fund was able to introduce another monetary package of 3.9 billion dollars (Liou, 211). This money was to be used for purposes of bailing out financial instituions, such as banks, and insurance companies operating in thailand. Furthermore, the Thai government wanted to use this money for purposes of funding some infrastructural developments, and introducing regulatory measures aimed at protecting the economy. An example of a regulatory mechanism, initiated by thailand includes the introduction of a monetary policy, aimed aat supporting the stability of the baht, against the dollar. It is important to explain that during the crisis, the baht fell from 25 to 56 bahts, against the dollar (Hunter, 57). This was a high percentage of a fall, and hence there was a need of stabilizing the baht, so that it could regain its strenght against the dollar. Furthermore, the Thai government was able to identify the most vulnerable areas of the economy, such as the banking sector, and used most of the money borrowed from imf to finance these sectors, and bail them out, from the crisis. It is important to understand that when the imf issued these loans to thailand, it was insisting that the Thai government should adopt the structural adjustment policies or measures. One of them, including developing austerity as a policy (Yu and Dianqing, 66). This means that the Thai government had to cut spending on some sectors of the economy, which were not crucial, for purposes of promoting the development of its economy (Masuyama, Donna and Siow, 72). An example of a country that is using austerity to develop its economy is greece. This was one of the major conditions given by Greece, by the European Union, in its bid to bail out the economy of greece from collapsing. Austerity is therefore a common policy that countries facing a financial crisis normally use, for purposes of improving their economic development. however, the only disadvantage of using this program, lies on the fact that it may lead to loss of jobs, and failure by the government to finance some important aspects of the economy, such as the health care industry, transportation, in favor of initiating stimulus programs, aimed at restructuring the economy, and improving its economic development (Masuyama, Donna and Siow, 78). In the early stages of the economic recovery programs, the government focused on liquidating financial companies, and recapitalizing the banking system, for purposes of protecting it against the crisis. There was also the restrucrtiring of corporate debts, and the disposal of financial assets for purposes of raising money that could be used in financing the recovery program (Yu and Dianqing, 70). The Thai government reformed the bankruptcy act, creating instituions that were responsible for regulating the manner which financial instituions could conduct their businesses, and also claim relief, because of bankruptcy. this is because by late 1998, the GDP of the Thai economy began to grow, by approxiamtely 4%. the countries economy retained this growth, upto the year 2000, hence recovering fully from the crisis. indonesia is also another country that was affected by the crisis (Hunter, 31). When the government of thailand was able to float the baht in the year 1997, this had an immediate impact on the indonesian currency, the rupiah, and the indonesian economy (Lai, 44). This is an indication that the economies of east asia were highly dependent on one another, and a crisis that could affect one economy, would also affect another economy. This is the reason why the devaluation of the thai baht had an effect on the economies of Japan, South Korea, Malaysia, Indonesia, and the Phillipines. this is majorly because of international trade, and the liberalization of the economies of these countries (Shaw and Bih, 62). The spill over effects of a financial crisis was also witnessed during the 2007/2008 global financial crisis. this is because the crisis began in united states, with the near collapse of its banking system, and spread to Europe, Asia and to other parts of the world (Riès, 80). The reasons for thiss happenings is basically because of the intergration of the global economy, which has been made possible by liberalization of its economy, and advances in infiormation technology and transportation system, that makes it possible for people to engage in inteernational trade in an easy and conveniet manner. In indonesia, the large stock of short term debts, and the structural weaknesses of the indonesian govenment, made the country to be unable to protect its currency, against the effects of the devaluation of the thai baht (Shaw and Bih, 91). The Thai government was able to intervene, only after the rupiah managed to depreciate by 30%, and this is by taking a shortb term loan of 10 billion dollars from the international monetary fund (Shaw and Bih, 72). The aim of this money was to be used for purposes of stabilizing the rupiah, and initiating structural and regulatory changes to the thai economy (Hunter, 33). In july 1998, the imf was able to provide an additional 1.4 billion dollars to indonesia, for purposes of financing infrastructures that can make it possible for the recovery of the economy of indonesia. Indonesia was also able to benefit from bilateral donors, who were able to inject a whooping 18 billion us dollars into their economy (Shaw and Bih, 91). The main aim of this money was to help in the stabilization of the rupiah, following the devaluatioin of the thai baht. however, this was only temporarli, majorly because in the later months of 1997, to january 1998, the rupiah began to fall again, and the indonesian financial system was collapsing. this led to the collapse of approximately 16 banks in indonesia, largely because they were unable to operate because of the high rates of debts that these banking institutions had (Lai, 17). This has some similarity with the effects of the crisis in thailand, where the financial system was heavily affected, leading to the closure of some banks, and the enactmeent of laws and procedures, that could help in regulating the financial system of Thailand (Yu and Dianqing, 70). The governmemt of Suharto, also failed to efficientlyt implement policies that could help in restructuring the economy of Indonesia. this led to a social upheaval, with the citizens of indonesia critizing the government for a slack approach in the manner which it took, for purposes of solving the crisis (Park, T J and Geng, 51). After an increase in the strenght of the rupiah, it later on fell by a margin of 65%, at the end of 1997 (Shaw and Bih, 91). This led to an increase in financial instability, sparking a near collapse of the indonesian economy. Unemployment was on the rise, and thousands of people were retrenched from their jobs. In the august of 1998, the international monetary fund stepped into the crisis, and helped the government of Indonesia to come up with reform measures aimed at correcting its economic system (Lai, 26). These reforms were able to center on the reduction of inflation, monetray control, and the stabilization of the rupiah (Shaw and Bih, 91). Food was also a problem during this crisis, and indonesia was forced to maintain food security by importing a large quantity of food, specifically rice. The indonesian government also introduced policies aimed at restructuring its corporate organizations, privatization of non-perfoming government instituions, enacting an neffectivge bankruptcy system, and improving the governance of the indonesian public service. These policies had an immediate results to the economy of indonesia, majorly because its economy was able to improve, the rupiah was stabilized, and there was an increase in fforeign reserves. Furthermore, the prices of rice, the major stable food in indonesia was stabilized. Malaysia and Phillipines were also affetcd, but not to a great extent. This is because the macro-economic conditions of Malaysia were strong, when compared to the other countries that werfe greatly affected by this crisis (Lai, 13). This is specifically in the areas of inflation, savings, and external debts. Furthermore, Malaysia had a significant fiscal surplus, and this money was used for purposes of stomulating the economic growth of Malaysia.The banking system of Malaysia and Philipines was also good, and stabilized (Lai, 22). Furthermore, Philipines was also implementing the structural adjustment policies, and hence it had thye support of the World Bank, and the IMF, and this helped the country to paass through the crisis at a lower cost. In conclusion, the East Asian Financial crisis had a negative impact on three major economies of East Asia. These economies are, Thailand, Indonesia, and South Korea. The economies of these countries were nealy collapsing, forcing the IMF and the World Bank to intervene by offering loans and financial assistance/aid. Furthermore, following the introduction of austerity measures, and the recosntruction of their financial policiees, these economies were able to improve, and by the end of 1998, these economies began to experience some elements of growth. Works Cited: Top of Form Hunter, William C. The Asian Financial Crisis: Origins, Implications, and Solutions : [papers Presented at a Conference Held on Oct. 8-10, 1998 at the Federal Reserve Bank of Chicago]. Boston [u.a.: Kluwer Acad. Publ, 1999. Print. Bottom of Form Lai, Jikon. Financial Crisis and Institutional Change in East Asia. New York: Palgrave Macmillan, 2012. Print. Top of Form Liou, Kuotsai T. Managing Economic Development in Asia: From Economic Miracle to Financial Crisis. Westport, Conn: Praeger Publishers, 2002. Print. Top of Form Masuyama, Seiichi, Donna Vandenbrink, and Siow Y. Chia. East Asias Financial Systems: Evolution & Crisis. Singapore: Institute of Southeast Asian Studies, 1999. Print. Bottom of Form Top of Form Park, Jehoon, T J. Pempel, and Geng Xiao. Asian Responses to the Global Financial Crisis: The Impact of Regionalism and the Role of the G20. Cheltenham: Edward Elgar, 2012. Internet resource. Bottom of Form Bottom of Form Top of Form Pempel, T J. The Politics of the Asian Economic Crisis. Ithaca [N.Y.: Cornell University Press, 1999. Print. Top of Form Bottom of Form Top of Form Riès, Philippe. Asian Storm: The Economic Crisis Examined. Boston [u.a.: Tuttle, 2000. Print. Bottom of Form Top of Form Saw, Swee-Hock, and John Wong. Managing Economic Crisis in East Asia. , 2010. Print. Top of Form Shaw, Daigee, and Bih J. Liu. The Impact of the Economic Crisis on East Asia: Policy Responses from Four Economies. Cheltenham: Edward Elgar Pub, 2011. Top of Form Yu, Zongxian, and Dianqing Xu. From Crisis to Recovery: East Asia Rising Again?Singapore: World Scientific, 2001. Internet resource. Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More