Asian Financial Crisis of 1997 Term Paper

Pages: 12 (3782 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Economics  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] Closer Look at The Causes

Financial Sector Weaknesses

In order to attract foreign capital flows the financial services sectors were liberalized rapidly in the Southeast Asian countries such as Thailand and Indonesia. Due to the haste, inexperience and lack of expertise adequate systems for proper regulation of financial institutions were not developed in time. Singapore's former PM Lee Kwan Yew also terms inadequate systems as the primary reason for the Asian crisis when he says: "The primary weakness was inadequate systems to absorb this huge inflow of funds in the last three years, during a period of euphoria about the Asian miracle."

The problem areas were identified as lax lending standards, weak supervisory rules and procedures, inadequate capitalization, excessive inter-connected lending, and a general lack of a credit culture. Safety nets such as deposit insurance were lacking in some countries.

Half-hearted Financial Reforms

Ironically, the countries most severely affected by the crisis were the ones that did attempt financial sector reforms aimed at upgrading financial institutions but did not follow through with sufficient regulatory reforms. For example, in Indonesia deregulation in the banking sector led to an increase in the number of private banks from 74 in 1988 to 206 in 1994. The countries that carried out these half-hearted financial sector reforms (Thailand, Indonesia, and South Korea) attracted a lot of short-term loans and were ultimately affected most by the crisis. On the other hand, countries that had strong regulatory mechanisms in place, e.g., Singapore and Hong Kong were not as badly affected. Countries (China, Vietnam) that had not undertaken any significant financial sector reforms were shielded in the crisis, as they had not attracted many short-term loans in the 1990s.

The moral of the story, therefore, is that half-hearted reforms in the financial sector are worse than no reforms at all!

Private Sector Borrowings

Traditionally in Asia, the governments did most foreign borrowing through the World Bank or consortiums of other international banks. As the Asian economies were liberalized in the 80s, the private sector local banks could borrow directly from foreign commercial banks at low interest rates and re-lend to local companies. In the 90s the proportion of these private sector borrowings increased dramatically.

Short-term Loans

Many banks and businesses in the troubled Asian economies had taken such short-term loans and some economists blame these as the primary reason for the Asian crisis. Short-term debts in Korea, Thailand, and Indonesia stood at $68, 46, and 34 billion respectively at the end of 1996 and their ratio to foreign exchange reserves consistently exceeded one in Thailand, Indonesia, and Korea after 1994. Such a high ratio is indicative of vulnerability to a crisis.

Peg with Dollar: Appreciating Exchange Rates

Most of the countries in the region kept their currencies pegged to the dollar and did not allow for adjustment of the exchange rate with changing economic conditions. This 'stable exchange rate policy' had the advantage of attracting foreign investment and the lowering of exchange rate risk for trade with the United States and countries with similar dollar pegs. However, when the dollar started to appreciate significantly in 1995/96, the 'pegged' currencies deviated sharply from their market values and needed increasing intervention from the government. It also made exports of these countries expensive in countries not pegged to the dollar, particularly Japan. Since the whole philosophy of the 'Asian miracle' was based on strong exports, this was a disastrous situation. It also gave an opportunity to traders and speculators to bet on the eventual fall of these currencies. When such attacks came at the start of the crisis there was a freefall in the values of the currencies far below their equilibrium levels.

Lack of Transparency

Lack of adequate systems and genuine absence of knowledge may have resulted in absence of timely information about the weak areas like non-performing loans. However, some governments also cover up such bad news information deliberately that prevents timely action being taken until a crisis situation develops. When world attention began to be focused on Japan's problem of non-performing bank loans, its government first announced in 1994 that the total amount of such loans was about $136 billion. A year later, it admitted that the total was close to $400 billion or about 9% of gross national product.

Mistakes Made in the Wake of the Crisis

The mistakes made by several countries and agencies after the crisis had started resulted in worsening it. When the property prices in Thailand began to fall in 1996, the Thai government spent a considerable portion of its foreign exchange reserves in maintaining the currency's peg to the dollar and in propping up failed banking institutions instead of arranging for their closure, or merger. For example, the government injected $3-4 billion in the Bangkok Bank of Commerce after its seizure in 1996. The Bank of Thailand spent $19.3 billion to keep 91 finance companies afloat in 1996/97 and spent another $16 billion in defending the baht in late 1996 / early 1997 and another $23 billion in forward trading swaps by June 1997. When the investors realized that Thailand's foreign reserves had fallen below its short-term foreign debts, they panicked and started to withdraw their investments from (not just Thailand) but the entire region. Another inexplicable move was the Korean government's decision to allow some of its Chaebols to fall, and then spending a large part of its reserves in defending its currency.

The unduly harsh comments of the Malaysian Prime Minister, Mahathir's comments about foreign investors and speculators and his threats to ban foreign currency trading did not help matters either.

Many experts believe that the IMF response to the crisis instead of improving the situation, exaggerated the collapse. The initial remedies suggested by the IMF were its standard recipes for commonplace balance-of-payment crises such as focus on fiscal deficits, high interest rates, restrictive money growth and closure of insolvent financial institutions. The inappropriateness of the IMF strategy is reflected in the discarding of the original fund programs within months of their introduction.

Effects of the Asian Financial Crisis

Re-evaluating the Benefits of Globalization

Before the Asian crisis of 1997-98 there was tremendous enthusiasm (verging on euphoria) about the benefits of globalization for the developing world. The reason was the tremendous growth shown by the East Asian countries by opening up their economies and using export as the engine of growth. The crisis and its aftermath has forced the developing world, in particular, to re-evaluate the benefits of globalization and made them realize that it is a double-edged sword bringing risks with opportunities. Now much more prudent policies are called for if the developing economies are to benefit by integrating in the world economy.

Seriousness of the Asian Crisis on East Asian Countries

There is no doubt that the Asian Crisis of 1997-98 has badly influenced investor confidence in the region as a whole and resulted in slow and even negative growth rates for some time in the countries directly hit by the crisis. It would be wrong to conclude, however, that the negative effects of the crisis have wiped out all the gains of the 'boom years' in these countries. For example, in the period between 1965 and 1995, the average income in Malaysia, Indonesia, and Thailand increased more than four times and rose seven-fold in Korea. Similarly, life expectancy at birth rose from 57 years in 1970 to 68 years in 1995, while the adult literacy rate improved from 73% to 91%. The population living under the poverty line in Indonesia dropped to just 15% in 1996 compared to 60% in the 1960s. Such substantial improvements in health, education, and income levels cannot be completely reversed even if the growth rates are significantly reduced (as they have been) after the crisis years.

The Social Impact of the Crisis

According to a World Bank report income distribution after the Asian crisis has been relatively small as compared to other comparable crisis like in Latin America, however, urban poverty increased in all the affected countries, particularly Korea. Employment fell and falling real wages in the urban formal sector affected the high-income groups most severely. Wages fell sharply, and in Indonesia this was most dramatic -- falling wages helped to contain decline in employment, though. Labor was generally relocated from the urban to rural areas and informal sectors.

Conclusion

The Asian financial crisis of 1997-98 was one of the severest financial meltdowns to hit a group of countries in the recent past, which for some time threatened to engulf most of the world. It was the first 'computer-age' crisis when the true impact of globalization and the ease of re-location of massive funds from markets (literally, at the touch of a button) were exhibited. The crisis was also unique in many respects. For example, it came as a complete surprise for most observers and financial experts. The reason was that most of the affected countries had been exhibiting… [END OF PREVIEW]

Four Different Ordering Options:

?
Which Option Should I Choose?

1.  Buy the full, 12-page paper:  $26.88

or

2.  Buy & remove for 30 days:  $38.47

or

3.  Access all 175,000+ papers:  $41.97/mo

(Already a member?  Click to download the paper!)

or

4.  Let us write a NEW paper for you!

Ask Us to Write a New Paper
Most popular!

Asian Financial Crisis and How it Affect the International Monetary System Term Paper


Asian Financial Crisis Essay


Asian Currency Crisis Term Paper


Asian Monetary Fund What Is it Why Is it Important Term Paper


Financial Crisis 2008 Threat or Opportunity for Banks in Hong Kong Dissertation


View 222 other related papers  >>

Cite This Term Paper:

APA Format

Asian Financial Crisis of 1997.  (2002, September 27).  Retrieved February 23, 2019, from https://www.essaytown.com/subjects/paper/asian-financial-crisis-1997/5213832

MLA Format

"Asian Financial Crisis of 1997."  27 September 2002.  Web.  23 February 2019. <https://www.essaytown.com/subjects/paper/asian-financial-crisis-1997/5213832>.

Chicago Format

"Asian Financial Crisis of 1997."  Essaytown.com.  September 27, 2002.  Accessed February 23, 2019.
https://www.essaytown.com/subjects/paper/asian-financial-crisis-1997/5213832.