South East Asian Crisis

The early 1990s exhibited a boom in many economies throughout the world due to factors such as globalization and other trade liberalization practices, but this boom was quickly halted in the latter half of the decade when bad investments nearly sent the entire world into economic turmoil. With the introduction of free trade practices such as the North American Free Trade Agreement, or NAFTA, the economies of many of the worlds “developing countries” skyrocketed due to an influx of foreign investment. At, first this exponential boom in small countries with emerging economies seemed like it would never end. However, this all changed when investors “caught wind” that these developing countries did not have the means to keep up with the massive inflow of investments. This led to what we know refer to today as the Asian Financial Credit Crisis. In order to understand how to prevent such a disaster from happening again, we must first examine how exactly this event was triggered, and what should have been done differently.

In 1997 the country’s exports were no longer booming and the Thai economy entered a unsafe and unpredictable phase. Foreign investors were skeptical about the current-account deficit and the big loans property developers. Bad debt continued to mount up and the stock market crashed to depths not seen in eight years. This caused the baht to fall prey to speculative attack. High debt, heavy borrowing, large current account deficit, and the semi-fixed exchange rate system all played a part to the Thai crisis.

The IMF did provide relief but at the expense of the food subsidies which the Thai rely on to compete for food prices. If the economy of Thailand were left alone, given their own economic sovereignty rather than launching them in the vicious global market while being compared and linked to the titanic financial power of the dollar, their quaint agricultural and textile industry could have thrived and met the requirements to maintain their nation. The deeply rooted free market ideals of globalization forced the Thai baht to be overvalued. The wolf pack like instincts (bred by the greed and profit seeking nature of global capitalism) of the foreign investors let the baht to be over sold and the price of the currency to be driven down into obscurity. The global market capital perspective provides an insightful perspective as to why the Thai currency crash was so impactful to not just Bangkok, or Asia but the entire globe. The interconnectedness of the international economy provides a community for nations but due to the infinite connections that exist in this paradigm, the problems of one place can be caused by anybody and leave widespread consequences in every modicum of the

He contends that when the East Asian companies opened up their markets to allow in foreign capital and appease citizens who wanted globalization, they unintentionally doomed themselves for the future (Wade 107). Before they opened up their markets, bankers in East Asian countries were very cautious about whom to give loans to, and as a result, banks often had a very good relationship with those they chose to lend money. As a result, loans were only given out to safe investments. This changed when these countries opened up to the international economy, which allowed inflows of foreign capital (95). The United States in the 80’s financed its debts by selling Treasury Bills, which were commonly bought by foreign banks and then resold for additional capital. When the United States went into a recession, these foreign banks decided to invest in East Asian markets because these markets had expansive room for growth, which allowed investors to get a high return on investment (100). With the new capital, the East Asian countries invested in industry and asset bubbles, which require constant capital to pay off debts. When the United States became a good investment again in the mid-1990s, foreign investors started investing back in the United States. The capital needed to finance the East Asian countries was gone, and these economies with high debt-to-equity

The development of the global financial crisis is a result of a number of complicated and interrelated factors. Starting with the downturn of the housing bubble in the US economy, the fall in the financial stability in the US, and the rising commodity prices, all of the factors, in one way or other, has initiated the crisis. As stated by the United Nation in its Conference on Trade and Development, and in its Trade and Development Report 2008, the major factors for the crisis are:

Since the Great Depression, the world has not witnessed an economic crisis on the scale of the current crisis. This is to the extent of it being referred to as the Great Depression of the 21st century. The crisis has resulted in a number of questions, most of which revolve around the interaction of political and economic forces in global economic management. It is difficult to point at one specific factor as a cause for the economic crisis, on the basis of arguments presented by a substantial number of commentators. What is meant here is that the economic crisis that has engulfed the world is a result of a wide range of gaps in political and economic governance. It is imperative to observe that the globalized economy of contemporary times encourages economic interdependence. However, it is the economic interdependence that has resulted in the replication of economic problems from one country or region to other countries and regions. This essay discusses the causes of the current global economic crises and the poor governance of the global monetary system.

When financial restrictions bring about nothing but deterioration the economy, the country will opt for a liberalisation to lessen government regulation and restriction in the financial market. Financial market liberalisation eliminates restrictions on financial institution and market domestically. This liberalisation strategy intends to free the flow of capital in and out of a country and encourage economic development. The purpose of removing restrictions on the market is to allow capital inflows from developed countries that would finance the emerging market to higher investment and growth, for insurance against shocks and volatile consumption, and spur development of domestic financial market. By lifting these financial restrictions, domestic financial market opens up to the international market allowing market forces to drive the market operation more effectively. In addition, it should achieve an efficient capital allocation and better sharing of individual risk. Emerging market economies generally refers to economies in an earlier stage of market development that have recently opened up to world. Emerging market nations liberalise their financial system with high hope of economic growth and reduced poverty. Their capability to manage a market liberalisation in order to enjoy its anticipated benefits is questionable. Being far from a developed country, emerging

On the other side, establishing capital market liberalization (pp. 44-46) was a mistake. Lastly, the IMF’s answers to the majority of economic crises, such as the one that laid waste to East Asia (pp. 89) had negative outcomes, deteriorating the conditions in these territories. In particular, raising the interest rates and enforcing financial austerity were burdens for the continent’s economic growth. In order to prove his points, the economist explains that China, India and Malaysia, the two first countries being spared by the studied crisis and the latter having known a quick recovery by ignoring the IMF’s advice.

The performance of East Asian nations, particularly Japan, South Korea, Taiwan and most recently, mainland China, is largely attributable to the East Asian Model, which accounts for the following notable observations: sustained economic growth at high levels for long periods, social, political and economic diversity, and economic activities that are industrialized, export-oriented and socially beneficial in nature. The East Asian Model is characterized by the following elements: investment and trade-driven growth, active governmental involvement, strong regional cooperation and economic development driven towards poverty reduction.

Asia in general was not affected by the current global financial crisis (1). The source of the crisis did not come from the developing countries as seen in the 1990s during the Asian crisis. In 2008 - 2009, the developed world initiated the global financial crisis with the sub prime lending implosion; thus, affected the rest of the world. The Philippines in particular did not fall into a recession since the banks were not exposed to toxic assets as seen in the European banks and other developed world. Despite the disaster in the world trade and credit markets affecting trade in the Philippines, the large volume of remittances from overseas

Jeffrey A Winters. 1999. The Determinant of Financial Crisis in Asia. In The Politics of the Asian Economic Crisis. Cornel University Press.

The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown (financial contagion). It is also commonly referred to as the IMF crisis.

It is usual today to hear of economic globalization referred to as an immensely valuable and modern process. The implication is that, as nations more fully engage in interactive trade and financial cooperation, benefits accrue to virtually all as the markets inevitably expand. Importantly connected to such a viewpoint is the perception that the expansion of the global economy must produce desirable results for those nations in various stages of development; in plain terms, the interaction on the global scale must both infuse such countries with capital and significantly promote the internal growth necessary for them to engage more fully in the international currents of finance. To some extent, there is validity to this; global integration does encourage accelerated development, and particularly in regard to trade. At the same time, there is as yet no conclusive evidence that the integration of developing countries into the global economy uniformly produces benefits for those countries. The research thus far indicates that individual national variables, as will be discussed, are critical factors, and that trade openness may be more advantageous than financial openness (Presad et al 8). As the following will investigate and affirm, the unique characters of developing nations themselves potently affect how integration into international markets goes to their further development. Ultimately, while such integration is seen to yield important benefits to the countries

The twentieth century economics was built on the foundations of liberalization and globalization to encourage emerging capital markets, open new avenues for financing and put developing economies on the global map. Needless to say, this policy requires a blatant need to reduce capital controls to reduce foreign investment and increased spending within domestic sector. Traditionally international organizations like the IMF have criticized the imposition of capital control measures by countries during unfavorable economic situations. However, upon close examination and analysis of developing economies that have undergone economic crises, I propagate a need for capital controls. This will be demonstrated through the course of my essay by examining the case study Malaysia during the East Asian crisis in the late 1990s. The themes addressed in the case of Malayisa include the economic, political and monetary background of the country, followed by the policy tools of capital controls, its effectiveness and lessons.

Neighbor South Korea dealt with economic uncertainty leading up to the 1997 currency crisis which plagued Thailand. South Korean chaebols or conglomerates were recording record debt levels between 1996 and 1997. Banking policies enacted by President, or Dictator, Park during the late 80’s constructed an economic environment whereby loans to chaebols were issued on the basis of company need, as opposed to individual judgment on part of the loan issuing authority. In more succinct terms, nationalized banks issues loans to chaebols without verifying whether the company could pay the loan bank, or whether the interest rates were reasonable, or even whether the company’s venture had enough collateral to back it up. In essence, chaebols were tasked with repaying loans that they might not have the appropriate level of capital for. Therefore, on the eve of the Asian Financial Crisis, chaebols such as Hanbo Steel, and others, were closing their doors due to debt burdens incurred without a proper foundation for capital generation.