Asian Financial Crisis Introduction Many economists have said that the growth experienced by Southeastern Asian countries during the 1980s and early 1990s was a miracle. Japan, Malaysia, South Korea, Indonesia and other countries in the region experienced annual growth rates of over 7 percent. Along with this rapid growth, these countries also saw very little unemployment and an almost invisible wealth gap between the different social and economic classes of citizens. Circumstances have dramatically changed, however. In the summer of 1997, Southeast Asia experienced a time of great financial and economic turmoil.
At first, the economic crisis was isolated in Thailand’s financial sector, but it quickly spread to Malaysia, Indonesia and South Korea as well. The Prosperous Times It seems that Southeast Asia has always been able to turn bad times around and recover to end up as some of the strongest economies in the world. South Korea, for instance, was very weak and vulnerable after fighting a civil war with North Korea in 1953. However, between 1960 and 1990, the country experienced remarkable economic growth and recovery, and soon the world’s 11th most powerful economy. Many other Southeast Asian countries had similar experiences.
South Korea, Hong Kong, Taiwan and Singapore were previously known as the Four Tigers because of their fast and aggressive entry into the global marketplace. Other examples include Japan, Malaysia, Indonesia and Thailand, each of which experienced rapid growth and prosperity in relatively short periods of time. In the U.S., the Asian miracle stirred up both awe and fear. This was especially so in the 1980s when Asian products became fierce competition for American products.
Japan’s automobiles and electronics were rivaled U.S. products and caused much fear among producers in these U.S. markets. This competition, in part, led to a U.S.
trade deficit. U.S. congress reacted by passing a number of trade regulations aimed at protecting U.S. industries. Southeast Asian governments engaged in acts that promoted certain industries and businesses. They provided them with tax credits or subsidies.
These policies allowed Asian government leaders to pick the leading industries and helped to ensure their success rather than allow the free trade market to dictate such decisions. Thus, these countries had a power to control and dictate the market, much more so than other Western powers. Supporters of the Asian system argued that such government intervention in the marketplace was necessary to ensure economic stability. They argued that policy makers could focus on industries with high growth potential. Many of these industries would have otherwise had great difficulty raising capital to start operations. Asian political leaders also implemented tariffs and other protection measures to protect their domestic industries from international competition.
The result was the growth of large corporations that became powerful competitors in international markets. Trouble Begins In late June of 1997 sixteen Asian financial companies collapsed which alerted investors to the stresses the economy was currently facing. . By July money market traders believed the government could be forced to abandon its pledge to link the currency unit of Thailand, the Baht, to the US dollar. They felt that the dollar was much stronger than the Baht, and thus pegging the value of the Baht to the value of the dollar greatly overestimated the value of the Baht. On the second of July the Thai government announced a managed float of the Baht.
They then called on the International Monetary Fund (IMF) for technical assistance. That day the value of the Baht fell approximately 20 percent in comparison to the US dollar. Many investors were concerned that the baht would become unstable and suddenly decline in value. So, large numbers of investors exchanged the currency for dollars.
They felt the value of the dollar on the international currency exchange was more certain, thus making that investment less risky. As more and more investors became concerned with the future of the baht there was an increase in the number of bahts being exchanged for other currency units. Thailand’s central bank was hoping that the large number of investors selling the baht would slow as confidence was restored in the currency. The baht experienced devaluation, which essentially lowered the price of Thai goods in dollar terms.
This made Thai products more attractive to foreign consumers, as they appeared cheaper than domestic goods. Although devaluation theoretically can help a weak currency, it had other effects on the Thai economy. A large portion of the money used by Thai banks and businesses to invest in the country was borrowed from foreign financial institutions. It became increasingly difficult for these banks and businesses to repay these foreign debts, as the dollar was much stronger than the baht. Many businesses were unable to raise enough baht to cover their debts and defaulted on their loans.
The large number of loan defaults caused even more problems for Thai banks, which were already close to filing bankruptcy. The Thai government tried to control the crisis, but the devaluation of the baht impaired their ability to save their banks. Thai government officials realized the need for help and began to look internationally for assistance. In August 1997, the International Monetary Fund (IMF) and several Asian countries pledged to provide a total of $16 billion in an attempt to save Thailand’s financial system. In return for the loans, the government agreed to improve business practices in the country.
The government had to agree to specific tax increases, implementing policies to discourage banks from making risky loans, and close more than 40 financial firms that were on the verge of bankruptcy that the government initially wanted to bail out. One of the immediate goals of the IMF bailout package to Thailand was to prevent further currency instability in the region. Yet much of the damage had already been done. Following the devaluation of the baht, other currencies in Southeast Asia plunged.
Most governments in the region were able to prevent their currencies from tumbling through a variety of monetary policies. Some of the hardest hit countries included Malaysia, Indonesia and South Korea. Each of their currencies lost nearly 40% of their value by the end of 1997. In Japan and Hong Kong stock markets experienced a drastic drop in October 1997.
This was especially alarming, as these were two of the strongest economies in Asia. This stock market crisis set off a panic in many international markets as well. For example, the Dow Jones Industrial Average experienced its largest one-day point drops ever on October 27. Japan and Hong Kong slowly regained strength, Their economies have been relatively stable since the beginning of 1998. In addition to Thailand, Indonesia and South Korea also sought international assistance in attempts to save their economies.
Indonesian President Suharto turned to the IMF for help in October 1997. In January 1998 they agreed to a plan that entitled Indonesia to receive $43 billion in loans from the IMF and from other nations. South Korea was very reluctant in seeking assistance, but eventually realized the dire need for help. They asked the IMF for aid in November 1997. Even though the country was experiencing extremely difficult times, many top Korean officials considered it humiliating to ask for help.
Hesitation was also due to fear that the IMF would order harsh reforms in return for aid. Nonetheless, the government agreed in December 1997 to a $57 billion package coordinated by the IMF. This was the largest package the IMF had ever coordinated. Other Causes There is general consensus that Asia’s crisis was mainly caused by an excess amount of domestic investment. Many of Southeast Asia’s banks and businesses were very optimistic that the rapid economic growth would continue. The result was huge amounts of money being borrowed by Southeast Asia’s investors.
They then invested in domestic ventures, such as real estate. When those investments did not make a profit, companies simply borrowed more money or extended their loans to cover outstanding debt. …