Asian Financial Crisis

The Asian financial crisis

The Asian financial crisis erupted, in July 1997, with the speculative attack of the Thai currency, surprising everyone. As P. Krugman (1998) commented, even though the boom of the Asian economies was arriving at its end and would restrain their rate of growth, it seemed that nobody was aware of either a crisis or its magnitude” The Asian crisis happened after more than three decades uninterrupted economic progress in the zone. The growth of the GDP (Gross Domestic Product) in the countries such as Indonesia, Philippines, Singapore and Thailand, during the previously ten years to the crisis, had reached an annual average of 8% thus, in a term of thirty years, the income per habitant was multiplied by ten times in Korea, five times in Thailand, and four in Malaysia. (Pilbeam K, 2001).

The antecedents of the Asian meltdown are placed in the financial crisis of Japan, initiated in the Nineties, in which the assets bubble of the eighties burst. The collapse of the stock-market of Tokyo lead to a situation of productive stagnation in Japan, accompanied by clear deflating symptoms and a banking crisis of great proportions. Likewise, the Japanese yen began to devaluate in front of the dollar and other strong currencies, increasing the competition between Japan and the Asian tigers in the external markets.

In contrast, the real appreciation observed in Asia in the 1990s was in part consequence of the exchange rate regime (fixed exchange rates) and the ensuing capital inflows, leading to a monetary appreciation and to external imbalances, hence the increase of the debt in dollars and with weaker currencies, more local currency was needed to pay the interest denominated in dollars. Besides, it represented a loss of real competitiveness of its products (as imports become cheaper and exports more expensive) hence, the exports of those countries stopped, partly due to the appreciation of their currencies, and the decrease of the Japanese imports.

Diverse factors indicated that the boom of the tigers and Asian dragoons was arriving at its end of economy boom. Conversely, the governments and its enterprise groups continued to forge ahead with expansionistic policies instead of responding to the changes by this new situation. As an example of the government reaction, the financial systems were liberalized and opened more to the outside and the external imbalances were financed increasingly with external flows of capital, making the external debt even larger and what it is even worse was that the international banks operating in the region had the belief that loans were guaranteed by the Government of by the potential for an IMF bailout package which may have contribute to a climate of excessive lending that made the crisis more likely to occur than if the perceived insurance schemes had not been in place. Krugman (1998) describes this situation as a “game of heads I win, tails the tax payer loses”. On the other hand, we have the speculative attack of Tai bath, which caused the exhaustion of the monetary reserves in that country and an adjustment of the type of change.

Nonetheless, it does not seem sufficient to attribute the crisis to the errors of economic policy committed by the governments. Certainly, the currencies that fell the most during the crisis were currencies of countries with the largest current account deficits. In 1997 the appreciation of the dollar relative to the high deficit currencies was 78 percent against the Thai baht, 52 percent against the Malaysian ringgit, 52 percent against the Philippine dollar, 107 percent against the Korean Won and 151 percent against the Indonesian rupiah. Most noticeably, the two surplus countries, Singapore and Taiwan witnessed their currencies fall by a relatively modest 18 percent. Thus, there is some evidence that there was a link between current accounts and the exchange rate turmoil. Corsetti et al (1998)

Economics makes a clear distinction between current account deficits due to domestic investment being greater than domestic savings and or government taxes exceeding government tax revenues. Generally speaking, where a current account deficit is caused by high domestic investment then the current account deficit is usually regarded as less worrying than in the case where it is caused by low savings, which is suggestive of a consumption boom. It is quite risky because, even if investment is higher than domestic savings, this investment needs to be productive. Also it needs to give a sufficient boost to the traded sector as to improve the future current account performance of the economy. To the extent that the investment is directed to the non-traded sector, for example, the property sector, then it may not help improve the current account in the longer run. Managerial Finance, page 116

As a consequence of the domino effect or let say of the contagion effect, once the crisis was initiated in Thailand, this was propagated like fire through the entire region, shaking the currencies and the equities of other emergent economies. The speculation of the currencies and the bullfights on the stock markets were extended to Malaysia and Indonesia, countries which since 1990 till the crisis (1997) were experiencing large or deteriorating current account deficits as a percentage of their GDP, and later, to the rest of the economies of the region, where although there were still macroeconomic differences amongst them, there were similar weaknesses in their financial systems, and/or their external currencies and accounts. See table 1 at the back (managerial finance, page 114)

However, as it happens in all the financial crises, the blast of the same obeyed to exogenous variables; in this case the detonator was external and internal factors. For instance, the International Monetary Fund (the IMF), said that the factors which conditioned the crisis were: "First, the failure to mitigate the pressures of the overheated economy, that had become increasingly evident in Thailand and many other countries of the region in which external deficits and bubbles in the market of real estate were evidenced; second, the long term pegging exchange rate, which encouraged external loans and lead to an exposure of the external exchange risk in the financial and corporative sector; and third, the lax prudential rules, that lead to a sharp deterioration in the quality of the credit banks ".

Further, we could mention as an internal factor,”Crony capitalism" prevailed in Southeast Asia and Japan, where the interests of banks, corporations and government were so overlapping that prevented the free operation of the laws of the market and lead to all types of inefficiencies, imperfections and corruptions. It is certain that the political systems were authoritarian and undemocratic. Within the bipolar world of the Cold War, many of those governments - for example, Suharto in Indonesia, - were governments favoured and supported by the government of the United States to stop the advance of Communism in the region. Nevertheless, the thesis of crony capitalism seems rather, a smoke screen to darken the basic causes of the crisis and to induce in the region a favourable reconstruction to the interests of international financial capital.

On the other hand, in the analyses of the IMF and other authors (Greenspan, 1998) did not mention other factors such are the role played by the external flows of capital out of the portfolio in the crisis and the overvaluation phenomenon and external imbalances. Equally the exchange appreciation, the boom of the imports, the brake of the exports and the impulse received by the external debt of banks and corporations were consequences of the opening of the account of capitals initiated in the Nineties and in addition the private capital flows towards the emergent countries was increased 50 billion dollars in 1990 to 304, 5 billion in 1996, year, making the Asian crisis excruciating.

Further, between 1990-1994, the surplus of the balance of capital generated by the entrance of flows of portfolio capital, represented 10,1% of the GIP in Malaysia, 9,4% in Thailand, 8,3% in Philippines and 5,3 % in Indonesia. Only in 1996, the private capital flow to Indonesia, Malaysia, Korea South, Thailand and Philippines totalised 93 billion dollars, against 41 billion in 1994. Making the economy attractive to foreign investors due to the capital flow was solid and therefore less risk.

A world of open economies for the Asian tigers became a threat for the future development, thus they became receiving zones of speculative capital and, therefore, candidates of the following financial crisis. The capital flows respond to resntability motivations thus its international movement implies high real interest rates and stable currencies and/or process of appreciation. Similarly, the overvaluation of the currencies was reinforced; for this reason the quantity of the flows increases. As Francois Chesnais says (1998): "to establish the dollar is the condition demanded to a colonial or semi colonial country so that it accedes to the condition of market (financial) emergent.

When the investors considered that the imbalances in Thailand were untenable, these decided to leave that country withdrawing the invested money causing with their decision, the depreciation of Tai bath. In agreement with Chesnais: "the professional financial operators were the first convinced amongst everyone, of the incapacity in which the small countries of Asia were of continue their exports conserving their alignment with the dollar, the foreign investor predicted the inevitable character of the devaluations thus they tried to keep the value of the currency, looking fro their own interest. With his decision they untied the financial crisis and a process began in the financial and exchange markets of the region and in other emergent markets. The speculation awoke and, as Kindelberger says (1997), when the panic explodes "every one goes together in a same package".

On the same lines, It does not exist balance or self-regulation in the financial markets, as those in favour of the globalisation and financial liberalization postulate, when the financial crises are triggered, the only rationality within the reach of the financial operators is the one to leave the markets and to undertake the flight towards the liquidity. As one of the most representative spokesmen of liberalism certainly recognizes (Bhagwati, 1998), the defenders of the opening of capitals mechanically extrapolate the benefits of the free commerce of merchandise and they are attributed to the market of capitals, in other words, the defenders confused the nature of the markets. The capital flows are characterized, since it has indicated to the economic historian Charles Kindelberger, by panics and odd habits." "Whenever a crisis related to capital flows strikes a country, this one typically happens to pass away.”

In sum, the speculation of the flows caused an overreaction of the markets and a chain of devaluations and collapses of the stock markets. By the interconnection that exists between the financial markets and banking, accentuated by the liberalization processes hence the deflation of assets was extended on the credit and the market of real estate. Clear it is that the debts was not born in 1997, but that was developed in all the period of expansion and of structural stability that lived in region for more than three decades; thus it was the opening of the account of capitals and the liberalization those that exacerbated the imbalances, encouraged the debt in dollars and lead to the crisis. Once initiate the financial crisis, the latent debt of the corporations and the banks, pronounced itself with all its force, the weakness of the state supervision of the financial system was demonstrated and all the negotiations of crony capitalism. Pilbeam K.(2001)

In Asia, the vicious circle of the debt-deflation recession was reinforced by the policies demanded by the IMF to make specific, the programs of financial rescue. The deflationary costs of the programs of the IMF were very high due to the orthodox policies of monetary and fiscal restrictions making the crisis even worse. The mention policies were oriented to restore the confidence of the investors in the financial markets, reduce the effective demand, causing unemployment and accentuating the strangling of the credit therefore taking to the companies and banks to bankruptcy. On the other hand, the cost was also political. The background of the corrupt regime of Suharto in Indonesia was precipitated by the myopic policy monetarist policies that demanded the elimination of the subsidies and severe adjustments of prices in basic products. The thesis that justifies the adjustment is the one of which after the same one and once implemented the reforms suggested by the IMF, "everything it will go well and the recovery will be fast, because the economies have solid foundations".

Likewise, as the American government, considers like refusal and interventionist the action of the IMF in Asia. He indicates that the roll of the IMF in this region has gone much too far, it has imposed programs requiring governments to reform its financial institutions and to make substantial changes in his economic structures and in its political conduct. Similarly he talks about to the policies of short term demanded by the IFM affirming, with regard to the case of Korea South the actions taken by the IFM depressed the growth and elevated unemployment, pushing the Korean financial institutions to bankruptcy. (Feldstein, 1997),

In conclusion, the Asian crisis is the second crisis of the financial globalisation model in the Eighties. This meltdown of the Asian tigers, was caused by a combination of internal and external factors which were developing through the years and that unfortunately almost no one took the necessarily measures to correct them. But in general we could say that the crisis was a consequence of the destabilizing effects of international private flows of capital. When the investors considered, that the imbalances caused by its own operation, (deficit in the current accounts, overvaluation of the currencies, external indebtedness of short term, etc.)were not longer sustainable, they initiated the torrent of the capitals flows causing an effect of contagion in the markets of other countries of the region that faced similar conditions.

The steep devaluation of the currencies and the collapse of the stock markets brought to the surface a situation from external and internal debt that had been developed and expanded during the long period of dynamic growth of the Asian economies, and that got worsen when the economies decelerated. The processes of economic growth and investment of the countries of the region were interrupted steeply giving way to vicious circles of falling real wages, and therefore of the levels of effective demand and causing the financial bankruptcy of corporations and banks. Likewise, the programs of adjustment imposed by the IMF only aggravated the tendencies to the deflation.


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