the causes of the asian crisis

The Causes of the Asian Crisis. There are many speculations about the causes of the Asian Crisis. From my research I found out that there is quite a number of reasons for the Asian currency crisis. There is a book called; The East Asian Miracle, which was published by the World Bank. This book expressed the relationship between government, the private sector, and the market. (See Hoover Digest 1998 No.3. William McGurn. What went wrong?) The book talks about the economic bloom in Southeast Asia. The East Asian countries borrowed a lot of money from the IMF and World Bank and used it to create a better economy for themselves. I found out that the following countries due to their reoccurrence during my research experienced the bloom. The countries are as listed: South Korea, Indonesia, Hong Kong, Thailand, Malaysia, The Philippines, Singapore and Taiwan.

These countries experienced a lot of growth, growth that even doubled the growth in the rest of East Asia, and almost tripled the growth in Latin America. The economic miracle started in South Korea, Hong Kong, Taiwan and Singapore then Malaysia, Thailand, Indonesia and the Philippines. These countries achieved very remarkable rates of growth and development. They built high quality manufacturing industries from clothes to computers. (What went wrong? Hoover Digest 1998 No.3 William McGurn) In the paper written by William McGurn “What went wrong?”, he explained that the people’s minds in Asia only understood the word miracle and the banks failed to recognize the risks and credits of the bloom. The banks also failed to realize that they were only being used as policy arms by the government. The only word that stuck in people’s minds in Asia was the word miracle. They therefor forgot the fundamentals, which could be easily understood. William McGurn said that the countries that suffered the most in the Asian economic crash were the countries that were heavily engaged in the state planning. ‘This in turn lead to all manners of extravagant claims about “Asian Values” and the idea that western concepts such as competition really didn’t apply” (William McGurn. What went wrong?) On February 19, 1998 a group of Hoover fellows and invited experts assembled in the Hoover institution to discuss the likely causes for the crisis. The discussion pulled a very large crowd in to the Hoover Stauffer Auditorium to hear what the well-recognized economists, political scientists and historians had to say. The panel came to an agreement that the crisis that started in Asia was due to excessive short-term borrowing, risky investments by banks and flawed government policies that permitted such investments. (See Hoover Institution Newsletter Spring 1998) From the article; “Why did it happen?”, on this web site:, I found out that Asia had been experiencing a miracle for the past 30 years, but they are now suffering a crisis. These economies are now experiencing collapsing currencies and depleting stock markets. The Asian countries at first borrowed a lot of money from the IMF and the World Bank and used it to invest in certain unprofitable ordeals. ” The problem was bad in Thailand, where a succession of weak governments had allowed money to flood into unwanted skyscrapers rather than investing in roads and telecommunications, and education.” (Directly from the article) “The unwise spending was the worst in South Korea where the entire economic system was based on governments encouraging banks to make cheap loans to big conglomerates for continued expansion regardless of world demand.” (Directly from article) They borrowed the money in US dollars thinking that they would have no problems paying the debts off, because their currency’s exchange rates were pegged to the US dollar. They borrowed money in dollars because their own currency’s interest rates were too small. In the middle of 1995, the US dollar started to rise against most of the world’s other currencies. Because the Asian exchange rates of local currencies were pegged to the US dollar they rose with the US dollar. The rise in value led to the Asian countries decrease in exports. Their exports became less demanded and competitive in the worlds market. For the economies to come out of the crisis and return to their normal sale of exports, they had three options. They would have to let go of the dollar value, wait for the dollar to depreciate against other currencies or buy local currency from the moneylenders. They couldn’t wait for the dollar to depreciate because they were unsure of how long it might take. At first the Asian countries borrowed money from the IMF and World Bank in dollars, because they did not have any fears about earning money in local currency to repay the debts.

The Asian governments were afraid of devaluing their currency by unpegging the currency to the dollar. They were afraid of destroying firms and industries that borrowed large amounts of money from the banks. The industries would have a harder time trying to pay off the debt because the value of their exports would decrease. They had no choice but to look to the moneylenders for help. The moneylenders sold large amounts of local currencies to the countries hoping that they would be able to buy the currency for cheaper before they were to deliver it. The sales the moneylenders made were forward sales, which are sales with guaranteed delivery a month or so from the day. If they succeeded in buying the currency at cheaper rates they would make an instant profit. The Asian governments tried to resist the need to devalue currencies by making deals with the moneylenders. The moneylenders sold local currencies to the banks for US dollars, but the bank’s stock of US dollars had to diminish eventually. It was Thailand who first ran out of their US dollar reserves, so therefore had to let her currency devalue. Malaysia then followed suit. Hong Kong, however, was able to resist the devaluation for longer because they had more US dollar reserves.

Hong Kong had enough reserves but they would have a very hard time trying to keep the Hong Kong dollar pegged to the US dollar. This caused their stock markets to crash and their market to be uncompetitive. To make the Hong Kong dollar attractive they would have to keep the interest rate therefor business would slump. (see why did it happen?) Another article; Four myths of the Asian economic crisis. 12-18 January 1998. Web site, disagrees with the view that pegged currencies is one of the problems. The article states that pegging currencies cannot be damaging as long as they are pegged at their market rates. It says that the only way a problem could arise is if the currency of an economy begins to inflate against the currency to which it is pegged. The countries will then begin to experience the crisis. “They find their currencies become overvalued, current account problems begin to emerge and speculators see the opportunity for arbitrage activities. The longer the inflating countries resist the necessary currency adjustments, the bigger the monetary shock would be when it eventually comes.” (Directly from the article) Continuing my research I found a document, which contained an address by Stanley Fischer, who is the first deputy-managing director of the IMF. He made this speech at Mid winter Conference of the Bankers’ Association for Foreign Trade. In the speech he expressed that the Asian crisis is an unfortunate occurrence after 30 years of incredible economic performance. He first talked about how well theAsian economy was doing before the crisis. The per capita income of each of the countries increased tremendously before the crisis. For example the per capita income of Korea increased tenfold and Hong Kong had a per capita income level higher than some industrialized countries. . He said that the growth was beneficial to other nations in the world. The developing markets in Asia were major exporters and they were a very important market for other countries’ exports. ” For example, these countries bought about 19% of US exports in 1996, up from about 15% in 1990.” (Directly from document) For this and some other reasons Asian market economies were a major engine for growth in the world economy. In the document the IMF claims that there are three things that caused the present situation. The failure to stop recognizable problems that were occurring in Thailand and many other countries in the region that were based on external deficits, property and the stock markets. The second problem is what I already mentioned earlier in this paper. The maintenance of pegged exchange rate system for too long. There was excessive exposure to foreign exchange risk in the financial and corporate sector because of the long period of pegging. The third is due to the “lax prudential rules”, which caused sharp deterioration in the quality of banks’ loan portfolios. The authorities were a problem as well. They refused to carry out actions that would release the pressures on the currencies and the stock markets. They were reluctant to tighten monetary conditions and also to close financial institutions. These actions or should I say lack of actions added to the already growing problems. Weaknesses in the Thai economy were revealed because of the domestic and external shocks. Before the unveiling of the weaknesses in the Thai economy, they were doing very well. ” Thai economy had been masked by the rapid pace of economic growth and the weakness of the US dollar to which the Thai currency, the baht, was pegged.” (direct from the IMF document) Thailand’s success was also responsible for it’s problems. The growth and good macroeconomic management attracted large short-term capital inflows. These inflows created faster growth and increased the amount of loans made by domestic banks.

The loans were used for “imprudent investments and unrealistic asset prices.” (direct from the IMF document) The Thai authority refused to make desperately needed adjustments. Talks between the Thai authorities and the IMF still didn’t encourage them either. They were too overwhelmed by their recent success. This disease was highly contagious ” The depreciation of the baht could be expected to erode the existing competitiveness of Thailand’s trade competitors, and this put some downward pressure on the currencies.” (direct from the IMF document) Because of the problems markets experienced in Thailand, they became more careful to look at Indonesia Korea and the neighboring countries problems. They saw that the same problem was happening in other countries especially in their financial sector.

The currencies were still sliding and there was an increase in the debt service costs of the domestic private sector. There was an exchange rate adjustment that was more than what was required. The adjustment was more than needed to correct the initial overvaluation of the Thai baht. This was because of the fears domestic residents had. They hedged their external liabilities, which caused the exchange rate pressures to be intensified. “In this respect the markets overreacted.” (direct from the IMF document ) The document stated that these reasons differ in somewhat important ways. Thailand was had a large current account deficit and Korea’s was slipping. It seemed that the larger the current account deficit was the harder it was for the IMF to find a solution. Another was that each country asked for help at different times from the IMF. Thailand called when most of its usable reserves were done and Korea called when it was almost drowning in the problem. These were the likely causes of the Asian financial crisis I found out from my research.

Some say that the IMF is responsible for the problems but from this analysis of the address from Stanley Fischer, a representative of the IMF, they do not think that they are responsible. Bibliography:

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