Asian Crisis

.. 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.

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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 The Asian Crisis: A view from the IMF. Address by Stanley Fischer; First deputy managing director of the IMF at the Mid winter Conference of the Bankers Association for Foreign Trade. Washington, D.C. January 22, 1998 Why did it happen? Asian Financial crisis put in perspective by Hoover Fellows, Experts. Hoover Institution Newsletter Spring 1998. Web page: What went wrong? William McGurn.

Hoover Digest 1998 No.3. Web page: Four Myths on the Asian Economic crisis, 12-18 January 1998. The New Australian.