Asian Crisis

.. debt dried up. “This financial crisis will probably lead to loss of confidence by investors in Thailand’s economy and a slow down and then a slump would ensue”, she predicted. Key Indicators to Watch Unemployment. Unemployment is already a problem, concentrated for the moment in urban areas, and affecting both skilled and unskilled workers in Asia.It is expected that in Thailand an estimated 900,000 workers will have lost their jobs by the end of 1999; in Indonesia, it is estimated that unemployment may have increased by some 2 million people, with predictions of substantial further rises in the coming months.

In other countries with rigid rules governing hiring and firing, such as Korea, unemployment may for the first time become a significant social problem. Effect of exchange rates on prices. Depreciating currencies have increased the price of imports and tradable goods, and in same cases, the crisis has hiked the price of certain publicly-controlled goods and services, leading to considerable public anxiety. While some people involved in the export sector may actually benefit from the effects of devaluation, others will suffer from a slowdown in their national economy. Cuts in public services to the poor. Public expenditures will be stretched by the costs of resolving the financial sector failures, the greater interest payments on local currency public debt, and the greater local-currency value of dollar-denominated external public debt.

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At the same time, revenues will fall with the weakening of economic activity. If these trends result in lower spending for social services, the economic downturn would have even more severe consequences for the poor. In Thailand, for example, roughly 10 percent of the population lives precariously just above the international poverty line, with incomes of between US$1.00 and US$1.50 a day. Restoring Confidence in the Markets The most important single step to help East Asia’s poor, and safeguard the region’s success in reducing poverty, is to reactivate its economy. However, this cannot be done without restoring confidence among foreign and domestic investors.

To restore that confidence, the region must address pressing issues such as weak financial sectors, lack of transparency and poor governance in the corporate sectors, and weaknesses in external liability management. Under-supervised financial sectors, and government intervention in allocating capital, allowed poorly governed corporations to invest borrowed money in highly-inflated or risky assets such as real estate ventures. A lack of transparency-in the form of unreported mutual guarantees in group companies, lack of disclosure of companies’ and banks’ true net asset positions, and insider relations-masked these poor investments. When combined with fixed exchange rate policies and implicit guarantees to financial entities, the effect was to create the incentives that led to resource misallocation and unsustainable external financing. Domestic weaknesses of this kind were aggravated by undisciplined foreign lending, which led to too much money chasing investments with potentially poor rates of return.The buildup of short-term, unhedged debt left the economies vulnerable to a sudden collapse of confidence. The resulting capital outflows, and with it depreciating currencies and falling asset prices, exacerbated the strains on private sector balance sheets and thus proved self-fulfilling.

The vicious circle has become even more vicious as financial problems have led to restricted credit, undermining the real sector, and thus further contributing to financial fragility. If the economic problems translate into rising social and political unrest, the problems would deepen still further. Re-invigorating growth will require deep-seated reforms focusing on policies and institutions that affect the behavior of the private sector. These include policies toward the financial sector, toward the real sector, and toward external financing.Rebuilding the financial sector is particularly crucial to restoring investor confidence and growth.

In Thailand, Indonesia, and Korea this has meant closing failed banks and financial institutions, recouping their good assets, re-capitalizing good banks, improving disclosure and bank supervision, and removing government interference in lending decisions and setting interest rates. All of these reforms are essential for the already high saving rates in the region to be channeled into productive investment so that economies can resume the strong growth they had enjoyed prior to the crisis. Raw capitalism So here is a more complete picture of what has gone wrong for capitalism in Asia: TNC-dominated industrialisation led to chronic trade deficits, uncontrolled speculation – often connected to political figures – and foreign funds used for non-export earning investments or luxury consumption, leading to catastrophic currency and banking collapses. Despite Western criticism of excessive regulation, the Asian countries have a free-wheeling capitalism with few restraints.

All the Asian governments kept their currencies pegged to the US$, a notable effort to provide some stability for foreign investments. This became unsustainable after the Thai baht had to be floated in July this year. Mainstream commentators such as Max Walsh reacted to all this by blaming the pegging of the currencies to the US$. His solution is to float all the currencies and everything will “correct itself”. The implications of the Asian financial crisis are many.A declining Asian economy will reduce demand for U.S.

and other countries’ exports. The devalued currencies of East Asia will make Asian imports seen cheap and will lead to increased American imports, thus increasing our trade deficit (Lochhead 2). A worldwide banking emergency could result if the embattled Asian economies failed to pay back their loans to the U.S. and other countries (Duffy 2).If the Asian economies fall further, in a desire to r aise cash, they might sell the hundreds of billion dollars of U.

S. treasuries they now own, leading to higher interest rates and an American recession (Lacayo 2). An article in the Economist reported that the Asian economic turmoil and the layoffs that ma y result, could instigate increased discontent and possibly give rise to violent strikes, riots, and greater political instability (1-2). Reven 3 Since the financial tumult causes instability in the world market, several solutions have been proposed designed to restore the health of the Asian economy.

The International Monetary Fund is offering $60 billion in aid packages to Thailand, Indonesia, and South Korea (Lacayo 1). The aid will be used for converting short-term debt to long-term debt and to keep currencies from falling lower in the world market (Passell 2).Lower currency values make repaying loans to other nations more difficult (Sanger 1 ). The aid packages are tied to measures that will ensure that the recipient countries reform their economies. Some of the measures the nations must follow are increasing taxes to decrease budget deficits, ending corruption, increasing banking regulation, improving accounting information so investors can make better decisions, closing insolvent banks, selling off inefficient state enterprises, and increasing interest rates to slow growth and encourage stability (Lacayo 3). Hopefully these market reforms will allow East Asia to improve its economic outlook. Since most of the Asian nations have balanced budgets, low inflation, cheap labor, pro-business governments, and high savings rates, the long-term outlook for these coun tries is very good (Marshall 1).

The financial crisis, instead of destroying the Asian tigers, will merely serve as a much needed lesson in debt management, orderly growth, competent accounting practices, and efficient government. Throughout the East Asian crisis many different ideas have been proposed to what the cause or causes were.Attempts to identify the fundamental causes of a financial crisis always suffer from the problem of distinguishing insight from hindsight. Many financial journalists today have said the the crisis was the inevitable counsquence of: “overvalued exchange rates, large current account deficits, short-term capital inflows, opaque financial systems, or one of several other supposedly fatal flaws in East Asian capitalism.” It seems fair to say that a year ago nobody suspected that a calamity like what we have seen was possible, although all of the characteristics that are now described as the fatal flaws of the East Asian economies were reasonably widely understood.

Considering the size of Asias contribution to the world economy, a rapid recovery will be greatly Anticipated.