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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.

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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.