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Asian Finanicial Crisis Essay

2519 words - 11 pages

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The Asian Financial Crisis

The Asian financial crisis is the previous example of the last economic ‘meltdown’. The current global financial crisis just shows how globalisation plays a huge role within this. Globalisation is “the integration of national economies into the international economy through trade, foreign direct investment (FDI), capital flows, migration and the spread of technology” (Bhagwati, 2000). The global economy is becoming further inter-twined and therefore it is very difficult to stop the effects of an economic crisis. The ...view middle of the document...

Within a week of that day in July, the Philippines and Malaysian governments were heavily intervening to defend their currencies. Soon other East Asian countries became involved; Hong Kong, Taiwan, Singapore and others to varying degrees.

As global integration was spreading and rapidly growing, the markets were opening up and becoming more liberalised. This enabled these countries to get a huge influx of foreign capital, the likes of which have never been handled before. These countries were targeted by investors because they were classified as ‘emerging markets’ – meaning that they had rapid growth and industrialisation. Hence, they seemed to be ideal for investors as they sought after high profits and yields. It must be emphasised that most of the inflows that came were for short term portfolio investment purposes. Private capital inflows coming into the ‘emerging markets’ were $42bn, which increased to a mammoth $256bn in 1997. Ironically, that peak was the same year as the markets crashed. As mentioned previously, most of the inflows were for portfolio purposes, therefore, the stock markets were experiencing high booms and estate prices were also on the rise. Most of the countries had their currency pegging loosely against the US $ in the run up to the crisis. The informal pegs to the US Dollar encouraged capital inflows due to the large interest rate differential. This tough, attracted problems too, due to the predictable nominal rates, it encouraged unhedged external borrowing. This ‘asset’ boom continued to grow and the flow of credit continued to increase. This resulted into Japan, who was already suffering from their ‘lost-decade’, into depreciating their currency. As a result, this made their currency weaker and doing so, it made the exports of the South-Eastern countries uncompetitive. This was damaging to the rest of the countries to integrate on a global scale. Most of the functions that these countries undertake are producing parts of a production that would be later assembled and completed in countries like Japan or China. As stated earlier, these ‘tiger-economies’ operated in a fixed exchange rate system, therefore their central banks needed to keep enough reserves so that they could support the Baht at the fixed exchange rate. As the central banks ploughed money in to support their currency to maintain the exchange rate, business confidence was shattered and spreaded across other countries. The effect of this was further felt as their exports were much dearer since Japan devalued their currency. The knock-on effect was that foreign investors started to take their money out. Thailand was the major casualty of this and quickly it passed onto its neighbours, thus, the start of the Asian financial crisis.

The financial crisis heavily affected three main emerging economies in the global market; Thailand, Indonesia and South Korea. These were the ‘hot-bed’ for foreign investors who seeked high...

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