Analysis and Comparsion of the Ways in Which East Asia States Recovered from the Financial Crisis of 1997-98

Topics: Economics, Monetary policy, 1997 Asian Financial Crisis Pages: 9 (2967 words) Published: January 14, 2013
Analyse and compare the ways in which East Asia states have recovered from the financial crisis of 1997-98

The East Asian Financial crisis occurred during 1997 - 98 and adversely affected five East Asian nations (Thailand, Malaysia, Indonesia, the Philippines and South Korea). According to (Sundaram 2006), the crisis was triggered by the collapse of the Thai baht in 1997, leading to a currency crisis, which brought about a financial quagmire leading to an economic havoc. The crisis had a devastating effect that impacted on the social, political and economic aspects of each of the five economies (Wesley, 1999). The meltdown which came as a surprise much to everyone’s chagrin, was due to the fact that East Asian countries had always been attributed with a record of economic success, even at one point being dubbed the 'miracle nations'. Notably, the benefits of economic growth were widely shared throughout the population leading to financial excesses. However, problems began to emerge in both macroeconomic (capital inflows, real exchange rate appreciation) and microeconomic (credit expansion, financial regulation and supervision) in the 1990s, that partially contributed to the onset of the crisis (MacIntyre, 2008). Further, Lucarelli (2002) clarifies that the crisis was attributed to three factors; firstly, most Asian currencies were pegged to the exchange rate of the U.S. dollar, which meant that if the US dollar appreciated then the export competitiveness of the East Asian exporting nations were affected. Secondly, the weak export demand in the European Union (EU) and Japan had been struggling to recover from sluggish growth thus leading to a slow balance of payments. Thirdly, the export slump, which preceded the financial crisis, caused chronic problems of excess productive capacity. In addition, it is also argued that there was too much short-term capital flowing into weak and under-supervised financial systems that finally led to a shortfall of liquidity caused by investor panic. As a result there were collapses in domestic asset markets, widespread bank failures and bankruptcies on multinational corporations and the private sector according to (Krugman, 1998). Moreover, according to (Jayasuriya, 2001), the crisis altered the political and economic landscape of the region - major Asian companies went bankrupt, anxious domestic and foreign investors relocated vast amounts of capital abroad, interest rates rose considerably and inflation and unemployment soared. The political economy of East Asia changed significantly – a reflection on the policies used by the nations. In the most severely affected economies for example, Thailand, the crisis led to a marked de-nationalization of ownership in manufacturing and services (MacIntyre, 2008). While it is important to point out the reasons that attributed to the crisis, it is also imperative to point out the recovery plans and measures that were put in place to boost recovery. Thus, this essay will attempt to analyse and compare the different ways (recovery methods) put in place by each of the five East Asian nations. The measures include monetary and fiscal policies, structural adjustment programmes, capital market deregulation and opening up of foreign direct investment markets and the roles the International Monetary Fund (IMF), the Asian Monetary Fund (AMF) and regional institutions (Association of East Asian Nations - ASEAN) and the Asia Pacific Economic Community - APEC). Before concluding the essay, I will however, briefly highlight the roles China and Japan played during crisis.

While this section is solely dedicated to analysing and comparing the recovery methods put in place to boost growth and end the crisis, it is significant to also mention the magnitude of the crisis. The crisis caused plunges in the exchange rates (depreciation), huge reductions in capital flows, slow rate of economic growth and rising unemployment (Bird, 1999). The East Asian economic makeup...
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