How IMF Policies Brought the World to the Verge of a Global Meltdown
The East Asia Crisis began on July 2, 1997, when the Thai baht rapidly depreciated. This sudden hit to the currency market affected not only Thailand but its effects were also felt in the rest of East Asia - South Korea, Singapore, Indonesia, Malaysia, the Phillipines, Hong Kong - and spilled over into Russia, Brazil, and even the United States. The East Asia Crisis is an important event to study as it clearly illustrates the interconnectedness of modern economies as well as the need to develop better strategies surrounding economic downturn.
Before the crisis, East Asia had experienced phenomenal growth; indeed, this economic success is often referred to as the East Asia Miracle. Poverty had decreased, and governments were more stable, providing more funding to education, and had strong industrial policies. Governments were vital parts of the economy and privatization was not reasonable. The IMF and the World Bank had not studied the great successes of this region; according to Stiglitz, this may have been due to East Asia's refusals to follow Western policies such as the Washington Consensus in order to achieve success.
Stiglitz discusses two patterns that emerged during the crisis. The first was the devaluation of the country's currency; this scenario played out again and again throughout the region. If a trader believes a currency will devalue, he sells his stocks of that currency; this causes the currency to devalue as the supply of money increases but the demand does not. As the currency devalues, more people sell their currency, causing its value to drop more. Or, a government spends its foreign currency reserves to prop up its own currency until it runs out of reserves. Either way, the currency falls in value. This was the case in Thailand. There was a speculative attack on the currency in May 1997 and this caused investors to sell off their... [continues]
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