Globalization and the Asian Financial Crisis

Topics: Economics, Investment, Monetary policy Pages: 7 (2622 words) Published: January 25, 2012
Globalization and the Asian Financial Crisis
The Asian financial crisis is a prime example of an economic meltdown and it exemplifies the effects globalization has during times of widespread economic downturn. According to the Oxford English Dictionary, globalization is “the integration of national economies into the international economy through trade, foreign direct investment (FDI), capital flows, migration and the spread of technology.” The global economy is becoming further inter-twined and therefore it is very difficult to stop the effects of an economic crisis. The Asian financial crisis was a major economic crisis that spread throughout several Asian countries.

The beginning of the Asian financial crisis can be traced back to July 2, 1997, with many believing the start of the crisis was triggered in Thailand (King 439). On this day, the Thai government floated their currency, the Thai Baht, and it also went to the International Monetary Fund (IMF) for “technical assistance.” One by one, South-East Asian countries such as Thailand, Indonesia, South Korea and Japan saw their economies crash in the wake of heavy foreign investment. An economic boom had made the region an attractive investment proposition for investors for much of the 1990s. From 1990 to 1997, the private capital flow to developing countries rose more than fivefold, from US $42 billion in 1990 to US $256 billion in 1997 (King 441). However, in the summer of 1997, the economic climate changed, on July 2, 1997, the Thai Baht fell around 20% against the US Dollar (King 441). This was seen as the trigger for the crisis, as investors grew nervous, which led to disinvestments on the Baht, resulting into domestic production and development stalling. The reason why this was happening was because many corporations depended on foreign investment and when they dried up, the businesses could not meet their debt repayments, leading to many firms folding across Asia.

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 growing rapidly, the markets were opening up and becoming more liberalized. This enabled these countries to get a huge influx of foreign capital. These countries were targeted by investors because they were classified as “emerging markets,” meaning that they had rapid growth and industrialization (Hanieh 65). Hence, they seemed to be ideal for investors as they sought after high profits and yields. It must be emphasized that most of the inflows that came were for short term portfolio investment purposes. Private capital inflows coming into the “emerging markets” were $42 billion, which increased to a gigantic $256 billion in 1997 (Hanieh 70). 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 dollar 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 though, 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 (Hanieh 74). 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...
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