Solving Contagion in Asia

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SOLVING CONTAGION IN ASIA

Prior to the onset of the Asian financial crisis, several Asian countries had been trying to attract short-term capital money from abroad to finance their growing domestic credit demand. Asian governments were reluctant to devalue their currencies in the fear that investors would lose confidence in their financial institutions. As a result, their financial system was highly vulnerable, and there was a massive outflow of short-term capital once speculators attacked.

One responsibility of the International Monetary Fund (IMF) is to issue short-term loans in exchange for a commitment to policy changes in recipient countries. However, the Asian countries were accumulating long-term debt, and the IMF had to continuously give bailout packages. Thus it may not have been the right institution to help with the problem.

The policies that the IMF were requiring were not suitable for the developing Asian economies. High interest rates and tight monetary and fiscal policies imposed by the IMF added to the existing problems of a depreciating currency and a weak financial system. The IMF did not just focus on resolving the balance of payment problems. It imposed economic, financial, and social structures suited for Europe and the United States, rather than ones relevant for resolving the debt problems of these developing Asian countries.

Through restrictive rules and conditions attached to the IMF’s aid packages, their tight fiscal and monetary policies, and their structural reforms, the IMF was suppressing the Asian economy. It was a vulnerable time in Asia because of the devaluation of currencies in response to speculative attacks. In turn, this caused negative impacts on the current account balances of trading partners. With the IMF’s policy of restricting issuance of bank credits, Asian countries were becoming more dependent on outside lenders. Countries were continuing to fall into crisis, and this caused many businesses and...
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