Asian Financial Crisis Essay

1484 words - 6 pages

The paradox of thrift is defined as “ a change in the amount household wish to save at each income leads to a change in equilibrium income, but no change in equilibrium saving, which must still equal planned investment” (Begg, Fisher, Dornbusch, 2009). Increase in savings is actually the consumption foregone by the consumer. Domestic saving increases investment in a country which fuel the economic growth. But could savings be a cause for the financial crisis in Asian countries? As told by Dr Zhou Xiaochuan, Governor of the People’s Bank of China, “ the East Asia countries are influenced by Confucianism, which value thrift, self-discipline, zhong yong or Middle Ground (low-key), and anti-extravagancy” ( 2009). Could this Confucius value be one of the reasons behind the financial crisis that occurred in 1997?

On July 2, 1997, Asian countries were struck by waves of financial crisis when the Thai baht was devalued (Delhaise, 1998). The unexpected crisis of Thai’s economy has caused several other nations’ currencies to depreciate as shown in figure 1. Why did it happen? However, before we begin to analyze the cause of crisis, let’s look at why was the crisis contagious. Radelet and Sachs (1998) as cited in Sharma (2003) have contributed their opinion. With the advance in technology, investors are able to obtain information on macroeconomic data, asset prices and exchange rates. Technology is used in capital market in order to move the funds to increase the rate of return. However, unconvincing news about health of financial institution or country will lead to down fall of the capital market. For example, it may trigger a rational investor to withdraw funds with just a click on the computer screen.
In support of this, Calvo (1996) as cited in Sharma (2003) highlighted that the economy is vulnerable to a herd mentality among investors. Investor has to take into consideration of the state of an economy at his/her own costs even though it’s costly. This will cause a rational investor to retreat from capital market if there is a problem. As every investor begin to follow other investor abroad in pulling out their funds, this herd behaviour pushes the related countries into recession.

The total capital flows to developing countries were about $50 billion in 1990. (see table 1.3). Asian countries received half of it and one third of capital flow went to Latin America. Within 3 years time, total capital flow reach $160 billion. This large portion in which Asian countries receive less than 40% (in the form of direct investment) and the rest went to Latin America (in the form of portfolio investment).( Ito,1999)

From 1990 to 1995, only eight countries have received more than $15 billion in net long- term private capital inflow: China (more than $160 billion), Mexico (more than $80 billion), Brazil ($60 billion), Korea ($50 billion), Malaysia, Argentina, Thailand, and...

Find Another Essay On Asian Financial Crisis

Boom and Bust: Financial Deregulation and the East Asian Financial Crisis of 1997/1998

1883 words - 8 pages Stiglitz's solution to the Asian Financial Crisis is to increase government spending and deficits and print more money. He claims that 'such a "Keynesian" response would have prevented recessions in the wake of the crisis, in contrast to what he calls the IMF's "alternative theory", which supposedly aggravated or even caused the contractions in output. The IMF's reaction to the crisis was to allow public finances to exert a stimulating impact on

The Asian Financial Crisis and Thailand: Catalyst for Change...or More of The Same?

1843 words - 7 pages as poor reform measures. Furthermore, the Asian Financial Crisis initially became a catalyst for political reform in Thailand, which eventually facilitated the rise of Thaksin Shinawatra. During the rapid transformation from agrarian to an export driven industrialized economy, Thailand was within the top 20 countries with the highest change in GDP per Capita. The World Bank explained the rapid growth sustained over decades as “fundamentally

The Effect in Hong Kong's Economy After the Asian Financial Crisis

2663 words - 11 pages I. IntroductionThe financial crisis in the Asian economies in 1997 has created tremendous interests in the economic point of view. This report focuses on the economic situation of Hong Kong in 1997-98, which has some very special features among the economies in the region.In the Asian Financial Crisis, the economy in Hong Kong did not sufferer from any banking or currency crisis like some of the Asian countries such as Indonesia, Malaysia, South

Analyzing Regional Financial Governance

559 words - 3 pages decisionmaking is managed by G-7 countries which pursue their own interests. After the Asian financial crisis, the International Monetary Fund IMF gave G-7's medicine that worked out before for Latin American countries; however Asian economies needed different approaches to stabilize their economy. For instance, Thailand, Indonesia and South Korea were asked to increase their interest rates and reduce expenditures. This medicine provoked painful

"Asian Values" vs. "mcWestern Values"

1289 words - 5 pages masses to feel indignant.Even when "Asian values" don't directly conflict with western values, governments will reject western ideas simply for being western. The Asian economic crisis underscored the need for policy reform, but their loyalty to "Asian values" prevented the government from taking certain necessary steps to curb the crisis. Upon realizing that Asian countries had been conducting business with partners based on nepotism rather than

The Effect of Recent Financial Crisis and Regulatory Implications in Asia

1914 words - 8 pages other countries. The crisis was triggered by a liquidity shortfall in United States banking system and resulted to the collapse of financial institutions. Asia is one major continent in which the recent financial crisis had spread. The impact of the crisis had far reaching effects on the economy of Asia than many people had anticipated. Historically, the economy of many Asian countries was extremely strong compared to that of most advanced

Remarks from the Thailand Crisis

1508 words - 7 pages liabilities (Jacque, 1999). Works Cited Bustelo, Pablo. (1998). The East Asian Financial Crises: An Analytical Survey. Retrieved January 15, 2014 from http://pendientedemigracion.ucm.es/info/eid/pb/ICEIwp10.pdf Bunyasrie, Vilasinee. (2005). Bank Regulations, Financial Crisis, And Credit Crunch: The Case of Thailand. Retrieved January 15, 2014 from http://books.google.ca/books Choompol, P. (2001). Asian Values and the Financial Crisis: A Case

“The Global Economic Situation and Prospects for 2010 and Beyond: Policy Options”

1725 words - 7 pages direct or indirect sources of exposures.1997-1998 Asian financial crisis was due to immense capital inflows becoming outflows.Many other reasons also initiated the outflows in the first place. Local financial firms were poorly regulated and supervised its borrowing in foreign currencies and over leveraging of loans to domestic corporations and projects of poor credit quality.In addition the currency crisis, which originally seem to be a minor

The Power Shift to Asia: How to Succeed There?

2185 words - 9 pages The global financial crisis, also known as the great world recession and recovery have had a serious impact on the Asian and global economies. While western economies suffered from enormous losses, Asian economies somehow managed to turn this misfortune into an opportunity. With the rise of Asian economies, the structure of world trade and finance is rapidly changing. If Western companies are planning to become more active and successful in

asian crisis

715 words - 3 pages Asian CrisisBus349 Financial EngineeringA Final Case Project presented to the School of Business inpartial fulfillment of the requirements for thedegree of Master of Business administrationDecember 2003Asian CrisisWhat happened and when did it happen?Asian Crisis that hit pacific Asian in middle 1997, it liked a big earthquake suddenly hit Southern Asia. In Thailand, the July 2, 1997 when it currency had to devalue, the baht, about 20% against

The Asian Economy Crisis

2803 words - 11 pages , stock market crashes and a major devaluation of other assets in a number of Asian countries. Hardest hit was Thailand, Indonesia, Korea, Malaysia and the Philippines. Totally unexpected and beyond control, the crisis threatened the financial systems of those countries and disrupted their real economies, causing large contractions in activity and created a human crisis as well as a financial one. Furthermore, the ripples from the East Asian disaster

Similar Essays

Economic History : Asian Financial Crisis

1986 words - 8 pages Reasons for the Asian Financial CrisisThere have been many discussions and debates involving the reasons behind the financial crisis. Through such discussions many schools of thought have emerged. These schools have focused on many areas both internally and externally to the economies that experienced the crisis. The focus of this essay is to illustrate the four fundamental reasons for the crisis outlined by these discussions.This essay will

Causes Of The Asian Financial Crisis

1302 words - 5 pages Introduction:There appears to be many theories and proclaimed reasons for the Asian financial crisis, which I guess is to be expected in a topic which is predominately to do with economics. So instead of going through each and every one of these theories, I will take a view of what I can see as a creditable and logical explanation of why the Asian financial crisis occurred.Leading up to the Asian Financial Crisis, the Asian region accounted for

The Background Of Asian Financial Crisis

5724 words - 23 pages Financial Management. The reasons for my chose are because I am interest in these topics, and I am very little understanding of the financial crisis, I want to know more about the Asian financial crisis in 1997. Also it is relative with my subject; these topics are full of challenges, temptations and knowledge. In addition, it is relevant my future career, know more about it is good for my future job.The aims of this report are through the research

Inflation In Thailand And Indonesia And The Asian Financial Crisis

617 words - 3 pages . It is caused by the Asian financial crisis which hit most of the asian countries. The crisis is started in Thailand as its currency, Baht is attacked by the currency traders, and eventually devalued after they found out that the market is unstaintable. For Indonesia, the nation belived that It is triggered by a sudden flow out of assets and money from Indonesia. Hence, the value of Rupiah and Baht moved sharply lower and led to a high inflation