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 begin with a brief background of these economies leading up to the crisis. Areas focused upon will be the influence and problems created by the economies pegged exchange rates, the amount of borrowing, areas this borrowing was invested into and the blatant disrespect for the rational market paradigm.Asia is a large region incorporating many of the major economic markets of the world. Over the past 30 years this region has seen major economic growth in many of the worlds important industries. The financial crisis that erupted in Asia in mid-1997 has led to sharp declines in this growth. Currencies, stock markets, and asset prices have all collapsed. The countries that are included in the East Asian crisis, known as the "Tiger" economies, are Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan and Thailand.Countries such as Thailand, Indonesia, Malaysia and the Philippines used an unusual policy combination in these pre-crisis economies. The liberalisation of financial capital flows and heavily managed exchange rates. These exchange rate systems were pegged using the United States dollar as their anchor. Such combinations were only sustainable in the longer term. An article in the economist writes ' pegged exchange is only successful if there is close harmonisation of economic and financial policies with the anchor country '. Such harmonisation could never be achieved.The Asian economies relied on the stability of the US (United States of America). Such stability was perceived to guarantee growth and prosperity. Reliance was placed upon a powerful fluctuating market. The size and importance of the US globally, is why having a stable peg could have never been maintained. The US continually alters monetary and fiscal policies to ensure maximum benefit of their respective market not that of the pegged Asian economies. If there was fluctuations in the anchor currency market values are drastically altered.The relationship between the Asian tigers and the U.S was buoyant when these economies were booming, but from mid 1995 the US dollar began to rise against many other dominant world currencies. In turn this caused the Asian currencies that were pegged to rise also. As with any currency increase in theory, exports become more expensive and less expensive on the world market. This created huge current account deficits, which increased the debts of these countries. The demand to depreciate and have these currencies floating would have created turmoil due to the high volumes of capital...

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