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 about half of all developing countries capital inflow. With the high interest rates that the Southeast Asian economies were offering, many foreign investors were attracted to the region with the opportunities for high returns on there investments. The mass growth of investment and capital in the region came on the back of the Asian Financial Miracle which saw GDP growth rates of about 10% in countries such as Philippines, Malaysia, Singapore, Indonesia & South Korea.Was there too much of a good thing?Starting in the early 1990s, there was a rapid increase in short-term lending by commercial banks to both banks and firms in the region. Most bank lending was non-syndicated and directed to non-financial private firms, but in some countries certainly lead by South Korea, the financial sector was also a recipient of these funds. Without trying to state the obvious both the Local and Foreign lenders and the Asian borrowers must have seen benefits for them in engaging in such transactions.In many cases the lenders of this money where coming from locations where the domestic markets were offering small returns on their investments on the back of the recession. Notably Japan and The U.S had slashed their interest rates on investments to help recoup from struggling markets and debts. Another reason was that compared to these countries, especially after the trouble in Mexico, the East Asian region was being seen as a far more stable economy. When pairing stability and high rates of return you can see why this was such a desirable option for foreign investors.There can be little doubt that a large part of the inflows was due to the attempt of domestic financial and non-financial firms to reduce their financing costs by borrowing from cheaper foreign markets, thus accumulating foreign-currency liabilities that were not balanced by foreign-currency assets.#However, firms were also driven by reduced earnings resulting from a series of external and internal factors to seek lower financing costs. For a number of reasons, the growth of export earnings dropped markedly after the mid-1990s throughout the region.While the 1990-1991 recessions in industrial countries had little impact on Asian export growth, paradoxically trade started to slow when recovery started in those countries in 1994-1995, because of a decline in their import propensities.For many countries it was also becoming increasingly difficult to maintain competitiveness in labour-intensive markets because of the entry of low-cost producers. This was...

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