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Asian Financial Crisis Essay, Research Paper

The Asian Financial Crisis:

Causes & Consequences

Few financial events have so rocked the world economic order as the Asian financial crisis of 1997-98. Beginning with the collapse of the Thai currency in early July of 1997 and extending through the near meltdown of the South Korean economy in December 1997 through January 1998, the financial crisis toppled one “tiger” after another. The chaos that resulted even challenged the solvency and stability of the once seemingly invincible Asian economic hegemon and the commonly accepted model of Asian economic development and prosperity: Japan. The interconnectedness of world capital and financial markets has made it difficult to isolate a national economy from the volatility in international currency markets and from the disasters that can result. This paper will be about how economic variables are interconnected, both domestically and internationally, and how poor performance in one sector can have a domino effect throughout the world economy.

The Asian financial crisis was caused by a number of different, but interrelated factors ranging from domestic, regional, and international sources. Each factor carries different weight in each country. The major factors summed up are as follows:

1) Macroeconomic weaknesses related to current account deficits and mishandling of currency devaluations. 2) Panic behavior by investors and lenders after the initial shock. 3) Disgraceful lending practices of international banks. 5) Significant weaknesses in the banking and financial sector. 4) Weaknesses in the so-called Asian development model and too-cozy business-government relations and misguided government initiatives.

Probably the best word to describe the initial response to the Asian economic crisis is “surprise.” Gerardo R. Ungson, in his analysis on the crisis, said:

Perhaps what was most surprising about the Asian financial crisis is that it caught most of us by surprise. Except for a disquieting article by MIT economist Paul Krugman, who even then simply took issue with the sustainability of Asia’s breathtaking pace of growth, commentators continued to laud the success of this region and predicted the next millennium as belonging to Asia (Ungson 321).

International management analysts were by no means the only ones caught by surprise. In the path of the crisis,

neither the international financial “forecasters” and rating agencies (e.g., Moody’s, Standard and Poor, etc.) or the financial “watchdogs” at the International Monetary Fund could legitimately claim they had seen the crisis coming.

Although few people predicted the crisis, many soon rushed to establish its cause(s). While most analysts stressed that the Asian financial crisis was caused by a complex mix of factors (domestic and international), some analysts took pains to emphasize the overwhelming importance of one causal factor over the others. At polar opposites were those who fixed the blame to the malfunctioning of international financial markets. More specifically, the irresponsible actions of foreign lenders and currency speculators-and those who gave blame to domestic factors like the Asian model of economic development and the prevalence of “crony capitalism”. Summarizing the first viewpoint was Malaysia’s Prime Minister Mahathir, who went so far as to claim that the Asian financial crisis was the result of a western conspiracy to impoverish the emerging Asian economies (Woodall 9). Epitomizing the second viewpoint was an extensive spectrum of Western analysts, who, often in

contradiction used the same arguments (focusing on the power of “Asian values”) to explain the Asian collapse they had used to explain the previous three decades of sustained economic.

The suddenness of the crisis is of particular concern for economists because the Asian model of development had been seen by many in the West as the possible successor to a highly individualistic American model that was having trouble producing the extraordinary gains in efficiency seen in the region. This “economic miracle” that had been producing phenomenal gains in GDP growth since the sixties was suddenly insolvent. Two explanations for this exist. First, in can be interpreted that these economies were structurally deficient in their financial structure, particularly in corporation’s high debt-to-equity ratio, was a cause of bank insolvency once currency valuations fell too low. Secondly, it could be interpreted that these vast financial transactions can affect the health of any economy and that Asia was simply the victim du jour.

While some factors were certainly more important in some of the Asian countries then in others (e.g. loans on inflated land values was not a significant issue in South Korea), commonalties could be seen across the region. In

early February of 1998, an analyst for the Far Eastern Economic Review summed up what had at the time become the general consensus on these commonalties:

In country after country the story was remarkably similar. Corruption and crony capitalism had weakened solid economies built on years of hard work and prudent investment. Lax, outdated banking rules had left nations unprepared to handle a flood of foreign funds. In short, a potent mix of globalization, poor governance and greed brought about the crisis that now engulfs the region (Chanda 46).

By early 1998 it had become fashionable to ascribe the Asian crisis to crony capitalism and weak banking systems (Wood S2). More cautious analysts, however, while acknowledging the contributions of too cozy business-government relations as casual factors in the crisis, began to tone down the emphasis on the “crony capitalism” argument. After all, what was now being maligned as “crony capitalism” was once

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