The Asian Financial Crisis: Origins and Solutions.
Although it has become eclipsed by the global financial crisis, the Asian financial crisis is still considered one of the most dramatic episodes in the recent economic history. As we know, from 1960s to 1990s many of the economies and societies in East Asia industrialized very rapidly. The economic development of Taiwan, South Korea, Singapore and Hong Kong were so impressive that they were soon named the “Four Asian Tigers”. Indonesia, Malaysia and
Thailand were known as the “newly industrialized economies”, reflecting their improving reputations. (Breen, 2013). The middle and lower middle classes in many East Asian countries were supposed to increase to a billion people by the turn of the century. However, as we already know, a half-century of economic progress and development came to a crashing halt in summer 1997.
The main victims of the Asian Financial Crisis of 1997 that elapsed in Thailand were
South Korea, Malaysia, Indonesia, The Philippines and Thailand itself. That economic turmoil also got the name “Asian Contagion” because of its broad effect. As economists established it, the hallmark of the crisis was the excessive borrowing from abroad that was considered necessary for the economic development in each of the countries. Asia had profited greatly during the 1980s and 1990s from massive amounts of foreign and domestic investment. The
economy was in the state of euphoria, when borrowers and investors were highly optimistic about the future. Local banks borrowed offshore at low, short-term rates and lent the money for long-terms at a substantial premium to manufacturers and real estate developers. Loans for so available they seemed free. Unfortunately, the abundance of available and inexpensive loans that were often given out without accurately analyzed business plans resulted a broad misallocation of capital into speculative and noncompetitive sectors and enterprises.
Simply, too much foreign capital was put into too few reliable investments that would be able to generate profit sufficient to service the principle and interest on debt, thus when the financial crisis happened, many borrowers found themselves unable to repay their loans, which then caused the economies of many Asian countries to massively and painfully collapse. (Hunter
Although external aspects such as high interest rates, fixed exchange rate and excessive borrowing from abroad were among the major causes of the crisis, nothing would have happened without internal weaknesses as well: inadequate supervisory institutions, traditional banking practices, and especially poor banking decisions made by the private sector of each country. Indeed, banking system in many Asian countries lacked adequacy. In fact, some local bank loans were often based on personal relationships rather than real business plans. (Jackson
One of the questions that comes on mind is why while some countries like South Korea,
Indonesia, The Philippines, Malaysia and Thailand were so strongly affected by the crisis, others countries in the same region like China, India, Vietnam or Singapore stayed relatively unaffected. Asian Contagion by Karl Jackson, 1999, suggests that those five nations became victims of the crisis because five of the following factors were present in each of the countries:
Capital account convertibility
Fixed exchange rates
Excessive expansion of domestic lending accompanied by gross misallocation of investment by private sector
Absence of regulatory and supervisory capacities to control excess in the financial sector
Paralysis of political decisions making at the onset of the crisis
While other Asian countries shared only few of the above characteristics, Thailand,
Indonesia, The Philippines, South Korea and Malaysia manifested…