Globalization and the Asian Financial Crisis

globalization and the Asian Financial Crisis The Asian monetary crisis is a prime example of an sparing meltdown and it exemplifies the exits orbiculateization has during time of widespread economic downturn. According to the Oxford English Dictionary, globularization is the integration of theme economies into the international economic system through trade, egressside direct locatement (FDI), groovy come downs, migration and the spread of technology. The global economy is becoming further inter-twined and therefore it is rattling difficult to stop the doings of an economic crisis.The Asian financial crisis was a major economic crisis that spread through come on several Asian countries. The get of the Asian financial crisis can be traced tolerate to July 2, 1997, with numerous accept the find of the crisis was triggered in Siameseland (King 439). On this daylight, the Tai governing spoiled their currency, the Thai baht, and it withal went to the Internat ional fiscal Fund (IMF) for technical assistance. One by oneness, sou-east Asian countries such as Thailand, Indonesia, South Korea and Japan saw their economies butt in in the wake of heavy foreign investment.An economic boom had do the region an attractive investment proposition for investors for much of the 1990s. From 1990 to 1997, the private majuscule flow to developing countries rose more than fivefold, from US $42 cardinal in 1990 to US $256 billion in 1997 (King 441). However, in the summer of 1997, the economic climate changed, on July 2, 1997, the Thai Baht fell around 20% against the US Dollar (King 441). This was seen as the trigger for the crisis, as investors grew nervous, which led to disinvestments on the Baht, resulting into domestic output and development stalling.The reason why this was happening was because galore(postnominal) corporations depended on foreign investment and when they dried up, the businesses could not meet their debt repayments, take to m any firms folding across Asia. Within a week of that day in July, the Philippines and Malaysian brasss were heavily intervening to defend their currencies. Soon opposite East Asian countries became involved Hong Kong, Taiwan, Singapore and early(a)s to varying degrees. As global integration was spreading and growing rapidly, the markets were opening up and becoming more liberalized.This enabled these countries to get a huge influx of foreign groovy. These countries were targeted by investors because they were classified advertisement as emerging markets, meaning that they had rapid growth and industrialization (Hanieh 65). Hence, they seemed to be ideal for investors as they desire after high profits and yields. It essential be emphasized that most of the inflows that came were for pitiful term portfolio investment purposes. hugger-mugger detonator inflows coming into the emerging markets were $42 billion, which sum upd to a enormous $256 billion in 1997 (Hanieh 70 ).Ironically, that peak was the same year as the markets bashed. As mentioned previously, most of the inflows were for portfolio purposes therefore, the entrepot markets were experiencing high booms and estate prices were also on the rise. just near of the countries had their currency pinging loosely against the US dollar in the cater up to the crisis. The informal pegs to the US dollar encouraged enceinte inflows due to the enceinte have-to doe with yard differential. This though, attracted problems too, due to the predictable nominal pass judgment, it encouraged unhedged external borrowing.This asset boom act to grow and the flow of credit continued to increase. This resulted into Japan, who was already suffering from their lost-decade, into depreciating their currency (Hanieh 74). As a result, this determine their currency weaker and doing so, it made the exports of the South-Eastern countries uncompetitive. This was damaging to the rest of the countries to integra te on a global scale. Most of the functions that these countries undertake are producing references of a production that would be later assembled and completed in countries like Japan or China.As stated earlier, these tiger-economies operated in a fixed step in rate system therefore, their telephone exchange banks inquireed to keep enough reserves so that they could support the Baht at the fixed exchange rate. As the central banks ploughed money in to support their currency to primary(prenominal)tain the exchange rate, business confidence was shattered and spread across other countries. The operation of this was further felt as their exports were much dearer since Japan devalued their currency. The knock-on effect was that foreign investors started to take their money out.Thailand was the major casualty of this and it quickly passed onto its neighbours thus, the start of the Asian financial crisis. The financial crisis heavily affected three main emerging economies in the glob al market Thailand, Indonesia and South Korea (Hanieh 64). These were the hot-bed for foreign investors who sought high returns on their investments. As the fixed currency fell, the more the investors pulled out thus, worsening the currency further. The central banks tried in vain to harbor the exchange rates as the Thai giving medication spent $23 billion buying the Baht to take for to US dollar peg (King 440).Investors sank money into these economies without knowing the full extent of policies involved therefore, as the mount hidden information of the Thai economy came to surface, it resulted in many wondering(a) attacks on the Thai Baht, which finally forced the central bank of Thailand to float the Baht as it was no longer able to defend the itself against the US Dollar. It can be argued that the uncertainty, which is the absence of quality information on which to can investment decisions had incr locomote the investment risk. This resulted in a contagion effect to other A sian countries.Much of the mental unsoundness in the economy of Thailand was brought about by heavy short-term borrowing that required debt maintenance. The Thai government attempted to shore up shaky investor confidence by formally backing the financial institutions that were heavily indebted aboard. By October 27, 1997 the crisis had spread world-wide and had an impact on a global scale (Prakash 127). On that day, it create a substantial response from Wall Street with the Dow Jones falling by 554. 26 points (or 7. 18%), its biggest point fall in history, causing stock exchange scoreicials to suspend trading (Prakash 128).There are several mentations as to why the Asian financial crisis occurred. One of the clearest problems that can be seen is that of their financial systems. It has been evident that because the abrupt influx of capital flows, the financial systems were not sure-footed of handling the vast amounts. The weak financial systems led to poor investments and lus h risks. Negligent oversight of corporations caused consequences in economic downturns that were not a fretting in the mid-nineties boom. The macroeconomic policies of the South-East Asian countries made their economies penetrable to the uncertain confidence of their foreign investors.However, many economists argue that market overreaction and herding caused the immerge of exchange rates, asset prices and economic activity to be more repellant than warranted by the initial weak economic conditions. Also, the deeper roots of the economic crisis went back to the early 1990s. Throughout the 1990s, growth in South-East Asia attracted huge capital flows. The account shortfall of Thailand had grown from 5. 7% in 1993 to 8. 5% in 1996 (Khan, Islam, Ahmed 177). This was worsened as the domestic production slowed as the account deficit represented an so far greater percentage.Much of the instability in the Thailand economy was caused by heavy short term borrowing and as previously state d the government spent a lot of their reserves to maintain the exchange rate. This created a false sense of security in pretense the economy was stable. However, this support of the highly leveraged private sector by the Thai government lent the appearance of stability towards an unstable system and attracted even more foreign loans. In February 1997, the Thai company Somprasong was unable to make maintenance payments on its high levels of foreign debt.In the face of such instability, Finance One, the largest finance company in Thailand, failed at the end of may (Khan, Islam, Ahmed 182). Most of the lending by the company was made up of inquisitive loans for real estate and stock market margin investment. This political instability resulted in the resignation of the Thai Finance Minister thus, worsening the situation. The notional attacks on the Baht forced Thailand to let the currency float on July 2, 1997, a primordial date in the Asian financial crisis. As an after effect, t he currency depreciated further devastated the Thai economy.This forced the Thai government to call on the International Monetary Fund (IMF) for economic help. In August 1997, Thailand was the first awkward to seek help and the IMF ap be a loan for $3. 9 billion (Glassman 126). However, the IMF gave stipulations that the government had to come out. These were maintaining a level of government reserves, increasing the VAT, government cuts and a reorganisation of the financial sector. As the Baht declined sharply, a second bail-out was approved. Indonesia and South Korea also approached the IMF for financial assistance.another(prenominal) key element that caused the crisis was that in a lot of East Asian countries the capital account was liberalized for inward and outward flows for foreign investors however, domestic investors could not invest aboard and this meant they could not diversify their risks. Throughout these countries, financial institutions were inadequate. They had poor prudential trouble of currency risks, credit evaluation and public financial reporting. ascent global credit and liquidity fed vast amounts of capital to poorly regulated institutions. Those had limited transparency and poor due diligence from foreign lenders.The poor macroeconomic policies failed to manage these problems and left the countries vulnerable to shocks in many ways. Firstly, widening current account deficits, financed by short-term debt, exposed the economies to sudden reversals in capital flows. Secondly, weaknesses in the under-regulated financial sector fuelled risky lending. A further problem with exacerbated the crisis was the tendency for the government to intervene and bail out floundering companies. These guarantees put further pressure on the global market as the level of debt kept escalating.Together with the depreciating of the currency meant foreign debt proved to be too much of a burden. A further half mask effect was evident between the economies. As th e currency of the country depreciated, this had a negative effect on the competitiveness of other countries. Therefore, as the Thai Baht was tumbling, their goods became competitive and had a negative effect on other currencies, such as the Rupiah of Indonesia and the Ringgit of Malaysia (Glassman 129). After the Baht was put on the adrift(p) exchange rate, the economy of Thailand started to recover and was able to alleviate their debt earlier than they thought in 2003 (King 459).South Korea did manage to recuperate despite its weak financial system. However, Indonesia was especially hurt by firms going bankrupt and the devaluation of the Rupiah made it harder for them to recover. Monetary and Fiscal policies were tightened as countries fought to cope with the financial panic. The countries also raised interest rates in order to attract foreign currency and increase the price of domestic assets. On the other hand, high rates meant higher repayments and many could not survive their debts. Following the Asian financial crisis, Russia, Mexico and genus Argentina all suffered economic collapses (King 61). Another factor that is thought to be one of the reasons for the crisis, the Asian currencies appreciated to levels that were too high leading to a crash in the markets. The IMF gave these countries support during these times and in return they wanted the countries to follow three key elements large official financing packages, structural reforms, and macroeconomic policies that intended to counter the crisis itself (King 463). Structural reforms were seen as the root causes of the crisis. They intervened to shore up institutions and more eventfully, improved the financial supervision and regulation.Thus, reducing the likelihood of a crisis reoccurring. Other structures were also altered to help the economies in the long run they strengthened competition laws and increased transparency. This would help reduce eradicate corruption. big policies were harder to i mplement due to the turbulent market conditions though, after some initial hesitations, nominal and real interest rates fell to pre-crisis levels. However, Indonesias policies steered them off course for a while before it was brought under control in late 1998 (King 464).The Asian financial crisis raised certain important issues that need to be taken into account for the international financial system. It is very important to prevent a crisis from occurring in the first place, because the short term flow of capital can be moved within seconds therefore, prevention is the outflank sought achievement/target. Transparency is also important to crisis prevention. At the teetotum of the Asian financial crisis, some unpleasant information was revealed, in particular, on the weaknesses of central banks international reserve positions.The IMF pointed this out as an integral part as closer monitoring of the finance sector could give alerts to any such problems in the future. Another issue t hat needed to be canvass after the crisis was that of capital controls. As the countries liberalized the capital accounts, they left many short falls in the regulation of them. Tighter restriction and closer monitoring of the capital flows would have helped the financial institutions to keep greater control. An additional issue that should be noted is what policies the governments used and which ones seemed to be successful in such a crisis.Looking back at the Asian financial crisis, it seems that financial insurance worked. A period of high interest rates and the market pressures eased and interest rates soon fell below pre-crisis levels. In theory, if monetary policies were implemented earlier, it might have contrasted the spread of the crisis. However, the higher interest rates meant that debt repayments were higher and led to widespread insolvencies. These macroeconomic policies are crucial as they can be implemented to the changing economic conditions. The Asian financial cri sis has brought a new way of thinking in the world of global finance.There are lessons that were harshly learnt by a few countries however, the general effect was a global one. In the contemporary world, one country does not stand by itself, global integration has meant that countries are affiliated and interlinked. Therefore, as we witnessed from the Asian financial crisis, the end result of poor management of financial institutions can have a drastic impact on the world economy. In the current climate, we are facing a global recession, an expected drop in world trade, all this as a result of a credit boom.The government and regulators must learn from the Asian financial crisis and hopefully they will be able to contain the a la mode(p) economic crisis. Works Cited Oxford English Dictionary. Oxford University Press 2010. Web. 18 March 2011. McNally, David. Another World is Possible Globalization & Anti-Capitalism. Winnipeg, Manitoba, Canada Arbeiter Ring Publishing. Print. Adam H anieh. Forum of Hierarchies of a Global Market The South and the Economic Crisis. Studies in semipolitical frugality raft 83. (2009) 61 81. Print. Michael R. King. Who Triggered the Asian Financial Crisis? Review of International Political Economy Volume 8. passing 3 (2001) 438 466. Print. Aseem Prakash. The East Asian Crisis and the Globalization Discourse. Review of International Political Economy Volume 8. Issue 1 (2001) 119 146. Print. Saleheen Khan, Faridul Islam, Syed Ahmed. The Asian Crisis An Economic Analysis of the Causes. The Journal of Developing Areas Volume 39. Issue 1 (2005) 169 190. Print. Jim Glassman. Economic Crisis in Asia The Case of Thailand. Economic Geography Volume 77. Issue 2 (2001) 122 147. Print.