South East Asian Crisis
On the 2nd of July 1997, Asia was hit by one of the most devastating financial crises it has ever seen. Of all the financial crisis that have taken place, this was one of the most distressing in that it was totally unexpected. The purpose of this paper is to show that particular developmental strategies employed by these economies eventually led to their downfall. It will attempt to find out where the origins of the crisis lie, and what events started the cycle that eventuated with this disaster. In order to trace the events that led to the eventual collapse of the Asian economies, one must venture across the ocean to the United States. The issue of liberalisation first gained attention in the US during the Regan Administration. However, it was during the Clinton era that liberalisation became a top priority. Whereas previous governments had pushed for the liberalisation of Japan, one of Clinton's main foreign policy objectives was the liberalisation of the Asian economies. This process was pushed forth in Asia with such vehemence because the region held a lot of investment opportunities for American Banks, Brokerages, and other financial sector businesses. Unfortunately, Asia's economies were not structurally ready to deal with
As you can see, a variety of factors went into the destruction of the Southeast Asian economies. The Americans failed to realise that under the conditions that existed in the region, uncontrolled capital liberalisation would not work. The influx of capital overwhelmed societies, which were not equipped with the knowledge to deal with it. The entire system was dependent on a delicate balance between exchange rates and other monetary factors. In the end the over liberalisation of these economies, without sufficient controls led to one of the most dramatic crisis of all time. In response one can not help but wonder if capital mobility is more a need of the west than of the east. Underdeveloped countries need time to develop the institutional framework to handle this new form of Globalisation. Until then, they can not be fully integrated into the world capital market. Some Asian countries could see where this type of short-term speculation was leading, but they were not willing (or unable) to impose regulations on banks and investors. Malaysia was one country that was able to reduce the degree of short-term speculation through a combination of various measure. At one point net inflows of capital actually went into the negative. Thai authorities, on the other hand, were unwilling to intervene to take control of their current accounts deficit. They felt that it was inappropriate for a government to intervene on behalf of a deficit that was caused purely by the private sector. Similarly, in Indonesia also the current account deficit started becoming a representation of private investments. Theories, like the one expressed by Cordon, imply that market forces will take care of any current account deficit. However, in an unusual situation like this, where enormous amounts of capital is available for short-term profit, private agents do not always behave rationally. These countries themselves provided investors with conditions that led to irrational behaviour. The adoption of a fixed exchange rate and an absolute commitment to an unregulated capital account made for good hunting. In these instances measures to keep the current account under control are essential. The second phase of the liberalisation process consisted of openeing up the capital accounts of the region. Guarantees were given to non-residents that they would be able to withdraw their investments and, also, the end of restrictions regarding foreign asset holding by residents. It is this phase that defined East Asian growth for almost a decade. For the first time Thailand's companies had access to external finance. This relationship between the corporations and the outside world also made this sector vulnerable to external changes. Through this entire process, Thai governments were playing a delicate game trying to balance the exchange rate and the interest rate. It was imperative for these economies that the exchange rate should not appreciate. They engaged in sterilisation op
Some common words found in the essay are:
East Asian, Thailand Asia, Similarly Indonesia, United Eventually, Southeast Asian, Southeast Asia, , Singapore Philippines, Japanese Japan, Thailand Philippians, exchange rate, asian economies, east asian, asian countries, foreign investment, current account, fixed exchange rate, southeast asia, thai baht, foreign capital, fixed exchange, current account deficit, east asian economies, rate foreign investment, foreign currency reserves,
Approximate Word count = 1996
Approximate Pages = 8 (250 words per page double spaced)
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