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Asia

Between 1997 and 1998 the currencies of Indonesia, Thailand, and South Korea lost over a third of their value, while the currencies of the rest of Asia lost over one-fifth their value. This economic downturn was fueled by many variables. Pinpointing those variables may be impossible. There are however many theories as to which entities lent hands in the collapse of the Asian economies and their currencies. The fundamental issue in Asia was a liquidity problem, not a solvency problem. The debt was concentrated in short-term liabilities while reserve assets were low. Though there is evidence of weak banking systems, this was not the primary cause of the currency crisis. This problem was deeply rooted in the financial policies that have been overlooked. This paper will examine the Asian currency crisis, the extent to which the IMF may have actually worsened the problem, the explanatory power of an Under-Consumption Theory, and the effect of the crisis on the Asian environment.

Finance and Liquidity leading to Crisis

During the 1990's, East Asia attracted large inflows of foreign capital, most of which were short term (Weber, 2001). These inflows were encouraged largely by weak European and Japanese economie


Although there are many factors that may have aided in the currency crisis, this paper examined some of the more supported ideas. The problem is that such a crisis could have been avoided, but now it has had serious complications and damaging effects on the people and the environment in the region. With such damage, the economy is weaken and vulnerable to even more threats. The financial economy may recover, but the real economy may not.

Leightner (2000) argues that Under-Consumption (based on Mummery and Hobson's Under-Consumption Theory) is a main factor in the Asian currency crisis. The main point in his argument is that all income is derived from final demand. If all this income is not used to buy all the final goods produced, then a condition of under-consumption results, causing incomes to fall and a depression of trade to occur. His argument continues to state that the Asian miracle failed when consumption did not absorb what was produced by the thrift of Asians and foreigners. This is evident in Thailand where about 755,000 housing units were built in Bangkok between 1992 and 1996, when only an estimated 382,240 were needed (Leightner, 2000). According to the Government Housing Bank, 40 percent of the houses remained unoccupied in spite of property prices falling more than 60 percent. Leightner (2000) continues to argue that saving for the future is possible for individuals but not for the whole community.

and vulnerability (Leightner, 2000).

Although consumption was inadequate by the mid-1990's to

Foreign investors began to withdraw money from Asia because of growing concerns about currency overvaluation and weak banks (Sachs, 1998). According to Sachs (1998) the IMF deepened the sense of panic because of its proposed fix, which included high interest rates, budget cuts, and immediate bank closures. This was evident in Indonesia, Thailand, and Korea where stock and currency markets dropped sharply after the IMF announced its entrance. Asia's own banks stopped making loans in response to the IMF's plan to cl

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Approximate Word count = 1387
Approximate Pages = 6 (250 words per page double spaced)


  

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