Globalization and the Asian Financial Crisis

globalization and the Asiatic Financial Crisis The Asian pecuniary crisis is a prime example of an economicalalal meltdown and it exemplifies the effects planetaryization has during times of widespread economic downturn. According to the Oxford English Dictionary, globalization is the consolidation of national economies into the international economy through trade, foreign direct investment (FDI), dandy flows, migration and the spread of technology. The global economy is sightly further inter-twined and therefore it is actually difficult to stop the effects of an economic crisis.The Asian fiscal crisis was a major economic crisis that spread throughout several Asian countries. The beginning of the Asian financial crisis offerful be traced back end to July 2, 1997, with many an another(prenominal)(a)(prenominal) believing the start of the crisis was triggered in Thailand (King 439). On this daylight, the Thai governing body floated their currency, the Thai Baht, a nd it also went to the worldwide M atomic number 53tary Fund (IMF) for technical assistance. One by one, southeastern United States Asian countries such as Thailand, Indonesia, sec Korea and Japan saw their economies crash in the wake of toilsome 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 mystical smashing flow to developing countries rose more than fivefold, from US $42 billion 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 reduce 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 municipal production and development stalling.The reason why this was happening was because many corporations depended on foreign investment and when they arid up, the business es could not meet their debt repayments, leading to many firms folding across Asia. Within a week of that day in July, the Philippines and Malaysian political sciences were heavily intervening to defend their currencies. Soon otherwise East Asian countries became touch Hong Kong, Taiwan, Singapore and others 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 capital. These countries were targeted by investors because they were classified as rising markets, meaning that they had rapid growth and industrialization (Hanieh 65). Hence, they seemed to be ideal for investors as they sought after postgraduate profits and yields. It must be emphasized that most of the inflows that came were for short term portfolio investment purposes. Private capital inflows coming into the emerging markets were $42 billion, which increased to a gigantic $256 billion in 1997 (Hanieh 70).Ironically, that peak was the aforesaid(prenominal) year as the markets crashed. As mentioned previously, most of the inflows were for portfolio purposes therefore, the stock markets were experiencing utmost booms and estate prices were also on the rise. approximately of the countries had their currency pegging loosely against the US clam in the run up to the crisis. The informal pegs to the US dollar promote capital inflows due to the large interest rate differential. This though, attracted problems as well, due to the predictable nominal grade, it encouraged unhedged external get.This asset boom continued to grow and the flow of credit continued to increase. This resulted into Japan, who was already distraint from their lost-decade, into depreciating their currency (Hanieh 74). As a result, this made their currency weaker and doing so, it made the exports of the South-Eastern countries uncompetitive. This was damaging to the rest of the countrie s to contain on a global scale. Most of the functions that these countries under bind are producing parts of a production that would be later assembled and comp permited in countries like Japan or China.As stated earlier, these tiger-economies operated in a fixed exchange rate system therefore, their central banks needed 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 maintain the exchange rate, business confidence was shattered and spread across other countries. The effect 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 bear upon three main emerging economies in the global market Thailand, Ind onesia 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 seek in vain to hold the exchange order as the Thai government spent $23 billion buying the Baht to maintain to US dollar peg (King 440).Investors sank money into these economies without knowing the profuse extent of policies involved therefore, as the mounting hidden learning of the Thai economy came to surface, it resulted in many speculative 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 base investment decisions had increased the investment risk. This resulted in a contagion effect to other Asian countries.Much of the instabili ty 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 worldwide and had an impact on a global scale (Prakash 127). On that day, it provoked a substantial response from Wall Street with the Dow Jones go by 554. 26 points (or 7. 18%), its biggest point fall in history, causing stock exchange outicials to immobilize trading (Prakash 128).There are several thoughts 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 sudden influx of capital flows, the financial systems were not capable of discourse the vast amounts. The weak financial systems led to poor investments and excessive risks. Negligent oversight of corporations cause d consequences in economic downturns that were not a concern in the mid-nineties boom. The macroeconomic policies of the South-East Asian countries made their economies defenceless to the uncertain confidence of their foreign investors.However, many economists argue that market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions. Also, the deeper roots of the economic crisis went back to the early 1990s. passim the 1990s, growth in South-East Asia attracted huge capital flows. The key 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 even greater percentage.Much of the instability in the Thailand economy was caused by heavy short term borrowing and as previously stated the government spent a lot of their reserves to maintain the exc hange rate. This created a false sense of security in simulation the economy was stable. However, this support of the highly leveraged private sector by the Thai government lent the port of stability towards an unstable system and attracted even more foreign loans. In February 1997, the Thai company Somprasong was otiose to make maintenance payments on its high directs 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 risky 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 speculative attacks on the Baht forced Thailand to let the currency float on July 2, 1997, a key date in the Asian financial crisis. As an after effect, the 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 country to seek help and the IMF clear a loan for $3. 9 billion (Glassman 126). However, the IMF gave stipulations that the government had to follow. 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 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 management of currency risks, credit evaluation and public financial reporting. mo ve up global credit and liquidity fed vast amounts of capital to badly regulated institutions. Those had limited foil 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 throw in 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 domino effect was evident between the economies. As the currency of the country depreciated, this had a negative effect on the competitiveness of other count ries. 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 floating 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 relegate 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, higher 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 cute the countries to follow three key elements large official financing packages, structural reforms, and macroeconomic policies that intended to paying back the crisis itself (King 463). Structural reforms were seen as the root causes of the crisis. They intervened to shore up institutions and more greatly, improved the financial supervision and decree.Thus, reduction the likelihood of a crisis reoccurring. Other structures were also altered to help the economies in the long run they fortify competition laws and increased transparency. This would help reduce eradicate corruption. Macro policies were harder to implement due to the turbulent market conditions though, after some initial hesitations, nominal and real i nterest 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 subject fields 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 best sought achievement/target. Transparency is also important to crisis prevention. At the height 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 that needed to be canvas 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 monetary policy 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 employ 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 crisis 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 overall effect was a global one. In the contemporary world, one country does not stand by itself, global integration has meant that countries are connected and interlinked. Therefore, as we witnessed from the Asian financial crisis, the end result of poor management of financial institutions can have a forceful impact on the world economy. In the current climate, we are facing a global recession, an expect 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 current 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 Hanieh. Forum of Hierarchies of a Global Market The South and the Economic Crisis. Studies in political Economy pile 83. (2009) 61 81. Print. Michael R. King. Who Triggered the Asian Financial Crisis? Review of International Political Economy record 8. Issue 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.