Europe S Renaissance Versus Asian MeltdownV Essay

Europe S Renaissance Versus Asian Meltdown.V Essay, Research Paper

Europe s Renaissance Versus Asian Meltdown. The origins of Asian Problems Major setbacks in Asia occurred after remarkable success-stories of many countries in the region. Average annual GDP growth came close to 10% per year for 30 consecutive years for the Asian Tiger economies. During the last decade their share in the world exports has grown to 20% of the total, in 1996 they bought about 19% of the US exports and they received a half of total capital inflows to developing countries. Over a decade, the region has been the source of lucrative investment returns.In contrast, during 1991-1993 world economy was quite recessive. Emerging markets were a hot topic and everything looked great. Then the reality knocked on the door.The origins of Asian problems come from long-talked-about overheating of these economies. Talking about the economy s overheating became a part of everyday life at the end of 1997. But it did hit hard at the moment nobody really expected it. All of a sudden everybody asked, what happened, why it happened, what overheating means. It meant large external deficits, property and stock market bubbles; amplified by having a pegged exchange rate system for too long. These factors encouraged foreign lending among both financial institutions and private companies, which exposed them to large foreign exchange risks. In happy days nobody discounted into the business plans the realisation of those risks, but when it did occur, private sector was hit hard. And lastly, boom periods always create very hectic banking activities, fast growth of loan portfolios, weaker financial supervision from central banks and large bad debt write-offs. Thanks to international capital liberalisation these economies now have much higher levels of foreign debt than a decade ago. Also, the economic decisions were largely influenced by politics, which in turn lead to corruption. In Indonesia the economy was almost entirely under the control of one family, the family of the ruling president Suharto. In South Korea, the collapse of family-based chaebols brought its whole economy close to ruins. Developed European countries and Japan contributed much to the problems. The banks of these countries are very rich in saving deposits. The returns on investment being low in homemarket, they started searching for places to invest. They became hooked up with the hefty returns in South East Asia and mismanaged their risks. In addition to that most of the investors considered themselves short-term, speculative investors. In case of any problems at all this money fleas the country first, making the things even worse. So it happened that Japan lost its export share which counted for forty-four per cent in the Asian countries. Comparison with Eastern Europe. A lesson learned. All this happened to Asian Tigers , but one could trace the same processes in most of the East European countries. The development stages are different, as are the problems. But it seems to be more the question of timing, not the probability or the order of occurrence of the problems. Eastern European economies, however, are not basket cases. Unlike East Asian tigers they have not enjoyed a decade of rapid investment-led growth. Investment in these countries averages 23 per cent of GDP against the tigers 40 per cent. Eastern Europe is not suffering from overcapacity either. It has not seen any property bubble and stock market capitalisation remains low. Hot money inflows, bank loans and portfolio investments have been relatively modest. On the other hand, direct investment inflows, foreigners buying companies and building factories have been significant and will stay put. For example, all of Hungary s and half of Poland s current account deficits have been financed by foreign direct investment. While real-exchange rates have risen over the past three years, the Baltic countries have progressed most. However, towards the end of year 1997 the sharp rise of the interest rates and fall of the stock markets in Eastern Europe was greatly affected by the Asian crisis. The reason is that Eastern Europe is considered to be an emerging market as well as South East Asia. When the Asian currencies devalued and stock markets collapsed, foreign investors lost confidence in the eastern European region that they regarded with the same risk coefficient as the Asian countries. The investors quickly withdrew their funds from Eastern Europe as well and located them in less risky enterprises in developed countries as well as in the US government T-bills. As the result of it the stock markets fell as much as ca 60 per cent in Estonia. The tragedy of Eastern European markets was in that their economy was much based on borrowed capital. Banks were heavily granting loans on favourable conditions. People were encouraged to spend instead of saving. Banks signed syndicate loans with foreign banks to allow for more spending, which had a double effect on the economy in the face of growing foreign trade deficit. With the end of borrowing opportunities and the lack of foreign capital inflow, the reserves of money decreased immensely. The central banks tightened their policies. The interest rates rose and there was a threat of currency devaluation. The stock prices, which had been overvalued, fell greatly and as there was no money coming in, they remained low. The investment of foreign investors in the stock mar