Asian Crisis Essay Research Paper Identification and

Asian Crisis Essay, Research Paper

Identification and Origins of the Asian Crisis As the economist Walden Bello said “the evaporation of the Asian economic miracle probably ranks second only to the unraveling of Soviet socialism as the greatest surprise of the last half-century” (Bello). The Asian crisis is a combination of several negative changes in their economy. The characteristics of the Asian Crisis are a lower G.D.P, foreign investment and value of a country’s currency. There was a drop of forty to eighty percent in Southeast Asian countries. The bankruptcy of the banks and other financial institution’s was another major characteristic of the Asian Crisis. Another common characteristic of the Asian crisis was people began to try to sell their currency for American dollars in a frenzy, which became a currency crisis. Total production of the countries has dropped severally (G.D.P). A frequent sign of the Asin Crisis was how high current account deficits were compared with the G.D.P of a country. It got as high as five to seven percent in some countries. The exact cause of the crisis is impossible to decide, that is why in this essay we will discuss five theories. The theories are competition from China and Japan, investments in high risk sectors, foreign investment into currency, financial intermediates, the Japanese economy and Asian country’s involvement into their dollar. Though the crisis was inevitable, it was not till July 2, 1997, that the inflated markets in Asia began to feel the crisis. This is when Thailand devalued its currency against the U.S. dollar. This devaluation started an effect like a ripple in a pond. This led to devaluations in Indonesia, Malaysia, Philippines, Taiwan and Vietnam. These devaluations were because most of the Asian economy deals with exporting. If Thailand had a lower dollar than it would make it easier for them to export, compared with the other Asian countries. When Thailand devalued the Baht, they forgot that the twenty billion dollars in foreign accounts would cause the account holders to sell. This is what eventually happened. Too many baht were chasing too few dollars that led to an enormous sell off which caused the currency crisis. The Asian countries characterized the hazards of fast-track capitalism. They entered billions of dollars through investments and loans into the Asian economy. Instead of this capital being put into the domestic manufacturing sector, which is commonly an area that provides a low yield but also low risk. They instead put this capital into high risk sectors of the economy like real estate, stock market and consumer financing. The abundance of real estate began to grow at an alarming rate. By 1996 there was more than $20 billion unowned property in Thailand alone. Since government policies did not regulate the financial sector, the banks were highly overexposed to the real estate market. Foreign investors began to notice that the Asian banks had significant amounts of money in real estate ventures that eventually turned into unpaid loans. With the overexposure in real estate, weak export growth and a spreading current account deficit was signaling fear of a currency devaluation that would devastate their investments. Another factors which caused the Asian crisis was competition of China and Japan versus the developing countries of Asia. Since the developing countries in Asia have been growing for the last thirty years, people were are starting to earn higher wages. As a result companies that produced low value goods began to move production from Southeast Asia to China. Southeast Asia faced the same challenge but it is with high value goods against Japan. Until the crisis the Yen had been slowing decreasing as the other Asian country’s currency’s began to rise. This meant that Japanese goods were becoming cheaper while Southeast Asian goods were becoming more expensive. Japan was not really a factor in creating the recent Asian crisis, but it plays a very large role in getting out of the crisis. Since Japan accounts for between five and 12% of all Southeast Asian country’s G.D.P, while Japan struggles other Asian countries will struggle. Since Japans G.D.P had also been hit hard with an annualized decrease of 5.3 percent, this has only fueled the crisis even more. The devaluation of the Yen to an 8-year low of 147 against the American dollar had a unbelievable effect on Asia. It undermined the competitive advantages that Asian countries had exporting because of their historical lows currency compared with the Yen. The governments lack of responsiveness to the financial sectors problems have also lead the Japanese economy into a whirling tailspin. The pillars of Japan’s banks have crumbled during the Asian crisis. Only now is the government beginning to intervene and take control of weaker banks in Japan. You probably are wondering how the Japanese banks go so into debt. Well under the governments guidance, the banks kept worthless companies in business by giving them loans that undermined the economy. . The Impact of the Asian Crisis Domestically and Foreign The impact socially and financially that the Asian crisis has had on the world is immeasurable. We once knew the Asian countries for the technology and economic power. Now they are responsible for the downturn in the global economy. “Asia was once feared for its economic might. Today it is feared for its economic weakness-and the harm its ailing system will