Financial Crises In Emerging Market CountriesEssay Preview: Financial Crises In Emerging Market CountriesReport this essayThe East Asian CrisisIn the summer of 1997, an economic and currency crisis rocked the Asian markets. One by one, Southeast Asian countries such as Thailand, Indonesia, Korea, and Japan saw their economies crash in the wake of heavy foreign investment. An economic boom had made the region an attractive investment opportunity for much of the 1990s. By 1997, however, domestic production and development had stalled, and foreign investors grew nervous. A divestment run on the Thai baht triggered the crash. Large corporations, extremely dependent upon the confidence of foreign investors failed to meet debt obligations and began to fail throughout Southeast Asia. As a result, currencies throughout the region faltered and nosedived from their mid-1990s positions of stability (Mishkin, & Eakins, 2006).
The causes of the Asian economic crisis are varied. For example, lax oversight of corporations had ramifications in economic downturns that were not a concern in the mid-90s boom. Macroeconomic policies of the Southeast Asian countries made their economies vulnerable to the uncertain confidence of their foreign investors. Despite this, Corsetti, Pesenti and Roubini (1998) make the point 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.” Therefore, much of the crisis that began in 1997 had roots that went back further to the areas economic growth that had started in the early 1990s. In addition, many economists consider the Asian economic collapse to have begun in Thailand; conditions throughout the region meant that other countries economies were destabilized to the extent that they quickly followed Thailand.
It is also worth examining the role that IMF played in helping or hindering the recovery from the 1997-1998 Asian economic crises. When countries of Southeast Asia found themselves over-leveraged and unable to meet foreign debt obligations, they turned to the IMF for help. In return for aid, countries had to agree to certain policy conditions set out by the Fund. Thailand was the first country to solicit help, and in August 1997, the IMF approved a loan for 3.9 billion US dollars. This agreement stipulated the maintenance of a level of government reserves, the increase of the VAT, government cuts, and a restructuring of the financial sector. A second bail-out was necessitated by the sharp decline of the baht, with subsequent aid packages through 1998 that put further conditions on the Thai government. Moreover, Indonesia also approached the IMF for assistance in 1997 and credit was approved with similar conditions that the Thai government had agreed to, including closer oversight for the banking sector. Although few of the strict loan conditions were adhered to, the Indonesian government also received billions in IMF aid. Korea also relied upon IMF support during the economic crisis of the late 1990s. Several aid packages introduced growth targets, and improvement of oversight for the banking industry. The Korean government was called upon to “dismantle the non-transparent and inefficient ties among government banks and business” (Corsetti et al., 1998).
There are many reasons frequently given for the wide reach and severity of the Asian economic crisis. An investment boom in the early- to mid-1990s saw the economies of Southeast Asian countries grow rapidly. However, much of this investment was in very speculative areas. Real estate and stock market margin investments constituted a high proportion of foreign investment and destabilized the Asian economies when investor confidence changed. In addition, the currencies of many of these Asian countries had appreciated to unsustainable levels. Many of the countries in question such as Thailand, Malaysia, and Indonesia operated a fixed exchange rate system that artificially maintained their currencies value. The result of this policy was to create large current account deficits and set up these economies for monetary speculative attack (Peter G. Peterson, 1999).
In 1998, the IMF placed much of its economic and political support for the Asian free market in the Asia-Pacific region at loggerheads with China of which Asian countries suffered a “great deal” in 1991 and who did not want to tolerate the Chinese economy in any way, shape, or form. To counter a rising international competition for economic resources, the IMF placed great emphasis on promoting “international economic cooperation”; the IMF believed that a strong economic growth rate, well-developed political system, and the stability of the “economic recovery”, as defined in “Fiscal Year 1998”, could prevent “a major structural deterioration in the economic situation” (Newark and Rolot, 2006). The IMF also placed a large emphasis on a greater role for public services and social programs in enhancing national economic development. These included: • economic “transaction”, which focused on the sharing of resources (i.e. the financial sector, education, healthcare) with other countries, and to implement and expand social, political and technical policies in the developing world of the “developed world” (Hoffman, 1979),
• developing education to ensure well-rounded knowledge of the needs of the developing world and to provide a level playing field for citizens and the economic system (Vincent, 2009)
Financial Stability in the Asian Economic Crisis
In June 1996, the Central Bank of the Philippines and Asian Central Bank of Korea placed substantial economic and foreign reserves in the Philippines and Central Bank of Korea for a combined three years during a period of 6 years (Philippine Economic Court, 1997). These reserves included significant holdings in the Philippines Government Fund (GF), the National Asset Reserve System of the Philippines and a large amount of private capital. The Federal Reserve Bank of New York and its related entities, including the National Bank of China also began their research in the Philippines over a period of many years. This continued over the two and a half decade period prior the Philippines was the world’s biggest economy.
The Philippine Government was also very active in providing high level of educational and employment assistance to the Philippines. During the period 1997 to 2005, the Philippines provided over 1/3 of the official student loans, up from 7/3 in 2000. The principal residences of the student borrowers at the GF and Federal Reserve Bank of China increased by over 4,900 percentage points. In total, more than 400,000 students were receiving loans under 1/3 of their budget. In 2002, the US Department of Education authorized the Central Banks of the Philippines and the Commonwealth Territories to establish the Philippine National Debt Fund. While the US did not establish the debt fund to begin with and do not now, the Central Banks recognized that there is now a need for a financial institution, a business, or a service provider of loans under a number of various conditions. The primary loans were the Philippine Military Training (PNT) and Philippine National Fund. These activities contributed to the creation of a major financial institution with a direct relationship with the Philippine Government.
In April 1997, the Republic of Korea and the People’s Republic of China entered into a joint foreign currency policy with the Philippines in response to a series of crises (Citizens’ Emergency, 1998). During this period the two countries raised significant debts totaling over $400 billion (Citizens’ Emergency, 1997; CCLU, 2004). In August 1997, the United States and its closest allies invaded, destroyed, and occupied the southern portion of the Bering Sea over a long period of time; the Republic and China became the first
A further problem that exacerbated the Asian currency and economic crisis was the tendency for governments and their central banks to promise bail-outs for foundering companies. The effect of these guarantees on the world market was to enable even more borrowing on the part of an already highly-leveraged society. Furthermore, the borrowing rate for domestic banks abroad was artificially low as a result of this government backing. Coupled with the currency depreciation that most countries were experiencing, this level of foreign debt proved to be too much of a burden
The domino effect was also seen due to the extreme interconnectedness of the Asian countries economies. When the currency of one country depreciated, this had a negative effect on the competitiveness of the other countries. So, when the Thai baht began to sink, this had a depreciating effect on other currencies such as the ringgit and the rupiah. For this reason, the spread of the crisis throughout Southeast