Asian Financial Crisis of 1997
It is indeed true to assert that The Asian financial Crisis of 1997 imparted a truly tremendous influence on the economic and political development of East Asian nations and sparked the necessary impetus in acknowledging the economic interdependence. This crisis also put clear emphasis on the necessity of cooperation and integration within this region of the world.
Causes of the Crisis
When it comes to the causes of the Asian financial crisis, there are two schools of thought on what caused it. The first school of thought orbits around the idea that the collapse of the Thai Baht in July of 1997 was largely responsible for this crisis. "One view is that there was nothing inherently wrong with East Asian economies, which have historically performed very well. These economies experienced a surge in capital inflows to finance productive investments that made them vulnerable to a financial panic. That panic -- and inadequate policy responses -- triggered a region-wide financial crisis and the economic disruption that followed (Sachs and Radelet 1998)" (Moreno, 1998). Thus, one can understand this theory in the sense that since the Asian financial system had such a long history of intense stability and prosperity, it was not used to adversity, and thus any negative activity was a crushing blow to the general morale and had the ability to instill panic.
On the other hand, an opposing view saw the Asian financial system as a whole as being responsible for the collapse. This is a theory which views the Asian financial systems as being inherently flawed and weak. "These weaknesses were caused largely by the lack of incentives for effective risk management created by implicit or explicit government guarantees against failure…The weaknesses of the financial sector were masked by rapid growth and accentuated by large capital inflows, which were partly encouraged by pegged exchange rates" (Moreno, 1998). This paper will attempt to demonstrate how these causes were actually both responsible for the crisis at large. This paper will also explore the major outcomes of the crisis and how the crisis ultimately led to greater integration.
Thai Baht Collapse
The previous environment of finance and trade in East Asia before the collapse was generally one of high savings and investment rates with moderate inflation; quick growth went hand in hand with large jumps in asset values, stock and land prices and in short-term borrowing from overseas (Moreno, 1998). However, a few years before the crisis a series of negative external factors such as the devaluation of Chinese and Japanese currencies, along with a marked decline in semi-conductor prices had an adverse impact on export revenues, which in turn retarded the growth of economic activity and asset prices steadily declined in a range of nations in Asia. Thailand could not withstand all of these factors and thus we saw the collapse of the Thai baht in 1997; this in turn caused investor to re-evaluate the robustness of currency pegs and other elements in the region (Moreno, 1998). "The result was a wave of currency depreciations and stock market declines, first affecting Southeast Asia, and then spreading to the rest of the region. In the year after collapse of the baht peg, the value of the most affected East Asian currencies fell 35-83% against the U.S. dollar (measured in dollars per unit of the Asian currency), and the most serious stock declines were as great as 40-60%" (Moreno, 1998). These types of disturbances are simply hard to bounce back from and can lead to comprehensive bankruptcies and a stalling in credit flows in some of the most extremely impacted economies. This in turn can stunt or slow economic activity as it did in the Asian financial crisis.
Once the Baht depreciated, foreign funds hemorrhaged into the country in order to indulge in the high interest rate differential (ADBI, 2013). The situation got worse as the region engaged in short-term borrowing from overseas, so that long-term projects could be bankrolled as a result of currency and maturity mismatches (ADBI, 2013)....
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