By: - Saefudin
- Shinto Thomas
Flinders University, Australia
- Shinto Thomas
Flinders University, Australia
Introduction
In the late half of 1980’s, the Asian economies started to grow in a faster pace and the
In the late half of 1980’s, the Asian economies started to grow in a faster pace and the
living
standards of the people improved on an average 4% to 6% in a year (Hong Kong Institute of
Economics and Business Strategy, 2000). This made possible by the government
policy to have high short-term interest to attract more capital investment and became
investor’s heaven (Knufken, 2008). Due to the economic growth and improved
entrepreneurial activities led the economy to tackle poverty, unemployment and poor
economic conditions prevailed in the region and paved way for better education
and better living standard. The government policy to increase the export and
continues flow of capital from Japan and Europe made the ‘east Asian miracle’
or economic
growth in the region and it continued until the first half of 1990’s (Beeson
& Rosser,
1998). The overflow of capital and unrealistic spending and investment later lead to the
financial crisis of many countries in the region and derailed the economy and people.
The spread of this crisis even then affected other emerging countries and world
capital market (Hong Kong Institute of Economics and Business Strategy, 2000).
Problems:
Flow of
events that lead to financial crisis:
In the first
half of 1990’s, the south-east Asian economy overheated by the foreign investment
and short-term debt accumulated beyond control. To keep the interest rate higher and
continue the economic boom, Thailand, South Korea and Indonesia acquired a
lot foreign fund in short-term. But the tumble in the world economy affected badly as
their export became less competitive due to the higher interest rate in the US.
The higher
US interest caused high cost of production to South East Asian countries due to the
borrowed fund and export went down (Knufken, 2008). The asset price of these
countries was grown high due to the conversion of foreign money to local money using their
foreign reserves and left central bank empty. Another reason for the crisis was that the
government policy to provide loans to less efficient entrepreneurs and good
credited entrepreneurs refused loans on the evil of the policy. (Moreo, 1998).
Most of the
investment raised channelled to the property market rather than production and deepened
the impact. In July 1997, the crash started with Thailand constantly reducing the
exchange rate with US Dollars and massive evaporation of capital from Thailand’s
economy. The crisis spread very vastly to the region including other countries such as
Indonesia, Malaysia, South Korea, Taiwan, Philippines and Singapore. A
few months later, the value of Indonesian rupiah, South Korean won, and
Malaysian ringgit fell massively and lost more than $100 billion from their
capital flows (D.Ba,
2013). At the same time, the international community expected some financial
acts from Japan to get rid of the financial crisis as the only surplus nation
in the region
and biggest importer from these countries. The international community wants Japan
to increase its import from these countries and support these countries and Japan
did not act on it. Instead of this expectation, the Japanese government increased
spending on other sectors. In this situation, the Japanese currency fell considerably
in the exchange rate with US Dollars and the Chinese fixed exchange rate is the
only consolation in the region (Richadson, 1998). As the crisis deepened, the
International Monetary Fund (IMF) came to rescue of the countries and offered financial
help based on some strict measures. The strict measure includes cut in public spending,
privatisation of government assets, higher taxes and dropping support for insolvent
institutions (Investopedia, 2005).
Financial
impact:
1. Loss of
exchange rate: The economic impact starts with losing the currency value of the
affected currencies with the US dollar due to pegging of exchange rates to
reduce the impact of interest and economic overburden. Hong Kong dollar was
the only exception as it utilised its currency board and foreign reserve to survive
(Beeson & Rosser, 1998, pp. 2-3).
2. Reduction
of capital flow: The reduction of free flow of capital adversely affected the
economic development, appreciation of regional assets and loss of investors
confidence. The investors deliberately avoided the main five affected
countries from their investment and resulted from a steep reduction from $93 billion
in 1996 to $9.4 billion in 1998 (Beeson & Rosser, 1998, pp. 3-4).
3. High
interest rate: Longstanding high interest rate of the affected countries, especially
shattered Indonesian and Philippines’s economy than others. These countries
used to attract foreign capital with the high-interest rate also triggered the
situation and caused all- time interest rate hike (Beeson & Rosser, 1998,
p.4).
4. Economic
growth rate decline: The economic growth of the region shattered, and consumer
demand fell in the economy. A substantial decline in economic growth rate
caused serious problems of poverty and instability to the economy.
5.
Insolvency: Most of the big companies of the affected region had foreign debt and failed
to pay the debt on reduction of exchange rate which led to the collapse of
the companies. To add to the turmoil, most the debts were shortterm rather than
long- term. Furthermore, these companies have a higher amount of
local loans which prevented the domestic- based recovery (Beeson &
Rosser, 1998, pp. 4-7).
The crisis
left the region with high inflation and this, in turn, increased the chances of social
unrest in the region.
Consequences
of the crisis:
1. Economic
consequences:
The crisis
had a macroeconomic -level effect on Asian economy which are sharp
reductions of currency value, asset price and stock market. It crippled the growth
profile, wealth and income of Asian economies substantially. This reduction of
income and wealth of Asian economy reflected on other economies who largely
export goods to Asian countries. Furthermore, the fall of exchange rates
increased the import expense and thereby increase the cost of exports. Hence, it
severely affects the export industry. Tourism industry’s profits decline by 70%
because the number of tourists fell (Bohat ala, 2017). Indonesia’s poverty
reached around 50% in total in several years after 1998 (Bohat ala,
2017).
2. Political
consequences:
The crisis
has made an impact on the political change in most of the Asian countries
after 1998. For instance, there was a democratic regime change called “reform”
to a good governance in Indonesia and there was a successful coup for the
government in Thailand (Richadson, 1998). In addition, liberation was deeper
in Singapore and Malaysia, though those were not a liberal democracy.
3. Social
consequences:
The economic
crisis caused millions of people fell below the poverty line in 1997-1998.
Many companies collapsed due to insolvency which led many with unemployment
(Beeson & Rosser, 1998).
Discussion
The Asian
financial crisis 1997 is a product of government’s inefficient and excessive intervention
in the market. The crisis developed due to the government policy to manipulate
the interest rate, subsequent capital over-flow and short-term debts. These issues were
covered up by the currency pegging and it triggered bigger issues and led to the
collapse. The affected economies failed to control and channel the incoming capital in
most productive industry to facilitate substantial economic growth. Also, these
countries had vigorous policies to lend money to inefficient projects and entrepreneurs
to add turmoil. For instance, Thailand mostly channelled the incoming capital to
the real estate and home loans which increase the financial burden. Furthermore,
the high expectation of government support in financial difficulties adversely
affected the borrowing and use of inflowing capital. So, it is evident that the developing
economies must have efficient management and subsequent monitoring of the
capital inflow. The fiscal deficits of the south-east Asian countries were
higher than the
normal at the time of crisis. They had amassed huge short-term debt to meet the vigorous
investment and fix the exchange problems with the US Dollars worsened the
situation. Thus, developing economies should be vigilant about this. The higher fiscal
deficit led to increase in the asset price, huge burden of interest and
subsequent fell of an
economy. The clear regulation of the market and foreign exchange could reduce such
problems in the future. A periodic assessment, evaluation and changing the
regulation would help to boost the investor’s confidence and hence attract more foreign
capital.
The focus of
east Asian economies was export-oriented. The same products were exported by
different neighbours and this caused increased competition between the neighbours
and reduction in the value of the currency (Hart-Landsberg, 1998). This action may
cause serious problems in export and leave the financial institution insolvency
problems. The trading management of the south-east Asian countries were mainly focussed on
fixing exchange rates in relation to Dollars, which usually affects the investor’s
confidence and cause a collapse. The use of speculative measures to deal with
foreign trade eventually devaluate and destabilise the home currency rather than doing
any good. The currency speculation signals the investor that the home currency is
weak, and the home currency falls the big trap of crisis. The currency speculation
was widely used by the south-east Asian economies widely to cover and increase the
earnings in shorter duration.
Conclusion
In
conclusion, the over attraction of foreign capital and mismanagement of it
caused the
development of an economic bubble in the south-east Asian countries and its subsequent
crisis. This crisis left these countries vast wealth and income in value reduction
and increased socio-economic problems in the region. This setback adversely
affected many of the lives in the region and across the world. It is inevitable to have an
open and independently regulated financial market; the lesson learned by the
investors and major economies.
Reference
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