Wednesday, December 19, 2018
'Globalization and the Asian Financial Crisis\r'
'Globalization and the Asiatic Financial Crisis The Asiatic monetary crisis is a superlative example of an frugal meltdown and it exemplifies the make homo-wideisation has during times of wide dot frugal downturn. According to the Oxford side Dictionary, globalization is Ã¢â¬Å"the integration of national economies into the transnational deliverance through trade, extraneous direct investiture (FDI), chief city accrues, migration and the dissipate of technology. Ã¢â¬Â The global sparing is becoming upgrade inter-twined and therefore it is very difficult to stop the onuss of an economic crisis.\r\nThe Asiatic fiscal crisis was a major economic crisis that spread through stunned several Asiatic countries. The beginning of the Asiatic pecuniary crisis can be traced back to July 2, 1997, with m some(prenominal) believing the start of the crisis was triggered in siamese connectionland (King 439). On this day, the siamese connection semipolitical sympathies drifted their bills, the Thai tical, and it in addition went to the International Monetary Fund (IMF) for Ã¢â¬Å"technical assistance. Ã¢â¬Â maven by one, southwestward- eastern hemisphere Asian countries much(prenominal) as Thailand, Indonesia, South Korea and Japan saw their economies crash in the wake of dark extraneous enthronement.\r\nAn economic elabo roll had made the region an bring inive investment proposal for investors for much of the 1990s. From 1990 to 1997, the private groovy flow to ontogenesis countries rose to a greater extent than fivefold, from US $42 cardinal in 1990 to US $256 billion in 1997 (King 441). However, in the summer of 1997, the economic climate changed, on July 2, 1997, the Thai tical ferine around 20% against the US Dollar (King 441). This was seen as the trigger for the crisis, as investors grew nervous, which guide to disinvestments on the tical, effecting into internal jock production and development stalling.\r\nThe conclude why this was happening was because many corporations depended on hostile investment and when they dried up, the businesses could non meet their debt repayments, jumper lead to many firms folding across Asia. Within a week of that day in July, the Philippines and Malaysian authoritiess were firmly intervening to defend their currencies. Soon other easterly Asian countries became involved; Hong Kong, Taiwan, Singapore and others to varying degrees. As global integration was spreading and growing rapidly, the marts were chess opening up and becoming more liberalized.\r\nThis en adequate-bodiedd these countries to get a huge influx of foreign capital. These countries were targeted by investors because they were categorise as Ã¢â¬Å" emerge markets,Ã¢â¬Â meaning that they had rapid harvest and industrialization (Hanieh 65). Hence, they seemed to be ideal for investors as they desire after highschool profits and yields. It must be emphasized that most of the inflows that ca me were for short consideration portfolio investment purposes. Private capital inflows coming into the Ã¢â¬Å"emerging marketsÃ¢â¬Â were $42 billion, which increased to a gigantic $256 billion in 1997 (Hanieh 70).\r\nIroni songy, that peak was the same year as the markets crashed. As mentioned previously, most of the inflows were for portfolio purposes; therefore, the contain markets were experiencing high booms and estate prices were excessively on the rise. Most of the countries had their coin pegging loosely against the US dollar in the run up to the crisis. The at large(p) pegs to the US dollar encouraged capital inflows receivable to the large participation rate differential. This though, attracted problems excessively, collectable to the sure nominal rates, it encouraged unhedged external borrowing.\r\nThis asset boom continue to grow and the flow of credit continued to increase. This resulted into Japan, who was already suffering from their lost-decade, into depr eciatory their currency (Hanieh 74). As a result, this made their currency weaker and doing so, it made the exports of the South-Eastern countries uncompetitive. This was change to the rest of the countries to integrate on a global scale. Most of the functions that these countries undertake argon producing parts of a production that would be belatedlyr assemb direct and completed in countries like Japan or China.\r\nAs state earlier, these tiger-economies operated in a amend sub rate carcass; therefore, their central banks indispensable to keep fair to middling reserves so that they could support the baht at the fixed exchange rate. As the central banks plowed capital in to support their currency to avow the exchange rate, business office was shattered and spread across other countries. The effect of this was get ahead tangle as their exports were much dearer since Japan devalued their currency. The knock-on effect was that foreign investors started to take their money out.\r\nThailand was the major misadventure of this and it quickly passed onto its neighbours; thus, the start of the Asian monetary crisis. The monetary crisis severely affected three main emerging economies in the global market; Thailand, Indonesia and South Korea (Hanieh 64). These were the hot-bed for foreign investors who sought high returns on their investments. As the fixed currency fell, the more the investors pulled out; thus, worsening the currency further. The central banks tried in vain to adhere the exchange rates as the Thai establishment spent $23 billion buying the Baht to nourish to US dollar peg (King 440).\r\nInvestors sank money into these economies without knowing the full extent of policies involved; therefore, as the mounting hidden information of the Thai economic system came to surface, it resulted in many speculative attacks on the Thai Baht, which finally forced the central bank of Thailand to float the Baht as it was no farseeinger able to defen d the itself against the US Dollar. It can be argued that the uncertainty, which is the absence seizure of quality information on which to base investment decisions had increased the investment risk. This resulted in a infection effect to other Asian countries.\r\nMuch of the imbalance in the economy of Thailand was brought about by heavy short-term borrowing that required debt maintenance. The Thai authorities attempted to shore up shaky investor confidence by officially backing the financial institutions that were heavily indebted aboard. By October 27, 1997 the crisis had spread human beingswide and had an strike on a global scale (Prakash 127). On that day, it provoked a substantial response from mole Street with the Dow Jones falling by 554. 26 points (or 7. 18%), its biggest point fall in history, causing stock exchange officials to suspend trading (Prakash 128).\r\n at that place are several purviews as to why the Asian financial crisis occurred. One of the clearest p roblems that can be seen is that of their financial systems. It has been discernible that because the sudden influx of capital flows, the financial systems were non capable of handling the vast amounts. The weak financial systems led to poor investments and excessive risks. Negligent solicitude of corporations ca apply consequences in economic downturns that were not a equal in the mid-nineties boom. The macroeconomic policies of the South-East Asian countries made their economies vulnerable to the uncertain confidence of their foreign investors.\r\nHowever, many economists argue 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. Also, the deeper firsts of the economic crisis went back to the early 1990s. throughout the 1990s, growth in South-East Asia attracted huge capital flows. The account deficit of Thailand had grown from 5. 7% in 1993 to 8. 5% in 1996 (Khan, Islam, Ahmed 177). This was worsened as the domestic production slowed as the account deficit represent an even greater percentage.\r\nMuch of the instability in the Thailand economy was caused by heavy short term borrowing and as previously stated; the brass spent a lot of their reserves to maintain the exchange rate. This created a false sense of credentials in pretending the economy was stable. However, this support of the exceedingly leveraged private sphere of influence by the Thai government lent the appearance of stability towards an unstable system and attracted even more foreign loans. In February 1997, the Thai company Somprasong was unable to make maintenance payments on its high levels of foreign debt.\r\nIn the face of such instability, finance One, the largest finance company in Thailand, failed at the end of May (Khan, Islam, Ahmed 182). Most of the lending by the company was made up of risky loans for solid estate and stock market margin inves tment. This political instability resulted in the resignation of the Thai Finance Minister; thus, worsening the situation. The speculative attacks on the Baht forced Thailand to let the currency float on July 2, 1997, a primaeval date in the Asian financial crisis. As an after effect, the currency depreciated further devastated the Thai economy.\r\nThis forced the Thai government to call on the International Monetary Fund (IMF) for economic help. In August 1997, Thailand was the first country to assay help and the IMF approved a loan for $3. 9 billion (Glassman 126). However, the IMF gave stipulations that the government had to follow. These were maintaining a level of government reserves, increasing the VAT, government cuts and a reorganisation of the financial sector. As the Baht declined sharply, a second bail-out was approved. Indonesia and South Korea also approached the IMF for financial assistance.\r\nanother(prenominal) key fraction that caused the crisis was that in a lo t of East Asian countries the capital account was liberalized for inward and outward flows for foreign investors; however, domestic investors could not invest aboard and this meant they could not diversify their risks. Throughout these countries, financial institutions were inadequate. They had poor prudential management of currency risks, credit evaluation and humans financial reporting. Rising global credit and runniness fed vast amounts of capital to badly adjust institutions. Those had limited transparency and poor due labor from foreign lenders.\r\nThe poor macroeconomic policies failed to manage these problems and left(p) the countries vulnerable to shocks in many airs. Firstly, widening new account deficits, financed by short-term debt, exposed the economies to sudden reversals in capital flows. Secondly, weaknesses in the under-regulated financial sector fuelled risky lending. A further problem with exacerbated the crisis was the leaning for the government to interve ne and bail out floundering companies. These guarantees get further pressure on the global market as the level of debt kept escalating.\r\nTogether with the depreciating of the currency meant foreign debt proved to be too much of a burden. A further eye mask effect was evident between the economies. As the currency of the country depreciated, this had a negative effect on the competitiveness of other countries. Therefore, as the Thai Baht was tumbling, their goods became competitive and had a negative effect on other currencies, such as the Rupiah of Indonesia and the Ringgit of Malaysia (Glassman 129). After the Baht was put on the floating exchange rate, the economy of Thailand started to recover and was able to alleviate their debt earlier than they thought in 2003 (King 459).\r\nSouth Korea did manage to recuperate disrespect its weak financial system. However, Indonesia was especially hurt by firms going bankrupt and the devaluation of the Rupiah made it harder for them to r ecover. Monetary and pecuniary policies were tightened as countries fought to cope with the financial panic. The countries also raised interest rates in order to attract foreign currency and increase the price of domestic assets. On the other hand, higher(prenominal) rates meant higher repayments and many could not survive their debts. Following the Asian financial crisis, Russia, Mexico and Argentina all suffered economic collapses (King 61). Another factor that is thought to be one of the reasons for the crisis, the Asian currencies appreciated to levels that were too high leading to a crash in the markets. The IMF gave these countries support during these times and in return they wanted the countries to follow three key elements; large official financing packages, structural reforms, and macroeconomic policies that intended to counter the crisis itself (King 463). Structural reforms were seen as the root causes of the crisis. They intervened to shore up institutions and more d efinitively, improved the financial supervision and regulation.\r\nThus, reducing the likelihood of a crisis reoccurring. some other structures were also altered to help the economies in the long run; they strengthened competition laws and increased transparency. This would help reduce eradicate corruption. Macro policies were harder to implement due to the turbulent market conditions; though, after some initial hesitations, nominal and real interest rates fell to pre-crisis levels. However, IndonesiaÃ¢â¬â¢s policies steered them off course for a plot of ground before it was brought under control in late 1998 (King 464).\r\nThe Asian financial crisis raised certain important issues that need to be taken into account for the international financial system. It is very important to prevent a crisis from occurring in the first place, because the short term flow of capital can be moved inwardly seconds; therefore, prevention is the best sought achievement/target. hydrofoil is also important to crisis prevention. At the height of the Asian financial crisis, some unpleasant information was revealed, in particular, on the weaknesses of central banks international reserve positions.\r\nThe IMF pointed this out as an integral part as approximate monitor of the finance sector could give alerts to any such problems in the future. Another issue that needed to be analyzed after the crisis was that of capital controls. As the countries liberalized the capital accounts, they left many short locomote in the regulation of them. Tighter restriction and closer monitoring of the capital flows would hold helped the financial institutions to keep greater control. An additional issue that should be noted is what policies the governments used and which ones seemed to be successful in such a crisis.\r\nLooking back at the Asian financial crisis, it seems that monetary policy worked. A period of high interest rates and the market pressures eased and interest rates soon fell bel ow pre-crisis levels. In theory, if monetary policies were implemented earlier, it might have contrasted the spread of the crisis. However, the higher interest rates meant that debt repayments were higher and led to widespread insolvencies. These macroeconomic policies are crucial as they can be implemented to the changing economic conditions. The Asian financial crisis has brought a new way of thinking in the world of global finance.\r\nThere are lessons that were harshly learnt by a a couple of(prenominal) countries; however, the overall effect was a global one. In the contemporary world, one country does not affiliation by itself, global integration has meant that countries are connected and interlinked. Therefore, as we witnessed from the Asian financial crisis, the end result of poor management of financial institutions can have a drastic impact on the world economy. In the current climate, we are facing a global recession, an expected drop in world trade, all this as a resu lt of a credit boom.\r\nThe government and regulators must learn from the Asian financial crisis and hopefully they will be able to contain the latest economic crisis. Works Cited Oxford position Dictionary. Oxford University Press 2010. Web. 18 March 2011. McNally, David. Another valet is Possible: Globalization & Anti-Capitalism. Winnipeg, Manitoba, Canada: Arbeiter Ring Publishing. Print. Adam Hanieh. Ã¢â¬Å"assembly of Hierarchies of a Global Market: The South and the frugal Crisis. Ã¢â¬Â Studies in governmental Economy raft 83. (2009): 61 Ã¢â¬ 81. Print. Michael R. King. Ã¢â¬Å"Who Triggered the Asian Financial Crisis? Review of International governmental Economy Volume 8. Issue 3 (2001): 438 Ã¢â¬ 466. Print. Aseem Prakash. Ã¢â¬Å"The East Asian Crisis and the Globalization Discourse. Ã¢â¬Â Review of International Political Economy Volume 8. Issue 1 (2001): 119 Ã¢â¬ 146. Print. Saleheen Khan, Faridul Islam, Syed Ahmed. Ã¢â¬Å"The Asian Crisis: An Economic Anal ysis of the Causes. Ã¢â¬Â The Journal of Developing Areas Volume 39. Issue 1 (2005): 169 Ã¢â¬ 190. Print. Jim Glassman. Ã¢â¬Å"Economic Crisis in Asia: The good example of Thailand. Ã¢â¬Â Economic Geography Volume 77. Issue 2 (2001): 122 Ã¢â¬ 147. Print.\r\n'