Question

Explain in detail how did the countries involved come out of there Asian financial crisis of 1997? What measures did they take? How did they resolve the issues? own words, no cpy and paste please!

Answer 1

The Asian financial crisis, also called the "Asian Contagion," was a sequence of currency devaluations and other events that began in the summer of 1997 and spread through many Asian markets.The Asian Financial Crisis of 1997 was a financial crisis that affected many Asian countries, including South Korea, Thailand, Malaysia, Indonesia, Singapore and the Philippines.

The financial crisis can be described as having been a "perfect storm": a confluence of various conditions that not only created financial and economic turbulence but also greatly magnified its impact. Among the key conditions were the presence of fixed or semi-fixed exchange rates in countries such as Thailand, Indonesia and South Korea; large current-account deficits that created downward pressure on those countries' currencies, encouraging speculative attacks; and high domestic interest rates that had encouraged companies to borrow heavily offshore (at lower interest rates) in order to fund aggressive and poorly supervised investment. Weak oversight of domestic lending and, in some cases, rising public debt also contributed to the crisis and made its effects worse once the problems had begun.

Debates about the causes of the financial crisis involved competing and often polarized interpretations between those who saw the roots of the crisis as domestic and those who saw the crisis as an international affair. The economic crisis focused much attention on the role of the developmental state in East Asian development. Proponents of neoliberalism, who saw the crisis as homegrown, were quick to blame interventionist state practices, national governance arrangements, and crony capitalism for the crisis.

The IMF was called in to provide financial support for three of the countries most seriously affected by the crisis: Indonesia, Korea, and Thailand. The strategy to address the crisis had three main components:

• Financing. Some US$35 billion of IMF financial support was provided for adjustment and reform programs in Indonesia, Korea, and Thailand, with the assistance for Indonesia being augmented further in 1998-99. Some US$85 billion of financing was committed from other multilateral and bilateral sources, although not all of this financing actually materialized. In addition, concerted action was taken (at different stages after the start of these programs, in different countries) to stem private capital outflows.
• Macroeconomic policies. Monetary policy was tightened (at different stages in different countries) to halt the collapse of the countries' exchange rates--which went well beyond what might have been warranted by fundamentals--and to prevent currency depreciation from leading into a spiral of inflation and continuing depreciation. The monetary tightening was appropriately temporary: once confidence began to recover and market conditions stabilized, interest rates were lowered. Fiscal policy was essentially to be held firm in the case of Indonesia and Korea, while in Thailand a fiscal tightening was planned to reverse an increase of the deficit the year before the crisis.
• Structural reforms. Steps were taken to address the weaknesses in the financial and corporate sectors. Other reforms were intended to alleviate the social consequences of the crisis and set the stage for a resumption of growth

Structural reforms were given more prominence than in typical IMF programs. The details of these reforms were formulated in collaboration with the authorities in each country, as well as the World Bank and Asian Development Bank.

The need for financial sector reform was particularly pressing, given the origins of the crisis. The following essential elements were common to policies in all three countries:

• the closure of insolvent financial institutions, to stem further losses;
• the recapitalization of potentially viable financial institutions, often with government assistance;
• close central bank supervision of weak financial institutions; and
• a strengthening of financial supervision and regulation, to prevent a recurrence of the fragilities that had led to the crisis, the objectives being to restore the health of financial institutions and bring supervision and regulation up to international standards. But in all cases standards were raised gradually, in view of the tradeoff between the need to make a convincing step forward and the concern that raising standards too quickly could shock a system already reeling from the crisis.

The need for corporate debt restructuring, including the establishment of viable workout mechanisms, was also considered to be an essential counterpart to the restoration of the health of the financial system. Here progress was slow in all three countries, with adverse consequences for the pace of economic recovery.

In addition, other reforms included:

• efforts to shield poor and vulnerable sections of society from the worst of the crisis, by deepening and widening social safety nets and (notably in Indonesia) devoting substantial budgetary resources to increasing subsidies on basic commodities such as rice;
• measures to increase transparency in the financial, corporate, and government sectors; and
• steps to improve the efficiency of markets and increase competition.