Question

In early July 1997, Asian Financial Crisis was gripped much of East Asia and raised fears of worldwide economic meltdown. Discuss four indicators towards this crisis

Answer 1

1) Crisis was preceeded by sharp increase in capital flows to the region. In early 1990s there was rapid increase in short term lending by commercial banks to banks and firms.

2) In 1990-91, there was recession in industrial countries that led the trade slow down. The import propensity declined leading to decrease in foreign demand and fall in export prices. Thus the growth rate of export s declined markedly in1996.

3) For many countries in South East Asia it was difficult to maintain competitiveness in labor intensive manufacture becauae of low cost producers. There was global excess supply and the price of manufactured goods exported from SEA declined rapidly.

4) Strucrural difficulties aggravated by swings in dollar yen rate. Yen appreciated by 40% in1995 and decpreciadein 1997. Depreciation decreases the Japanese incentive to invest in SEA.

5) In the same period, China took steps leading to adjustment of external calev og it's currency. Thereby leading to increasing competitive challenge to East Asian newly industrials economies.

The loss of competitiveness, declined in export earning increased exposure to foreign exchange risks.