Outline the causes and impact of the Asian crisis of 1997/1998

Expert Solution

Causes and impact of the Asian crisis of 1997/1998:

The Asian crisis of 1997/98 is considered one of the international financial crisis in the modern history. The crisis first started in Thailand which later spread to Malaysia, Indonesia, Philippine and Singapore; not forgetting Hong Kong, Taiwan, Korea, Japan and China. In 1997, what had started as a currency crisis in Thailand quickly developed into a financial and economic crisis and spread to other countries in the region. We will discuss the causes & impact of this crisis in detail below.

1) Excessive monetary growth & international capital flow: The fast growth of the Asian economies in 1990-97 & rapid expansion of global capital markets increased flow of capital to Asian countries. The volume of private capital flows to these economies rose nearly 30% annually. Since most of the Asian countries had pegged their currencies they were not able to absorb the inflow. They opted to create domestic liquidity rather than letting their exchange rate flow. This large inflow created structural weakness in the economy.

2) The contagion effect: The Thai currency “Thai baht” collapsed after Thai government was forced to float the baht due to lack of foreign currency to support its currency peg to the U.S. dollar. This collapse of currency prompted international short term creditors to withdraw their loans from the entire East Asian region.

3) Crony capitalism: Crony capitalism refers to a form of capitalism that restricts the allocation of resources & opportunities to few elites. This system results in corruption & lower incentives for wealth creation. Most of the Asian economies did not practice free market capitalism.

4) High corporate leverage & protectionism: Asian corporations in many countries experienced high level of leverage compared to corporations in developed countries. Between 1991 & 1996 leveraged doubled in Thailand and Malaysia and increased by one-third in Korea. Korean companies had very high leverage levels. These high leverage ratios were mainly a result of protectionist government policies. This protectionism in the form of import tariffs & crony capitalism shielded the domestic economies from market competition and international best practices and standards, and ultimately created weaknesses and resource misallocation within the corporate sector.

Impacts:

Due to the currency devaluations Asian countries witnessed one of the biggest stock market plunge. It led to a negative wealth effect which led to a general contraction of domestic demand. Consequently, domestic-oriented industries, such as the construction and services sectors, were severely hit by the crisis. The foreign direct investment (FDI) levels displayed a declining trend. The financial crisis resulted in higher rates of unemployment.

Rahul Sunny answered 1 year ago

Explain the causes and impact of a financial crisis as seen in the Asian Financial Crisis...

Explain the causes and impact of a financial crisis as seen in the Asian Financial Crisis in 1997 and Global Financial Crisis in 2008. As both Singapore and Hong Kong have good banking regulations and are surplus economies in the balance of payments, how do they suffer from contagion effects of the Asian Financial Crisis and what can they do to minimise such effects?

Question 2 Explain the causes and impact of a financial crisis as seen in the Asian...

Question 2 Explain the causes and impact of a financial crisis as seen in the Asian Financial Crisis in 1997 and Global Financial Crisis in 2008. As both Singapore and Hong Kong have good banking regulations and are surplus economies in the balance of payments, how do they suffer from contagion effects of the Asian Financial Crisis and what can they do to minimise such effects?

The Asian financial crisis of 1997 and the global financial crisis of 2007. Summarize these two...

The Asian financial crisis of 1997 and the global financial crisis of 2007. Summarize these two crises and highlight any similarities and dissimilarities. PLEASE BE THOROUGH IN SUMMARIZING AND HIGHLIGHTING

How did Singapore fare in the Asian Financial Crisis in 1997 and the Global Financial Crisis...

How did Singapore fare in the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008 relative to its other ASEAN partners (you may pick any one of them for discussion)?

What were the domestic effects of the Asian Fianncial Crisis of 1997 on the economy of...

What were the domestic effects of the Asian Fianncial Crisis of 1997 on the economy of the Thailand? What sectors were impacted and why? Own words, no copy and paste from wikipedia please!

Explain the dimensions of the Asian financial crisis in 1997, focused in Thailand, what caused it,...

Explain the dimensions of the Asian financial crisis in 1997, focused in Thailand, what caused it, and how it was triggered. Make sure you are very detailed in this part. Assume the reader does not know anything about the case. Also make sure own words are used, no copy and paste from wikipedia please.

In early July 1997, Asian Financial Crisis was gripped much of East Asia and raised fears...

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

When studying financial crises in the world, the East Asian crisis of 1997 stands out because...

When studying financial crises in the world, the East Asian crisis of 1997 stands out because it was so unexpected, given the sustained economic growth of these countries for a long time before the crises occurred. A. What was the East Asian crisis of 1997? Which countries were involved and what were the consequences of the crisis (on various economic indicators, such as income growth, exchange rates, etc.). B. What were the main factors that caused the financial crisis to...

The Asian financial crisis of 1997-98 began with currency speculators dumping the overvalued Thai baht that...

The Asian financial crisis of 1997-98 began with currency speculators dumping the overvalued Thai baht that eventually led to its devaluation. Sensing that other Asian economies were also weak, speculators targeted them as well which led to the crisis spreading to Malaysia, Indonesia, the Philippines and South Korea. Initial Post Instructions What do you think are the main causes of this crisis? Are there factors that are critical in any explanation and which may indicate that a crisis is imminent?

Discuss about impact and cause of finanical crisis 1997 and 2008 with political economy?

Question