There are many speculations about the causes of the Asian Crisis. From my
research I found out that there is quite a number of reasons for the Asian
currency crisis. There is a book called; The East Asian Miracle, which was
published by the World Bank. This book expressed the relationship between
government, the private sector, and the market. (See Hoover Digest 1998 No.3.
William McGurn. What went wrong?) The book talks about the economic bloom in
Southeast Asia. The East Asian countries borrowed a lot of money from the IMF
and World Bank and used it to create a better economy for themselves. I found
out that the following countries due to their reoccurrence during my research
experienced the bloom. The countries are as listed: South Korea, Indonesia, Hong
Kong, Thailand, Malaysia, The Philippines, Singapore and Taiwan. These countries
experienced a lot of growth, growth that even doubled the growth in the rest of
East Asia, and almost tripled the growth in Latin America. The economic miracle
started in South Korea, Hong Kong, Taiwan and Singapore then Malaysia, Thailand,
Indonesia and the Philippines. These countries achieved very remarkable rates of
growth and development. They built high quality manufacturing industries from
clothes to computers. (What went wrong? Hoover Digest 1998 No.3 William McGurn)
In the paper written by William McGurn "What went wrong?", he
explained that the people's minds in Asia only understood the word miracle and
the banks failed to recognize the risks and credits of the bloom. The banks also
failed to realize that they were only being used as policy arms by the
government. The only word that stuck in people's minds in Asia was the word
miracle. They therefor forgot the fundamentals, which could be easily
understood. William McGurn said that the countries that suffered the most in the
Asian economic crash were the countries that were heavily engaged in the state
planning. 'This in turn lead to all manners of extravagant claims about
"Asian Values" and the idea that western concepts such as competition
really didn't apply" (William McGurn. What went wrong?) On February 19,
1998 a group of Hoover fellows and invited experts assembled in the Hoover
institution to discuss the likely causes for the crisis. The discussion pulled a
very large crowd in to the Hoover Stauffer Auditorium to hear what the
well-recognized economists, political scientists and historians had to say. The
panel came to an agreement that the crisis that started in Asia was due to
excessive short-term borrowing, risky investments by banks and flawed government
policies that permitted such investments. (See Hoover Institution Newsletter
Spring 1998) From the article; "Why did it happen?", on this web site:
www.megastories.com/seasia/why/why.htm, I found out that Asia had been
experiencing a miracle for the past 30 years, but they are now suffering a
crisis. These economies are now experiencing collapsing currencies and depleting
stock markets. The Asian countries at first borrowed a lot of money from the IMF
and the World Bank and used it to invest in certain unprofitable ordeals. "
The problem was bad in Thailand, where a succession of weak governments had
allowed money to flood into unwanted skyscrapers rather than investing in roads
and telecommunications, and education." (Directly from the article)
"The unwise spending was the worst in South Korea where the entire economic
system was based on governments encouraging banks to make cheap loans to big
conglomerates for continued expansion… regardless of world demand."
(Directly from article) They borrowed the money in US dollars thinking that they
would have no problems paying the debts off, because their currency's exchange
rates were pegged to the US dollar. They borrowed money in dollars because their
own currency's interest rates were too small. In the middle of 1995, the US
dollar started to rise against most of the world's other currencies. Because the
Asian exchange rates of local currencies were pegged to the US dollar they rose
with the US dollar. The rise in value led to the Asian countries decrease in
exports. Their exports became less demanded and competitive in the worlds
market. For the economies to come out of the crisis and return to their normal
sale of exports, they had three options. They would have to let go of the dollar
value, wait for the dollar to depreciate against other currencies or buy local
currency from the moneylenders. They couldn't wait for the dollar to depreciate
because they were unsure of how long it might take. At first the Asian countries
borrowed money from the IMF and World Bank in dollars, because they did not have
any fears about earning money in local currency to repay the debts. The Asian
governments were afraid of devaluing their currency by unpegging the currency to
the dollar. They were afraid of destroying firms and industries that borrowed
large amounts of money from the banks. The industries would have a harder time
trying to pay off the debt because the value of their exports would decrease.
They had no choice but to look to the moneylenders for help. The moneylenders
sold large amounts of local currencies to the countries hoping that they would
be able to buy the currency for cheaper before they were to deliver it. The
sales the moneylenders made were forward sales, which are sales with guaranteed
delivery a month or so from the day. If they succeeded in buying the currency at
cheaper rates they would make an instant profit. The Asian governments tried to
resist the need to devalue currencies by making deals with the moneylenders. The
moneylenders sold local currencies to the banks for US dollars, but the bank's
stock of US dollars had to diminish eventually. It was Thailand who first ran
out of their US dollar reserves, so therefore had to let her currency devalue.
Malaysia then followed suit. Hong Kong, however, was able to resist the
devaluation for longer because they had more US dollar reserves. Hong Kong had
enough reserves but they would have a very hard time trying to keep the Hong
Kong dollar pegged to the US dollar. This caused their stock markets to crash
and their market to be uncompetitive. To make the Hong Kong dollar attractive
they would have to keep the interest rate therefor business would slump. (see
why did it happen?) Another article; Four myths of the Asian economic crisis.
12-18 January 1998. Web site www.newaus.com, disagrees with the view that pegged
currencies is one of the problems. The article states that pegging currencies
cannot be damaging as long as they are pegged at their market rates. It says
that the only way a problem could arise is if the currency of an economy begins
to inflate against the currency to which it is pegged. The countries will then
begin to experience the crisis. "They find their currencies become
overvalued, current account problems begin to emerge and speculators see the
opportunity for arbitrage activities. The longer the inflating countries resist
the necessary currency adjustments, the bigger the monetary shock would be when
it eventually comes." (Directly from the article) Continuing my research I
found a document, which contained an address by Stanley Fischer, who is the
first deputy-managing director of the IMF. He made this speech at Mid winter
Conference of the Bankers' Association for Foreign Trade. In the speech he
expressed that the Asian crisis is an unfortunate occurrence after 30 years of
incredible economic performance. He first talked about how well theAsian economy
was doing before the crisis. The per capita income of each of the countries
increased tremendously before the crisis. For example the per capita income of
Korea increased tenfold and Hong Kong had a per capita income level higher than
some industrialized countries. . He said that the growth was beneficial to other
nations in the world. The developing markets in Asia were major exporters and
they were a very important market for other countries' exports. " For
example, these countries bought about 19% of US exports in 1996, up from about
15% in 1990." (Directly from document) For this and some other reasons
Asian market economies were a major engine for growth in the world economy. In
the document the IMF claims that there are three things that caused the present
situation. The failure to stop recognizable problems that were occurring in
Thailand and many other countries in the region that were based on external
deficits, property and the stock markets. The second problem is what I already
mentioned earlier in this paper. The maintenance of pegged exchange rate system
for too long. There was excessive exposure to foreign exchange risk in the
financial and corporate sector because of the long period of pegging. The third
is due to the "lax prudential rules", which caused sharp deterioration
in the quality of banks' loan portfolios. The authorities were a problem as
well. They refused to carry out actions that would release the pressures on the
currencies and the stock markets. They were reluctant to tighten monetary
conditions and also to close financial institutions. These actions or should I
say lack of actions added to the already growing problems. Weaknesses in the
Thai economy were revealed because of the domestic and external shocks. Before
the unveiling of the weaknesses in the Thai economy, they were doing very well.
" Thai economy … had been masked by the rapid pace of economic growth and
the weakness of the US dollar to which the Thai currency, the baht, was
pegged." (direct from the IMF document) Thailand's success was also
responsible for it's problems. The growth and good macroeconomic management
attracted large short-term capital inflows. These inflows created faster growth
and increased the amount of loans made by domestic banks. The loans were used
for "imprudent investments and unrealistic asset prices." (direct from
the IMF document) The Thai authority refused to make desperately needed
adjustments. Talks between the Thai authorities and the IMF still didn't
encourage them either. They were too overwhelmed by their recent success. This
disease was highly contagious " The depreciation of the baht could be
expected to erode the existing competitiveness of Thailand's trade competitors,
and this put some downward pressure on the currencies." (direct from the
IMF document) Because of the problems markets experienced in Thailand, they
became more careful to look at Indonesia Korea and the neighboring countries
problems. They saw that the same problem was happening in other countries
especially in their financial sector. The currencies were still sliding and
there was an increase in the debt service costs of the domestic private sector.
There was an exchange rate adjustment that was more than what was required. The
adjustment was more than needed to correct the initial overvaluation of the Thai
baht. This was because of the fears domestic residents had. They hedged their
external liabilities, which caused the exchange rate pressures to be
intensified. "In this respect the markets overreacted." (direct from
the IMF document ) The document stated that these reasons differ in somewhat
important ways. Thailand was had a large current account deficit and Korea's was
slipping. It seemed that the larger the current account deficit was the harder
it was for the IMF to find a solution. Another was that each country asked for
help at different times from the IMF. Thailand called when most of its usable
reserves were done and Korea called when it was almost drowning in the problem.
These were the likely causes of the Asian financial crisis I found out from my
research. Some say that the IMF is responsible for the problems but from this
analysis of the address from Stanley Fischer, a representative of the IMF, they
do not think that they are responsible.

Bibliography
The Asian Crisis: A view from the IMF. Address by Stanley Fischer; First
deputy managing director of the IMF at the Mid winter Conference of the Bankers
Association for Foreign Trade. Washington, D.C. January 22, 1998 Why did it
happen? www.megastories.com Asian Financial crisis put in perspective by Hoover
Fellows, Experts. Hoover Institution Newsletter Spring 1998. Web page: www-hoover.stanford.edu
What went wrong? William McGurn. Hoover Digest 1998 No.3. Web page: www-hoover.stanford.edu
Four Myths on the Asian Economic crisis, 12-18 January 1998. The New Australian