Essay, Research Paper: Asian Crisis

Economics

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A large economic downturn in East Asia threatens to end its nearly 30-year run
of high growth rates. The crisis has caused Asian currencies to fall 50-60%,
stock markets to decline 40%, banks to close, and property values to drop. The
crisis was brought on by currency devaluations, bad banking practices high
foreign debt, loose government regulation, and corruption. Due to East Asia’s
large impact on the world economy, the panic in Thailand, Indonesia, Korea, and
other Asian countries has prompted other Countries to worry about the affect on
their own economies and offer aid to the financially troubled nations (The Great
Wave). The East Asian crisis has affected almost all of the Asian Nations, but
the three hardest hit countries are Thailand, Indonesia, and South Korea. The
panic began in Thailand in May of 1997 when speculators, worried about
Thailand’s slowing economy, excessive debt, and political instability devalued
the Baht (Thailand currency) as they fled for market-driven currencies like the
American dollar. Indonesia’s economy soon fell soon after when the rupiah hit
a record low against the U.S. dollar. Indonesia is plagued by more than $70
billion worth of bad debts and a corrupt and inefficient government. Thailand
and Indonesia also suffer from being overbuilt during real estate booms that
they were the result of huge influxes of cash by optimistic foreign investors.
South Korea faltered under the weight of its huge foreign debt, decreasing
exports, and weakening currency (Asian Fall). Other major countries touched by
the crisis are Japan, China, Malaysia, and the Philippines. Japan’s economy is
burdened by $300 billion in bad bank loans and a recession. Chinese banks may
carry bad bank loans of up to $1 trillion. The banks lend 66% of China’s
investment capital to state-run industries that only produce 12% of China’s
industrial output. Malaysia and the Philippines are both faced with devalued
currencies and lowered stock markets (Asian Fall). The implications of the Asian
financial crisis are many. A declining Asian economy will reduce demand for U.S.
and other countries’ exports. The devalued currencies of East Asia will make
Asian imports seen cheap and will lead to increased American imports, thus
increasing our trade deficit (Asian Fall). A worldwide banking emergency could
result if the embattled Asian economies failed to pay back their loans to the
U.S. and other countries (Nuffield Case study). If the Asian economies fall
further, in a desire to raise cash, they might sell the hundreds of billion
dollars of U.S. treasuries they now own, leading to higher interest rates and an
American recession (The Rise and Fall of the Third Reich). An article in the
Economist reported that the Asian economic turmoil and the layoffs that may
result, could instigate increased discontent and possibly give rise to violent
strikes, riots, and greater political instability (Economist). Since the
financial tumult causes instability in the world market, several solutions have
been proposed designed to restore the health of the Asian economy. The
International Monetary Fund is offering $60 billion in aid packages to Thailand,
Indonesia, and South Korea (The Rise and Fall of the Third Reich). The aid will
be used for converting short-term debt to long-term debt and to keep currencies
from falling lower in the world market (Nuffield Business and Economics). Lower
currency values make repaying loans to other nations more difficult (The Great
Wave) The aid packages are tied to measures that will ensure that the Recipient
countries reform their economies. Some of the measures the nations must follow
are increasing taxes to decrease budget deficits, ending corruption, increasing
banking regulation, improving accounting information so investors can make
better decisions, closing insolvent banks, selling off inefficient state
enterprises, and increasing interest rates to slow growth and encourage
stability (The Rise and Fall of the Third Reich). Hopefully these market reforms
will allow East Asia to improve its Economic outlook. Since most of the Asian
nations have balanced budgets, low inflation, cheap labour, pro-business
governments, and high savings rates, the long-term outlook for these countries
is very good. The financial crisis, instead of destroying the Asian tigers, will
merely serve as a much-needed lesson in debt management, orderly growth,
competent accounting practices, and efficient government. Considering the size
of Asia’s contribution to the world economy, a rapid recovery will be greatly
anticipated.

Bibliography
William L. Shirer, ‘The Rise and Fall of the Third Reich’, pages. 58-61.
 David Hackett Fischer, ‘The Great Wave’, pages 192-193. 
Erik Achorn, ‘European Civilization and Politics since 1815’, (London:
1935), pages. 561 - 562.  David Johnson, ‘Asian Fall’, pages.
343-442.  Economist, articles 5,6 and statistics on Japan, Indonesia,
China and Thailand.  Nuffield Business and Economics, pages 300-385.

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