East Asia Crisis Essay, Research Paper
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 devauations, bad banking
practices, high foreigh debt, loose government regulation, and corruption.
Due to East Asian countries has prompted other countries to worry
about the affect on their own economies and offer aid to the financially
troubled nations (Sanger 1). 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, exces sive debt, and political
instability devalued the baht as they fled for market-driven currencies like the
American dollar. Indonesia s evonomy soom 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 ineffcient government. Thailand and Indonesia also suffer from
being overbuilt during real estate booms that reven2 were the result of huge
influxes of cash by ooptimistic foreign debt, decreasing exports, and
weakening currency (Lochhead 4-5). Other major countries touched by the
crisis are Japan, China, Malaysia, and the Philippines. Japan s economy is
burdened by 300 billion in bad back loans and a recession. Chinese bank may
carry badd banks loans of up to $1trillion. The banks lend 66% of China s
investment capital to state-run industries that only produce 12% of China s
industrial output (Manning 2).
Malaysia and the Philippines are both faced with devvalued currencies
and lowered stock markets (Lochhead 5). The implicationsof 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 imprts seen cheap and will lead to increased American
imports, thus increasing our trade deficit (Lochhead 2). A worldwide
banking emerge could result if the embattled Asian economies failed to pay
back thier loans to the U.S. and other countries (Duffy 2). 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 Amereican recession.
An article in the Economist reported that the Asian economic turmoil
and trhe layoffs that may result, could instigate increased discontent and
possibly give rise to violent strikes, riots, and greater political instability.
Since the financial turmoil causes instability in the world market,
several solutions have been porposed designed to restore the health of the
Asian economy. The int4ernational Monetary Fund is offering $60 billion in
aid packages to Thailand, Indonesia, and South Korea.
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. Lower
currency values make repaying loans to other nations more difficult. 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
bank banking regulations, and improving accounting information so investors
can make better decisions.
Closing insolvent banks, selling of inefficient state enterprises, and
increasing interest rates to slow growth and encourage stability. 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
labor, 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.
Considereing the size of Asias contribution to the world economy, a
rapid recovery will be greatly anticipated.