ASIAN CRISIS

Causes & Consequences of Asian Financial Crisis 1997

Causes & Consequences of Asian Financial Crisis 1997

Q. 6: Analyse the Causes & Consequences of Asian Financial Crisis of 1997.

Introduction

Few financial events have so rocked world economic order as Asian financial crisis of 1997-98 (Muchhala 2007). Beginning with collapse of Thai currency in early July of 1997 and extending through near meltdown of South Korean economy in December 1997 through January 1998, financial crisis toppled one "tiger" after another (Kaufman 1999). The chaos that resulted even challenged solvency and stability of once seemingly invincible Asian economic hegemony and commonly accepted model of Asian economic development and prosperity: Japan. The interconnectedness of world capital and financial markets has made it difficult to isolate the national economy from volatility in international currency markets and from disasters that can result. This paper will be about how economic variables are interconnected, both domestically and internationally, and how poor performance in one sector can have the domino effect throughout world economy.

Causes & Consequences

The Asian financial crisis was caused by the number of different, but interrelated factors ranging from domestic, regional, and international sources. Each factor carries different weight in each country (Ries 2000). The major factors summed up are as follows:

Macroeconomic weaknesses related to current account deficits and mishandling of currency devaluations (Radelet 1998).

Panic behavior by investors and lenders after initial shock.

Disgraceful lending practices of international banks.

Significant weaknesses in banking and financial sector (Radelet 1998).

Weaknesses in so-called Asian development model and too-cozy business-government relations and misguided government initiatives.

Probably best word to describe initial response to Asian economic crisis is "surprise." Gerardo R. Ungson, in his analysis on crisis, said:

Perhaps what was most surprising about Asian financial crisis is that it caught most of us by surprise (Ries 2000). Except for the disquieting article by MIT economist Paul Krugman, who even then simply took issue with sustainability of Asia's breathtaking pace of growth, commentators continued to laud success of this region and predicted next millennium as belonging to Asia (Kaufman 1999).

International management analysts were by no means only ones caught by surprise. In path of crisis, neither international financial “forecasters” nor rating agencies (e.g., Moody's, Standard and Poor, etc.) or financial "watchdogs" at International Monetary Fund could legitimately claim they had seen crisis coming.

Although few people predicted crisis, many soon rushed to establish its cause(s). While most analysts stressed that Asian financial crisis was caused by the complex mix of factors (domestic and international) (Muchhala 2007), some analysts took pains to emphasize overwhelming importance of one causal factor over others. At polar opposites were those who fixed blame to malfunctioning of international financial markets. More specifically, irresponsible actions of foreign lenders and currency speculators-and those who gave blame to domestic factors like Asian model of economic development and prevalence of "crony capitalism" (Ries 2000). Summarizing first viewpoint was Malaysia's Prime Minister Mahathir, who went so far as to claim that Asian financial crisis was result of the western conspiracy ...