What were the main causes of the Asian financial crisis?
Business
The Southeast Asian countries achieved massive economic growth in the 1980s to the early 1990s. Economic success was much due to the growth of export and the increase in foreign investment. The Asian countries made the interest rate and currency exchange rate relatively high to attract investment. Followed by the recovery of the US economy in the mid-1990s, the Federal Reserve raised the interest rate against inflation. The higher interest rate in the US led to an appreciation of the dollar. The currencies pegged to the US dollar appreciated, and the massive capital outflow caused a depreciation in the currencies of Asian countries (Eichengreen, 182).
The banking sector of Thailand became hit when many clients withdrew their money from the local bank. In fear of slowing the economic growth, the Thailand government did not prevent investment and refused to alter the exchange rate. Instead, they encouraged the banks to borrow money from foreign countries with a favorable tax rate and regulatory treatment. The Thai banks began to find their inability to repay the money since they ran out of foreign currency. On 2 July 1997, the Thai government became forced to devalue and float the baht (Eichengreen, 183).
Two weeks later, the Philippine peso and Indonesian rupiah underwent significant devaluations as well. The Philippines was hit right after because it was mostly dependent on capital inflows and its relatively rigid dollar peg (Eichengreen, 183). The Indonesian government did not react timely as well, which led to a quick outflow of its capital.
The citizens ravingly withdraw their money from the bank, and the government found the impossibility to increase the money supply to meet the aggregate demand. The entire banking system in Indonesia became shut down, and the country faced a huge recession. Taiwanese authorities also allowed the New Taiwan dollar to decline preemptively. The crisis spread internationally, and Asian stock markets plunged to their multi-year lows in August. The capital market of South Korea maintained relatively stable until October, and the won fell hugely in November.
The crisis was prevented from further spreading when the G-7 government convinced the international banks to extend short-term loans to South Korea (Eichengreen, 185).
The Asian crisis severely affected the economy in Thailand, Indonesia, the Philippines, and South Korea. In these countries, their currency exchange rate and stock markets decreased quickly and suddenly. The GDPs of these countries were negatively affected. The Asian Crisis caused international investors to become less willing to invest in and lend money to developing countries, both in Asia and other areas in the world.
Works Cited
EICHENGREEN, BARRY. Globalizing Capital: A History of the International Monetary System – Second Edition. REV – Revised, 2 ed., Princeton University Press, 2008.
What were the main causes of the Asian financial crisis?
