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The Asian Tigers Financial Crises Essay

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An overview of the Asian Tigers financial crises

The occurrence of the financial crunch stormed the South East Asia Tigers economies from mid 1997 to early 1998. The world most impressive and highest economic development rates were listed in South East Asian republic of South Korea, Hong Kong, Indonesia, Singapore, Malaysia, and Thailand in the past decades.

From the Gross Domestic Product (GDP), the compounded economies of these nations expanded to nine point five percent form six point five percent (6.50%-9.50%). However, owing to the implosion of the currency and local stock bazaars of these countries in the fiscal 1997, the appearance of the Asian wonder came to a sudden stop.

Approximately more than 71.0% worth of stock markets in various Asian Tigers states was lost at a time when the dust of financial crisis started to calm down in early 1998. The frontrunners of these nation states that were at one time full of pride had to humbly strive for an enormous aid from the IMF (Corsetti, Pesenti & Roubini, 1998).

This was after a comparable quantity of their currencies had depreciated relative to the US dollar. Nonetheless, this crisis transpired as soon as the unprecedented development of the economy materialized in these countries. These nations shared quite a lot of common elements, which gave the investment as well as economic growth impression and remained significant to various separate states.

Indeed, the South East Asian nations used export as the engine for economic development. For instance, many Asian states advanced into export powerhouses as a result of relatively and cheap plunging barriers to global trade, economies concerned with export, and a combination of fine cultured labor (IMF, 1998). Furthermore, economic growth equally happened because of the combination of overseas corporations’ hefty private investment in Malaysia, South Korea, and Thailand in the course of the last quarter of that century.

The reported annual growth value for export was inconsistent amid these nations between the fiscal 1990 and 1996. In fact, the Indonesian and South Korean export value grew up to 12.10%, Hong Kong (14.50%) and Singapore experienced 15.0% in development worth. Additionally, Thailand had its export value developed to 16.10% but then Malaysian growth rate was 18.0% per year.

Thus, the recent years have experienced a shift in the nature of exports (Radelet & Sachs, 1998). Textiles existing as the elementary products and materials were shifted with customer electronics, semi-conductors, and automobiles that are progressive and high technological products.

The impressive economic growth rates reported by the Asian Tigers became to an abrupt end in the fiscal 1997 due to the financial crunch. Regardless of the financial storm, which swept across the Asian Tigers in the fiscal 1997, the effects that remained behind might certainly take several years to be repaired (Noland et al., 1998).

This paper analyzes the changes in the Asian Tigers economic policies and the domestic economic structures. The paper further offers the consequences of the policy changes to suggest whether these economies will ever really recover from the 1997 economic crunch.

The Asian tigers’ growth strategy before crisis

The swiftly rising human capital and the secluded national investment mostly enabled the Asian tigers to attain high development. The saving from high level of domestic finance continued the nations’ high level of investment. The republic experienced better output and rapid development despite the diminution in significance of sector of agriculture.

Indeed, there was a prompt decline in growth rate of populace in Asia compared to other developing universal nations. Therefore, the economic development augmented as a result of improved cultured labor force and well-organized schemes of public administration. Conversely, the essential framework for secluded investment was provided for by the macro-economic enactment and administration that were remarkably steady and virtuous (Sanger, 1998).

The level of economic savings that was elevated by the strategies employed to make banking scheme more available to non-traditional severs and to upsurge the integrity also steered this growth. Besides, the training policies engendered rapid escalations in skills of labor force with focus on secondary and primary edification.

The pre-crisis growth strategy

In South Korea and other Asian Tiger countries, the state had to intervene to enhance the development and growth of particular industries as well as to boost economic growth. In fact, the state utilized various variable policy mechanisms to pursue clear-cut economic goals including high private and public savings, rapid growths in exports, as well as macroeconomic stability (Goutorbe, et al, n.d).

However, the state used multiple forms of interventions:

  • Implemented policies meant to guard substitutes for the home imports, supported export targets for particular industries, boosted the establishing firms, as well as industries that were declining.
  • Policies geared toward encouraging private investments:
  • Policy strategies meant to contain the private financiers or investors risks
  • Interest rates subsidized by the state to spearhead investments in business venture
  • Exchange rates, tariffs, and tax policies intended to keep the investments goods low pries
  • The state implemented policies to promote investments with equities, create strong financial markets, and bolster savings. For instance, these policies included maintaining borrowing rates ceiling, and keeping low deposits rates in order to augment retained earnings and profits besides offering support and establishing state banks as well as widely sharing info amid the private and public sectors.

Unlike in Thailand, Malaysia, and Indonesia, the state interventions contributed significantly and recurrently towards the realization of South Korean economic sensation. The ability of South Korea to implement and administer particular policy intercessions was very constructive.

Productivity, human capital, and investments

To realize the economic growth, South Korea and other Asian tigers showed distinctive attributes from those depicted by developed and developing nations.

  • South Korea had the unsurpassed output growth rate. Such performances in productivity accrued from successful allocation of resources to the high yielding business ventures, alongside drawing level to the industrialized nations in terms of technological adoption.
  • The widespread basic education ensured that the human capital endowment increased
  • The investment rates significantly increased and exceeded 20.0% of the averaged gross domestic product amid the fiscal 1960 and 1990.

The state administration derived some benefits through applying and respecting various economic growth fundamentals including; encouraging locked property rights, solvent and sound monetary institutions, basic edification, macroeconomic steadiness, as well as harmonizing public investments.

Besides, the South Korean state and other Asian Tigers encouraged balancing public business ventures in low comparative investment commodities prices and infrastructure investments.

The consequences of the 1997 Asian Financial Meltdown

The financial meltdown of the fiscal 1997 posed various macro-level effects on Asian Tigers. In fact, the most notable effects included sharp declines in the assets prices, stock markets, as well as currency values. Besides, the meltdown led into the collapsing of various businesses, which consequently made millions of South Koreans, and other Asian Tigers citizens to live underneath the poverty line between the financial year 1997 and 1998.

According to Krugman (1998), Thailand, South Korea, and Indonesia materialized to be greatly affected economies by the 1997 financial crunch. The meltdown that struck the Asian Tigers imposed a setback to the perceptions held by South Korean and other Asian Tigers economies. Initially, South Korea and other Asian tigers believed that they had idiosyncratic sets of standards alongside economic and political structures, which were much better than those adopted by the Western Nations.

Despite the eminent consequences, South Korea reported long-term effects such as setbacks in the relative gains generated during the booming periods prior to the financial meltdown. In East Asia, a great volume of the economic weight and investments moved from South Korea, Japan to the republic of China (Sharma, 2003).

Amongst the leading economies, South Korea is ranked number eleven in the entire world. However, South Korean financial institution was saddled with non-profit advances although the fundamentals of microeconomics turned out to be virtuous. The major buyouts and failures accrued from the eventual unwarranted debt overdue.

For instance, Kai Motors, the third leading wagon manufacturer in South Korea called for an emergency mortgage in the mid-year 1997. During the same period, the rise in the Asian marketplace downturn, made Moody to lower the South Korean credit rating to A3 from A1 (General Books LLC, 2010). However, Moody’s in the final quarter of 1997 downgraded the credit rating to Baa2.

In the meantime, the stock bazaars were already bearish in November thus further contributing to the degeneration of the market. The IMF introduced stringent macro-economic policies in South Korea and insisted that the inflation rate must be maintained below 5.0%. From the rise in import prices and the collapse in the monetary value, South Korea will hardly maintain the inflationary pressures since the country is compelled to implement superfluous monetary policies.

After IMF and South Korea signed the first deal, the rate of interest increased to 21.0% from 12.50%. This implied that South Korean corporations could not service the enormous interim balance due commitments (Ariff & Khalid, 2000).

The IMF provided economic cures that instead of reducing the prevalent corporate debt defaults increased them. Foreign financial institutions with interim loan arrears in the South Korean corporations were obliged to rearrange mortgages at rates of interest, which hardly rewarded the mortgage maturity extension.

Changes in the post-crisis growth strategy

Most economists, financial analysts, and policy makers assert that the 1997 financial crunch that wrecked the Asian Tigers economies might take long time to be repaired. The indulgence into the debt binge by Asian countries such as South Korea might have proved very productive, though the outstanding Asian economies eventually crushed to the ground in the awake of the 1997 financial crunch.

Indeed, the Asian economy significantly lost many years of economic growth and development. Beyond the lost period of economic progress, the meltdown resulted into the emergence of various elementary economic and financial policy questions concerning the viability of the fixed and floating exchange rates virtues, the IMF roles, and Asian Economic Model sustainability (Kaufman & Krueger, 1999).

The Asian economic miracle is practically believed to have resulted from the poorly regulated financial systems and state directed investments that brought about excessive debts or debt burdens, over investments in both the private and public sectors and ultimately the emergence of the financial meltdown.

The Asian Way economic model had inherent risks that caused the South Korean and other Asian tigers’ currencies and stock markets to collapse besides the debt bond explosion that occurred late in the fiscal 1997. After the occurrence of the financial crash, the Asian Tigers, particularly South Korea started to move towards the Economic model of the West from the famous Asian Way Economic Model.

The strongest advocate for the shift in economic models was IMF. However, in South Korea and other Asian Tiger economies, some business leaders and politicians strongly advocated for the shift in economic models (Jackson, 1999). The state withdrew the close associations with businesses, troubled financial institutions, besides allowing corporations to fail and tightening the financial disclosure regulations.

Furthermore, the South Korean government together with other Asian economies deregulated the markets to enhance the levels of foreign direct investments and increase competitions. As a result, the Asian Tigers and various other economies in Asia reasonably very strongly resemble the free marketplace systems that the US championed to replace the Asian Way economic model that Japan demonstrated in the financial year 1980s.

Conclusion

The 1997 financial crisis that hit the Asian Tigers significantly affected these economies given the momentum, extent, and vitality under which the meltdown occurred. From various financial and economic reports analyzed by economists, the crisis greatly affected various nations including South Korea and other Asian Tigers. For instance, millions of livelihoods were directly impacted, but the pace at which the meltdown ceased without affecting various developed economies pleased economists.

Regardless of the financial storm, which swept across the Asian Tigers in the fiscal 1997, the effects that remained behind might certainly take several years to be repaired. The changes in the Asian Tigers economic policies and the domestic economic structures imply that these economies will never really recover from the 1997 economic crunch, and if the tiger economies recover then they realize sustainable economic growth.

References

Ariff, M, & Khalid, AM 2000, Liberalization, growth, and the Asian financial crisis: lessons for developing and transitional economies in Asia, Edward Elgar Publishing, Baronet, OM.

Corsetti, G, Pesenti, P, & Roubini, N 1998, What caused the Asian currency and financial crisis? New York University Press, New York.

General Books LLC, 2010, Economy of South Korea: four Asian tigers, 1997 Asian financial crisis, South Korean won, Chaebol, automotive industry in South Korea, General Books LLC, Memphis, Tennessee.

Goutorbe, A et al, n.d, Asian crisis and consequences. Web.

IMF 1998, International capital markets: developments, prospects, and key policy issues, Thomson Learning, South Melbourne.

Jackson, KD 1999, The Asian contagion: the causes and consequences of a financial crisis, Westview Press, Boulder, Colorado.

Kaufman, GG, & Krueger, TH, 1999, The Asian financial crisis: origins, implications, and solutions, Springer, New York City.

Krugman, P 1998, “Asia: what went wrong,” Fortune, pp.32.

Noland, M et al. 1998, “Global economic effects of the Asian currency devaluations,” Policy Analyses in International Economics, Institute for International Economics, United Kingdom.

Radelet, S & Sachs, J 1998, “The onset of the East Asian financial crisis,” NBER Working Paper No. 6680.

Sanger, D 1998, “As economies fail, the IMF is rife with recriminations,” New York Times (October 2, 1998).

Sharma, S 2003, The Asian financial crisis: new international financial architecture: crisis, reform and recovery, Manchester United Press, Oxford, UK.

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