A large economic downturn in East Asia threatens to end its nearly30 year run of high growth rates. The crisis has caused Asian currenciesto fall 50-60%, stock markets to decline 40%, banks to close, and propertyvalues to drop. The crisis was broughton by currency devaluations, bad banking practices, high foreign debt,loose government regulation, and corruption.
Due to East Asia’s largeimpact on the world economy, the panic in Thailand, Indonesia, Korea, andother Asian countries has prompted othercountries to worry about the affect on their own economies and offer aidto the financially troubled nations (Sanger 1).The East Asian crisis has affected almost all of the Asiannations, but the three hardest hit countries are Thailand, Indonesia, andSouth 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 as they fled formarket-driven currencies like the American dollar. Indonesia’s economysoon 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 estatebooms thatReven2 were the result of huge influxes of cash by optimistic foreigninvestors. South Korea faltered under the weight of its huge 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 billionin bad bank loans and a recession. Chinese banks may carry bad banks loansof up to $1 trillion.
The banks lend 66%of China’s investment capital to state-run industries that only produce12% of China’s industrial output (Manning 2). Malaysia and the Philippinesare both faced with devalued currencies and lowered stock markets(Lochhead 5).The implications of the Asian financial crisis are many. Adeclining Asian economy will reduce demand for U.S. and other countries’exports. The devalued currencies of East Asia will make Asian imports seencheap and will lead to increased American imports, thus increasing our trade deficit (Lochhead 2). A worldwide bankingemergency could result if the embattled Asian economies failed to pay backtheir loans to the U.
S. and other countries (Duffy 2). If the Asianeconomies 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 Americanrecession (Lacayo 2). An article in the Economist reported that the Asianeconomic turmoil and the layoffs that may result, could instigateincreased discontent and possibly give rise to violent strikes, riots, andgreater political instability (1-2). Reven 3Since the financial tumult causes instability in the world market,several solutions have been proposed designed to restore the health of theAsian economy.
The International Monetary Fund is offering $60 billion inaid packages to Thailand, Indonesia, and South Korea (Lacayo 1). The aid will be used for converting short-termdebt to long-term debt and to keep currencies from falling lower in theworld market (Passell 2). Lower currency values make repaying loans toother nations more difficult (Sanger 1). The aid packages are tied to measures that will ensure that therecipient countries reform their economies.
Some of the measures thenations 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, andincreasing interest rates to slow growth and encourage stability (Lacayo3).Hopefully these market reforms will allow East Asia to improve itseconomic outlook. Since most of the Asian nations have balanced budgets,low inflation, cheap labor, pro-business governments, and high savingsrates, the long-term outlook for these coun tries is very good (Marshall1). The financial crisis, instead of destroying the Asian tigers, willmerely serve as a much needed lesson in debt management, orderly growth,competent accounting practices, and efficient government. Considering thesize of Asia’s contribution to the world economy, a rapid recovery will begreatly anticipated.