Asian Economies and Monetary Programs After Crisis

Introduction

The Asian financial crisis was experienced from July 1997 through to 1998, and brought fear all over the globe. The world feared that the financial crisis could spread to the rest of the countries in the world a situation that was not anticipated. The financial crisis could be termed as a wakeup call to the rest of the countries in the world. Experiences from the crisis meant that countries should be able in future to control and account for their financial systems and avoid aid from the world monetary organizations or other financial institutions such as the International Monetary Fund (IMF), World Bank, Asian Development Bank (ADB) and Africa Development Bank (ADB) (DeCastro 210). In spite of the warning indicators from the experienced economists and other experts in financial matters, most governments and other financial institutions did not take adequate measures to avoid the occurrence of the financial crisis.

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Asian countries had not been affected by financial crises for a long period other than those caused by persistent droughts that were easily managed by various financial institutions (Moghadam 39). The countries that were affected by the financial crisis and the performance of their economies after the end of the crisis have discussed in this paper. The steps taken by the IMF to control the situation are discussed together with how those actions have affected the economies of countries involved is also a subject of discussion in this paper. This paper discusses the questions raised above. In addressing these issues, the paper presents the data available on the financial crises that occurred in East Asia begging from Thailand in 1997. Furthermore, the paper explores the causes of the crisis, the economic implications of the crisis on the Asian countries that were affected, and the role played by the International Monetary Fund (IMF) in saving the Asian countries from the crisis (Berg and Patillo 43). The measures that were taken by IMF to curb future crisis of the same nature have also been addressed in this paper.

Origin and the spread of the Crisis

The crisis originated in Thailand after the devaluation of the Thai Baht in July 1997. Devaluation led to the loss in value of foreign exchange value after the loss of value of their currency. Countries that were most hit by the crisis included Thailand where the crisis started, Indonesia, Philippines, Korea, and Malaysia. Taiwan, Singapore and Hong Kong were also affected but with less impact. Economists and other financial analysts were divided on the extent to which the crisis could spread. Some held that the financial crisis could spread to other parts of the world while few others held divergent opinion. India and China had and still have sound economic and financial systems and could feel the impact of the crisis (DeCastro 33). Though the crisis began in Thailand in the mid 1997, it had spread to other parts that have been mentioned by the end of the same calendar year.

The financial experts who predicted a spread of the crisis to the rest of the countries in the world were proved right when Russia and Latin America precisely Brazil by mid nineteen ninety-eight. The impact of the crisis on Russia was particularly devastating as its entire political, economic, and financial systems collapsed. The International Monetary Fund (IMF) saved the economic and financial systems of Brazil from imminent collapse by giving huge loans to the same nation (Berg and Patillo 66). Countries that were affected recovered slowly and gradually from the crisis after the aid from the International Monetary Fund and the World Bank and by the turn of the century all the economies had fully recovered.

Table A

COUNTRY 1995 1996 1997 1998
Asia
Korea 8.9 6.8 5.0 -5.8
Malaysia 9.4 8.6 7.7 -6.7
Thailand 8.8 5.5 -1.3 -9.4
Indonesia 8.2 8.0 4.7 -13.7
Singapore 8.2 7.5 9.0 0.3
Philippines 4.7 5.8 5.2 -0.5
Taiwan 6.0 5.7 6.8 4.9
India 8.0 7.4 5.5 5.8
Hong Kong 3.9 4.5 5.3 -5.1
China 10.5 9.6 8.8 7.8
World 3.8 4.3 4.2 2.5

(Kaplan & Rodrik 6).

Table A shows the effect of the nineteen ninety-seven financial crisis on the economies of selected countries in East Asia. The table indicates the degree to which the Gross Domestic Product (GDP) declined from 1995 to 1998. Analysis of the contents of the table shows that Indonesia, Philippines, Thailand, Korea, and Malaysia had their economies feeling the worst impact of the crisis (DeCastro 112).

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The impact of the crisis

Several issues resulted from the Asian financial crisis. The first among them was the shortage of foreign exchange in the countries that were worst hit. The countries included Korea, Thailand, and Indonesia among many more. Their currencies lost value. The rest of the world including the United States was affected. It is important to note here that the political, financial and economic systems of Russia collapsed completely by the summer of nineteen ninety-eight. After the crisis, the economy of Brazil was saved from collapse by the loan from International Monetary Fund (Chey 554). Thailand was forced to borrow some funds initially before they were even hit by the crisis, a situation that made their conditions worse. Most of the parts of Eastern Asia were greatly hit by the crisis with the exception of China, Taiwan, Vietnam were less affected.

The other issue that came under scrutiny was the role of the International Monetary Fund and the World Bank among other international financial institutions. Their duty in replenishing funds to the affected countries and their operations had to be re-examined to check their worth. Generally, all the Asian countries felt the effects of the crisis since their stocks did not receive new investors, the prices of basic commodities rose over the short period and they lost confidence from investors from other countries who initially had interests (IMF 46). The drop in value of the Thai Baht, Philippine peso, Malaysian ringgit, and Indonesian rupiah also had effect on other currencies for instance the Hong Kong dollar, Taiwan dollar, Brazilian real and the Korean won. The financial institutions in the respective countries had to offload all their foreign currency reserves to cut the pressure the crisis was having on their domestic currencies. This move by the governments led to an automatic raise in the lending interest rates to attract foreign investors thereby attracting foreign capital (Berg and Patillo 52). The economic effects of these actions included the stock prices hitting their lowest levels ever. They also slowed the economic growth and led to the decline in the performance of other global stock markets. All the capital flows in out of Asia were greatly affected.

The role of the IMF

The International Monetary Fund acted fast to prevent further loss that was arising from the economic crisis. It was predicted that the crisis could spread to the rest of the countries globally. IMF is an international financial organization that aids most countries when faced with such crisis. The actions of IMF have bore some fruits in terms of being able to prevent reoccurrence of financial crises but still others are aging. The impact of the financial crisis was harsh in other parts few years later as the programs that IMF had put in place were not seriously followed. The IMF laid down special packages to salvage the affected economies. The international financial donor was central to the resurgence of the troubled economies that were hit by the financial crisis (Chey 334). The measures that were taken to make sure that the economies were saved and remained stable included directing issuance of funds. The financial body was to give more funds after the affected governments met certain conditions.

The role of IMF included giving technical support to the financial regulators in the affected countries and helping the institutions in developing policy that could help in faster recovery. The organization gave out more than forty billion dollars to the Asian countries to salvage the economies of the affected nations. This was to make sure that economic confidence in the countries that were hard hit by the crisis was restored. The stabilization of the currencies of the nations was also the main reason that was considered to give respective countries the economic advantage so that their stocks would be attractive and enable most investors to gain confidence and invest in the Asian economies (Chey 574).

Table B

Country Thailand Indonesia Korea
Total pledge 17.2 40 57
IMF 3.9 10.1 21.0
World Bank 1.5 3.0 5.0
Asian Development Bank 1.2 3.5 4.0

(IMF 17).

Key: The money is in billion US dollars.

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Table B shows the total amount of money loaned by various financial donors to the countries that were adversely affected by the crisis.

The lessons learnt

The affected countries learnt several lessons from the crisis that occurred starting in 1997 to the turn of the century when it was finally controlled. Countries globally were forced to develop both political and monetary policies on to avert further occurrence of such financial calamities. The mandatory need to build a new international financial architecture was one of the lessons learnt (Moghadam 23). Such a program would make sure that there was proper allocation and use of the capital, proper management of free capital mobility, and provision of financial safety nets in addition to the prevention of the herding in the financial markets.

These were all attributed to the lessons that the countries learnt because of the crisis. The main goal of this architecture would be to improve and take care of the tradeoff between financial freedom and financial stability thereby preventing financial crises. It would also help to solve such complications at the lowest cost possible if at all they may occur. The macro-vision of a new international financial architecture that was proposed has never been realized. Economists today can confidently prove that there still exists a real need for an international financial system that will be in a position to design the rules of the financial system in ways that enhance global stability and promote economic growth (Kaplan and Rodrik 564).

Countries that took loans from the IMF have learnt important lessons about their programs with the financial institution. The Fund provided more that $100 billion dollars to Indonesia, Thailand and Korea, since they were the hard hit by the crisis with the aim of restoring investor confidence and in the process cut the economic crisis. It has however, led to acceleration of the capital flight instead of solving the issues at hand. The proper focus on overhauling financial institutions in the middle of the crisis, negatively affected the investors’ confidence by re-emphasizing on domestic financial weakness (Moghadam 54).

IMF and its structural financial plans of reducing the crisis to happen at that time could be termed as being mission creep, which means they included reforms in areas that were not typical of the Fund’s market financial control and surveillance. The high interest rates that the IMF charges to the countries that they have aided in stabilizing their foreign currencies are too high and this has led to a severe credit crunch that exacerbated the financial dilemmas of the local banks and firms and had a sharp deflationary effect on domestic economic activity (Chey 224).

Ten years after the crisis, most economists are portraying the countries to be in a V-shaped type of economic recovery since then. They have been on the increasing side of accumulating the lost currency stability and they have earned enough capital investments that are playing a vital role to overturn the economic conditions. As per the economists approach, the macroeconomic indicators have of the region today illustrate that after a decline of the GDP in 1998 to a 4 %, it has climbed or increased to a 6% in the respective countries between 1998 and 2005. This is a clear indicator of appositive development as far as the economic structure of a given country is concerned. The lower growth rates are because of the decline in the investment levels in the region (Ping and Yean 5).

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Currency depreciation has not fully recovered though as the IMF interest rates have played a major role in its growth. The once depleted foreign reserves are slowly increasing as the countries have learnt to self-insure their reserves against the dire balance payment of payment difficulties that it experience during the crisis. The Association of Southeast Asian nations (ASEAN) and China, Japan and South Korea have united and established many financial initiatives that will make sure they have strengthened the overall region’s economic resilience. Due to the reasons that they learned from the crisis, the initiatives are also for stabilizing their own economies so that they can never rely on international financial organizations such as the IMF and others whose main interest is to control the regions (Moghadam 69).

Conclusion

The IMF played part in reducing the impact of the economic crisis within a short period but in the end, they would bring harm to the economies. Policies need to be instituted so that they can work progressive and prevent further financial crisis. Capital flight should be cut and this will play an important role in reducing the loss of value in the foreign currencies.

Works Cited

Berg, Andrew and Catherine Patillo. Are Currency Crises Predictable? IMF Staff Papers, 46 (1999).

Chey, Hillary. ‘The Changing Political Dynamics of East Asian Financial Cooperation: The Chiang Mai Initiative.’ JSTR. 2009. Web.

De Castro, Richard. ‘The 1997 Asian Financial Crisis and the Revival of Populism/Neo-Populism in 21st Century Philippine Politics.’ JSTR. 2007. Web.

IMF. ‘The IMF and Recent Capital Account Crises: Indonesia, Korea, Brazil.’ Imf.org. 2003. Web.

Kaplan, Ethan & Dani, Rodrik. ‘Did the Malaysian capital controls work. ‘ Havard.edu. 2001. Web.

Moghadam, Reza. Combating the Crisis: How Have IMF Programs Fared? 2009. IMF. Web.

Ping, Lee and Tong, Yean. ‘Malaysia Ten Years After the Asian Financial Crisis.’ JSTR. 2007. Web.

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