The document summarizes the East Asian financial crisis that began in 1997. It started in Thailand with the collapse of major companies which destabilized the economy. This triggered a rapid withdrawal of foreign funds across East Asia due to concerns over political and economic stability. The withdrawals accelerated into a financial panic. Countries were affected through currency depreciation, high inflation, rising debt, and economic contraction. The IMF provided $120 billion in bailouts but its austerity programs may have worsened the crisis. India was less impacted due to capital controls and strong fundamentals.
The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.
Financial contagion refers to “the spread of market disturbances -- mostly on the downside -- from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows." Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, or even regions.
The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.
Financial contagion refers to “the spread of market disturbances -- mostly on the downside -- from one country to the other, a process observed through co-movements in exchange rates, stock prices, sovereign spreads, and capital flows." Financial contagion can be a potential risk for countries who are trying to integrate their financial system with international financial markets and institutions. It helps explain an economic crisis extending across neighboring countries, or even regions.
Asian Financial Crisis in 1997
Asia before Financial Crisis
Beginning of Asian Financial Crisis
Affected countries from Asian financial Crisis
End of Asian Financial Crisis
IMF role during Asian financial crisis
3 Causes of Asian Financial Crisis
Impact of Asian Financial Crisis to:
Thailand
Philippines
Malaysia
Japan
How these countries overcame the Crisis
Current developments to Avoid future financial crisis
Promote international monetary cooperation;
Facilitate the expansion and balanced growth of international trade;
Promote exchange stability;
Assist in the establishment of a multilateral system of payments; and
Make resources available (with adequate safeguards) to members experiencing balance of payments difficulties.
The IMF is accountable to the governments of its member countries. At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country.
The Board of Governors meets once each year at the IMF-World Bank Annual Meetings.
Twenty-four of the Governors sit on the International Monetary and Financial Committee (IMFC) and normally meet twice each year.
The IMF's day-to-day work is overseen by its 24-member Executive Board, which represents the entire membership, this work is guided by the IMFC and supported by the IMF staff.
The Managing Director is the head of the IMF staff and Chairman of the Executive Board and is assisted by four Deputy Managing Directors.
In the aftermath of the Asian crisis of 1997, a number of rapid assessments on the extent and nature of the social impact appeared. They brought out the human cost of the crisis in bolder relief. One such study, launched in the last quarter of 1998, was conducted by ADB. It was designed to assist in devising policy responses to the social crisis and identifying reforms that would strengthen social protection systems in the longer term. It covered Indonesia, the Republic of Korea, the Lao Peoples' Democratic Republic, Malaysia, Philippines, and Thailand. It sketched the transmission of social impacts from the crisis, analyzed the crisis effects on prices and employment, discussed the impact on inequality and poverty, looked at human development in terms of education, health, and family planning, touched on social capital, and looked at the environment.
International trade is the exchange of capital, goods, and services across international borders or territories.
international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, salt roads), its economic, social, and political importance has been on the rise in recent centuries.
To understand the pattern in international trade, Different trade theories are postulated. Some famous trade theories are:
Mercantilism
Absolute Advantage Theory
Comparative Advantage Theory
Hecksher-Ohlin Factor endowment theory
Product Life Cycle Theory
New Trade Theory
Porter’s Diamond Theory for competitive advantage
Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves and gold and silver reserves. (known also as bullionism)
Granting of state monopolies to particular firms especially those associated with trade and shipping.
Subsidies of export industries to give competitive advantage in global markets.
Government investment in research and development to maximize efficiency and capacity of domestic industry.
Allowing copyright / intellectual theft from foreign companies.
Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.
Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.
England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
All colonial exports to Europe had to pass through English first and be re-exported to Europe.
Under British Empire, India restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax, led to ‘Salt tax’ revolt led by Gandhi.
In seventeenth Century France, the state promoted a controlled economy, with strict regulations about the economy and labour markets
In the modern world, mercantilism is sometimes associated with policies, such as.
Undervaluation of currency e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive.
Government subsidy of industry for unfair advantage. China has been accused of offering too much subsidised investment for industry, leading to over supply of industries such as steel – meaning other countries struggle to compete.
Surge of protectionist sentiment, e.g. tariffs on imports.
Copyright theft
Asian Financial Crisis in 1997
Asia before Financial Crisis
Beginning of Asian Financial Crisis
Affected countries from Asian financial Crisis
End of Asian Financial Crisis
IMF role during Asian financial crisis
3 Causes of Asian Financial Crisis
Impact of Asian Financial Crisis to:
Thailand
Philippines
Malaysia
Japan
How these countries overcame the Crisis
Current developments to Avoid future financial crisis
Promote international monetary cooperation;
Facilitate the expansion and balanced growth of international trade;
Promote exchange stability;
Assist in the establishment of a multilateral system of payments; and
Make resources available (with adequate safeguards) to members experiencing balance of payments difficulties.
The IMF is accountable to the governments of its member countries. At the top of its organizational structure is the Board of Governors, which consists of one Governor and one Alternate Governor from each member country.
The Board of Governors meets once each year at the IMF-World Bank Annual Meetings.
Twenty-four of the Governors sit on the International Monetary and Financial Committee (IMFC) and normally meet twice each year.
The IMF's day-to-day work is overseen by its 24-member Executive Board, which represents the entire membership, this work is guided by the IMFC and supported by the IMF staff.
The Managing Director is the head of the IMF staff and Chairman of the Executive Board and is assisted by four Deputy Managing Directors.
In the aftermath of the Asian crisis of 1997, a number of rapid assessments on the extent and nature of the social impact appeared. They brought out the human cost of the crisis in bolder relief. One such study, launched in the last quarter of 1998, was conducted by ADB. It was designed to assist in devising policy responses to the social crisis and identifying reforms that would strengthen social protection systems in the longer term. It covered Indonesia, the Republic of Korea, the Lao Peoples' Democratic Republic, Malaysia, Philippines, and Thailand. It sketched the transmission of social impacts from the crisis, analyzed the crisis effects on prices and employment, discussed the impact on inequality and poverty, looked at human development in terms of education, health, and family planning, touched on social capital, and looked at the environment.
International trade is the exchange of capital, goods, and services across international borders or territories.
international trade has existed throughout history (for example Uttarapatha, Silk Road, Amber Road, salt roads), its economic, social, and political importance has been on the rise in recent centuries.
To understand the pattern in international trade, Different trade theories are postulated. Some famous trade theories are:
Mercantilism
Absolute Advantage Theory
Comparative Advantage Theory
Hecksher-Ohlin Factor endowment theory
Product Life Cycle Theory
New Trade Theory
Porter’s Diamond Theory for competitive advantage
Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves and gold and silver reserves. (known also as bullionism)
Granting of state monopolies to particular firms especially those associated with trade and shipping.
Subsidies of export industries to give competitive advantage in global markets.
Government investment in research and development to maximize efficiency and capacity of domestic industry.
Allowing copyright / intellectual theft from foreign companies.
Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.
Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.
England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
All colonial exports to Europe had to pass through English first and be re-exported to Europe.
Under British Empire, India restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax, led to ‘Salt tax’ revolt led by Gandhi.
In seventeenth Century France, the state promoted a controlled economy, with strict regulations about the economy and labour markets
In the modern world, mercantilism is sometimes associated with policies, such as.
Undervaluation of currency e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive.
Government subsidy of industry for unfair advantage. China has been accused of offering too much subsidised investment for industry, leading to over supply of industries such as steel – meaning other countries struggle to compete.
Surge of protectionist sentiment, e.g. tariffs on imports.
Copyright theft
Presentation talks about the crisis faced by Korea,Indonesia,Malaysia.
Some of the important reasons being BOP Deficits and Inefficient Financial Systems, drop in GDP and increase in Unemployment rate etc.
Bubble Spotting - The East Asia Currency and Debt crisis of 1997Benjamin Van As
During the 1990s, various Eastern Asia economies grew at double-digit figures, and exports grew at well over 10% pa. in some cases.
Then the party ended with a bang as the Currency and Debt Bubble popped, the impact of which could be felt in markets around the world.
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A situation in which the wealth of a nation or State or country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling national output, a drying up of liquidity and inflation/deflation. An economic crisis can take the form of a recession or depression.
What are the main causes of and contributing factors to internationa.pdfanaxeetech
What are the main causes of and contributing factors to international financial crises? How can
they be resolved? How can they be prevented? Answer this question in the context of the Asian
Crisis of 1997.
Solution
Causes of Asian financial crisis-. Firstly, huge amounts of foreign capital became readily
available at relatively low interest rates, as investors in search of fresh opportunities shifted huge
amounts of capital into Asia. As under all boom cycles, stock and real estate prices in Asia
increased initially, thus attracting further funds. But, domestic allocation of borrowed foreign
capital was inefficient due to weak banking systems, inefficient corporate governance, and
inadequate transparency of financial sector. Insufficient absorptive capacity also added to the
inefficient allocation of foreign capital. Secondly, the economies\' exchange rate regime was
fixed hence giving borrowers an illusionary sense of security, encouraging them to go for dollar-
denominated borrowings.
The huge capital inflows plus weakening exports were reflected in increasing current account
deficits. Also, a substantial part of the capital inflows was in the form of short-term borrowing,
making these economies prey to external shocks.
Once the trigger started in Thailand , other markets overreacted and the crisis spread.
Remedies.
A Case Study Analysis on the Asian Financial Crisis of 1997 and Zapa ChemicalsSadman Ahmed
Asian Financial Crisis of 1997:-
The Asian crisis was one of the worst financial disasters in the history of Thailand. The investors moved away large sums money away, inflation spiraled out of control, and it ultimately put pressure on the exchange rates of the Baht. Due to Thailand’s problems alone, the effect of the crisis spread along different countries in Asia. The impacts prove how integrated the economies of today are. Much of the fault lies on the failed policies of the government and weak regulatory regime.
Zapa Chemicals (risk management)
The exchange rate exposure and the legal hurdles can be quite a burden when transferring funds across the borders. In the case of Zapa Chemicals, the tax filing problem did not help them to transfer funds. They didn’t know when exactly the funds would be available for receiving. The risk management of the firm is quite a hefty task for foreign companies to successfully pursue.
Unit 8 - Information and Communication Technology (Paper I).pdfThiyagu K
This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
Operation “Blue Star” is the only event in the history of Independent India where the state went into war with its own people. Even after about 40 years it is not clear if it was culmination of states anger over people of the region, a political game of power or start of dictatorial chapter in the democratic setup.
The people of Punjab felt alienated from main stream due to denial of their just demands during a long democratic struggle since independence. As it happen all over the word, it led to militant struggle with great loss of lives of military, police and civilian personnel. Killing of Indira Gandhi and massacre of innocent Sikhs in Delhi and other India cities was also associated with this movement.
Francesca Gottschalk - How can education support child empowerment.pptxEduSkills OECD
Francesca Gottschalk from the OECD’s Centre for Educational Research and Innovation presents at the Ask an Expert Webinar: How can education support child empowerment?
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Synthetic fiber production is a fascinating and complex field that blends chemistry, engineering, and environmental science. By understanding these aspects, students can gain a comprehensive view of synthetic fiber production, its impact on society and the environment, and the potential for future innovations. Synthetic fibers play a crucial role in modern society, impacting various aspects of daily life, industry, and the environment. ynthetic fibers are integral to modern life, offering a range of benefits from cost-effectiveness and versatility to innovative applications and performance characteristics. While they pose environmental challenges, ongoing research and development aim to create more sustainable and eco-friendly alternatives. Understanding the importance of synthetic fibers helps in appreciating their role in the economy, industry, and daily life, while also emphasizing the need for sustainable practices and innovation.
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Dive into the world of AI! Experts Jon Hill and Tareq Monaur will guide you through AI's role in enhancing nonprofit websites and basic marketing strategies, making it easy to understand and apply.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
1. EAST ASIA CRISIS Main Reference: The Onset of the East Asian Financial Crisis Steven Radelet and Jeffrey Sachs Harvard Institute for International Development March 30,1998
2. Introduction East Asian Miracle Types of Crisis Beginning of Crisis the role of financial panic as an essential element of the Asian crisis. Impact of Crisis Role of IMF
4. East Asian Countries South Korea Indonesia Philippines Thailand Hong kong Singapore Malaysia Taiwan Source : Google Images
5. Four Asian Tigers The Four Asian Tigers or Asian Dragons are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan (Republic of China) These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s. All four Asian Tigers have a highly educated and skilled workforce and have specialized in areas where they had a competitive advantage
6. Four Asian Tigers Their economic success stories became known as the Miracle on the Han River and the Taiwan Miracle and have served as role models for many developing countries, especially the Tiger Cub Economies. They sustained rate of double-digit growth for decades. Each nation was non-democratic and relatively authoritarian political systems during the early years.
7. East Asia Miracle Many factors have been identified as the cause of East Asia's relative success - outward orientation, high saving and investment rates, macroeconomic discipline, and other good public policies Each focused on exports to rich industrialized nations. Each of the Asian Tigers had high tariffs on imports and undervalued currencies. They had high interest rates attractive to foreign investors looking for high rate of return.
9. East Asian Crisis Financial crisis is a situation in which some financial institutions or assets suddenly lose a large part of their value. It is a testament to the shortcomings of the international capital markets and their vulnerability to sudden reversals of market confidence.
10. Diagnosing Financial Crises Five Type of Crisis Macroeconomic policy-induced crisis: Balance of payment crisis currency depreciation; loss of foreign exchange reserves; Financial panic: case of multiple equilibria in the financial markets short-term creditors suddenly withdraw their loans from a solvent borrower
11. Diagnosing Financial Crises 3. Bubble collapse: occurs when speculators purchase a financial asset at a price above its fundamental value In each period, the bubble may continue to grow, or may collapse 4. Moral-hazard crisis: arises because banks are able to borrow funds on the basis of implicit or explicit public guarantees of bank liabilities. undercapitalized or under-regulated banks may use these funds in overly risky or even criminal ventures 5. Disorderly workout: occurs when an illiquid or insolvent borrower provokes a creditor grab race a forced liquidation even though the borrower is worth more as an ongoing enterprise.
12. Before Crisis Received large inflow of money High growth rate (8-12%GDP) Dramatic run up in asset prices Increase capital investment High per Capita Income Thailand, Indonesia and South Korea had large private current account deficit It led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.
13. Beginning of Crisis The rapid reversal of private capital inflows into Asia. Net private inflows dropped from $93 billion to -$12.1 billion. The sudden drop in bank lending followed a sustained period of large increases in cross border bank loans. At the end of 1996, the proportion of loans with maturity of one year or less was 62% for Indonesia, 68% for South Korea, 50% for the Philippines, 65% for Thailand, and 84% for Taiwan.
16. Triggering Events In early 1997 in Thailand Hanbo Steel, Sammi Steel and Kia Motors collapsed. These bankruptcies, in turn, put several merchant banks under significant pressure The Bank of Thailand lent over Bt 200 billion ($8 billion) to distressed financial institutions through Financial Institutions Development Fund (FIDF). The BOT committed almost all of its liquid foreign exchange reserves in forward contracts, usable reserve levels of Central Bank fell sharply
17. Other Events In late June 1997, the Thai Government removed support from a major finance company, Finance One. This shock accelerated the withdrawal of foreign funds, and prompted the currency depreciation on July 2, 1997. The Thai baht devaluation triggered the capital outflows from the rest of East Asia.
18. Causes of withdrawl Bank failure. In Thailand, the failures of finance companies helped set off the exodus. Corporate failure. In Korea, the withdrawal of funds was based on concerns over the health of the corporate sector. Political uncertainty: hastened the credit withdrawals, since each country faced the potential for a change in government. Contagion. Many creditors appeared to treat the region as a whole, and assumed that if Thailand was in trouble, the other countries in the region probably had similar difficulties. International Interventions. the IMF recommended immediate suspensions or closures of financial institutions, measures which actually helped to incite panic.
19. Add a title The withdrawal of foreign funds triggered a chain reaction which quickly developed into a financial panic. The withdrawal of funds also set off a liquidity squeeze and a sharp rise in interest rates Offshore creditors grew reluctant to roll over short-term loans. The lack of clear bankruptcy laws and workout mechanisms The losses on foreign exchange exposure and the rise in non-performing loans eroded the capital base of the banks
20. Mistakes in Policies Rapid evolution into panic was aided by policy misjudgements and mistakes across the region. Thailand and Korea, to defend their exchange rate peg, exhausted a substantial proportion of their foreign exchange reserves. Malaysia and Thailand introduced mild controls on foreign exchange transactions. Inflammatory statements by government officials and market participants added to the panicked withdrawal of funds
21. Element of Panic The Asian financial crisis had substantial elements of panic and disorderly workout. The crisis was largely unanticipated. The crisis involved considerable lending to debtors that were not protected by state guarantees The sudden withdrawal of investor funds to the region, rather than simply a deflation of asset values
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24. Effects on Countries What happened in Hong Kong : Hong Kong dollar came under attack in November as a result of currency depreciations. Hong Kong banks faced steeply rising interest rates on liabilities What happened in Taiwan: New Taiwan dollar also came under pressure and fell sharply, despite Taiwan's huge stock of reserves.
28. Effect on China The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994. Heavy speculation that China would soon be forced to devalue its currency to protect the competitiveness of its exports. RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia. China was unaffected by the crisis compared to Southeast Asia and South Korea.
30. Effect on India India was two large countries where GDP growth was relatively unaffected by the East Asian crisis India’s balance of payments (BoP) was also spared the effects of the East Asian turmoil. Indian rupee depreciated by 15% against the US dollar, compared to declines of between 25 and 35% in the Thai, Malaysian, and South Korean currencies and a 70% fall in the Indonesian rupiah
31. Why was India not affected much? Floating exchange rate with some influence by the RBI during periods of crisis Strong fundamental growth with services sector being the prime reason External debt to GDP has been declining for the past few years India does not have capital account convertibility so capital outflows through a contagion effect could not destabilize the economy. Banks in India are discouraged from making investments in real estate and the stock markets, while corporate exposure to external debt has been controlled.
32. IMF role Provided $120 billion as bailout package. Imposed restrictive condition IMF programs up till the end of 1997 apparently added to the panic. The IMF programs generally called for six key actions: immediate bank closures; quick restoration of minimum capital adequacy standards; tight domestic credit; high interest rates on central bank discount facilities; fiscal contraction; non-financial sector structural changes. Domestic bank lending stopped abruptly in countries with Fund programs.
33. IMF role The de-capitalized banks restricted their lending in order to move towards capital-adequacy ratios required by bank supervisors and by the IMF. Currency depreciation and stock market collapse continued long after the programs were signed More bankruptcies Local called the financial crisis “the IMF crisis” due to its controversial role.
34. Why the Asian Crisis was not Predicted The Countries maintained good budgetary positions Domestic savings and investment rates were very high throughout the region Interest rates were usually less in rest of the world (US and Japan). Massive capital inflows were attracted into the region during the 1990s. Healthy Forex reserves – Thailand reached $38.6 billion in 1996 equivalent to over 7 months of imports
35. CONCLUSION East Asian crisis resulted from financial panic that arose from certain emerging weaknesses in these economies It could have been largely avoided with relatively moderate adjustments and appropriate policy changes. There were macroeconomic imbalances, weak financial institutions, widespread corruption, and inadequate legal foundations. Abrupt actions by domestic and international policy makers can worsen an incipient crisis, by helping to trigger the capital outflow
36. References Main Reference: The Onset of the East Asian Financial Crisis by Steven Radelet and Jeffrey Sachs IMF's Role in the Asian Financial Crisis by Walden Bello. India, the Washington Consensus and the East Asian crisis by C. RammanoharReddy http://wikipedia.en.org/ Google images
37. of Crisis Thailand's economy developed into a bubble fueled by "hot money“ The short-term capital flow was expensive and often highly conditioned for quick profit. The crisis started with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the USD. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.
Editor's Notes
Non-convertibility can generally be defined with reference to transaction for which foreign exchange cannot be legally purchased (e.g. import of consumer goods etc), or transactions which are controlled and approved on a case by case basis (like regulated imports etc). A move towards free convertibility implies a reduction in the number / volume of the above types of transaction.