• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What were the main causes of the East Asian financial crisis?

Extracts from this document...


MSc Development Studies 2003/4 Module: Images of Development What were the main causes of the East Asian financial crisis? The East Asian financial crisis of 1997 represented a major interruption in the rapid economic and social development enjoyed by much of the region in the decades leading up to it. In less than a year, some East Asian economies went from being examples of successful development practice to a situation of economic stagnation and decline. Growth rates that had averaged 8-10 per cent per year over many years turned negative, economies that enjoyed continuous high employment and experienced labour shortages suffered from rapidly rising unemployment levels, and stock market assets lost half their value. In a region where growth was dubbed 'miraculous', economies became structurally unstable and needed rapid intervention by international agencies such as the IMF (UNCTAD, 1998). The crisis arose from the large scale shift of funds out of domestic financial markets in the region, starting in Thailand (IMF, 1997). The effects of the financial crisis are still having an impact not only in the region but are also reverberating around many other parts of the global economy. This essay first attempts to define 'East Asia' by reviewing the different sets of countries in literature focussing on the crisis. It outlines the countries that suffered most as a result of the crisis, by examining pertinent economic and financial indicators in the region. It asserts that a discussion of the causes of the crisis is impossible without an understanding of the development process in the region before crisis, and examines the particular circumstances in the region that may have contributed to the onset financial crisis. It then looks at the context for the financial crisis and focuses on events in Thailand - the country where the crisis first took hold - in an attempt to identify the relative importance of the various underlying causes of the crisis put forward. ...read more.


Since many economies in the region were pegged to the Dollar, the competitiveness of their exports rose, encouraging still further influx of capital into the region. In 1995 the Dollar had reached its lowest level against the Yen and in response to warnings that this could trigger sell-offs of Japanese holdings of US Treasury Bonds, the Dollar was pushed up. When the Dollar gained in strength from 1995, this favourable condition in the region was reversed, leaving economies with losses in competitiveness and a reduction in export growth. In the region as a whole, export growth rates fell from an average of 20 per cent per year in the mid-1990s to only 5 per cent in 1996. The clear correlation between the relative strengths of the Dollar and Yen and the health of East Asian economies brought into question with wisdom of maintaining pegged exchange rates between a relatively small country's currency to the world's most powerful economy, as it exacerbated any problems the region already had. This phenomenon is discussed below. In addition to the part played by Japan and the US, Beams (1998) points to the role of China as an external factor that contributed to the build up to the East Asian financial crisis. The 50 per cent devaluation of China's currency in 1994 made its exports increasingly competitive: China already boasted cheaper labour than many of the East Asian economies where massive growth had fuelled rises in the costs of living and therefore wage rises. Investment began to move on from East Asia to China from 1994 onwards, putting further pressure on other East Asian economies by providing a certain amount of new competition in addition to diverting investment. As each individual country's economic growth slowed, they were also less able to export commodities to each other. Part of the success of development of manufacturing in the region was based on the ability of countries to trade intra-regionally, often engaging in 'work-sharing' which meant that countries engaged in different sectors ...read more.


Some economists, such as Beams (1998), asserted that the theories outlined above merely describe the symptoms of an over-expansion and subsequent contraction of the market - the so called 'boom and bust' cycles that are an intrinsic part of the capitalist economy - rather than explaining the causes of the crisis. In saying this Beams seems to blame the international capitalist economy itself rather than any of the factors discussed above that were pertinent to the East Asian crisis. It is certainly true that the crisis in East Asia exhibited many of the same characteristics as other crises in Mexico, Brazil and Russia. They were all emerging markets that enjoyed an influx of foreign capital previous to crisis, enabled through financial liberalisation. The crises were precipitated by currency instability coupled with a loss of investor confidence and contagion. But while the relevance of this assertion is undeniable, it fails to explain the particular set of circumstances and the nature of the pattern of events that was particular to East Asia. It is clear from this analysis that the East Asian financial crisis was caused by a combination of inter-relating factors. These were both underlying conditions - leaving economies in a fragile situation even if growth was strong - and chains of events that actually brought about the crisis. The most important underlying factors were financial fragility due to the large percentage of short-term investments; mismanagement of incoming funds by domestic financial institutions that were unprepared for the scale of investment and tended to give loans to low quality enterprises; external change that undermined comparative advantages and altered the inter-regional balances; and currency inflexibility that caused pressure of local currencies when the Dollar and Yen appreciated or depreciated. Although these were the underlying causes setting the right conditions to crisis, it is evident that the most important factors in actually bringing about and spreading the crisis were currency depreciation and contagion. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Political & International Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Political & International Economics essays

  1. Since the initiation of the open door and reform policy, China has experienced the ...

    During the period, according to China's statistics, the Japanese FDI in China was US$ 955 million, which covered 12.8 percent of the total foreign FDI in China, and it was much lower than the US$4320 million investment from Hong Kong and Macao.23 According to the statistics of Japan, the total

  2. There are four major components of GDP. Describe each of these components, including a ...

    the effects of a government surplus A government surplus means the public saving rises, as a result, the national saving grows though the level of private would not be affected. Therefore, the supply of the loanable funds will increase.

  1. Aylesbury pressing case

    This approach is really a wise choice compare to breakthrough improvement that is more expensive. Six sigma is an approach that combines these two approaches. It is a broad and flexible system for approaching, nourishing and maximising business success. It mainly includes process design and redesign, balanced scorecard measure, ongoing process planning, control continuous improvement, statistical process control.

  2. "East Asia has both greatly benefited and greatly suffered from the effect of globalisation". ...

    With Europe experiencing high influxes of 'hot money', it is easy to see why economic fundamentals have allowed for trillions of dollars to be exchanges in one economy over the time period of one day. This is mainly due to investors not paying deposit insurance, economies not having any interest rate regulations, and either low or no taxes.

  1. Managing Financial Resources.

    All EU decisions and procedures are based on the Treaties, which are agreed by all the EU countries. Initially, the EU consisted of just six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands. Denmark, Ireland and the United Kingdom joined in 1973, Greece in 1981, Spain and Portugal in 1986, Austria, Finland and Sweden in 1995.

  2. Economic growth in China

    Japanese FDI in China were involved with 25 projects of US$730 million, which just covered 0.16 percent of the total foreign FDI from Japan during the corresponding period24. At that time, Japanese FDI mainly focused on the non- manufacturing sectors, with 13 projects of US$ 530 million, which covered 52

  1. Asian financial crisis hit the most fast developing and successful economies in the world. ...

    Due to the increase in debt there is an increasing dependence on foreign currency that has far reaching implications in the economies. This increase in debt was largely in hard currency (Dollar/Yen). When hard currency appreciated it made it extremely difficult for Asian countries to pay off their debt as their debt in real terms grew exponentially.

  2. Causes and Effects of the Global Financial Crisis

    By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak (also shown in the graph). Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work