East Asia Crisis Essay, Research Paper

A large economic downturn in East Asia threatens to end its nearly 30

year run of high growth rates. The crisis has caused Asian currencies to fall

50-60%, stock markets to decline 40%, banks to close, and property values to

drop. The crisis was brought on by currency devauations, bad banking

practices, high foreigh debt, loose government regulation, and corruption.

Due to East Asian countries has prompted other countries to worry

about the affect on their own economies and offer aid to the financially

troubled nations (Sanger 1). The East Asian crisis has affected almost all of

the Asian nations, but the three hardest hit countries are Thailand, Indonesia,

and South Korea.

The panic began in Thailand in May of 1997 when speculators,

worried about Thailand s slowing economy, exces sive debt, and political

instability devalued the baht as they fled for market-driven currencies like the

American dollar. Indonesia s evonomy soom 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 ineffcient government. Thailand and Indonesia also suffer from

being overbuilt during real estate booms that reven2 were the result of huge

influxes of cash by ooptimistic 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 billion in bad back loans and a recession. Chinese bank may

carry badd banks loans of up to $1trillion. The banks lend 66% of China s

investment capital to state-run industries that only produce 12% of China s

industrial output (Manning 2).

Malaysia and the Philippines are both faced with devvalued currencies

and lowered stock markets (Lochhead 5). The implicationsof the Asian

financial crisis are many. A declining Asian economy will reduce demand

for U.S. and other countries exports. The devalued currencies of East Asia

will make Asian imprts seen cheap and will lead to increased American

imports, thus increasing our trade deficit (Lochhead 2). A worldwide

banking emerge could result if the embattled Asian economies failed to pay

back thier loans to the U.S. and other countries (Duffy 2). If the Asian

economies 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 Amereican recession.

An article in the Economist reported that the Asian economic turmoil

and trhe layoffs that may result, could instigate increased discontent and

possibly give rise to violent strikes, riots, and greater political instability.

Since the financial turmoil causes instability in the world market,

several solutions have been porposed designed to restore the health of the

Asian economy. The int4ernational Monetary Fund is offering $60 billion in

aid packages to Thailand, Indonesia, and South Korea.

The aid will be used for converting short-term debt to long-term debt

and to keep currencies from falling lower in the world market. Lower

currency values make repaying loans to other nations more difficult. The aid

packages are tied to measures that will ensure that the recipient countries

reform their economies, some of the measures the nations must follow are

increasing taxes to decrease budget deficits, ending corruption, increasing

bank banking regulations, and improving accounting information so investors

can make better decisions.

Closing insolvent banks, selling of inefficient state enterprises, and

increasing interest rates to slow growth and encourage stability. Hopefully

these market reforms will allow East Asia to improve its economic outlook.

Since most of the Asian nations have balanced budgets, low inflation, cheap

labor, pro business governments, and high savings rates, the long-term

outlook for these countries is very good.

The financial crisis, instead of destroying the Asian tigers, will merely

serve as a much needed lesson in debt management, orderly growth,

competent accounting practices, and efficient government.

Considereing the size of Asias contribution to the world economy, a

rapid recovery will be greatly anticipated.