Last Updated 04 Jul 2021

Currency Crisis of the Asian Countries

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Memorandum

The significant growth rates of the Asian economies affected by the financial crisis were baffling in the least in the period prior to the predicament. As outlined by Berg (1999), the crisis took roots at the backdrop of a seemingly well-performing economy in the region. However, looking back, the real factors that were responsible for the predicament revolved around issues with far reaching impact on the economic performance.

Pempel (1999) asserted that during the 1990s, the Asian economies recorded reduction in inflation and unemployment as well as waning foreign debt. However, the interaction between the domestic and foreign stakeholders of the economy trickled down to a fierce crisis. With the economies having pegged their currency on the dollar, the value of their exports began to dwindle as early as 1995.  By 1997, most of the nations were paralyzed and unable to bailout the banking and financial sector of the economy owing to the domino effect.

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Baharumshah (2005) concurred with Robison, et al (2000) when he stated that both external and internal shocks contributed to the crisis. Inadequate and faulty fiscal policies were reprehensible for the internal shocks. The haphazard lending undertaken by banks mirrored on mismanagement of funds owing to the reduced due diligence and adherence to moral hazards guidelines. Consequently, the financial panic emanating from the reaction of banks towards the depleted credit facilities. In 1994, China, a major player in the Asian economic relationships was devalued by 35% to the official exchange rate as outlined by Whitt (1999). In spite of the negligible impact experienced due to the devaluation, it became the trigger to the crisis.

The recessionary period experienced in Japan during 1991 also influenced the amount of imports from the Asian region. Thirdly, the sharp rise in the dollar exchange rates influenced the currencies of the Asian countries which were tied to that of the dollar. As posited by Chang (1999), fundamental deficiencies in the macroeconomic component of the region contributed to the over-valuation of exchange rates propelled the effects of insufficiency of the domestic financial institutions to interact with huge capital inflow.

In the occurrence of a crisis of such a magnitude, the fiscal and monetary policies of an economy become impotent in the correction of the crisis. As a result, external influence from institutions is required in order to baulk the constrained economy. Hunter (1999) postulated that the IMF is mandated to provide the affected with financial resources in order to bail out the institutions and help restore investor confidence. Similarly, the injection of foreign exchange is aimed at curtailing the impact of foreign currency exchange rate fluctuations. Despite the posited capital mobility, the availability of foreign exchange is sufficient enough to revamp the operations of the economy in the meanwhile. During the Asian crisis, Thailand, Indonesia and Korea were recipients of a total of 117 billion dollars in order to cushion the adversity of the crisis as posited by Berg (1999).

Actions aimed at protecting the foreign exchange reserves of a country are also used by the IMF to deter investors from converting domestic currency to the foreign currency. By so doing, the investors are prevented from causing demands and supply inequalities which are capable of catapulting the uncontrollable fluctuation of foreign exchange rates (Ghosh,2001).

The IMF also institutes measures to safeguard the future of the economy by increasing surveillance of adherence to sound fiscal and monetary policies by the economy.  By so doing, the IMF ensures that precipitating factors are culled early in advance with the nations maintaining a balance in the productivity and expenditure.

The political structure is also influenced by the decisions of the IMF in order to foster democracy and fairness in resource allocation. Countries with dictatorial leaderships face sanctions aimed at persuading the leadership to adopt constructive political stances and protect the citizens from the unscrupulous creditors.

References

  1. Baharumshah, A. Z. (2005).  Open economy macroeconomics in East Asia. Burlington: Ashgate             Publishing, Ltd.
  2. Berg, A. (1999). The Asian Crisis: Causes, Policy Responses and Outcomes. IMF Working         Paper.             Accessed on 19 May 2020 from        http://www.imf.org/external/pubs/ft/wp/1999/wp99138.pdf
  3. Chang, R. (1999). Understanding Recent Crises in Emerging Markets. Economic Review.          Accessed on 19 May 2010 from http://www.frbatlanta.org/publica/eco-  rev/rev_abs/99er/q2/chang.pdf
  4. Edwards, S. (2000).  Capital Flows and the Emerging Economies: Theory, Evidence, and          Controversies. Chicago: University of Chicago Press
  5. Ghosh, B. N. (2001). Global Financial Crises and Reforms: Cases and Caveats Volume 27 of    Routledge Studies In The Modern World Economy. New York: Routledge
  6. Hunter, W. C. (1999). The Asian Financial Crisis: Origins, Implications, and Solutions. Massachusetts: Springer
  7. Pempel, T. J. (1999). The Politics of the Asian Economic Crisis Cornell Studies in Political          Economy. New York: Cornell University Press
  8. Robison, R et al (2000). Politics and Markets In the Wake of the Asian Crisis Asian Capitalisms.             London: Taylor & Francis
  9. Vestergaard, J. (2009). Discipline In The Global Economy?: International Finance And The End           Of Liberalism New Political Economy. New York: Taylor & Francis
  10. Whit, J. (1999). The Role of External Shocks in the Asian Financial Crisis. Economic Review.    Accessed on 19 May 2020 from http://www.frbatlanta.org/publica/eco-rev/rev_abs/99er/q2/whitt.pdf

 

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