Economic Downturn in East Asia
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 he Asian nations, but the three hardest hit countries are Thailand, Indonesia, 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 eing 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.
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The banks lend 66% of China"s investment capital to state-run industries that only produce 12% of China"s Malaysia and the Philippines are both faced with devvalued currencies nd 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. reasuries they now own, leading to higher interest 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 nd 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 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.
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