(This article is under construction – come back soon!)
Introduction
In 1997 the Asian Financial Crisis took place. It was a period of instability in the Asian world which adversely affected a few major countries that had recently enjoyed economic progress. It began to raise many fears around the idea of an international economic crisis.
Pre-bubble boom
The history of growth in the Asian market began after the Second World War. Reconstruction in Asia was assisted by the American army under the command of Douglas MacArthur. Japan was democratized and war criminals were punished. Japan proved to be cooperative and even adopted a constitution in 1946 while renouncing militarism and began introducing Western style democratic government policies. This eventually paved the way for Japan to recover economically.
In China things were not progressing as well. There had been a bitter civil war between the communists and the Nationalists. The United States had supported Chiang Kai-shek while the communists eventually gained victory under Mao Zedong in 1949. Nationalist China collapsed, signaling a depressing defeat for the United States and the Western Allies. While Nixon is largely known for resigning from office, his foreign relations and diplomacy policies cannot be undercounted. At the time, anti-communism raged within the United States and any attempts toward making peace with either China or the Soviet Union would have been viewed with a tremendous amount of suspicion by Americans. Given Nixon’s previous reputation as a strict anti-communist during the earlier part of his career, his motives certainly could not be questioned. As a result, the overtures he made toward China and the USSR were largely accepted by the American public. The Cold War certainly did not come to an end, but as a result of the efforts of Kissinger and Nixon, it did begin to thaw.
In the fall of 1949 it became known that the Soviets had detonated an atomic bomb. In an effort to outpace the Soviets, President Truman ordered work to begin toward the development of the hydrogen bomb, which would be more deadly than the atomic bomb. In 1952, the Americans completed work on the bomb, with the Soviets exploding their first H-bomb in 1953. These terrifying events signaled a race for nuclear superiority and an attempt to gain peace through mutual terror.
Bubble mania
Prior to 1997, Asia had begun to attract nearly half of the total capital inflow from developing countries. The economies of the region experienced high interest rates which foreign investors found attractive in terms of the high rate of return. This resulted in a large inflow of money and an increase in asset prices. Simultaneously, the economics of South Korea, Malaysia, Singapore, Thailand, and Indonesia experienced high GDP growth rates between eight and twelve percent. This was done thanks to funding from the Asian economic miracle and the World Bank and IMF. While the Asian economic miracle was beneficial for local Asian economies, many did not take notice of the total factor productivity and its marginal increase. Capital investment was responsible for the short term growth but only total factor productivity would result in long term growth (Maroney, Naka, & Wansi, 2004).
Bubble Burst
The crisis began in Thailand. The financial collapse was a result of the Thai government being forced to float their currency, the baht because foreign currency was unable to support the fixed exchange rate. They were also forced to cut their peg to the dollar in spite of exhaustive efforts to try and rally support in the face of a financial bust. This bust was mostly driven by real estate and a financial overextension. Thailand inherited the burden of foreign debt which had made the country essentially bankrupt long before its currency collapsed. This financial burden extended beyond Thailand and began to affect other regions of Southeast Asia. Japan, for instance, watched their currency fall alongside their asset prices and stock markets (Sharma, 2003).
While it started in Thailand, the economic bubble and financial crisis extended into Indonesia and South Korea and soon after, Hong Kong, the Philippines, and Malaysia and Laos were affected. Vietnam, Singapore, The People’s Republic of China, Pakistan, Taiwan, and India remained less affected by it but did suffer a reduction in demand and confidence in the general Southeast Asian area (Tuluca, & Zwick, 2001).
During this time the foreign debt to DPG ratios increased from one hundred percent to one hundred and sixty seven percent within four of the economies from the Association of Southeast Asian Nations. This was between 1993 and 1996. At the height of the crisis in 1997, these ratios reached one hundred and eighty percent. In places such as South Korea the ratios increased from thirteen to twenty one percent and then reached a climax of forty percent. Thailand and South Korea were the two countries to watch their debt service-to-exports ratio increase (Sharma, 2003).
Because the crisis was so severe, the notion of colonialism was discussed. The countries which were adversely affected were falling apart and were also some of the richest not just in their region but in the world. This meant that hundreds of billions were at stake and therefore the international community should get involved. Instead, the International Monetary Fund did. They created a series of rescue packages for the countries that were most affected in order to ensure they nation did not default. These rescue packages were conditional and given only in exchange for a series of severe economic reforms which were influenced by neoliberal principles. This was done under the theory that it would help to restore confidence in the solvency of the nations which were affected while penalizing insolvent companies and then protecting the currency values (Woo, Sachs, & Schwab, 2000).
The effects this bailout had remains controversial as do their results. The countries who agreed to the help were forced to reconstruct most of their financial framework and suffered from permanent devaluation. They also faced high unemployment rates, social unrest, and real estate busts. The overall intervention by IMF was strongly criticized because the development encouraged Asian countries to lean toward capitalism by way of liberalizing their financial section and elimination any current restrictions on capital flow (Tuluca, & Zwick, 2001).
Even today the results of the changes forced upon South Korea remain. KORUS FTA is a free trade agreement that has warranted years of debate between not just the United States and Korea, but also other international partners. The goal of the agreement was to function as an economic boost for South Korea as well as the United States. It is primarily targeted toward the agricultural sector, though there are others involved. The agreement was agreed upon years ago, but it was not until recently that it was legally signed and measures taken to ensure that it is implemented. Overall, the agreement seeks to lower tariffs on imports and exports. KORUS FTA is a treaty between the Republic of Korea and the United States. It is a free trade agreement whose negotiations were first announced in February of 2006. The conclusion of those negotiations took place in April of 2007. However, after the first signing of the treaty, neither the United States’ Congress nor the National Assembly of South Korea took measures to enforce it.
Once this free trade agreement is ratified it will be able to eliminate nearly one hundred percent of the tariffs from each country within a time period of five years while also creating additional protection for financial services catered toward multinational firms. This agreement is the first free trade agreement between the United States and another major Asian economy. The deal also stands as the largest trade deal the United States has had since 1993. As far as the Republic of South Korea, it is the second largest trade agreement signed with a country other than the European Union.
Conclusion
After the government of Thailand faced a widespread financial crisis as a result of incurred debt, much of Southeast Asia was adversely affected by the bubble burst in 1997. While many of the governments throughout Asia had sound fiscal policies a forty billion dollars program was instigated by the International Monetary Fund to stabilize South Korea, Thailand, and Indonesia, those countries which were hit the hardest by the crisis. The domestic situation throughout Indonesia was not settled by global efforts and as a result of this bubble burst, the president was forced to step down. The effects continued to linger through 1998 when the Philippines watched their growth drop to nothing. Taiwan and Singapore were two countries insulated from the bubble burst but still suffered hits because of size and location (Hunter, Kaufman, & Krueger, 1999).
References
Hunter, W. C., Kaufman, G. G., & Krueger, T. H. (1999). The Asian financial crisis: Origins, implications, and solutions. Boston: Kluwer Academic.
Maroney, N., Naka, A., & Wansi, T. (2004). Changing Risk, Return, and Leverage: The 1997 Asian Financial Crisis. Journal of Financial and Quantitative Analysis,39(01), 143. doi: 10.1017/S0022109000003926
Sharma, S. D. (2003). The Asian financial crisis: Crisis, reform, and recovery. Manchester, UK: Manchester University Press.
Tuluca, S. A., & Zwick, B. (2001). The Effects of the Asian Crisis on Global Equity Markets. The Financial Review, 36(1), 125-142. doi: 10.1111/j.1540-6288.2001.tb00007.x
Woo, W. T., Sachs, J., & Schwab, K. (2000). The Asian financial crisis: Lessons for a resilient Asia. Cambridge, MA: MIT Press.