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 by 50-60%, stock markets to decline by 40%, banks to close, and property values to drop.
The crisis was brought on by currency devaluations, bad banking practices, high foreign debt, loose government regulation, and corruption. Due to East Asia’s large impact on the world economy, the panic in Thailand, Indonesia, Korea, and other Asian countries has prompted other countries to worry about the effect on their own economies and offer aid to the financially troubled nations. 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, excessive debt, and political instability, devalued the baht as they fled from market-driven currencies like the American dollar.
Indonesia’s economy fell when the rupiah hit a record low against the U.S. dollar. The country is plagued by over $70 billion worth of bad debts and a corrupt and inefficient government. Thailand and Indonesia also suffer from being overbuilt during real estate booms that were the result of huge influxes of cash by optimistic foreign investors.
South Korea faltered under the weight of its huge foreign debt, decreasing exports, and weakening currency (Lochhead 4-5). Other major countries affected by the crisis include Japan, China, Malaysia, and the Philippines. Japan’s economy is burdened by $300 billion in bad bank loans and a recession. Chinese banks may carry bad bank loans of up to $1 trillion. 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 devalued currencies and lowered stock markets (Lochhead 5). The implications of the Asian financial crisis are many. A declining Asian economy will reduce demand for U.S. products.
Other countries’ exports may be affected by the devalued currencies of East Asia, making Asian imports appear cheap and leading to an increase in American imports. This, in turn, could increase our trade deficit (Lochhead 2). If the embattled Asian economies fail to repay their loans to the U.S. and other countries, it could result in a worldwide banking emergency (Duffy 2).
If the Asian economies fall further, they might sell the hundreds of billions of dollars of U.S. treasuries they now own in a desire to raise cash, leading to higher interest rates and a possible American recession (Lacayo 2). An article in the Economist reported that the Asian economic turmoil and resulting layoffs could increase discontent and possibly lead to violent strikes, riots, and political instability (1-2). Several solutions have been proposed to restore the health of the Asian economy since the financial tumult causes instability in the world market (Reven 3).
The International Monetary Fund is offering $60 billion in aid packages to Thailand, Indonesia, and South Korea. The aid will be used to convert short-term debt to long-term debt and to prevent currencies from falling further in the world market. Lower currency values make it more difficult to repay loans to other nations. The aid packages are tied to measures that will ensure the recipient countries reform their economies. Some of the measures the nations must follow include increasing taxes to decrease budget deficits, ending corruption, increasing banking regulation, improving accounting information for better investor decisions, closing insolvent banks, selling off 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 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 (Marshall 1). The financial crisis will serve as a much-needed lesson in debt management, orderly growth, competent accounting practices, and efficient government instead of destroying the Asian tigers. Considering Asia’s contribution to the world economy, a rapid recovery will be greatly anticipated.
