The East Asian Crisis

Why are the East Asian countries known as the Asian tigers?

East Asian countries like Hong Kong, Indonesia, Malaysia, Japan, South Korea, Singapore, Thailand, and Taiwan are known as the Asian tigers.

• due to their high growth and equity, they grew faster than any other region in the world.

• e.g. from 1965-1990, many living standards indicators improved dramatically such as:

  • welfare,

  • life expectancy,

  • absolute poverty,

  • and education.

Describe the characteristics of their success.

The success of the “Asian Miracle” was characterised by factors like:

• domestic investment,

• high saving rates,

• growing human capital,

• productivity improvements,

• gradual financial liberalisation,

• govt intervention in the following areas in order to;

  • foster economic development,

  • develop specific industries,

  • implement policies to bolster savings and to promote investments,

  • build stronger financial markets,

  • and transition from import-substituting to export-oriented industries.

What were the conditions that may have led to the 1997 crisis.

Two prevailing views that either nothing was wrong (attributing financial instability to panic) or the weakened financial system (due to lack of risk management) set the stage for crisis.

Conditions leading to the 1997 crisis include;

• external shocks like the devaluation of the renminbi & yen;

  • greatly affected Southeast Asian countries

• sharp decline in semiconductor prices;

• added pressure on export revenue, asset prices, and economic activity;

• added pressure in Thailand’s foreign market,

  • then speculative attacks on all currencies.

Why did the IMF ask the East Asian countries to raise interest rates in 1997?

What were they trying to achieve (or prevent)?

What were the problems with these actions?

The IMF came under heavy criticism for flawed predictions and later flawed policy recommendations about the crisis;

• policies only worsened the crisis, prolonging economic misery in the affected region.

• IMF loaned money to East Asian countries in exchange for using strategies like restructuring;

  • wanted them to increase interest rates in order to;

    • stop speculative attacks on their currency,

    • attract fleeing foreign investment,

    • stop capital flight,

    • and to increase loans.

  • however, in practice;

    • financial outflows increased,

    • bankruptcies and defaults went up

    • and loans reduced.

  • the major problem with these policies was focusing on economic distress instead of fixing social issues and caring for most vulnerable in those societies.