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Chap.4 Econ - Dev. Rica

The Asian financial crisis began in June 1997, affecting regional currencies and stock markets, with government responses leading to high-interest rates and market restrictions. The crisis was attributed to financial bubbles, external sector issues, and contagion effects, while policy implications suggested options for protection against future crises. Post-crisis, stronger economies have recovered slowly, while weaker ones like Indonesia have shown significant growth, with South Asia also experiencing accelerated growth due to reforms.

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Rubielyn Necio
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10 views3 pages

Chap.4 Econ - Dev. Rica

The Asian financial crisis began in June 1997, affecting regional currencies and stock markets, with government responses leading to high-interest rates and market restrictions. The crisis was attributed to financial bubbles, external sector issues, and contagion effects, while policy implications suggested options for protection against future crises. Post-crisis, stronger economies have recovered slowly, while weaker ones like Indonesia have shown significant growth, with South Asia also experiencing accelerated growth due to reforms.

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Rubielyn Necio
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© © All Rights Reserved
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CHAPTER 4: THE ASIAN CRISIS AND RECENT DEVELOPMENTS

4.1 Introduction
 Timeline: The crisis began in June 1997 with the Thai baht, followed by other currencies
in the region.
 Stock Market Impact: Equity prices fell dramatically, particularly those denominated in
U.S. currency.
 Government Responses: Pegging exchange rates and defending currencies led to high-
interest rates, affecting portfolio investors.
 Market Restrictions: Restrictions on foreign investment and lack of hedging facilities
exacerbated stock market declines.
 Herd Instinct: Local ownership dominated the stock markets, with notable exceptions in
Indonesia and the Philippines.

4.2 Why Did It Happen?


In this section, three alternative and even complementary explanations for the crisis are
reviewed:
1. Financial Bubble: A bubble in stock markets, real estate, and bank credit, combined with
short-term external borrowing and reliance on USD parity, made the financial sector vulnerable.
2. External Sector Issues: A rapid increase in the current-account deficit, overvalued real
exchange rates, and declining export competitiveness.
3. Contagion Effect: Pressure on currency and financial markets spread from country to country,
worsening the crisis.

4.3.4 Emerging Development Divide in Asia?


4.4.2 Some Policy Implications
To protect against financial crises, Asian economies had several options:
1. They could have cut back on growth.
2. They could also have loosened the attachment of their currency to the U.S. dollar.
3. They could have put a tax on short-term capital inflows if there was a reluctance to loosen the
exchange-rate peg.

4.5 Summary and Developments in the New Millennium


 Post-Crisis Recovery and Growth Trajectory
 The “golden age” of growth in the early 1990s is unlikely to return for most Asian
economies, except for China and India.
 Stronger economies (Korea, Taiwan, Singapore, Hong Kong) have recovered and will
grow more slowly due to higher income levels and past overheating.
 Weaker economies, like Indonesia, took longer but are now on a stronger growth
trajectory, averaging over 5% GDP growth since 2002.
 South Asia’s Accelerated Growth
 South Asia (e.g., India, Bangladesh) experienced accelerated growth due to policy
reforms, rivaling East Asia’s growth rates by 2007.
 Challenges remain for Pakistan and Sri Lanka due to political unrest.
 Economic Developments (1999–2002)
 Strong recovery in East and Southeast Asia (1999–2000), with growth exceeding 7% in
some economies.
 Slower growth in 2001–2002 due to U.S. recession and global electronics slowdown,
especially in export-driven economies.
 Deflation Concerns
 Deflationary pressures affected major economies like Japan, China, and Hong Kong.
 Countermeasures included monetary expansion, interest rate adjustments, and fiscal
stimulus.
 Impact of SARS (2003)
 The SARS epidemic negatively impacted trade, tourism, and services across Asia.
 Growth slowed by up to 1.5 percentage points in the first half of 2003 but resumed quickly
after the epidemic was contained.
 Long-Term Outlook
 Regional growth remains dependent on prudent macroeconomic policies, competition,
investment in human capital, and embracing technology.
 Despite challenges, Asia’s growth trajectory remains strong, driven by reforms, domestic
demand, and export competitiveness.

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