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ASIAN FINANCIAL CRISIS.
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Causes of the 1997 crisis.... More...
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Paper Abstract:
Causes of the 1997 crisis. Factors that caused the crisis to be severe. Economic growth of the economies of Southeast Asia from early 1970s to late 1990s. Emphasis on stability-oriented macroeconomic policies. Growing excessive debt in manufacturing industries. International Monetary Fund (IMF) rescue program as unsuitable for Asia.

Paper Introduction:
CAUSES OF THE ASIAN FINANCIAL CRISIS IN 1997 AND THE DEEPENING OF THE EFFECTS OF THE CRISIS This research examines the Asian Financial Crisis that developed in 1997. The focus of the examination is on the initial causes of the Asian Financial Crisis and the factors that caused the Asian Financial Crisis to be more severe than it otherwise might have been. From the early-1970s up until the beginning of the economic crisis in Southeast Asia, the economies of Southeast Asia were envied for their spectacular records of economic growth. While the economic management and focus in each of the economies of Southeast Asia varied, one point of uniformity was an emphasis on stability-oriented macroeconomic policies. These policies sought to achieve low rates of price inflation, an avoidance of o

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It was the excessive debt in themanufacturing industries of these Southeast Asian economies thatprecipitated the beginnings of economic crises in these economies(Quattara, 1998). The IMF stated that: "Forceful, far-reaching structural reforms areat the heart of all the programs, marking an evolution in emphasis frommany of the programs that the IMF has supported in the past, where theunderlying country problem was imbalances reflecting inappropriatemacroeconomic policies. During the last six months of 1997, the IMF provided rescue packagesfor Indonesia, Korea, and Thailand. While tailored to the needs of individual countries, in allcases the IMF programs for the three Asian economies sought the followingoutcomes (International Monetary Fund, 1999: 1. Factsheet. The Korean package, approved on 3December, committed the IMF to provide support at the level of US$57billion (Lane, Ghosh, Hamann, Phillips, Schulze-Ghattas, & Tsikata, 1999). Economic growth in the Southeast Asian economies of Indonesia, SouthKorea, and Thailand was spectacular (International Monetary Fund, 1998).Even considering that it was easier for these countries to achieve highrate of growth because of the relatively low level of economic performanceat the beginning of the period, the rates of growth attained wereimpressive. Bycontrast, however, money supply management in Thailand was substantiallymore liberal than that in than that developed economies such as in theUnited States (International Monetary Fund, 1998). The IMF response to the Asian Crisis. Closer supervision of weak institutions is the thirduniversal outcome. Jeffrey Sachs (1997) contended that the IMF approach would not work inAsia because the problems emanated from the private sector as opposed tothe public sector. (1999). Because financial sector problems were a majorcause of the crisis, the centerpiece of the Asian programs has been thecomprehensive reform of financial systems" (International Monetary Fund,1999, p. 2. (1999, January 17). (1997, November 3). There was at work also in the Asian Financial Crisis, themacroeconomic concept of contagion. Rather,the IMF disburses loans on a piecemeal basis following periodic reviews ofthe progress being made by a recipient country toward the attainment of IMF-specified goals (Lane, Ghosh, Hamann, Phillips, Schulze-Ghattas, & Tsikata,1999). Increasing the potential for foreign participation indomestic financial systems is the fourth of these universal outcomes. IMF-supported programs in Indonesia, Korea, and Thailand: A preliminary assessment. 3). The Asian crisis: Origins and lessons. R., Hamann, J., Phillips, S., Schulze-Ghattas, M., & Tsikata, T. Washington: International Monetary Fund.Lane, T., Ghosh, A. Retrieved from the Internet on 2 2- 12- 9 at: http://www.imf.org/external/np/speeches/1998/ 5 498A.HTMSachs, J. Transparency is being increased, both as regardseconomic (on external reserves and liabilities in particular) and fiscaldata, and in the financial and corporate sectors" (International MonetaryFund, 1999, p. The IMF stated further that, to "address the governance issues thatalso contributed to the crisis, the reform of the financial systems isbeing buttressed by measures designed to improve the efficiency of markets,break the close links between business and governments, and ensure that theintegration of the national economy with international financial markets isproperly segmented. The wrong medicine for Asia. Washington, D.C.: International Monetary Fund. New York Times, B1. World economic outlook: World economic and financial surveys. Further, these ratioswere rising in Indonesia and Thailand, while they were beginning to fall inKorea at the time the Asian Financial Crisis materialized (InternationalMonetary Fund, 1998). Sachs (1997) contended that the IMF policies,especially those associated with the concept of conditionality, (1) areunsuitable for dealing with problems emanating in the private sector and(2) actually make matters worse. Actions of the International Monetary Fund (IMF),however, made the Asian Financial Crisis more several and longer lastingthan likely would have been the case in the absence of those actions. D. Sachs pointed-out that the Indonesian and Thai governments wererunning budget surpluses prior to the development of the crisis, and, thus,did not even meet the IMF's own guidelines for the application of theconcept of conditionality. The recapitalization of undercapitalized institutions is thesecond of the universal outcomes. (1998). Washington, D.C.: International Monetary Fund.International Monetary Fund. As a consequence, even still healthy banks were placed in aprecarious position. 3. From the early-197 s up until the beginning of the economic crisis inSoutheast Asia, the economies of Southeast Asia were envied for theirspectacular records of economic growth. The IMF noted that: "These closures, far fromimproving public confidence in the banking system, have, instead, set off arenewed flight to safety" ("Even Healthy Banks Are Hurt", 1998, p. Money supply in both Indonesia and Korea was rather conservative incomparison to that in developed economies such as the United States. The closure of un-viable financial institutions, with theassociated write down of shareholders' capital is the first of theseuniversal outcomes. Washington: International Monetary Fund, 1999.Quattara, A. When the manifestation of the AsianFinancial Crisis began in Indonesia, the cause ripple effects in currencyexchange values, pricing for exports, international trade, internationalpayments among the three countries that soon enveloped Thailand and SouthKorea in the Crisis. Sachs (1997) compared the actions of theIMF in the Asian Financial Crisis to those of the Federal Reserve in theUnited States in 1933 when it tightened credit in the midst of panic bankruns. TheIndonesian package, approved on 5 November, committed the IMF to providesupport at a level of US$43 billion. The IMF typically does not disburse all of its aid at once. Similarly, the proportionate level of private sector credit in bothIndonesia and Korea was rather conservative in comparison to that indeveloped economies such as the United States. The AsianFinancial Crisis began in Indonesia, South Korea, and Thailand. Unusually high levels of investment as a proportion of gross domesticproduct (GDP) were attained in the economies of Indonesia, South Korea, andThailand at the expense of current consumption. (1998, January 13). Financial Times, 3.International Monetary Fund. Eventually, most other Asian economies felt theimpact of the Crisis. Further, this ratio wasrising in the three Southeast Asian economies when the Asian FinancialCrisis materialized, while it was falling in developed economies, such asthe United States (International Monetary Fund, 1998). By contrast, however, theproportionate level of private sector credit in Thailand was substantiallyhigher than that in developed economies such as the United States(International Monetary Fund, 1998). IMF rescue packages, or loan agreements, come with strings attached.The strings are in the form of the IMF conditionality requirements.Conditionality requirements attempt to change the ways in which the economyfunctions in countries receiving IMF loans. Typically, a government mustcut spending, impose higher taxes and interest rates, close insolventbanks, end price controls or subsidies on basic foods, end itsrelationships with leading industries, open a country's markets to moreforeign competition, and ease the ability of foreign enterprises to acquiredomestic enterprises (Lane, Ghosh, Hamann, Phillips, Schulze-Ghattas, &Tsikata, 1999). (1998, October). The debt-to-equity ratios in manufacturing firms in the economies ofIndonesia, Korea, and Thailand were excessive in relation to such ratiosamong manufacturing firms in developed economies such as the United States(International Monetary Fund, 1998). The Thai package, approved on 18 July,committed the IMF to provide support at a level of US$17.2 billion. ReferencesEven healthy banks are hurt. Indonesian bank closings demanded by theIMF as a condition of bailout funding touched-off bank runs in thatcountry. The relatively high private savings rates in the economies ofIndonesia, South Korea, and Thailand curtailed current consumption whilesimultaneously supporting high-level investment. causes of the asian financial crisis in 1997 and the deepening of the effects of the crisis This research examines the Asian Financial Crisis that developed in1997. Even the IMF conceded that some of its programs in the Asian FinancialCrisis did not work as expected. These policies brought substantial economic success to theSoutheast Asian economies (International Monetary Fund, 1998). 4. The focus of the examination is on the initial causes of the AsianFinancial Crisis and the factors that caused the Asian Financial Crisis tobe more severe than it otherwise might have been. 3). 3). While the economic management andfocus in each of the economies of Southeast Asia varied, one point ofuniformity was an emphasis on stability-oriented macroeconomic policies.These policies sought to achieve low rates of price inflation, an avoidanceof overvalued currencies, high rates of physical and human capitalaccumulations, high rates of personal savings, and export-orientedproduction. D.

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