Asian Crisis

Asian Crisis There are many speculations about the causes of the Asian Crisis. From my research I found out that there is quite a number of reasons for the Asian currency crisis. There is a book called; The East Asian Miracle, which was published by the World Bank. This book expressed the relationship between government, the private sector, and the market. (See Hoover Digest 1998 No.3.

William McGurn. What went wrong?) The book talks about the economic bloom in Southeast Asia. The East Asian countries borrowed a lot of money from the IMF and World Bank and used it to create a better economy for themselves. I found out that the following countries due to their reoccurrence during my research experienced the bloom. The countries are as listed: South Korea, Indonesia, Hong Kong, Thailand, Malaysia, The Philippines, Singapore and Taiwan. These countries experienced a lot of growth, growth that even doubled the growth in the rest of East Asia, and almost tripled the growth in Latin America.

The economic miracle started in South Korea, Hong Kong, Taiwan and Singapore then Malaysia, Thailand, Indonesia and the Philippines. These countries achieved very remarkable rates of growth and development. They built high quality manufacturing industries from clothes to computers. (What went wrong? Hoover Digest 1998 No.3 William McGurn) In the paper written by William McGurn “What went wrong?”, he explained that the people’s minds in Asia only understood the word miracle and the banks failed to recognize the risks and credits of the bloom. The banks also failed to realize that they were only being used as policy arms by the government. The only word that stuck in people’s minds in Asia was the word miracle. They therefor forgot the fundamentals, which could be easily understood. William McGurn said that the countries that suffered the most in the Asian economic crash were the countries that were heavily engaged in the state planning.

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‘This in turn lead to all manners of extravagant claims about “Asian Values” and the idea that western concepts such as competition really didn’t apply” (William McGurn. What went wrong?) On February 19, 1998 a group of Hoover fellows and invited experts assembled in the Hoover institution to discuss the likely causes for the crisis. The discussion pulled a very large crowd in to the Hoover Stauffer Auditorium to hear what the well-recognized economists, political scientists and historians had to say. The panel came to an agreement that the crisis that started in Asia was due to excessive short-term borrowing, risky investments by banks and flawed government policies that permitted such investments. (See Hoover Institution Newsletter Spring 1998) From the article; “Why did it happen?”, on this web site:, I found out that Asia had been experiencing a miracle for the past 30 years, but they are now suffering a crisis.

These economies are now experiencing collapsing currencies and depleting stock markets. The Asian countries at first borrowed a lot of money from the IMF and the World Bank and used it to invest in certain unprofitable ordeals. ” The problem was bad in Thailand, where a succession of weak governments had allowed money to flood into unwanted skyscrapers rather than investing in roads and telecommunications, and education.” (Directly from the article) “The unwise spending was the worst in South Korea where the entire economic system was based on governments encouraging banks to make cheap loans to big conglomerates for continued expansion.. regardless of world demand.” (Directly from article) They borrowed the money in US dollars thinking that they would have no problems paying the debts off, because their currency’s exchange rates were pegged to the US dollar. They borrowed money in dollars because their own currency’s interest rates were too small. In the middle of 1995, the US dollar started to rise against most of the world’s other currencies.

Because the Asian exchange rates of local currencies were pegged to the US dollar they rose with the US dollar. The rise in value led to the Asian countries decrease in exports. Their exports became less demanded and competitive in the worlds market. For the economies to come out of the crisis and return to their normal sale of exports, they had three options. They would have to let go of the dollar value, wait for the dollar to depreciate against other currencies or buy local currency from the moneylenders.

They couldn’t wait for the dollar to depreciate because they were unsure of how long it might take. At first the Asian countries borrowed money from the IMF and World Bank in dollars, because they did not have any fears about earning money in local currency to repay the debts. The Asian governments were afraid of devaluing their currency by unpegging the currency to the dollar. They were afraid of destroying firms and industries that borrowed large amounts of money from the banks. The industries would have a harder time trying to pay off the debt because the value of their exports would decrease. They had no choice but to look to the moneylenders for help. The moneylenders sold large amounts of local currencies to the countries hoping that they would be able to buy the currency for cheaper before they were to deliver it.

The sales the moneylenders made were forward sales, which are sales with guaranteed delivery a month or so from the day. If they succeeded in buying the currency at cheaper rates they would make an instant profit. The Asian governments tried to resist the need to devalue currencies by making deals with the moneylenders. The moneylenders sold local currencies to the banks for US dollars, but the bank’s stock of US dollars had to diminish eventually. It was Thailand who first ran out of their US dollar reserves, so therefore had to let her currency devalue.

Malaysia then followed suit. Hong Kong, however, was able to resist the devaluation for longer because they had more US dollar reserves. Hong Kong had enough reserves but they would have a very hard time trying to keep the Hong Kong dollar pegged to the US dollar. This caused their stock markets to crash and their market to be uncompetitive. To make the Hong Kong …