Economics Research Paper: Background Factors to the Asian Financial Crisis

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Background Factors to the Asian Financial Crisis
The Asian financial crisis refers to a major financial disaster that weakened the Asian economy and later affected the global economy by the end of the 1990s. Often known as the “Asian Contagion,” the Asian financial crisis caused a series of currency devaluations and other economic pitfalls in the summer of 1997 (Blaszkiewicz 14). It is believed that the first currency fails occurred in Thailand when the government made the decision to unpeg its currency from the United States (U.S.) dollar. The decision resulted in rapid currency declines through East Asia, leading to significant stock market failures, lower import revenues, and disorder in the government (Chowdhry and Amit 143). Understanding the causes of the Asian financial crisis is essential. Many economists point to various factors that contributed to the gradual vulnerability of Asian economies in the 1990s. The paper provides an analysis of the background factors to the Asian financial crisis including increased capital inflows, appreciation of the exchange rate, decline of the export growth, weak institutions and government interventions, and presence of an asset price bubble.
One of the background factors that contributed to the financial crisis in Asia is increased capital inflow. Blaszkiewicz (16) argues that private capital flows rose in the 1990s but official capital flows decreased drastically. While in 1970s to 1981 the official capital flow stood at 49.5 percent, in 1990 to 1996, it dropped to 9.5 percent. Blaszkiewicz (16) states that between 1994 and 1996, private capital inflows rose by 7 percent in Malaysia, 5 percent in the Philippines, and 6 percent in Indonesia. A similar situation occurred in Thailand. By 1990, total capital flow stood at approximately 30 billion dollars and by 1993, it reached 140 billion dollars. Approximately two thirds of the capital inflows were in Asia and a third went to Latin America (Blaszkiewicz 16). Most of the investments in Asia occurred in the form of Foreign Direct Investment (FDI) increasing the total net private flows. The portfolio assets, bank borrowing, and bonds remained high enough to trigger surpluses in balance payments (Chowdhry and Amit 144). Similarly, countries like Philippines, Thailand, Indonesia, Malaysia, and Korea witnessed increased rate of domestic savings to almost 30 percent of the GPD. The aggressive investment boom caused fragility in the markets with many extra short-term capital flows (Blaszkiewicz 17). Capital inflows continued to increase in the Asian economy in 1996 because of the flows coming from Europe and the U.S. Notably, Europe and U.S. inflow rose because the Yen had depreciated, meaning that flows from Japan declined. As the crisis started, private capital declined in Thailand, Philippines, Korea, and Indonesia.
The Asian financial crisis could also be attributed to the appreciation of the exchange rate. Between 1998 and 1996, countries such as Thailand and Malaysia began showing concern about the appreciating exchange rate (Blaszkiewicz 17). The exchange rate was appreciating at 5 percent in Thailand, 13 percent in Malaysia, 5 percent Indonesia, ...