On the contrary, the second phase of the crisis came into effect with an economic downturn pressing down the currencies of Taiwan, Brazil and Hong Kong among others. If you want to use any of the provided resources, make sure you cite them properly. That is not to claim that all structural measures are fair game for inclusion in an IMF-supported program, nor to deny the legitimacy of questions about the inclusion of particular measures. The mentioned financial crisis in the Asian region was catastrophic in nature as it had affected the economic performance of virtually all the trading partners of the Asian countries. I will analyzed 5 scholarly journals on the financial crisis in East Asia, 3 scholarly articles on the role of IMF in the East Asia . Other than the panics and recessions, there are other situations that characterise the financial crisis. Loss of domestic capital, as well as monetary loss of value, was still evident after the programs had been implemented. For instance, crisis has disastrous effects on the USs imports and exports besides the crippled capital flows in the region. Risky borrowing of foreign currency had posed a threat to domestic investments considering the possibility that domestic currency was on the verge of depreciating (Bello 1). Consequently, the traders intervened through trials to convert the Asian money into dollars while the Asian money plummeted. This move reduced the rate of financial outflows and therefore maintained a free monetary circulation and boosted internal spending. The US was the main neighbour that experienced catastrophic effects of the crisis. Read more about this topic: 1997 Asian Financial Crisis, What is charm then? This paper, however, seeks to analyse the Asian Financial crisis of 1997-98, which badly hit the currencies of at least five major states, including Indonesia. This was the case as the economies experienced current account imbalances. At the same time, this move also reduced the incentive of the economy to encourage positive Foreign Direct Investment (FDI) which could have otherwise increased the performance of the private sector while at the same time neglecting the economically powerlessness of the marginalized group Knowles & Economics and Development Resource Center, 1999). In addition, financial systems were to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions. These questionnaires will be relayed to respective destinations via the email in order to widen the scope and coverage of the sample space. 2022. It is important to prevent the crisis from occurring by ensuring currency value is maintained and most importantly by avoiding debts on short time loans. The governments particularly, Thailand and South Korea moved forth to seek assistance from the IMF in order to improve their banks reserves which at the moment were too low. Many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (elimination of restrictions on capital flows), maintenance of high domestic interest rates to attract portfolio investment and bank capital, and pegging of the national currency to the dollar to reassure foreign investors against currency risk. Definitely! 2 Nonetheless, by the start of their IMF-supported programs, Thailand, Indonesia and Korea faced a number of similar problems, including the loss of market confidence, deep currency depreciation, weak financial systems, and excessive unhedged foreign borrowing by the domestic private sector. In order to avoid such occurrences again, it is recommended that nations should adopt the western way of managing finances, especially in Cultural Revolution by building economic power in ethnic communities. Nor would it be in the countries interest to leave the structural and governance issues aside: markets have remained skeptical where reform efforts are perceived to be incomplete or half-hearted, and market confidence has not returned. On fiscal policy, the recent suggestion of a package of 16 trillion yen, about 3 percent of GDP, would be a good starting point. "Asian Financial Crisis and the Role of the IMF." However, the fiscal policies in both Indonesia and Korea were to remain intact while Thailands tightening meant a reversed increment in the deficit relative to the previous year. Unemployment has resulted in poverty in the affected Asian countries. EduRaven. However, international financial institutions became insecure in lending money to developing countries. However, despite the undertaking of various measures aimed at counteracting the challenge, very little technical improvement was realised in the financial systems of the countries involved. Furthermore, Korean authorities also affected an expansionary fiscal capacity which basically helped restrain the impact of the unavoidable recession. 20 years since the Asian Financial Crisis, a look back at how Malaysia's then-Prime Minister Mahathir Mohamad defied the International Monetary Fund, and his. This may also result in failure of a given country to settle its sovereign debts, a condition known as Sovereign default. Indeed, the interest rates on loanable funds take a hike, making the borrowings to be extremely expensive. The support packages issue by the IMF the countries such as Indonesia and Thailand were subject to the stipulation of the Frank-Sanders amendment of the US. Indeed, the rising interest rates discouraged borrowing and therefore low investments in the short-run. The financial crisis that hit Asia in 1997 was a very severe experience that caused a lot of distress to many citizens. There is a lot to be done. It is to claim that the emphasis on financial and corporate sector restructuring and governance in the current IMF-supported programs in Asia is entirely appropriate. Read more about this topic: 1997 Asian Financial Crisis, Nothing is ever simple. Crash Course European History #1 Asian Financial Crisis 1997: The Asian Contagion The . In particular IMF entered a tripled faced strategy meant for reinstating the financial sectors of the states by virtue of financing. Among the countries that the crisis badly hit were Indonesia, Thailand and South Korea. Consequently, the Thai government took the constructive measures of reverse increment of the deficits that overwhelmingly altered the situation. However, it remains an irrefutable fact that IMF injected packages have also contributed significantly to the achievement of the financial stability and the consequent recovery of the region from the crisis. Besides that, the crisis also influenced negatively the value of US dollar (Economics and Development Resource Center, 1999). Anyone who doubts the effectiveness of tax measures need only consider the effectiveness of last years tax increases in curbing demand. In this regard, according to the report by the New York Times, the financial crisis that strokes the region was the result of loose regulations on the credit default swaps. IMF is lending some companies that are suffering from financial troubles for many reasons, the main role of IMF lending are handling the countries that are suffering from financial problems, settling their economies as well as helping the sustainable economic growth to retain. However, the IMF is blamed for having not foreseen deep recessions of that saw the GDP value decline mainly in the three major economies Thailand 6 per cent, Korea, 7 per cent and Indonesia, 14 per cent in the 1998 fiscal year. They pointed out that the U.S. government had pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States itself entered a recession in 2001, and arguably the same in the fiscal and monetary policies during the 20082009 Global Financial Crisis. The answer in the case of the Asian programs is yes. For example, if the cost of cleaning up the financial sector is expected to amount to 15 percent of GDP -- a realistic estimate for some countries in the region -- then the corresponding fiscal adjustment would be about 1.5 percent of GDP. Their stock markets are both higher than they were at the turn of the year, and well down from the middle of last year. Indeed, the IMF treated the economic hardships in Asia similar to other situations in which countries fail to meet their basic obligations on balances of payment. Indeed, the IMF focused on additional of currency in circulation to the affected economic which indeed implied an economic moral hazard thus the irrefutable claim of abject failure to alleviate the situation (Hunter, & International Monetary Fund, et al. However, this move met a lot of negative block. 1929). However, the move did nothing in the formulation and restructuring of the financial reforms that could have implied high return on the capital. View the full answer. Indeed, the Asia banks that possessed a huge loan value by the turn of the crisis would presumably be expected to return huge loans as stability in financial market resumes. In an attempt to control the situation, the US treasury had tremendously communicated with both IMF and World Bank to take precaution on undertaking collective measures that would see the improvement of the working conditions of the Indonesians and Thailand besides other developing nations in the world. "Asian Financial Crisis and the Role of the IMF." For this they have earned the commendation of the international community. Hong Kong, Singapore, South Korea, Taiwan) and Tiger Cubs (i.e. The IMF, World Bank, Asian Development Bank, and other authorities all played a role in resolving the Asian financial crisis. Or it could be October 1997, when the Hong Kong dollar was attacked, and for a few days the contagion threatened a global economic conflagration, that could have spread from Asia through Wall Street, and on to Latin America, Eastern Europe, and Russia. In the coming weeks, the U.S. Congress will be debating the role and policies of the International Monetary Fund and how or whether the United States should support this international institution. The IMF, therefore, did contribute to the worsening of the financial crisis. Indeed, the further liquidity support can be advanced to undercapitalised financial institutions which must also demonstrate solvency. is well acquainted. Once confidence is restored, interest rates can return to more normal levels. In essence, the financial performance of the Korea and Thailand sprung from the negative interest rates and currency depreciation blasting through an inflated economy to high interest rates and stable market conditions. After analyzing the IMF responses in this crisis, I found that the IMF policies need to be reformed in order to monitor and prevent future financial crises spill-over effects at the global and regional levels. But there is also the risk that the external environment will turn adverse. 1997 Asian Financial Crisis - IMF Role IMF Role Such was the scope and the severity of the collapses involved that outside intervention, considered by many as a new kind of colonialism, became urgently needed. However, exchange rates were lowered soon after the stabilization of external markets. Do not hesitate to call us, send an email, contact via Live Chat, or use message system, should you have any inquiries. However, it may at times. Before the financial crisis, Malaysia experienced a huge current account deficit between 4-5 per cent relative to its GDP. Reduction in exchange rates led to the collapse of locally produced goods in the exterior markets. Indeed, by continuing to cushion weak banks, the injection may further delay the resolution of the problem by undermining banks incentives to adjust. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic loss. The most affected were the groups that work in factories since their only source of income was cut out. International oil prices from Indonesia decreased a great deal since the crisis occurred at a time when the country was faced with adverse drought. Essential ingredients of this approach include: -- early identification and prompt closure of insolvent institutions; -- aggressive efforts to dispose of problem loans; -- linking future injections of public funds to strong restructuring plans, including a. requirement to raise funds from the market; -- an end to regulatory forbearance in recognizing the extent of bad loans; -- adoption of international disclosure standards; and, -- a large increase in resources for the new financial supervision authority, more than. There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. In particular, with the devaluation of the Thai baht in 1997, the immediate effect was a subsequent attack on the Malaysian ringgit due to negative speculations. Also among other programs included public works and seasonal livelihood protection which all had the impact of embracing financial performance of the state (Johnson, 1998). This is the case due to the increasing speculative attacks, commonly known as the crisis Balance of payment crisis or simply the currency crisis. On the other hand, South Korean government initiated programs geared towards financial stabilization. Indeed, it is clear that the crisis that hit the country in July 1997 was an ingrown crisis. On the contrary, Malaysia disregarded further opening of its economy and imposed capital control instead. 1999 . As a result, the economic performance of the region was short-lived. Indeed, the reluctance to tighten interest rates forcefully at the beginning has been an important factor in perpetuating the crisis. In at least one of the affected countries the restrictions on foreign ownership were greatly reduced. The effect was a strong distribution system and momentary subsidies of food items. Furthermore, various questions have been raised as to whether the willingness to lend funds in the time of crisis spearheads moral hazard in the recipient nations (Das, 2011). This was a huge bro on Asian economies as they could not adequately pay off their debts while at the same time raising the expenditure on imports. In essence, the various measures that were put in place were fragile and very few of them were achieved by the mere intervention of the governments in isolation. The main measure that the Malaysian took was the migration of the ringgit from free float to rigid exchange rate system (Blustein, 2001). External investors had become aware of the crisis due to the increased imbalances in debts and assets. To be sure, in some areas important progress is being made -- notably the big bang financial reforms, which are now well under way and are following a clear road map. Moreover, all suffered from a lack of transparency about the ties between government, business, and banks, which has both contributed to the crisis and complicated efforts to defuse it. This is a relevant tradeoff, but there can be no question that the degree of devaluation in the Asian crisis countries is excessive, both from the viewpoint of the individual countries, and from the viewpoint of the international system. In particular, IMF is seen to be an economic motivator that jutted in during the crisis to help the hit countries to reinstate their economic performance. The overall results of the IMF were destructive to all Asian countries that had been involved. In this regard, the economies experienced varying change in the exchange rate values. The implementation of sound economic policies in the Asian region was an important step towards improving the financial system particularly due to the high rise in demand for Euro in the year 2000 (Das, 2011). the Asian financial crisis in 1997-98, the . The IMF generated several bailout packages for the most affected countries during the financial crisis. Indeed, the governments of the Philippines, Indonesia, Thailand, South Korea and Malaysia enhanced their financial systems as this counsel had led to the serious improvements in the financial systems by 1999. The adoption of financial and economic growth stimulating mechanisms by the federal governments such as capital controls in the Philippines made a significant contribution to the improvement of economic performance of the individual countries and the region in general. There has been a rise in the so-called Asian tigers which were initially seen to be the drivers of economic growth as perceived by most financial institutions. 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