Lessons from Economic Financial Crises in Recent Times

Published on Nov 30, 2023

Abstract

The topic that we have worked on in the project includes the two major crises that hit the world viz. South-East Asian crisis that affected the countries including China, Hongkong, Korea and Sub-Prime crisis that affected the US.

The first crisis started off in the year 1997-99. The crisis started in Thailand with the collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the USD, after exhaustive efforts to support it in the face of the severe financial overextension that was in part real estate driven.

At that point of time Thailand acquired the burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency leading to serious repercussions later on. The second most serious crisis that crashed in the US recently was sub-prime crisis. Sub-prime lending is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history.

The phrase also refers to banknotes taken on property that cannot be sold on the primary market; including loans on certain types of investment properties and certain types of self-employed persons. It led to the failure of one of the biggest bank in US i.e. Merrill Lynch. The various causes and effects of these two crises are discussed later on in the project.

The main objective of the project is the deep analysis of the above mentioned two crises that had serious effect on the economy of the various south-east Asian countries. To study the various causes that led to the economic devastation and various effects that shook the economy. To look in to the various measures taken by every country to overcome these problems has been the main area of study. We have focused on how the world recovered from its clutches and emerged as the various powerful economies. And to suggest some measure which could have been, if adopted, would have made the situation better or prevented it.

South-East Asian Crisis

The South-East Asian Financial Crisis beginning in July 1997 spread all over the large economies of South-East Asia and raised fears of a worldwide economic downturn. Thailand, Indonesia, South Korea were the country’s most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hurt by the slump. The People's Republic of China, India, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region.

In the late 1980s and early 1990s, the economies of Southeast Asia maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand,Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates( 8-12% GDP). This achievement was widely acclaimed as the "Asian economic miracle". But in the mid 1990s, capital inflow into those countries started declining and export started losing competitiveness. The Balance of Payment situation worsened as a result of increasing current account deficit.

The crisis first broke out in Thailand with the financial collapse of the Thai baht caused by the decision of the Thai government to float the baht, cutting its peg to the USD. Previously the Thai government had tried to keep the exchange rate fixed in terms of USD to save its currency (Baht) from being devaluated on the face of drastic decline in exports and foreign investment. As the crisis spread, most of South-East Asia and Japan saw slumping currencies, devalued stock markets and other asset prices. In the large Asian economies, foreign debt-to-GDP ratios shot up beyond 180% during the worst of the crisis.

The South-East Asian economic crisis had deep impact on the concerned nations. There were high inflation, severe job cuts and political turmoil. In Indonesia, President Suharto was forced to step down in May 1998,after being 30 years in power, in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. In the Philippines growth dropped to virtually zero in 1998. Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and geographical location between Malaysia and Indonesia. However, by 1999, South-East Asian economy began to recover.

Reasons behind the Crisis

Exchange rate policy

Lack of control on foreign investment

Dollarization

Less growth in factor productivity

The ‘Hot Money’ bubble and poor structure of financial market