Term Paper on "Asian Currency Crisis"

Term Paper 8 pages (2684 words) Sources: 3

[EXCERPT] . . . .

Asian Currency Crisis

The objective of this work is to determine the primary explanations for the 1997 Asian currency crisis and to discuss implications of that crisis for the Asian economic paradigm.

PLAZA ACCORD (APPRECIATION of YET AGAINST DOLLAR)

The work of Hughes (1999) entitled: "Japanese Policy and the East Asian Currency Crisis: Abject Defeat or Quiet Victory" states that while Japan cannot be held as responsible for the model of growth of the East Asian states, at the same time "Japanese government policy and transnational corporations (TNC) undoubtedly have played a decisive role in instigating the process which has propelled this growth strategy. The role in the transfer of the developmental model to East Asia as well as economic integration of the region is known to have been "enhanced substantially following the Plaza and Louvre Accords of 1985 and 1987, designed respectively to raise the values of the yen and NIES-4 currencies against the U.S. dollar. The objective of the Plaza Accord and appreciation of the yen was to reduce the U.S.'s burgeoning trade surplus with Japan and to begin to force the latter to move away from its own export-oriented growth strategy, depend on the U.S. overseas market, and switch to reliance on domestic demand." (Hughes, 1999) the unintended and greatest impact of the Plaza Accord and the appreciation of the yen is stated to have been provoking "...a massive upsurge in Japanese investment in East Asia, as well as in the U.S. And Europe. The primary impact of the Plaza Accord is stated to be the release of "...huge flows of Japanese production capital into East Asia, which were to then circumvent U.S. efforts to rein in Japan's ability to conduct an export-led growth strategy." (Hughes, 1999)

II. LIBERALIZATION (BANK of JAPAN, FOREIGN LOANS)

Following the Plaza Accord the Bank of Japan was characterized by liberalization and specifically in the area of foreign loans and as well the Bank of Thailand followed the same course in lending. Entrepreneurs in Asia are noted in the work of Wong entitled: "Lessons from the Asian Financial Crisis relates that Asians are known to place a general trust in their governments for enactment of economic policies which are sound and "their failure to sense the dangers of borrowing short in foreign currency and investing in long-term projects with earnings denominated in local currency was disastrous." (Wong, nd) in July 1997 Thailand "ran out of foreign reserves and devalued the baht which lost over 1/2 of its value. Having admitted the total loss of foreign reserves, there was a run on the bank of Thailand and this quickly spread to Malaysia, Indonesia, the Philippines, South Korea, Singapore and Taiwan. Attempts of the International Monetary Fund to assist these countries was not successful with too small a bailout package at too late of a date.

III. KIERETSU - EXPORT of CAPITAL

The work of Ouandlous and Philippatos entitled: "The Effect of Japanese Financial Liberalization on Keiretsu, the Main Bank System, and Japanese Corporate Financing: Evidence for 1972-1992" relates that: "Critics of the Japanese financial system have long held that Japanese keiretsu and the Main Bank system have helped Japanese corporations reduce their cost of capital and therefore gain a cost comparative advantage over their western counterparts. These institutional practices, claim critics, have limited the access of foreign firms to the Japanese product and financial markets. From the mid-1980s onwards, the evidence shows that Japanese financial liberalization has not only reduced the financial influence of these institutions, but has had a varied impact on Japanese corporate flow-of-funds patterns and on Japanese corporate size." (1999) Ouandlous and Philippatos state that the groups which comprise the keiretsu are the most influence and powerful firms "defined by either the size of their assets or by the size of their domestic market share..." And "...have reciprocal ownership interests and close financial ties with the largest city banks." (1999) at the core of each grouping of keiretsu is "a large and powerful bank..." with the role "in addition to being stockholders, is to participate in the financing of the keiretsu member firms." (Ouandlous and Philippatos, 1999) When financial liberalization began to take effect between 1975 and 1985 "...corporate financial deficits reversed their precarious course and dropped sharply to an annual low of 2.9%. Increasing government fiscal deficits, the impact of the oil crisis, the inflation that ensued, the slow economic growth, and the concomitant effect of the deregulation of financial markets initially caused this drastic drop. In the following three years this financial deficit declined further to reach an annual average historical low of 1.8%." (Ouandlous and Philippatos, 1999)

IV. END of BUBBLE ECONOMY

Ouandlous and Philippatos report that corporate financial deficits in the Japanese economy began to show an upward trend in the period between 1985 and 1990 and that "the full effect of liberalization of financial markets and recent Japanese economic recession - the cause of which includes the appreciation of the yen and the 'bubble' economy in which assets prices have soared to gargantuan proportions - explains to a large extent the decline in the corporate deficit on the early 1990s. " (1999)

V. FOREIGN BANKS LENDING EXPANDS

The 1987 Plaza Accord result in the dropping of the value of the U.S. dollar and "ushered in a new era of the appreciating Yen. This led to a six-year cycle of Japanese investment in Asia that transformed and expanded the industrial base for Malaysia, Indonesia, and Thailand." (Wong, nd) During this time the Bank of Japan was writing off bad debts in the banking system following the bursting of the asset bubble and pursued a low interest rate policy focused on bank solvency. Unusual risks were taken by the banks lending to the Asian economies in seeking high yields seeking a resolution to their own debt problems. According to Wong, "Foreign banks and other institutional investors from Europe and later the United States, all flush with funds, soon discovered Asia's emerging markets, where interest rates were high and risk was low because currencies were pegged to the U.S. dollar." (Wong, nd) This financial business environment "led to a five-year boom with Asian equities. As the Asian economies grew, infrastructure bottlenecks became apparent." (Wong, nd) Not only were these banks "effecting currency and maturity mismatches, these banks often extended loans without adequately assessing credit risks." (Wong, nd) Wong relates that by 1995 the.." era of the strong yen was being replaced by the era of the strong U.S. dollar and a number of Asian economies were slowing down and experiencing current account deficits." (Wong, nd)

VI. 1988 -GSP STATUS ENDS (4 TIGERS ECONOMY)

The work of Barros (1998) relate that the economic progress of the four Asian Tigers, or the countries of Hong Kong, Singapore, South Korea and Taiwan were regarded as miraculous "where growth rates of real per capita gross domestic product from 1960 to 1995 were around 6% per year. " (Barros, 1998) However, Barros reports in 1998 that the reputation of the Asian countries have suffered due to "financial crises and recessions." (Barros, 1998) the work of the Federal Reserve Bank of San Francisco entitled: "Banking System Developments in the Four Asian Tigers" states that the name the 'four tigers' was earned by Hong Kong, Korea, Singapore and Taiwan due to the remarkable sustained growth in this countries over the past 30 years preceding the time of this report in 1997. All four of these economies began poor except as relation to a potentiality in supply of labor. Average per capita income grew in all four of these countries at approximately 6 to 7% per year. In all three of these countries, except Hong Kong, "the governments of these economies took very active roles in mobilizing savings and financing industrialization efforts." (Barros, 1998) Commercial banks are stated to: "...have also played a critical role, because they were the major source of private saving. In Korea and Taiwan, the governments required commercial banks to extend credit towards industries targeted in the government's development plans. Furthermore, due to regulated loan rates, which were below market-determined interest rates, and the lack of loanable funds, these loans were offered at very favorable lending rates." (Barros, 1998) Approximately 54% of the total bank loans in Korea went to the manufacturing sector "the crown jewel of the economy in 1980" however, by 1990 only 44% of total bank loans went to this sector. Because the speculated businesses in this sector had not culminated the bank was faced with complications due to massive credit infusion. A similar situation existed in Taiwan and Singapore. The work of Sallstrom entitled: "U.S. Withdrawal of Thailand's GSP Benefits: Real or Imagined?" states that the "Generalized System of Preferences (GSP) programs which allowed reduced tariff rates of developing countries which have clearly profited from those benefits experienced lowering of the margin of preference for these countries following a successive round of GATT negotiations in 1994.

VI. 1994 - CHINA: DEVALUATION of CURRENCY

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