Asian Crisis
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Asian Crisis
On the 2nd of July 1997, Asia was hit by one of the most devastating financial
crises it has ever seen. Of all the financial crisis that have taken place, this
was one of the most distressing in that it was totally unexpected. The purpose
of this paper is to show that particular developmental strategies employed by
these economies eventually led to their downfall. It will attempt to find out
where the origins of the crisis lie, and what events started the cycle that
eventuated with this disaster. In order to trace the events that led to the
eventual collapse of the Asian economies, one must venture across the ocean to
the United States. The issue of liberalisation first gained attention in the US
during the Regan Administration. However, it was during the Clinton era that
liberalisation became a top priority. Whereas previous governments had pushed
for the liberalisation of Japan, one of Clinton’s main foreign policy
objectives was the liberalisation of the Asian economies. This process was
pushed forth in Asia with such vehemence because the region held a lot of
investment opportunities for American Banks, Brokerages, and other financial
sector businesses. Unfortunately, Asia’s economies were not structurally ready
to deal with the influx of capital that was headed their way. They had weak
banking and legal systems that were unable, or unwilling, to regulate the flow
of foreign capital in the country. The Americans eventually persuaded Korea to
relax its capital flow regulations by giving it the option of joining the
Organisation for Economic Co-operation and Development. Even then, Korea was
concerned that its financial institutions may not be able to deal with an influx
of foreign capital. One fatal mistake that Korea, as well as other Southeast
Asian countries made, was that they opened their capital markets in the wrong
way. They did not allow long term investments in Korean companies, but rather,
only short-term investments that could be removed easily. One example of the
sort of quick investments that were being made in Asia can be seen in the
Japanese. In Japan the interest rates were very low, so investors would borrow
at 2 percent and then convert their currency into Thai baht. Due to the interest
rate differential, they were able to make a lot of money off simple currency
conversion. Other Asian economies were quick to follow suit, and soon there was
a movement of huge amounts of capital into the region. In just one year, more
then...
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