Asian Financial Crisis Sample Essay

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Asian Financial Crisis Sample Essay

Asian financial crisis, which erupted in the middle of 1997, has occurred because of large shifts of funds out of national financial markets starting in Thailand.  Asian economies have already recovered in the result of steady policy implementations and financial support from international community.  International Monetary Fund (IMF) has supported several programs for Korea, Indonesia, and Thailand.  According to the official IMF site (www.imf.org), IMF has provided important policy advices, promptly adjustments and corrections, and successful strategies.  Only due to the efforts of IMF, Asian financial markets restored stability and achieved resumption of economic growth.  Nevertheless, the extensive research suggests that contribution of IMF to economic recovery of Asian countries is much overestimated.

The basics of Asian crisis

Asian financial crisis was hand-made, as Patrick Buchanan suggested (1998, p. 29), and IMF was fully responsible for it.  When crisis occurred, IMF hurried to bail out the banks and set its patented programs on Asian regimes.  According to Bretton Woods Agreement, the World Bank is responsible for provision of reconstruction financing.  IMF, similar to the World Bank, is responsible for short-term financing aimed at stabilization of exchange rates.  However, what has happened in 1998?  IMF had to establish an economic order in which trade and investment would be compatible with full employment and progressive taxation (Felix, 2000, p. 1).  The achievement of this objective was possible only through control of international capital flows.  It is worth to note that IMF was and is empowered to request tighter controls and to deny emergency credits.  As evidence shows, none of IMF programs in Asia was focused on tightening capital controls as well as credits were not denied. 

The first point of IMF criticism is based on the assumption that International Monetary Fund has failed to foresee the crisis.  Moreover, the programs concentrated adjustments costs on borrowers and protected the lenders.  As David Felix summarized, IMF has been transformed into an instrument for collecting foreign debt which resulted in increased socioeconomic costs to Asian countries requesting IMF aid (2000, p. 1).  IMF is increasingly criticized for interfering with the markets and for nature of its programs.  The programs, which were carried in Asia during the period of financial crisis, were based on the promise of full payment to foreign investors while the adjustments were borne for economies it “helped” (Tabb, 1998, p. 28). 

As U.S. Federal Reserve Chair Alan Greenspan warned, Asian crisis quickly spread to other regions and only large investments could prevent the economic panic.  The Asian crisis was caused by numerous big loans of the region’s banks which could not be repaid.  Most of these loans were based on dishonest dealings of highly corrupted economies.  For example, Indonesian President Suharto enrolled the national banks to lend for very dubious projects.  Exports of Hong Kong, whose currency was held by foreign reserves), became uncompetitive only in one night (Tabb, 1998, p. 28).  While the Asian region was experiencing extreme economic recession (Figure One, Appendix), many companies intensified investments into Asian economies to knock out the weak competitors.  Hyundai and Daewoo, for example, continued expansion despite of crisis. 

IMF programs in Asia

Supporters of IMF programs in Asia noted that these programs were not a set of measures aimed at restoring macroeconomics, but rather were a set of far-reaching structural reforms aimed at strengthening financial systems and restoring market confidence (“IMF Asian Programs”, 1998, p. 19).  IMF programs in Asia were carried out through closure of non-viable financial institutions and establishment of other institutions required to comply with international practices.  IMF had an objective to strengthen financial sector regulation in Asia, to increase transparency in government sector, to encouraged private sector activities, and increase market competition.  These reforms would require a deep change in domestic business practices, culture, and governmental affairs.  Has IMF chosen the right path to address Asian crisis in 1997?

The evidence shows that programs chosen by IMF were too tough for Asian region.  Even though investment rates have increased in 1997, they fell dramatically in 1998 (Figure Two, Appendix).  By the time Asian countries approached IMF, the currency values and reserves were very low.  The only way to rescue domestic currency was to raise interest rates (Figure Three, Appendix).  Some economists suggest that countries with foreign currency debt suffer more from a long slide in value of domestic currency compared to rise in domestic interest rate.  Nevertheless, the increased interest rates lead to restructuring of financing towards equity which is not always supported by international companies which prefer leaving the market instead. 

David Marshall suggested that Asian crisis was systematic and should be seen as a failure of investment coordination (1998, p. 24).  Recalling the crisis of 1995 in Mexico, the only solution that helped was initiative to induce a single large investor to provide needed liquidity.  U.S. government was this investor with Mexican government owing $28 billion (10% of Mexican GDP).  Similar situation occurred in Asia when American non-bank financial company took advantage of low Asian equity values and acquired several companies at very low prices.  It was not a solution to Asian crisis and the IMF has failed to prevent these acquisitions.  The inappropriate IMF programs in Asia have encouraged the international community to think about establishing a backup provider of liquidity for international liabilities (Marshal, 1998, p. 25).  This provider would monitor the capital levels of borrowing institutions and would be able to take corrective actions not when the crisis has already spread, but before.  Moreover, such institution would not intervene in a crisis if arrangement was not previously established.  IMF works differently and functions only as a source of foreign exchange to be loaned to countries experiencing crisis on an ad hoc basis.  IMF has failed to address the causes of Asian crisis and its programs have not brought desirable result to Asia region economies. 

The failure to create Asian Monetary Fund (AMF)

The IMF intervened into Asian crisis to ensure deep structural reforms.  Nevertheless, the initiative to create an Asian Monetary Fund was not supported either by IMF or by World Bank.  From this perspective, IMF has failed to ensure economic restructuring addressing the strategic issues facing Asian region (Gill, 1999, p. 1).  Recalling the debt crisis of 1980s, IMF subjected approximately 60 countries to austerity measures.  Harsh conditionality, however, has failed to work for Asian crisis.  In the result of IMF programs, cartels, privatized and state-owned enterprises were broken up allowing workers to be fired more easily (Gill, 1999, p. 1).  Obviously, it did not address the Asian crisis.  On the contrary, the food subsidies in Indonesia were eliminated, per capita income has been decreased to $150, and millions of farmers faced starvation.  IMF initiated socialization of private debts to foreign investors and this operation showed the lack of commitment of IMF to pure free-market policies. 

Nevertheless, many economists assumed that IMF-style reforms were required in 1998.  At the same time, many of them agreed that these reforms were maneuvering to retain IMF privileges while placing additional costs for countries in Asian region (Jones, 1998, p. 80).  IMF has failed to provide economic assistance because of its interference into domestic affairs and control over the distribution and usage of funds.  Jones continued that in the course of change, the whole region could be destabilized even more (1998, p. 80).  IMF operations have led to Anti-Western resentments in South Korea, Malaysia, Indonesia, and Thailand.  The fact that IMF did not prevent and even encouraged Western firms buying Asian companies at fire-sale prices clearly indicated that financial assistance was given not to support the Asian region, but to ensure benefits of the Western economies. 

Consequences of IMF programs

International Monetary Fund was a leader in restructuring Philippines, Thailand, and Indonesia.  Nevertheless, its leadership has not brought appropriate results because it required the national governments to cut spending, to raise interest rates, and to reduce subsidies.  Jeffrey Sachs argued that IMF programs were inappropriate for Asian crisis because in these countries the public sector had no control.  IMF addressed the problems of governmental overspending, while the basic problem was with private debt (Narine, 2002, p. 182).  Programs designed by IMF were intended for financial markets but they were not based on economic theory.  As a consequence of IMF programs in Asian countries, Indonesian political situation has much weakened. 

IMF has contributed to the recovery of money spent by wealthy foreign investors rather than to helping Asian nations to overcome financial crisis.  From financial perspective, programs imposed by IMF were focused on furthering economic and political goals of the United States of America.  IMF policies were favored only by Singapore (Narine, 2002, p. 183).  Both Thailand and Indonesia turned to IMF for support, however, they did not receive sufficient adequate assistance.  Malaysia, for example, was able to employ capital controls only partially.  Devesh Kapur referred to IMF help as curse (1998, p. 114) and noted that funds were mostly irrelevant to managing economic relations among major economic powers.  Expansion of IMF power was bad for debtor nations in Asian region because absence of risk sharing meant creation of conditions when political taxation without representation was formed. 

Asian region has managed to recover its economy; however, the long-term damages of IMF cannot be underestimated.  IMF eliminated rules ensuring self-restrain and pushed the funds toward policy prescription giving them more influence.  Placing the onus of adjustment only on debtor economies, the actions of IMF relieve pressure on creditor countries to change their status quo (Kapur, 1998, p. 115).  IMF promoted democracy, however, it failed to succeed in Asia. 

The organization (IMF) has acted not merely to deal with transient financial effects of a bursting investment bubble coupled to investor panic, and done so ineptly, but has gone on to indulge in schedules of proposed reforms oriented to U.S.-style market liberalization and market opening which are both wholly outside its traditional remit, and reveal a radical misunderstanding of the nature of East Asian "developmental capitalism” (Preston, 1998, p. 241+). 

The free movement of capital, as a policy objective of IMF programs, was fulfilled for Mexican economy, while for Asian region it was seen as radically destabilizing.

Malaysia as the only beneficiary

Most of the Asian countries have become the victims of IMF program and only Malaysia has partially benefited.  Along with China, Honduras, Korea, Thailand, and Taiwan, Malaysia restricted capital account movements to discourage hastened exodus of capital.  The control measures were lowering an exit tax to 10% and restriction for new capital to remain for a year.  Within one year, in 1999 the control was eased, however, the international and national corporations were not permitted to have offshore banking accounts.  IMF assumed full control over all transfers of capital (Pang, 2000, p. 573).  Nevertheless, the acceptance of all terms imposed by IMF by Malaysia has led to a debate whether the economy could be recovered attracting inflows of FDI at the same level as before crisis.  Malaysia’s ratio of foreign capital dependence on domestic investment grew twice in the period 1980-1998 (from 12.6% to 25.8%), while the Asian average was 1.5% in 1980 and 12.4% in 1998. 

In conclusion, International Monetary Fund has failed to fulfill its objectives in assisting Asian region with crisis overcoming.  The failure was caused by inappropriate programs and lack of understanding of the crisis causes.  IMF programs addressed the problem of governmental corruption and overspending, while the main cause of Asian crisis was in private debt.  Asian nations reacted to IMF programs with protest, however, the region did not manage to resist harsh interference into economic and political fields.   IMF was unable to predict Asian crisis and programs it imposed on Asian region were not adjusted to local situation, but rather were the repletion of programs initiated in Mexico.  Even though Malaysia has partially benefited from strict control by IMF, the vast majority of Asian countries became the victims of its programs.  


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