After nearly thirty years of great economic growth many Asian countries are in recession due to many bad business decisions. The Asian financial crisis caused the value of Asian currency fall 50-60 percent, stock markets to decline by 40 percent, property values to drop, and banks to close. The Asian financial crisis began in mid 1997 because of currency devaluation, bad banking practices, high foreign debt, and corruption; has lead to a decline in the currency and stock markets of all Asian countries. As the financial crisis continued it soon turned into an economic and social crisis as well.
At the base of the financial crisis is millions of dollars in bad bank loans. Many of the banks suffered from limited institutional development and a lack of governing laws. Credit tended to flow towards borrowers with government relationships or private bank owners and to favored sectors rather that on the basis of projected cash flows, realistic sensitivity analysis, and recoverable collateral values.
The financial crisis began in Thailand in May of 1997 when investors became worried about Thailand s political instability, slowing economy and excessive debt. As they invested their money in more stable markets and pulled out of Thailand the value of the baht fell sharply. Due to the inter-linked economies of Asia Indonesia, the Philippines, and Malaysian economies were soon crippled by the fall of the baht value.
Indonesia s economy soon fell after when the rupiah lost 80 percent of its value against the U.S. dollar. The country was plagued with more than $70 billion worth of bad debts due to a corrupt and inefficient government. Indonesia and Thailand were also suffering from being to ambitious with the expansion of their infrastructures due to the huge influx of money from optimistic foreign investors.
Two major economies that were also effected were China and Japan. Chinese banks may have been carrying up to $1 trillion dollars in bad bank loans. Much of this came from government corruption and loaning 66 percent of China s investment capital to state-run industries that produce only 12 percent of Chinas industrial output.
Japan was crippled by more than $300 billion in bad bank loans due relaxed banking rules and corruption. Also their exporting decreased, as other countries were able to produce high-end electronics for cheaper. Both the Japanese yen and stock market declined in value as a result causing Japan to go into a recession.
Korea was also greatly effected since its export growth has tended to mirror changes in the yen-dollar exchange rate. They were also suffering from huge foreign debt that they were no longer able to pay off.
As Asian economies slowed down many families felt the effect of the crisis. The demand for labor has dropped dramatically since building and expansion projects have come to a halt. Because of this and drought many urban and rural families are now unemployed. Due to exchange rate devaluation prices for basic necessities such as food and medicine, have risen drastically. Spending has also slowed down since families don t have enough money to purchase more than that which is necessary.
Due to Asia s large role in the world economy other countries economies have suffered because of the crisis. As Asian currency devaluated and economies declined so has the demand for importing goods from other countries. The devaluated currency also has made Asian products seem cheaper which has led to increased level of exporting to other countries.
The plan calls for an increased intrest rate and to tighten money supplies in order to slow down expansion. The restructuring of conglomerates and better supervision of banks to cut down on the type of corruption that was very common in the past. Opening of the international market to bring back foreign investment and encourage investors to buy off failed companies. They also want to increase taxes to create a government surplus so Asian countries can better control their economies. So far the IMF has loaned $18 billion to Thailand, $47 billion to Korea, and $57 billion to Korea in hopes of accomplishing its plan.
Right now it looks as though the IMF plan is working. Many Asian economies are experiencing growth after the market bottomed out last year. Many governments are making tougher banking laws and the increased interest rate has curved the rapid growth that helped lead to the financial crisis. The Asian countries are starting to open their doors to more foreign investment and ownership.
Many people are worried that this is a temporary solution and that Asia will fall into a worse economic crisis. If the Asian economies fall even further, in a desire to raise cash, they might sell the hundreds of billion dollars in U.S. treasuries they now own. This along with an increased trade deficit, coming from more importing and less exporting will lead to higher interest rates and an American recession.