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East Asia Crisis

East Asia Crisis

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Published by JohnPapaspanos
This is another economics paper I wrote which I find to be very relevant in the present given the current sovereign debt crisis in the Euro Zone.
This is another economics paper I wrote which I find to be very relevant in the present given the current sovereign debt crisis in the Euro Zone.

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Published by: JohnPapaspanos on Feb 18, 2010
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06/13/2010

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I. Introduction
In this paper, I will discuss the history of Japan’s policy positionas it pertains to IMF conditionality. Since Japan is an industrializednation that generally does not approach the IMF for assistance, Iemployed the 1997 Asian Finance Crisis as a case study. With manyvested interests in the stability of the region, Japan was prompted toclearly articulate its policies concerning IMF conditionality during thedevelopments of the crisis. Furthermore, this discussion will naturallyinclude Japan’s underlying interests in the East Asian economies andwill conclude with Japan’s present-day policy objectives for the region.
II. Background of the 1997 Asian Finance Crisis
In July of 2007, the Asian Financial Crisis “began in SoutheastAsia when foreign bankers, investors, currency speculators, andmarket analysts lost confidence in Thailand's ability to cope with adeteriorating economic situation, including a rising trade deficit and agrowing international debt that had reached 50 percent of GrossDomestic Product.” (Cronin) During the 1990’s, foreign investorspoured vast amounts of capital into the booming East Asian economiesto reap the highly attractive rates of return. This heavy influx of foreign investment allowed East Asian governments, businesses, andbanks to access credit for much lower rates than domestic sources.Such a high scale of leverage led to unsustainable borrowing, andwhen profit expectations were finally “undermined by developmentssuch as competition from lower cost production in China,
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a glut of office space and hotel rooms, or a collapse of computer chip prices…bankruptcies soared.” (Cronin)
 
 The high magnitude of business defaults created downwardpressure on economic growth, even before the currency crises sweptthe region. The economic slowdown acted as a catalyst thatundermined the confidence of investors both at home and abroad, andthereby created an environment of uncertainty. Foreign investorsresponded by selling their domestic currency holdings
en masse
, whilebuying the more stable US dollar. Meanwhile, the inflow of foreigndirect investment (FDI) decreased as investors fled to safer assets,which caused a pronounced decline in asset prices from currency andstock evaluations to real estate. At last, since the South East Asiangovernments were in a difficult position to service their accumulatingdebt obligations, the result was ominous: a “dangerous buildup of debtand excessive property development and manufacturing capacity,”(Cronin) which further dragged down economic growth and led to aregional crisis that eventually spilled over into the broaderinternational financial system.
III. IMF Intervention
As aforementioned, the IMF was established “to promoteexchange stability and international monetary cooperation, facilitatethe expansion and balanced growth of international trade, and during aserious crisis, to act as a lender of last resort.” In the last two decades,the IMF has predominantly assisted developing countries. Either theborrowing countries encountered a temporary imbalance in paymentsbecause: (a) they were fledgling economies with recurringmacroeconomic problems, or in the more unique case of the AsianFinance Crisis, (b) they were burgeoning economies with commendable
 
track records that faced temporary setbacks. But the primary functionof the IMF, regardless of a country’s past economic performance, is toaddress
the balance of payments difficulties that a country cannot overcome by its own means.
If every other option is exhausted, thecountry is forced to approach the IMF, which is perceived to be theonly lender that can grant the necessary funding without the privatesector’s prerequisite of having internationally-accepted collateral.During the Asian Finance Crisis, the countries of Indonesia, Thailand, Philippines, and eventually, South Korea received IMF aid tooffset the collective shock that impacted the South East Asian region. The use of IMF funds was tied to the fulfillment of specific conditionsthat “consisted of macroeconomic variables and structural measuresthat were within the Fund’s core areas of responsibility.” (Guidelineson Conditionality pg. 2) These conditions included:“requirements that recipient governments end the kinds of collusive practices that have brought about the current crisis, andwhich have the effect of giving special advantages to favored domesticproducers and monopolies, and
open up their economies to foreigntrade and investment.
These are over and above more basicrequirements to put their banking and financial systems in betterorder, achieve budget surpluses, and-somewhat contradictorily-
reducetheir trade deficits
.” (Cronin)In the given case of the Asian Financial Crisis, the issue of conditionality became a major point of contention between Japan andthe United States because the two economic powers held differentunderstandings as to the nature of the crisis and conflicting interests

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