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THE ECONOMIC CRISIS OF 1997-99 OVERVIEW Unfolding of the Crisis (June 1997) 1. 2. 3. 4. 5. 6. Fixed exchange rate system pegged to the USD. When the Dollar rose, consequently the ASEAN currencies grew too, resulting in lower exports. Decline in Export competitiveness particularly in Electrical goods. The decrease in exports resulted in increased Trade and Current Account deficit. The crisis first emerged in Thailand when as a crisis of loan repayment. This led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions. The withdrawal of ST credit led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF. The contagion then spread to Philippines, Malaysia and Indonesia.
ANALYSIS Causes of the crisis in 1997 There are 2 main theses as to the causes of the crisis. 1. Weakness of Macro-Economic fundamentals The basic weaknesses in the Macro-Economic fundamentals itself led to Low productivity and competitiveness vis-à-vis other regions of the world. Inadequate supervision of Financial institutions and lack of adequate disclosure by the corporate world further worsened the situation. Weak governments lacked the political autonomy or will to enact the deflationary policies necessary to reduce current account deficits and domestic asset bubbles. They also contributed to the cronyism and ethical problem that encouraged over borrowing, over lending, and over investment in the private corporate sector as well as in state projects. 2. Overvalued Exchange Rate & Openness of Capital Account Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows. This resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves. The Opening up of Capital Account led to local financial institutions over borrowing more from foreign sources. All this made a currency devaluation inevitable and attracting speculators eager to benefit from it. Borrowed Short-Term funds were invested in the Stock market and in Real Estate. The overall quality of investments declined with reduction investor confidence which was a result of bad news that the export market had slowed down.
Financial Institutions need to be properly regulated with greater disclosure and better transparency Norms. Private organizations should play a more active role in preventing students from dropping out of school. A Re-look at the policies of the IMF towards such economies is highly suggested. This brought about huge unemployment and an undesirable social impact – on food. This would stop withdrawal of foreign lending in the long run. 3. To tackle this. Moreover. Adjustment of Industrial Structures The Govt. Revitalizing the Financial Markets . One needs to take advantages of the integrated ASEAN market for restructuring and look for opportunities within ASEAN. To make matters worse. regulations governing disinvestments should be in place. reducing taxation levels and facilitating finance for investments. the bankruptcy laws need to be put in place and enforced properly. The firms should not be allowed to take any further debt which would imply Debt Standstill. which led to a slowdown in manufacturing and industrial activity. Proposed Solutions 1. Collective re-negotiation of debt should be encouraged and the Provision of Working Capital will keep the business activities going. Since ASEAN is the fourth largest trading block in the world. Prevention of flight of foreign capital in key sectors. Dealing with the Social impact To deal with the Social Impact the availability of food and healthcare at affordable prices has to be ensured to prevent the impact to prolong. can help companies by increasing access to new technologies. 4. the Government imposed higher domestic Interest rates.Impact of the crisis The crisis led to weaker. which will prevent the negative social impact on human resources. 2. 6. Strengthening the Financial sector The Assurance needs to come that foreign capital will not leave the country at the first signs of trouble. International Financial markets Regulation and control of capital flow should be made to open economies. the spillover effect was on world trade (mainly ASEAN’s trading partners). There is a lot of need for specialized Training Institutes in Finance (in the ASEAN region). healthcare and education. unstable exchange rates and weakened Financial Institutions. the financial crisis coincided with the worst drought conditions in the ASEAN region. 5. There should be a surveillance system to monitor flow of capital. Increase in domestic savings has to take place as it is crucial. Loans should be rolled over and re-scheduled which will help in servicing loans through export earnings rather than fresh debts. Stabilizing the Exchange Rate and Debt Management The idea here is to stabilize the exchange rate.
IV The expansion and diversification of ASEAN . These include the joint monitoring of financial and economic movements in East Asia and in the world and a network of currency swap and repurchase agreements to make resources available to countries in balance-of-payments difficulties. 2. Trans-SEAN Gas Pipeline Network and Telecommunications interconnectivity. 3) ASEAN is working towards the development of the trans ASEAN highway system. The progressive openness of ASEAN economies 1) ASEAN economies are on the steady path of liberalization. II Sound Financial measures 1) ASEAN plans to adopt sound financial practices and standards by 2003. certain measures can be put in place to reduce the adverse impact of sudden shift in capital flows. 3) The process of expanding co-operation between ASEAN and China.is rapidly gaining momentum. ASEAN: Steps to Handle the Crisis Four areas where new developments are taking place that are relevant to long-term investment decisions. One must now use ASEAN currencies for trade among ASEAN countries. Capital markets will be deepened. I. Examples are the recently initialed Singapore-New Zealand Agreement on a Closer Economic Partnership and the recently announced start of negotiations on a SingaporeJapan Economic Agreement for a New Age Partnership. privatization and deregulation. 2) ASEAN is moving toward new forms of linkage with other countries and regions. particularly the bond market. to provide a wide variety of instruments with longer maturity and ample liquidity. 2) ASEAN countries are streamlining and harmonizing customs procedures. They are entering into mutual recognition arrangements. At the same time. 2) Common currency is being given serious consideration 3) Capital account liberalization shall be properly sequenced to allow freer flow of capitals. open-skies regime.the process known as ASEAN+3 . Moreover the proposed Asian Bond Market can effectively deal with flow of debt capital.The ASEAN mutual monitoring mechanism established in Feb 1998 provides an opportunity for ASEAN Finance ministers to exchange views on status of financial and exchange markets in their countries. III The growing integration of the ASEAN economy 1) Under the ASEAN commitment to AFTA (ASEAN Free Trade Area) more than 85 per cent of tariff lines in the AFTA scheme already in the minimal-tariff zone and there is a proposal to abolish all import duties on trade by 2010. Japan and the Republic of Korea . and ASEAN Power Grid.
The Manila Framework ASEAN has come up with new initiatives under the so-called Manila Framework that includes (i) ASEAN Surveillance Process: This has been set up to keep an eye on macroeconomic trends and short-term capital flows. The Chiang Mai Initiative At the ASEAN Plus Three Finance Ministers Meeting in Chiang Mai in May 2000. 2) ASEAN is making a special effort to upgrade the skills of the people of the newer members and build their institutional capacity.1) Expansion of ASEAN will give investors more choices in deciding where to locate their operations for the increasingly integrated ASEAN market or for production for export elsewhere in the world. the discussion on the expansion of the ASEAN swap arrangement (ASA) to include all ASEAN countries and increase its size to US$1 billion by the ASEAN central banks was near its final stage. It is something of an early warning system to signal possible trouble. S.. G-24 Discussion Paper Series Severino Speech SOURCE: ASEAN Secretariat http://www. 2. Conference on ASEAN into the new millennium Growth after the ASEAN Crisis. The ASEAN Plus Three countries decided to combine the expanded ASA with a network of bilateral swap arrangements (BSAs) among the ASEAN Plus Three countries to establish the first regional financing arrangement called the "Chiang Mai I” REFERENCES ASEAN Economic Co-operation.aseansec.org LATIKA CHOPRA . one of the main topics of discussion was how to develop a regional financing arrangement that could be utilized to maintain financial stability in the East Asian region. (ii) Peer Review in which the ASEAN countries exchange views with one another on economic developments and measures being undertaken to address the crises and to jointly formulate policy responses to pending problems. Some major initiatives taken 1. What remains of the East Asian Model By Jomo K. Southeast Asian Affairs ASEAN Economic Integration By Worapot Manupipatpong. At that time. Adjusting to the crisis By Suthod Setboonsarang.
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