Economic Development

Chapter 4
1. The Asian financial crisis was a surprise to most economists, even those
that specialized on economic developments in the region. Why do you
think this happened?

Answer: The Asian financial crisis was a period of financial crisis that gripped
much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a
worldwide economic meltdown due to financial contagion. It is also called “Asian
Contagion” a sequence of currency devaluations and other events that began in the
summer of 1997 and spread through many Asian markets. The currency markets first
failed in Thailand as the result of the government's decision to no longer peg the local
currency to the U.S. dollar (USD). Currency declines spread rapidly throughout East
Asia, in turn causing stock market declines, reduced import revenues, and government
upheaval.
I think this was happened because the Asian financial crisis was trailed
somewhat due to financial intervention from the International Monetary Fund and the
World Bank. The Asian crisis led to some much-needed financial and government
reforms in countries such as Thailand, South Korea, Japan, and Indonesia.

CAUSES

Series of asset bubbles. Growth in the region's export

economies

Sources:https://www.google.com/search?
q=asian+financial+crisis&oq=asian&aqs=chrome.0.69i59j69i57j0l4j69i60l2.4418j0j
7&sourceid=chrome&ie=UTF-8
 2. Explain how the institutional and cultural setting of financial institution in
Asia contributed to the crisis.
Answer: Asian financial crisis generally have neglected the influence of cultural
factors and instead have focused on macroeconomic variables. It argues that East
Asian cultural values served as the social foundation that generated these critical
factors. The inventories the different policy recommendations proposed by the
international bodies and comments on the extent to which the cultural, institutional, and
organizational requirements embedded in these recommendations conform to the
dominant cultural, institutional, and organizational characteristics of the countries in
crisis. Asian Financial Crisis has drawn different intellectual responses as to its causes.

3. How did SARS and the Iraqi war affect the Asian region? Were these
impacts similar to those of the Asian crisis? How were they different?
Answer: SARS has severely disturbed the economics of other countries in the
Asia, and expected to reduce GDP growth in East Asia. This has happened in an
environment of an already quiet global economy. SARS has caused a large demand
shock in East Asia, particularly to the consumption of services, especially travel.
However, excepting further outbreaks, the economic disturbance should be relatively
short-lived, with the worst of the economic impact expected in the June quarter 2003. It
also affected by having high oil prices, the stalling in technology exports, and overall
weak economic growth in major industrialized economies. GDP growth slowed
significantly in a number of East Asian economies.
For me, its impacts is similar to those of the Asian crisis, because it all has
effects in the economic growth in every country in the Asia, it also lessen the income of
every people in a country because of the outbreak, also experience negative economic
impacts due to weaker tourism and spillover from slower economic activity.
Sources: https://www.hindawi.com/journals/jeph/2018/2710185/

4. Governments have built up significant levels of foreign reserves since

financial crisis. Discuss the policy issues relating to such policy.
 Answer: Before anything else, let’s define the meaning of foreign reserve.
Foreign reserves are assets held on reserve by a central bank in foreign
currencies. These reserves are used to back liabilities and influence monetary
policy. It includes any foreign money held by a central bank, such as the U.S.
Federal Reserve Bank. One of its policies was at a minimum; countries have
enough to pay for three to six months of imports. That prevents food shortages,
for example. Another guideline is to have enough to cover the country's debt
payments and current account deficits for 12 months. In 2015, Greece was not
able to do this. It then used its reserves with the IMF to make a debt payment to
the European Central Bank.
Reserve accumulation can be an instrument to interfere with the exchange
rate. Since the first General Agreement on Tariffs and Trade (GATT) of 1948 to
the foundation of the World Trade Organization (WTO) in 1995, the regulation of
trade is a major concern for most countries throughout the world. Hence,
commercial distortions such as subsidies and taxes are strongly discouraged.
However, there is no global framework to regulate financial flows. As an example
of regional framework, members of the European Union are prohibited from
introducing capital controls, except in an extraordinary situation.

Sources: https://en.wikipedia.org/wiki/Foreign_exchange_reserves

5. Some observers have suggested controls to cut down on the volatility of

capital movements. What are some advantages and disadvantages of such
proposals?
Answer: It is hard to frame this in a list of advantages and disadvantages as
capital controls are a choice made by policy makers to pursue goals related to
exchange rate arrangement. They are good if they work and the goals are good.
They are not good if they don't work or the goals are bad.
For the advantages, they are necessary in a fixed exchange-rate system if
the monetary authority wishes to purse an independent monetary policy focusing
on the domestic economy. Second they help reduce exchange rate volatility - If a
country's Exchange rate pass through is high, then changes in exchange rate
transmits into the country's economy as fast changes in inflation. Small, open,
emerging market economies are highly at risk to hot money outflow from
domestic capital markets. Last, they prevent "dollarization" - typically domestic
firms and households in emerging markets can borrow at lower rate from
international markets, usually in a hard currency like Dollar, Euro and more.
For the disadvantages, it is very hard to enforce because huge amount of
regulator's energy and time is spent implementing and tuning these and even
then it is hard to prevent "leaks". Second, it is bad for domestic investors and
firms because in the absence of capital controls domestic investors can expand
their group, invest in international markets and achieve better risk adjusted
returns. Firms can benefit from lower borrowing rates in international markets.
Capital controls governments can pursue irresponsible economic policies
without worrying about market reaction for quite some time.

Sources:https://www2.gwu.edu/~ibi/minerva/Fall1998/Sylvana.Souza/Sylva
na.Souza.html