AN ANALYSIS ON THE ASIAN CRISIS OF 1997

Also called the “Asian Contagion”, was one of the worst financial disasters in history.

Started mid-1997 in Thailand and like domino effect, spread to other Southeast Asian countries

like Indonesia, Malaysia, Philippines and South Korea. This was a huge shock even to most

economists specialized in economic developments on their region.

BACKGORUND:

CAUSE:

Before the crisis, those Asian countries experienced rapid growth and great foreign

capital inflows. They were referred to as the Asian Tiger Economies. However, it all came to an

end in July 1997. The collapse of the Thai Baht has forced their government to float their

currency exchange rate which was previously pegged to the US-dollar. Because the economy

has no sufficient foreign reserves required to support its exchange rate, the government had no

choice but to float the currency, thus causing the Thai Baht devaluation.

The cause of the crisis is disputable, some theories said that the Thai economy developed

into what is called economic bubble. Several factors have been also determined and these

includes rapid growth in current account deficits, overvalued exchange rates and a collapse in

their exports.

EFFECT:

The financial crisis heavily damaged currency values, stock markets, and other asset

prices, reduced import revenues and government upheaval. There were also reported cases of
suicide due to no income. International investors lose confidence in investing to developing

countries, not just in Asia but all over the world. Oil prices also fell due to the crisis.

RECOMMENDATION:

Countries should maintain enough level of foreign reserves to avoid currency devaluation

and external shocks. The economy should strive for current account surpluses. Government

should be actively participative in the economic market and should intervene and make good

economic decisions. Country’s domestic financial systems should be strengthened and there

should be a strong fiscal and monetary policies.

CONCLUSION:

“It’s better to not fly further towards the sun, just like Icarus who flew too near and his wings

melted, fell to the sea and drowned.”

It is now over 2 decades since the Asian crisis had happened. Most countries that were

badly affected have now recovered. The outbreak has brought devastating economic and

psychological consequences. Just like in life, it is important that weaknesses should not be

ignored and vulnerabilities should be identified. Be mindful of the warning signs and don’t be

too complacent.