The financial crisis in East Asia is one that can be described as shocking because the markets

were performing well, albeit it occurred and investigation needs to occur to evaluate what
caused the financial crisis. The East Asian markets described as countries such as Thailand,
Malaysia and South Korea as well as others which will be identified within the paper. The
evaluation of the financial crisis in East Asia will have a special focus on the corporate
governance of corporations within the East Asian markets. This paper will then aim to focus
on the macroeconomic and microeconomic policy which led to the East Asian Financial
crisis. The paper will aim to evaluate the causation of the crisis and how it was dealt with as
in the domestic markets of East Asian, as well as international markets which they interact
with such as European markets and the United States markets. The effects of the financial
crisis need to be evaluated, this is because it will aid in explaining how the reaction to the
crisis was dealt with. Lastly the paper needs to evaluate the long term ramifications of the
financial crisis which struck East Asian markets.

It is important that the paper defines what a financial crisis is so that the definition may be
applied to the case of East Asia. Eichgreen & Portes (1986: 1) define a financial crisis as a
disturbance in markets also marked by the insolvency of debtors thus affecting capital
allocation in the market. This seems to have been the case in the East Asian markets, as their
financial crisis was characterised by the inability of debtors to raise capital and thus left the
market with less capital available. Lastly it was the case for East Asia because there was a
disturbance in the market which subsequently led to the decline of the stock prices in the East
Asian countries.

Within this paper East Asia is defined as a group of countries to the East of Asia, albeit the
term broad for the purpose of this paper they are specific countries which will be referenced
as the data collected is from their economies and they experienced the consequents of the
financial crisis. The countries which will be defined as ‘East Asian block’ in this paper are:
Thailand, Taiwan, Malaysia, Japan, Indonesia, Hong Kong, Singapore, South Korea and
Philippines. These are the 9 countries which were part of the East Asian financial crisis of
June 1997, and so felt the ramifications of their market actions. It is notable to note the
exclusion of China, this is because it had not felt the shock of the financial crisis and their
financial markets remained relatively stable. These are the countries which were affected by
the financial crisis albeit at different degrees
The onset of the East Asian financial crisis began in June of 1997. It consisted of a group of a
few countries which led the international financial community to disregard it as a minor
regional market slump. The first country to be a precursor of the crisis was Thailand it
quickly spread to Indonesia, Malaysia and Philippines subsequently it went to South Korea.
The crisis was then characterised as massive amounts of net capital outflowing from the East
Asian markets, with as much as $102 billion outflowing in the second half of 1997 (Khor,
n.d.: 2).

As most observers point out the East Asian financial crisis was beset by a wave of panic
which execrated therefore the magnitude of the financial crisis. The panic arises because the
countries were countries which had steady improvements in economic growth as well as
stable markets; making their poor performance a shock to the world markets thereby
spreading a wave of panic. This wave of shock led to a withdrawal of foreign investors
ultimately causing stock prices to plummet (Radelet & Sachs, 1998: 3).

The triggers for the financial crisis were already seen as far back as the early 1990’s, because
there had been consistently present in the financial structures of East Asia. Not one factor can
be attributed to the financial crisis but rather a range of factors contributed to the financial
crisis as these factors combined led to exposing the vulnerability of the markets (Radelet &
Sachs, 1998: 3). According to Classen (1998: 31) one of the main causes of the financial
crisis was the use of high short term borrowing the countries engaged in and this
unfortunately led to their detriment. The East Asian markets were already at risk because they
had been exposed to poor macroeconomic pressures because they had faced budget deficits
(Radelet & Sachs, 1998: 3).

The causality of the East Asian financial crisis can be attributed to various factors as stated
above; the most notable was the shock to the markets which was due to the fall of the
currency in these countries as they had high amounts that they had borrowed a large amount
of short-term funding from external corporations. The other factor was the shock as well to
the demand which was in decline in their respective domestic markets this pushed up the
inflation as well as the input costs including labour; as a result, this is the most popular view
of the causality of the East Asian financial crisis. It is the most popular because it displays
factors which would put any market in a vulnerable position; as depreciation of currency,
higher inflation rate and the decrease in demand more commonly lead to a volatile market
situation (Radelet & Sachs, 1998: 5).
The inspection on the corporate governance of the East Asian block also displays why the
block was beset with such a crisis. Firstly, the nature of transparency of the government and
shareholders was the most detrimental factor with regards to corporate governance. There
was no transparency with regards to how corporations were giving their lenders any
information why they were able to borrow more capital albeit at the moment they should
have been declared bankrupt (Claessens, Djankov & Xu, 2000: 30). To illustrate we can look
at a Taiwanese semiconductor company which was still able to attain external funding even
though they should have been declared bankrupt, the nature of the financial crisis led to them
finally declaring bankruptcy. In addition to this, there were higher rates on investment
because there was an injection from external financing groups because East Asians
corporations had low levels of capital (Claessens, Djankov & Xu, 2000: 32).

Transparency was such a key issue because it also enabled the companies to seek further
financing because they could not return to their old creditors because they had high amounts
of bad debt. This was further exacerbated by the lack of a strong judicial system which would
hold corporations accountable for their actions. The way in which this affected the financial
crisis largely was that creditor accounts of these corporations were increasing, whilst the
companies were not making as much profit as they were stating (Claessens, Djankov & Xu,
2000: 32). Consequently, this would mean that the financial institutions of the East Asian
block would need to ensure that their institutional framework will allow for them to state
their financial position credibly and reliably.

The return on assets for the East Asian corporations varied from low to high but generally in
comparison to the rest of the world it was high. It was high because right until the crisis of
June 1997 most the countries were reporting positive growth, hence the panic factor which
was discussed earlier in the paper (Claessens, Djankov & Xu, 2000: 26). If we evaluate
Hong Kong and Japan their ROA was lower than that of Indonesia and Thailand; this is
because Thailand and Malaysia were more reliant on higher borrowing from external
financers.

What also transpired was that leverage was low because there were low levels of long-term
debt. This is unlike in European countries which rely heavily on their banking systems, the
East Asians countries had high short-term and low long term debts which affected their
leverage. Therefore, with the combination off all the factors the crisis was a result of a
liquidity crisis, this arose both from the mismatching currency from which they used to
borrow, as well as the profit overestimation (Claessens, Djankov & Xu, 2000: 26).

With any financial crisis it is bound to impact on the economy rather negatively, slowing
down Gross Domestic Product growth and estimation thereof. The East Asian block which
had experienced a large increase in credit in the early 1990’s was showing significant growth
with regards to their respective economies (Barro, 2001: 2). As very few financial institutions
anticipated the financial crisis they had still forecast results of positive and healthy economic
growth for East Asia. To illustrate we can review the forecasts for 1998 set by the
International Monetary Fund in May 1997, which was a month before the crisis and the actual
growth figures in April 1998 it is clear that the crisis was unanticipated (Goldstein,1998: 3).

There was anticipated growth for the East Asian block countries as there was steady growth
throughout the 1990’s for Asia, the property markets were also doing well and contributing to
the growth of the banking and other financial services in the markets. The crisis brought
about a recession in a few countries even though they were forecasted to have positive
growth figures. This is because the crisis brought about a sharp decline in growth and slowed
down economic growth in the economies. The only exception was China although it also
received less than 1.8% growth than anticipated it was still showing strong signs of continued
growth, but it was not immune to the wretched economic conditions of neighbouring
economies (Goldstein, 1998: 3).

The aspects of long term ramifications due the financial crisis include, measures put into
place to ensure that the crisis does not occur once more as well as the long term effects the
markets faced due to the crisis. Firstly, dealing with the austerity measures to ensure the crisis
does not occur was the improvement of the corporate governance system in the East Asian
block, as it was one of the leading causes to the crisis. This was done by way of ensuring that
transparency in the financial positions of companies was now of paramount importance. This
was a measure put in place to ensure the minimisation of bad debt being increased which
would further jeopardise the stability market.

Additionally, long term ramifications can be categorized into three groups; long term effects
on growth, stock price as well as the investment ratio. Although GDP effects were discussed
earlier in the paper, the ramifications of the financial crisis span for years because economies
needed to recuperate for the losses suffered (Barro, 2001: 2). After the crisis the countries
subsequently recovered with positive GDP growth per capita reported as soon as 2000, for all
9 of the economies. The investment ratio which is the ratio of real investment to real GDP;
experienced sharp declines from the onset of the crisis right through to 1998. It has to be
considered that investor confidence in these countries was relatively low, this is why it would
take more time for the investment ratio to show signs of improvement. With the data
collected in 2000 there were still countries whose investment ratios had not improved
significantly enough namely: Indonesia, Malaysia, South Korea and Thailand (Barro, 2001:
3). The improvement of investment ratio takes a longer time period, so the trend of growth
was evident soon enough, for example with South Korea it maintained an investment ratio of
above 30% for the period even though at its peak in the 1990’s it was above 35% (Bergheim,
2008:57). Consequently, this would further explain the increase in GDP as some experts
would say an increase in real investment brings about in increase in GDP per capita by up to
1.5%.

Lastly to be discussed of long term ramifications would be the stock market prices of the East
Asian block. Stock market prices are usually a reflection of what the environment of the
economy is like at that particular point in time. Usually the fall in stock market prices are
representative that there in less confidence and also coincides that there’s less growth
occurring in the market at that point. As a long term effect again a couple of the East Asian
countries faced more stressful price declines, this is because of how their particular market is
designed and what real exchange rate is in that particular country. An exceptional case was
Thailand where the decline in the valuation of stock had happened prior to the financial crisis.
The other countries affected most severely by the decrease in stock market valuations were:
Malaysia, South Korea, Indonesia and Philippines. The immediate decline was a cause of the
financial crisis but then in the long term the stock market prices went back up as the economy
was improving once more (Barro, 2001: 4).

One of the chief factors which led to the crisis was the reposed nature of the Western
financial markets. We can evaluate such a structure as the International Monetary Fund, the
organisation was impressed with the massive expansion of the East Asian markets (Khor,
n.d.: 1). This was because the markets were receiving large amounts of capital inflow in short
periods of time for example; there was net inflow of $70 billion for the first half of 1997
(Khor, n.d.: 2). In contrast as the markets faced a crisis the IMF then blamed the crisis firstly
on regional factors then subsequent to that to the weak financial structures, ultimately it was
the way in which their open market system was being operated, as it was alternatively of the
Anglo-Saxon version (Rajan & Zingales, 1998: 1).
It is important to note how the crisis was triggered and thus the snowball effect which led to
the East Asian financial crisis. The trigger action in Thailand was when there was a group of
hedge fund managers from the United States of America who bought the Thai baht, the
currency depreciated rapidly leading to them receiving exceptional gains. This then exposed
that some of the currencies in East Asia were overvalued; because these countries exchanged
foreign currency even for capital inflows and outflows (Khor, n.d.: 3).

An overview of the crisis reveals what led to the crisis of the East Asian financial crisis of
1997, which were the weak financial structures as well as weak microeconomic and
macroeconomic policies. With the weaknesses combined it led to the overvalued currencies
being exposed, as well as corporations which had overvalued their profits being vulnerable.
The vulnerability of the corporations in these countries factored with a weak corporate
governance structure further meant a deepening of the crisis, as corporations began to declare
bankruptcy. The stock market prices as well began a sharp decline because capital was
outflowing at a tremendous rate. This concludes how the crisis happened and the reasons for
the crisis occurring.

The financial crisis of June 1997 had adverse effects on the markets in eastern Asia, these
effects some of them ranging from short –term to long-term. The most adverse economic
effects would be the rate of economic growth which the countries faced. The financial crisis
led to some of the countries experiencing a recession as they had consecutive negative
numbers for their economic growth. Concurrently investment ratios as well were stagnant and
not moving because there was low investor confidence in the Eastern Asian markets. To
mitigate the risk of a financial crisis occurring again measures were put in place to ensure a
well-functioning market. The improvement of the corporate governance structure, the
strengthening of the financial institutions, also leads to show how there are long-term
ramifications of the financial crisis.

In conclusion this paper aimed to provide a discussion of the East Asian financial crisis, by
discussing various factors of the crisis. The paper firstly defined terms which would be of
importance to the fundamental elements to the essay. The paper recognised the reasons as to
how the financial crisis occurred namely depreciation of currency, weak policy as well as the
large capital outflows in the East Asian markets. An evaluation of the effects of the crisis on
the economies of these countries, using measures such as the GDP rate per capita, stock
prices and investment ratio. Lastly the ramifications of the financial crisis were discussed as
to how in the long-term the financial crisis still impacts policies in recent day. The paper
discussed the way in which these countries recovered from the market stagnation to be on a
path of growth once more, as the East Asian markets were some of the best performing
markets in the world.

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