Question

Q1. How does the East Asian countries should do to avoid the recurrence of the crisis?

Q2. Why did it become embroiled in one of the worst financial crises in the postwar period? What went wrong? Is this just a financial panic or problems in the economics fundamentals? (East Asian country case)

Answer 1

For the purpose of answering the case study, Question 2) has been answered first as it involves the fundamental core reasons for the existence of the East Asian crisis. We will look at the solutions later

Question 2)

The East Asian Crisis happened in the mid 1990's, and was started by Thailand, when it devalued its currency to the US dollar. This was done primarily because the Thai baht was falling and the government wanted to protect it against the same.

As a result of this however, the interest of investors in the currency fell rapidly and it lost its value by as much as 40%. The world realized that Asian currencies were overvalued and had high rising debt which was not assessed in terms of its actual value.

Asian countries on its part lacked economic and financial stability. They had invested heavily in debts and had favoured companies, banks and others by providing them heavy subsidies and at times helping banks during bad times directly to ensure economic stability. What they did not realize however is that this increased expenditure would come at a huge cost unless recovered. Companies on the other hand did not bring in significant profits for these countries and were always assured of government support. As a result of which the crisis came into the picture.

When government debts are high, the exchange rates usually fall and investor confidence in the currency remains low. This leads to a wide reduction in the capital of the countries which is exactly what took place in the countries.

It was thus, not a financial panic, but rather the evidence of countries such as Thailand amassing huge debts and expenditures, without worrying about the critical aspect of exchange rates. This along with the fact that these countries had overvalued their currency and when the bubble burst, they went down as much as 40% is seen as the key economic reason for the emergence of the crisis.

Question 1)

To address the problem, the International Monetary Fund had provided these countries sufficient capital at lowest possible interest rates to solve the economic crisis. However, in the long run if these countries do not improve on their financial risk taking and expending capabilities these problems will again come into the picture.

It is essential that these countries follow strict rules on lending within banks as well as government subsides should not extend beyond the paying capacity of the country and should be avoided as much as possible.

Following a market-based economy, is further essential to ensure that the local industries in the country can grow at a similar pace as the rest of the world. The problem with being protectionist and providing high subsidies to business owners and banks is that they turn complacent and instead do not function appropriately. This may lead to significant losses in business and the economy as a whole also suffers.

We can conclude by saying, that lower debt and higher financial responsibility is essential in ensuring that such crisis of this magnitude do not happen again.

Please feel free to ask your doubts in the comments section.