Asian Financial Crisis of 1997-1998 and the Role of IMF
The beginning and spread of the Asian Financial crisis can be attributed to a four-factor revolving pattern which can also be associated with four major problems. These include: inadequacy of the foreign exchange; shortage of developed financial enterprises and other means of providing capital that would help arrest the deteriorating impacts of the already worsened Asian economies. The catastrophic effect of crisis was also eminent in both the US and the world in general as well as it plays the absolute role of reinstating the supply, operation and other refurbishment of funds within the International Monetary Fund (IMF). At the inception of the crisis, the main cause could be attributed to the twofold depreciation of the currency value which has taken effect from early 1997. The initial problem rose from the depreciating value of the Thailand, Malaysian, Philippine and Indonesians’ Baht, ringgit, Peso and rupiah respectively. However, after the stabilisation of these currencies the crisis did not go off the tangent (Nanto & Library of Congress, 1998).
On the contrary, the second phase of the crisis came into effect with an economic downturn pressing down the currencies of Taiwan, Brazil and Hong Kong among others. Indeed, the main effect of the crisis made the governments in the hit countries experience a condition of economic underperformances. In particular, the governments were compelled to sell their foreign exchange reserves while the level of interest rates escalated, producing a negative impact on people borrowing capacity. This also put a downward pressure on the economy of the region via the crippled advances in the individual country’s economic performance. Indeed, the rising interest rates have reversed the preference for interest-bearing securities at the expense of equities. Furthermore, the crisis has further denoted the persisting problems within the financial base of the troubled Asian economies (Economics and Development Resource Center, 1999).
To confront the situation, the IMF planned the advanced support packages for the countries bad hit by the crisis, such as Thailand, Southern Korea as well as Indonesia. Such packages comprised of primary infusion of funds tied to strict conditions to warrant additional funding through loans. However, despite the overwhelming side effects of the crisis to the affected countries, it is of particular interest to US. For instance, the means of combating the crisis are initiated and carried on by the IMF, World Bank, Asian Development Bank as well as the Exchange Stabilisation Funds. The latter belongs to the United States and therefore acts as a major tool of controlling the exchanges and reaping benefits from the suffering Asian economies. Furthermore, the financial markets are also interlinked. Consequently, the effect of crisis on the Asian markets affects the United States financial markets. In addition to that, the Americans are the main investors in the region either directly or through subsidiary US companies. The Americans, however, are not to enjoy the isolation of the economic complications. For instance, crisis has disastrous effects on the US’s imports and exports besides the crippled capital flows in the region. The overall effect is that America has also experienced economic challenges from the decreased imports from the Asian countries while the latter has simultaneously increased their exports. This affects the US economic package through minimal net exports (Economics and Development Resource Center, 1999).
In essence, the Asian financial crisis has been ideally a causation of collapse of financial institutions of Asian countries after becoming bankrupt with non-improving economic condition. In order to avert the effect of the financial crisis in Asia as well as to chase for resolving it, the US seeks to approach the problem in three legislative perspectives, namely: improved financing and injections from the IMF. Furthermore, the US must counter its declining economic productivity including checkups of the effect of crisis on the US financial institutions. Finally in this context, there must be unrelenting efforts spent on the liberalisation of trade and investments worldwide. The Asian financial crisis is of particular importance to the US in that it plays a key role in defining the value of exports and imports as well as the capital flows. Besides that, the crisis also influenced negatively the value of US dollar (Economics and Development Resource Center, 1999).
Significance of the Study
The mentioned financial crisis in the Asian region was catastrophic in nature as it had affected the economic performance of virtually all the trading partners of the Asian countries. In particular, the crisis had a heightened effect on the economic performance of US while at the same time it affected the performance of the financial institutions within the region. In essence, the inception of the crisis saw the beginning of struggle for the entire region (Asia), witnessing the collapse of the financial institutions, preceded by an unfavourable rise in the interest rates and poor financial exchanges. Indeed, the rising interest rates discouraged borrowing and therefore low investments in the short-run. As a result, the economic performance of the region was short-lived. With time, the effect spread to the immediate trading partners, which affected the level of exchange by exports and imports. Despite the fact the condition has relatively subsided, the impact of the crisis remains felt for long and therefore the need to explore the effectiveness of the measures that were taken to avert the challenge and seek important remedies that would be assumed in the future to avoid a recur of the same (Knowles & Economics and Development Resource Center, 1999).
Asian financial crisis (1997-98) was one of the most disastrous economic downturn in the region and beyond. It resulted in the collapse of economic performance of the region due to the destruction of the financial supply which forms the basis of investments and therefore, a rise in economic recess. The effect of this was underperformance in individual economies and lastly the economy of the region and beyond. This situation therefore called for a special attention towards its arresting and reversing the order to one that supports economic growth in the region and beyond.
The financial crisis that struck the Asian region in the period of 1997-98 was one of the most challenging financial crises in the region and was destructive for the financial institutions in particular. In this regard, the period had several drawbacks that prompted the intervention of other external forces like the IMF to arrest the situation that tended to capsize the global economy in the long-run. The US was the main neighbour that experienced catastrophic effects of the crisis. The trade between the Asian regions and the US declined marginally. This prompted the sought for new interventions like the ordinary monetary policy development that in the affected countries would arrest the situation.
2.2 Theoretical Literature
Financial crisis is a term used to be applied to various economic temporal situations that financial assets undergo a cross-cutting decline in their nominal value. In the period of late 19th and early 20th centuries there were similar situations of financial crisis and uprising phenomena of escalating financial crisis in many regions of the world. Indeed, at that particular time, most of the losses accrued from recessions as well as the bank panics which came about simultaneously, worsening the situation. Other than the panics and recessions, there are other situations that characterise the financial crisis. These comprise stock market crashes, currency crisis and the burst of financial bubbles with regard to various exchanges. In absolute terms, the financial crisis results in the drastic loss in the paper wealth. However, financial crisis may not necessarily interfere with the real economy of the region. However, it may at times. Despite many theories that have been put forth to describe the uprising, there is no any universal consensus on the occurrence of financial crisis that can discretely describe the uprising and give a prediction of the same (Goldstein & Institute for International Economics, 1998).
2.2.1 International Financial Crisis
There have been a number of multinational financial crisis that influenced countries within the same economic zones. The occurrence and spread of the financial crisis often start from one region and spreads to others more rapidly with trading partners. Indeed, the occurrence of financial crisis comes about as a result of economic recession that springs forth to a multiple repercussions, particularly in the performance of the economies. The main effect, however, is characterised by the banking sector going bankrupt and meeting dead-ends in a closure of financial institutions. This instance results in reduced amounts of investments and therefore an overall reduced capital generation process. Indeed, the interest rates on loanable funds take a hike, making the borrowings to be extremely expensive. This phenomenon discourages borrowing and therefore minimises investment in the long-run. The aggregate product of this situation is sometimes low GDP growth and reduced incentives to invest (Goldstein & Institute for International Economics, 1998).
In such a situation, the country in the context is forced to maintain constant exchange rates that are an irrefutable devaluing of its currency. This is the case due to the increasing speculative attacks, commonly known as the crisis Balance of payment crisis or simply the currency crisis. This may also result in failure of a given country to settle its sovereign debts, a condition known as Sovereign default. In this regard, when the sovereign defaults and currency devaluation occur simultaneously being based on the governmental decision, the instinctive result of the latter is perceived as the one to produce a change in the sentiments of investors which further leads to abrupt decline in the levels of capital inflows or uncalled for sudden rise in capital flights. For instance, various types of currencies that were found in the common pool of the European Exchange Rate Mechanism underwent catastrophic crises between 1992 and 1993. Reference for this paragraph should be provided.
As a result, these currencies were forced to undergo a forceful devaluation or the withdrawal for the main mechanism. This paper, however, seeks to analyse the Asian Financial crisis of 1997-98, which badly hit the currencies of at least five major states, including Indonesia. Furthermore, the 1998 Russian Financial Crisis also impacted negatively the rouble leading to its subsequent devaluation while the bonds of Russian government were defaulted (Bird & Rajan, 2002).
The consequences of the financial crisis have been often negating the overall effect of default and devaluations with respect to currencies. Various economists have further described the situation from the different perspective. Indeed, it is perceived that the investors are interested in understanding what their fellow investors within the market are offering in order to base their investment plan on achieving a competitive advantage. George Soros referred to the need for a guess on what others are doing as ‘reflexivity’. On the same note, John Maynard Keynes brought a comparative observation of the financial markets with an ordinary beauty contest where each contestants attempt to predict the most preferred model by the other contestants. Indeed, many instances see the investors growing incentives to manipulate their abilities to choose their preferred investments. According to the classical and Keynesian economists, the extra preference to imitate other investors’ strategic placements is known as the Strategic Complementarities Bird & Rajan, 2002).
Indeed, there have been many intervention measures made by the governments in the hit regions to mitigate the aspect of financial crisis. In essence, the various measures that were put in place were fragile and very few of them were achieved by the mere intervention of the governments in isolation. Certainly, the involvement of the international communities in the crisis makes it extremely hard for one government to combat the crisis in isolation. The main goal in the imposition of regulations is to enhance transparency. This is achieved through the implementation of a clear, regular reporting with the adoption of systematic accounting procedures. Regulations also enhance the availability of sufficient assets within the financial institutions which enables them to fulfil their contractual duties. Indeed, the strike of financial crisis can and has often been attributed to the insufficient regulations (Johnson, 1998).
It is clear that the essence of the creation of IMF was to oversee the entire global financial system. However, it is also clear that IMF cannot however compel any state to change its economic policies but offer the requisite advice on the same. As a result, IMF intervened in the Asian financial crisis to arrest the situation owing to poor economic policies however, the general effect of the crisis persisted in most of the countries as the crisis also perpetrated due to a pro-poor policies despite the intervention of IMF financial package. The banking regulations with respect to amount of reserves was highly uncontrolled by the federal governments particularly in Philippines which consequently increased lending in absence of expansion of bank reserve and magnitudes of loanable funds. To achieve economic surveillance of the IMF, its executive board have a direct role in manipulating the process and perpetrating financial advice counsel to the states involved. Failure to adopt sound economic policies as proposed by the IMF made most of major economic players in the region to continue experiencing financial imbalances. Consequently, IMF assisted the economies in tightening and imposition of stricter financial policies as well as tighter monetary policies aimed at imposing financial excesses produced by global imbalances. This was not however the best policies as they would only achieve such objective by cutting down the long-run global economic growth. This was the case as the economies experienced current account imbalances. The market liberalization that took effect in the 1990s was a simultaneous injection in the world economies coupled with the rising industrializing nations like China. However, this implied a significant competitive shock particularly on the advanced economies with their fixed labour markets and products. The implementation of sound economic policies in the Asian region was an important step towards improving the financial system particularly due to the high rise in demand for Euro in the year 2000 (Das, 2011).
Indeed, there were pro-poor monetary policies before, during and in the shorter period after the financial crisis. For instance, the economies were highly vulnerable to external interruption. Philippines for instance experienced externally dictated interest rates which rose to 32 per cent at the inception of the crisis. On the other hand, Indonesia experienced one of the highest interest rates come the intensification of the crisis in 1998 standing at 65 per cent. This was a clear indication of unsound financial policies controlled externally than internally. Consequently, the local currencies of the economies depreciated profusely with the deteriorating crisis. This was the case too in Thailand, Malaysia and South Korea. Indeed, the effect of this fate is the ranging doubts in IMF’s implication on the crisis owing to its high prescription on the economic crisis. There was an eminent decline in national GNP and deteriorating exchange rates during the period (Johnson, 1998).
As a result, various changes have been enacted to spearhead financial performance and to avoid recurring of the same situation of unrest. In this regard, according to the report by the New York Times, the financial crisis that strokes the region was the result of loose regulations on the credit default swaps. However, despite the blame put on the lack of regulations or loose implementation of regulations as the main causes of the crisis, it is also clear that the excess regulations are also inhibitors and causations of the financial crisis. For instance, Basel II Accord became one of the most blamed causes of the financial crisis by necessitating banks to raise their capital contributions with the rising risks. This may be a cause of the banks’ reduced lending and a consequent potential crisis (Johnson, 1998).
The Asian financial crisis has been a pivotal economic blow in the region and beyond. The effect of the crisis has necessitated the rise in measures to not only combat the current unrest, but also to prevent further recurrence. Indeed, the unveiling of the crisis has been a vital tool in assessing the role of the IMF in the stimulation and spearheading of the development of world economies and being aware of any impending economic challenges that result from capital degeneration. Furthermore, the crisis denoted the effective importance of investments and the federal requirement towards booting investments. Some of the prompting question focusing on the role of the IMF is the extent of the crisis and the relative facility endowment of the IMF to cope with it. Furthermore, various questions have been raised as to whether the willingness to lend funds in the time of crisis spearheads moral hazard in the recipient nations (Das, 2011).
IMF led the unveiling of a series of rescue packages towards the five main affected nations in order to help them keep off default. However, IMF tied these bailouts to reforms that to production of the requisite reforms through production of the intended reforms towards restoration of the Asian Currency as well as the financial systems in harmony with the one for United States and other European economies. IMF package was therefore a propagator of moral hazard since it is attributable to conditional attachment to drastic reforms in the financial sector as well as the economies in general. Indeed, it was highly influenced by neoliberal principles of economics known as the Structural Adjustment Package (SAP). SAP was an indicator of thorough understanding of pro-poor financial policies as it advocated for acute reduction in the crisis-struck governments’ expenditure as well as deficits besides giving room for failure of the insolvent financial institution thus through an increment in interest rates. Thus move was aimed at increasing confidence in the states’ fiscal solvency and penalizes the insolvent corporations as well as protecting the values of the currency. The moral hazard was also perpetrated in the sense that it was irrationally administered with favoured parties that received preferential treatment in fund allowances.
Additionally, questions have further been raised concerning whether the consequences of the crisis can be dealt with sustainably. Indeed, the Asian crisis has also been attributed to the insufficiency of funds supply by the IMF to the public in order to spur effective and informed decision making procedures. However, the contemporary liberalisation with respect to the capital market has been identified as a major contributor towards the uprising incidences of financial crises in the Asian region as noted in 1997 and the world in general.
Market liberalization was initiated long before in the early 1990s with positive economic implications. However, the liberalization is one of the factors that paved way for the economic exploits by the competing nations particularly the developed nations like USA. In essence, the capital inflows were highly reduced as opposed to capital outflows due to the diminishing currency value in the region. Huge economies also took advantage of the situation and the low interest rates to further destabilize the weak Asian economies by further increasing the level of exchange rates at the expense of the weaker economies. This situation came about as a result of lower interest rates which resulted to poor financial standard of the Asian economies. The international communities were an important pillar to restore the collapsing financial sector but this rarely happened. Market liberalization encouraged massive interaction of global financial dependencies and accessibility. The governments particularly, Thailand and South Korea moved forth to seek assistance from the IMF in order to improve their banks reserves which at the moment were too low. Consequently, this move made the economies to impose a temporary rise in the interest rates which could be achieved holding domestic currencies. In this regard, it had been noted that the volume of capital outflow was extremely high and therefore a need to withhold outflows thus negating the trend in outflows.
According to IMF, however, the governments of the affected countries are so much reluctant to approach it for assistance to arrest the situation until the situation gets out of hand. This results in major unparalleled effect of the crisis that also hit the economies of the regions in the long-run. Indeed, the crisis undermines both material and currencies exchanges and thus influences the GDP.
In this regard, economists also argue that the IMF is presumably unable to control the crisis, especially ones that strikes simultaneously due to financial incapability. This acts to perpetuate crisis whenever they strike, leading to a catastrophic spread to other neighbouring regions (Goldstein & Institute for International Economics, 1998).Following the strike of the crisis, there was a high rise in the exchange rates across economies of Asia. In this regard, the economies experienced varying change in the exchange rate values. However, the most fragile economies of Indonesia were the badly hit owing to its high absorbent nature of the crisis from the hearth in Thailand where it originated. High exchange rates led to a sharp decline in the economies’ net exports and a resultant decline in the Gross National Product. On the other hand, the Gross national products of the region also experienced a drastic decline assuming the same trend as the exchange rate values as shown below:
2.2.2 The role of Philippines Government in Combating the Asian Financial Crisis
The Philippines are historically attributed to underdeveloped and pro-poor financial systems. According to the Williamson and Mahar survey of 1998, which is based on the financial systems of 34 nations, the Philippines government was always rated as ‘repressed’, concerning six dimensional analysis of interest rate, privatisation, credit controls, global capital flows, interest rates, entry barriers as well as bank autonomy. In 1998, Hutch Croft described the Philippines’ banking sector as the one that is characterised with ‘rampant favouritism’ and minimal crippled state regulations. As a result, the financial sector of the Philippines was quite ineffective in mobilising savings while allocating capitals for investments. Furthermore, the sector was quite fragile and unstable with momentous crisis since mid 1970s (Blustein, 2001).
The Philippines government, however, came up with various measures to mitigate the crisis and perhaps to record a better performance of the sector. To begin with, the government enhanced equity in all economic zones. Furthermore, the entry barriers were considerably moderated to encourage the entrants. Consequently, at the struck of the Asian financial crisis, the Philippines financial sector was still weak and unable to competently combat the incoming forces of the crisis. From the word go, the Philippines was regarded as a weak sister of Asia. However, in the Asian financial upheaval the country did perform relatively better than it would be anticipated. Indeed, the overall economy of the country was destined to grow at a rate of 6 per cent in 1998. Indeed, the post crisis analysis revealed that the country was relatively better placed than any other Asian region. The main lessons that the crisis offered, however, were those the singled out policies in any economy are quite important tool for the amendment used to combat crisis, fastened by economic reforms in the financial systems of an economy. This is the case, no matter whether the origin of the crisis forms within or without the country by means of contagion. Indeed, it is clear that the crisis that hit the country in July 1997 was an ingrown crisis. Indeed, the aftermath of the crisis left the country unable to capitalise on its immediate and elaborately fortified performance. The latter indicates the governments’ inability to capitalise on the measures that would see the country out of the aftermath of the crisis (Nanto & Library of Congress, 1998).
2.3.2 Malaysia and Asian Financial Crisis
Before the financial crisis, Malaysia experienced a huge current account deficit between 4-5 per cent relative to its GDP. This means that the country had a wider room for foreign investors to perpetrate. This was a projection from the World’s most popular stock exchange known as KLSE. Despite the high expectation on the family’s tended development to advance to developed status by 2020, it came as uncalled for the financial impediment that saw the weak performance of the financial sector. In particular, with the devaluation of the Thai baht in 1997, the immediate effect was a subsequent attack on the Malaysian ringgit due to negative speculations. This caused a sudden rise in the interest rates, ranging from 8 to 40 per cent. This set the currency market to downgrade (Tran & Harvie, 2000).
In a move to avert the situation, the Malaysian government put various measures in place, including the fixing of the native currencies to US dollar. Besides that, the government also halted the overseas trade, involving the Malaysian Ringgits, therefore frustrating the use of ringgit in the offshore scenes. These measures restricted the take away funds to abroad and resulted in a relative impeachment of the local currency transfers. Despite the various convincing measures, the 1998 output in real economy was reportedly declining, leading to the country’s first recession in history. The main measure that the Malaysian took was the migration of the ringgit from free float to rigid exchange rate system (Blustein, 2001).
2.3.3 Effect and Positions of other Governments on the Asian Financial crisis (Indonesia, Thailand)
Asian Financial Crisis basically involved a period of a financial crisis that shadowed most of the Asian region from 1997. This uprising was not only a problem of the region, but was of a global importance, becoming the challenge that seemed to raise questions on the effective performance. The beginning of the crises took place in Thailand and resulted from the devaluation of the Thai currency when the government was forced into floating it. This was a result of insufficient and at time complete lack of foreign currency to warrant the country’s fixed exchange rates that forced the country to use the US dollars. Indeed, the country had acquired huge capital foreign debts that made it unable to survive in the crisis due to a huge foreign debt (Noble & Ravenhill, 2000).
The government of Indonesia has engaged various mechanisms to arrest the situation. In 1998, the reform agenda was further fortified to break inflation by the virtue strong money control measures. Furthermore, the government enhanced food supply through emergency imports particularly rice. The effect was a strong distribution system and momentary subsidies of food items. Furthermore, the government of Indonesia also enhanced reforms in banking and corporate restructuring which also accompanied deregulation and privatization of most financial institutions. The policy framework thus resulted in virtual elimination of inflation as well as stabilization of Rupiah (Johnson, 1998).
On the other hand, South Korean government initiated programs geared towards financial stabilization. Initially, the authority formulated policies that focused basically on seasonal hike in interest rates which aimed at bringing about a stable and fighting depreciation-inflation spiral. This was an important step that irrefutably restored stability in the country’s financial sector. Furthermore, Korean authorities also affected an expansionary fiscal capacity which basically helped restrain the impact of the unavoidable recession. Indeed, the government also initiated a tripartite accord which focused on cooperation between government, labor and the businesses besides expanding unemployment insurance system which grossly strengthened social security. Also among other programs included public works and seasonal livelihood protection which all had the impact of embracing financial performance of the state (Johnson, 1998).
Finally in this context, the Thailand’s authorities also adopted policies that would foster economic recovery and enhance the stability of exchange rates. In essence, the government of Thailand seized monetary policies that focused on managing the float of baht. This measure saw the closure of a total of 56 bankrupt finance corporations. Furthermore, the government also enacted budget cuts in order to free up resources for other investments with a common goal of improving current account position. This was also a move to improve the performance of the private sector and luring foreign investments (Noble & Ravenhill, 2000).
Within the continuum of the perpetual crisis, most of the countries in Southeast Asia experienced slumping money value, and loosely valued stock markets besides other devalued assets. This also increased the private debts in the countries while the government intrusion had a little effect on the economic challenges due to the lack of strong and competent financial systems. Among the countries that the crisis badly hit were Indonesia, Thailand and South Korea. The foreign debts also rose by a margin of 67 per cent. In response to this, most of the Asian governments developed sound economic policies to arrest the situation. For instance, the economies of the economies adopted new-fangled monetary policies that led to the temporarily raising of the interest rates. This move reduced the rate of financial outflows and therefore maintained a free monetary circulation and boosted internal spending. This policy was adopted and spread to various Asian economies. For instance, in May 1997, the government of Philippine through its central backs raised the interest rates by 1.75 per cent followed by a per cent rise in end June the same year. Abrupt measures were taken to avert the effect of Thai’s implication as by July, 1997 which made the central bank of Philippine to further raise interest rates overnight with the inception of the crisis in July 1997. The crisis however saw the loss of value in Philippine currency exchange rate from 25 Peso per dollar to 38 Peso per dollar in 1999 and 54 Peso in late 2001 (Noble & Ravenhill, 2000).
However, the problem was far to be alleviated before solving it. As a result, the International Monetary Fund intervened through a pilot program worth $40 billion to resettle the financial sectors of Thailand, Indonesia and South Korea which were badly hit in the crisis (Noble & Ravenhill, 2000).
2.4 Role of IMF in stabilising the Asian Nations after the Asian Financial Crisis
The international community seemed to be an important pillar in stabilising the economies of the regions and the world in general. In particular, IMF is seen to be an economic motivator that jutted in during the crisis to help the hit countries to reinstate their economic performance. However, despite the expectations the performance of the domestic economy of Indonesian was very poor if any way established through the IMF support package. On the other hand, the 1998 fiscal year also saw the drop of the Philippines economy to almost zero. After the 1997 financial crisis, the majority of the economies in the Asian region were operating at a cutting edge of financial stabilisation based on financial supervisions. According to economic analysts, however, the Asian economies began to recover substantially in the 1999 (Sheng, 2009).
The IMF has exercised multi-billion dollar bailouts for the three main states namely: Indonesia, South Korea and Thailand. There has been a rise in the so-called Asian ‘tigers’ which were initially seen to be the drivers of economic growth as perceived by most financial institutions. Indeed, the recent perception has, however, changed and the Asian ‘tigers’ were now perceived as the main cause of inflation in the global scenes as well as financial crisis contagions. The IMF gave a lump sum bail on countries that were badly hit by the crisis. However, this saw a minor improvement in economic performance of the region until it established other impartial measures that would see the improvement of the regional financial systems of the countries involved (Haggard, 2000).
In essence, IMF package rendered the economies into minor improvement partly because of the intensity of the crisis but grossly because of the inability of IMF to directly change the structural base of the financial systems of the member countries which was the most regarded changes in the economies. However, this cannot escape the contribution of the IMF package that considerably alleviated the situation and further reaffirmed the economic measures that the federals were taking to avert the effects of the crisis. Indeed, the IMF treated the economic hardships in Asia similar to other situations in which countries fail to meet their basic obligations on balances of payment. The funds provided made the countries to meet a considerable proportion of the foreign debts which largely focused on the private financial institutions with the condition that the beneficiaries would adopt various structural adjustment in polices.
The effect however was different from other ordinary economic recession, this formed one of the causes of failure in acute attainment of the objective of IMF to attain a positive monetary flow in the individual economies and the region in general. For instance, the Asian government did not run budget deficits while the IMF funds directed them on cutting the expenditure values which was indeed a recessionary policy that further increased the economic slowdown. The funds did not manage orderly rollover on short-term loans with respect to long-term loans. However, this forced governments such as the South Korean and Indonesia with a view to guarantee private debts which the economies owed to overseas creditors. In this regard, IMF could admit having made the financial situation worse. Indeed, the Malaysian government is one of the economies that refused the assistance of IMF. On the contrary, Malaysia disregarded further opening of its economy and imposed capital control instead. This was an important move to keep off speculative trade involving its currency which saw greater success despite a high opposition from IMF. As a result Malaysia suffered relatively low economic problems of financial crisis than any other countries in the region.
In essence, the IMF introduced a three pillar model of counselling which later saw most of the Asian countries following a three-pronged strategic approach towards accruing more foreign capital. These pillars were the liberalisation of financial segment in the region, which saw no restriction to capital flows. Indeed, the governments of the Philippines, Indonesia, Thailand, South Korea and Malaysia enhanced their financial systems as this counsel had led to the serious improvements in the financial systems by 1999. Besides, the IMF also alerted the countries on effective maintenance of the local interest rates. The escalated interest rates would be strategic in enhancing portfolio investments as well as the banking capital. Furthermore, IMF also inspired the countries to initiate and develop pegging of local currencies in relation to the dollars. This move would seek to reinstate the foreign trust and confidence against currency risks (Nanto & Library of Congress, 1998).
Through the latter initiatives, the above mentioned countries and their governments demonstrated the dangers of hastened capitalism. Indeed, the foreign capital inflows increased rapidly in the form of short-term loans through the respective nation’s commercial banks. The entry of these funds, however, did not make any positive effect on the real economic zone as it hardly reached the national zones of capital generation points. As a matter of fact, there were multiple investments in the high-yield sector realised by most commercial banks and financial institutions within the Asian countries. Indeed, there were so many individuals and groups borrowing to spend on the real estates and private ventures that income yield were hardly believable. (Knowles & Economics and Development Resource Center, 1999).
Consequently, in 1997 there was a decline in the money of the investors who withdrew from the business in fear of devaluated currency that would adversely ruin their respective investments. This means that capital generation process was badly hit and therefore, a protracted crisis occurred. Through the counselling initiative, the IMF was able to considerably beef up the investors’ confidence by increasing the regarded insight for the investment (Noble & Ravenhill, 2000).
Various policies that were advanced by IMF in Asia failed. However, IMF sought to revise its guiding article in order to give room for the liberalisation of capital flows within its jurisdiction. However, despite the legal provisions of the IMF to regulate the capital flows, it was ineffective in implementing a strategic plan to mitigate the problem of Asian Financial Crisis. The support packages issue by the IMF the countries such as Indonesia and Thailand were subject to the stipulation of the Frank-Sanders amendment of the US. Indeed, Frank-Sanders provides that the US treasury should be able to direct executive directors of International Financial Institutions of which IMF is included, to their requisite discretions to compel institution charged with the responsibility of curbing Financial Crisis to adopt the pertinent policies aimed at alleviating the situation. In an attempt to control the situation, the US treasury had tremendously communicated with both IMF and World Bank to take precaution on undertaking collective measures that would see the improvement of the working conditions of the Indonesians and Thailand besides other developing nations in the world. However, little if anything had the IMF done to deter the occurrence of the unrest in Asia and therefore, the support packages came at a time that it was relatively late for arresting the situation. Indeed, the support package that IMF extended to Indonesia in particular was perceived as being against Frank-Sanders Amendment Knowles & Economics and Development Resource Center, 1999).
Furthermore, the IMF support package towards the main three Asian nations was questioning due to its bailing out of the commercial banks as well as the private sector while neglecting marginalized group which is perhaps the main cause of failure in the main policies that IMF use in the region. The bailing out of the commercial backs increased the bank ability to lend. However, the move did nothing in the formulation and restructuring of the financial reforms that could have implied high return on the capital. However, the economic sectors that would have otherwise implied positive economic growth such as the private sector was highly neglected as it capitalized on the federal sectors. At the same time, this move also reduced the incentive of the economy to encourage positive Foreign Direct Investment (FDI) which could have otherwise increased the performance of the private sector while at the same time neglecting the economically powerlessness of the marginalized group Knowles & Economics and Development Resource Center, 1999).
However, according to IMF, the packages were justified as they were oriented on the achievement of a wider economic view as well as the improvement of the structural imbalances. This comes in the ways to defend their move to bail commercial banks claiming that the move was not in any way intended to protect commercial banks from bankruptcy and a subsequent closure of business. On their parts, the governments of the badly hit economies of Indonesia and South Korea made tremendous efforts through their banking systems to maintain stable interest rates that would presumably lead to the improvement of the currency Knowles & Economics and Development Resource Center, 1999).
Additionally, the IMF recognised the fact that the governments often guaranteed certain categories of accounts (deposit insurances). Indeed, the further liquidity support can be advanced to undercapitalised financial institutions which must also demonstrate solvency. IMF, however, considered the latter support for being possible only if the institutions are capable of subsequent restructuring in order to restore their lost image. According to the report by US federal Reserve Chair person, Sir Greenspan, the effect of the financial crisis on the foreign investors within the Asian locality underwent an irrefutable loss of approximately $700 billion which included a $30 billion for the American investors within Asia. Additionally, the IMF package did very little to rescue the creditors who had exchanged credits from New York Tokyo besides those from Europe all accruing from bad lending strategies. Indeed, the Asia banks that possessed a huge loan value by the turn of the crisis would presumably be expected to return huge loans as stability in financial market resumes. However, it remains an irrefutable fact that IMF injected packages have also contributed significantly to the achievement of the financial stability and the consequent recovery of the region from the crisis. Despite the critics, IMF infusion of the dollars has beefed up the trade in dollars and foreign currencies in general, which has increased trade in currency. In the 1997, it became clear that private enterprises could not meet their individual balances of payments which instigated panic in the international currency markets. Consequently, the traders intervened through trials to convert the Asian money into dollars while the Asian money plummeted. This was a huge bro on Asian economies as they could not adequately pay off their debts while at the same time raising the expenditure on imports. This necessitated the intervention of the IMF through the infusion of the dollars. This was the case as there were other underlying causes of the crisis including the overinvestment in such sectors as real estate besides other speculative ventures. It is however eminent that financial disasters as well as currency crash were quite inappropriate with regard to the weaknesses in the Asian Economies. However, there remains a great challenge for the banks operating in Asia due to momentous fluctuation of currency and by the fact that various investors have not fully grown trust in investing in such a fragile economy (Jackson, 1999).
IMF is not largely to blame for the momentous uprising and the huge level of increased financial crisis in the region. As a matter of facts, many countries in the Asian region and the major five which experienced a huge blow over the incoming crisis, the countries mainly needed complete structural reforms to avert the problem and develop a sustainable flow of funds both from the local and international scenes. Indeed, the countries required sound economic policies that that would enhance capital controls and interest rates projections. In essence, all these roles fell outside the scope of IMF. Consequently, the IMF undertake advisory motive to urge the countries to reform their financial institutions in order to avoid recur of the same crisis in the future. The adoption of financial and economic growth stimulating mechanisms by the federal governments such as capital controls in the Philippines made a significant contribution to the improvement of economic performance of the individual countries and the region in general. In this regard, the failure of coherence in the outcomes of the IMF interventions can therefore be greatly associated with the incompatibility of the responsibilities between what the crisis need and what was legally bound for the IMF to offer. This also subjected IMF into uncalled for controversy between the Congress and the Treasury department of the US due to lack of conspicuously defined responsibilities and roles of International Financial Institutions (Jackson, 1999).
2.4.1 Programs that IMF Supported with a View to Alleviate the Crisis
IMF rescue was deemed necessary for the recovery of the Asian financial sectors. Indeed, the IMF intervened to rescue the three most affected states namely: Korea, Thailand and Indonesia. In particular IMF entered a tripled faced strategy meant for reinstating the financial sectors of the states by virtue of financing. These scopes involved: financing; developing macroeconomic policies as well as enhancing structural reforms. In essence, IMF offered US$35 billion support spearhead adjustments as well reform initiatives in Indonesia, Thailand and Korea. Furthermore, an extra package was beefed up for Indonesia through a consolidated funding from other bilateral and multilateral sources worth US$85 billion. However, a considerable amount of these funding did not materialize to realize an effective position in financial performance of the respective economies. Besides that, there were multiple concerted activities that were enforced at different phases aimed at boosting the private capital outflows (Noble & Ravenhill, 2000).
Additionally, the IMF also stemmed forth in aid for the formulation of resolute macroeconomic policies. This involved the tightening of the monetary policies within diverse level and countries. Basically, this initiative was geared towards preventing the drastic fall in the Countries’ foreign exchange rates. This also prevented the perpetual depreciation of the currencies which could lead to a spiral of perpetual inflations and depreciation. However, the tightening of the monetary policies was effective for a shorter span of time. Indeed, when the people’s confidence began to sail back and subsequent stabilization of the market conditions, this paved way for the lowering of interest rates. However, the fiscal policies in both Indonesia and Korea were to remain intact while Thailand’s tightening meant a reversed increment in the deficit relative to the previous year.
In early 1997 the Thai trade in shares was hovering. This also accompanied by the government’s measure to make arrangements for the troubled corporations to sell their rights to the small Thai financial institutions through the reciprocated sponsorship by the central bank of Thai. However, this move met a lot of negative block. This was followed by an ever rising level of bad loans in the country’s property market to over 30 billion dollars as at May, 1997. The bank, Finance One, became bankrupt as a result while the same trend was deemed to take shape. Consequently, the Thai government took the constructive measures of reverse increment of the deficits that overwhelmingly altered the situation. The Thai performance before and after the crisis took the shape below (Vines & Gilbert, 2004).
IMF also played a significant role in the enhancement of structural reforms. Indeed, it undertook various steps to redress the issue of weak financial institutions and corporate sectors in general. However, the IMF is blamed for having not foreseen deep recessions of that saw the GDP value decline mainly in the three major economies Thailand 6 per cent, Korea, 7 per cent and Indonesia, 14 per cent in the 1998 fiscal year. Conversely, besides the active role of the IMF in the financial support programs, it also engaged in further support of Philippines through its extensive Support programs in 1997. In addition, IMF also intensified consultation with countries affected by the crisis and also offered insurmountable advisory support in policy development aimed at cracking down the contagion of the crisis in the region and beyond. In this regard, IMF supported the view of Chinese authorities which provided for stable exchange rates of Chinese currency relative to the US dollar (Vines & Gilbert, 2004).(Hunter, & International Monetary Fund, et al. 1999).
IMF tightening of monetary policies led to diverse effects. In essence, the financial performance of the Korea and Thailand sprung from the negative interest rates and currency depreciation blasting through an inflated economy to high interest rates and stable market conditions. However, Indonesia continued to experience negative interest rates across 1998 fiscal year with e extensive monetary expansion as a result of collapsing banking sector and social-political turmoil. The interest rates of the Philippine, Thailand and South Korea appear as in figures 1.5, 1.6 and 1.7 in the link, http://www.nber.org/chapters/c9645.pdf. Furthermore, the currency collapse relative to the other regional countries is also clear in the said three economies above.
Indeed, the country’s currency collapse was indicatively the worst in the region despite the measures by IMF monetary tightening which proved counterproductive. The failure of the IMF support initiatives and their resultant failure can be attributed to failure to augment structural reforms which were the most necessary to address the root causation of the financial crisis. The programs however did have an initial focus on corporate issues as well as the financial sector till later, which could have helped avert the problem. The IMF package focused mainly on the general economic crisis and ignores specificity of the Asian crisis which basically attributed its inception to the poor structural forms of the economies. Indeed, the IMF focused on additional of currency in circulation to the affected economic which indeed implied an economic moral hazard thus the irrefutable claim of abject failure to alleviate the situation (Hunter, & International Monetary Fund, et al. 1999).
3.1 Research Design
This research paper capitalises on the forensic inquiry into the international balances of payment with the focus on the Asian Financial Crisis of 1997-98 that saw the sudden decline in the financial exchanges in the Asian regions. However, due to the effect that the crisis had on the other international communities, the study will also consider the overall effect on the trade patterns and balance of payment in the US. In essence, US was the most hit ‘external’ character in the crisis as resulted in declined condition of output in the Asian region and the process of capital generations in Asia was also negatively affected. In general, the export values of US declined while the foreign investors from American origin in Asia experienced huge losses from the low forensic exchanges. Consequently, this research adopts the strategic mode of questionnaire to gather information necessary for understanding the effect of the crisis on the international financial market, particularly US. These questionnaires will be relayed to respective destinations via the email in order to widen the scope and coverage of the sample space.
Besides that, the research will also use Computer Aided Interview from the respective banking institutions from the region (Asia). This will enable the researcher to acquire vital information with regard to the historical experiences of the banking sector in the period of the uprising. However, the research will not only capture the commercial banks that were in existence at time of the crisis but also other new-fangled financial institutions in order to understand the preparedness of such institutions in case of another struck. Other than the electronic media, the researcher will also use secondary record, such as publications and books displaying the actual event of the crisis, and evaluate the effectiveness of the measures that were taken to restore the norms of operation and the regions as well as the long-term measures that were taken to arrest any future impediments to financial performance in the region. Economic publication reports from the regions will also be an important source of the information to the researcher since it will lay a foundation for the development and recommendations for sound financial measures and reforms that would be effective implemented to realise an effective operating financial systems particularly in Philippine and Indonesia.
3.2 Result / findings
The Asian financial crisis was an abrupt rise in huge capital from countries within Asian which ended up paralyzing the financial sector due to pro-poor mechanisms of regulating them through prudential measures particularly formulated and enacted by the government and adopted by the financial institutions. Furthermore, the situation was further distorted by negated foreign exchange rates. Indeed, this crisis is perceived as unprecedented in the fact that it was characterised with severe corporate distress while banking sector also experienced demystifying challenges. Therefore it was unable to support the foreign and local currency flow in the region. However, despite the undertaking of various measures aimed at counteracting the challenge, very little technical improvement was realised in the financial systems of the countries involved.
The main causes that made structural reforms in the financial system was the protracted ideologies within the US, IMF as well as the UK, thus hampering international financial system reforms. The chain under which the crisis spread was a gradual transfer of effect from Thailand to Indonesia before it spread to Philippines, Korea and Malaysia. The crisis resulted into a number of challenges which included reduced exports, depletion of foreign reserves that led to devaluation of currencies, decline in the number of investors to loss of confidence in the economies as well as the inflow of emergency funds from the IMF that accrued to tense budget and monetary policies. Furthermore, the crisis also came about as a result of incompetent policy framework with respect to banking financial systems in the region. For instance, the presence of fixed exchange rates further increased the vulnerability of the economies to crisis due to such features as unregulated capital inflow. The appreciations of the currencies negatively influenced the competitiveness of the regional exports as well.
According to the research findings, the failure of the Asian finance was attributed to poor policies regarding foreign exchanges. The banks and other financial institutions suffered acute deficiency of structural capacity to hold the incoming market forces, particularly in the financial market. Consequently, this deprived the economies of a chance to exploit international market. It caused by the poor exchange rates that discouraged prospective investors besides undermining the value of exports by the countries in the region. To counter these challenges in the future, the countries in the region and the world in general should act wisely in making monetary policies that would encourage borrowing and therefore encourage investments. Furthermore, the countries should have moderate financial regulations that would see the attraction of foreign investors by increasing confidence in local investments. Furthermore, IMF and World Bank, which are the main International Financial Institutions (IFI), should also be allowed to work independently in order to dispense their mandate without political interference besides diversifying its scope. This would enable it to intervene in any financial impediment without limitations.