The international political economy is one of the important phenomena in international relations. Issues in international economics have huge impact on the relations at the international stage. One of the most important issues in international economics is the forces in the international business cycles resulting in economic crises. International financial crises have been prevalent in international economics occurring kin different regions at different times. The first major financial crisis in the world occurred during the post WW1 era in what is famously known as the great depression of 1930s. Other crises in international economies have been occurring including the recent financial crisis which directly affected the United States and the European Union. There is also the least talked about financial crisis that occurred in East Asia within a span of one year; 1997-1998 which had devastating consequences on the East Asian economy. However the quick actives responses by the states in the region helped in the quick aversion of the crisis and its effects on the economy of the region (Heo & Horowitz, 2000). This paper is going to discuss the developments of the financial crisis in East Asia financial crisis. The effects of the crisis on the affected states will be discussed. Also the paper will discuss measurers applied by states in averting the crisis. This will center on two benchmark states: Singapore and Australia. In the paper, it will be argued that economic crisis will often have a spill over effect especially when applied to regional economic blocs.
Origin/causes and development of the financial crisis in East Asia
Most research findings point at a number of aspects as being behind the financial turmoil in East Asian States between the year 1997 and 1998. Weak macroeconomic policies and foundations by East Asian countries have been found to dominate the argument about the causes of the financial crisis. This argument was made by both financial institutions like the International Monetary Fund and economists. However, there is another argument which points out that the cause of the presumed causes of the crisis do not wholesomely apply to all the countries in the region. In most cases, the economic analyses of the causes are generalized. This relates to political settings of these countries, economic structures, the social environment and the relations between these countries. Diversity however exists in the internal economic and political structures of these countries which points to different inclinations causes, responses and results of the crisis to individual countries (Hasan, 2002 pp. 1).
Radelet and Sachs, 1998, observe that the financial crisis in East Asia emanated from liquidity flight in Thailand and the subsequent depreciation of the Thai currency. The baht recorded a big percentage of depreciation – over 50 percent in the year 1997. Because of the participation of the country in regional trade, this depreciation has effects on the currencies of other countries. The Indonesian currency was the second one to respond. Eventually all the countries the economies of East Asia followed in this progression. Indonesia and Thailand in which the crisis emanated were the hardest impacted by the crisis. Inflation became very high with a lot of cutbacks and crunches being witnessed in these economies. Inflation rose by 58 percent in Indonesia in a period of leas than a year (Reisen, 1999). Inflationary pressures were also recorded in the entire states of East Asia. With different economic abilities in handling the crisis thus the most devastated countries were those states that had weak economic structures. East Asian countries had different liberalization patterns which aided them differently in mitigating the effects of the crisis. Countries with strong economic structures like Malaysia are argued to have suffered regional economic contagion. Political pressures of the 1970s and 1980s had forced most of the countries in the region to liberalize their financial systems. This was also done in order to give the countries power to easily respond to the external market. Therefore, it was evident that the economies of the countries in the regions were closely knit in the sense that individual countries could not easily resist economic falls in one country (Baek and Jun, 2011).
The Asian financial crisis can be looked at from both the micro and micro-economic policies that were being pursued by the countries which resulted in currency speculations. Speculation and the pursuance of hard monetary policies are argued to be the genesis points of the Asian financial crisis. Prior to the crisis, most Asian countries has for close to two decades executed economic strategies that had put them on a clear lane of economic development. This crisis led to lapses and the destruction of the flow of economic development for most countries in this region. On the other hand, it is argued to have been a pointer to economic re-examination by most countries in the region. A number of countries like Singapore, Malaysia and Korea picked up from the crisis and have attained great economic achievements which surpass the achievements made in USA and Europe. Some countries have founding it strenuous in fully recovering from the crisis because of the policy lanes that they followed. However, other emergent issues combine to hinder the countries from full recovery and the attaining of strong sustainable economies (Denis, 2002). Among the factors that economies of East Asia is the 2007 economic turmoil that originated in the United States and Europe. This signifies the fragility of international economies (Jeon, 2010).
Response and effectiveness of response to the crisis
In history, whenever countries have been faced with finances crises, the have often resorted to certain policy response mechanisms. One of the most common policy responses is the search for funds from international financial institutions to help in cushioning the financial crunch. International financial institutions are like the International Monetary Fund in most cases ascends to the need of the states by providing funds to bail the countries affected by the crisis. However, this response is not often immediate or rapid as countries have to fulfill the conditions of the international financial institutions like ensuring that there is economic transparency. The East Asian financial crisis was responded to by all the affected countries which sought ways of revitalizing their monetary systems. Malaysia is one of the countries that were hardly hit by the crisis which threatened to sway it from the rapid economic path that was being pursued by the country (Sundaram, 2006).
According to Hasan, 2001, Malaysia took a different response path to the crisis. Malaysia did not choose to approach the IMF for financial support but rather chose to go as per the prescriptions of the IMF. Malaysia adopted a tight monetary policy for a period of one year. This was one of the prescriptions that was made by the international financial institutions and entailed the raising of the interest rates. However this policy lane did not seem to be favorable to the Malaysian economy. The economy began to shrink because of the inability of business institutions to access finance due to unsustainable interest rates. Many projects that were running had to be either put on hold or progress at a very slow pace due to deep cuts in public expenditure. The employees suffered from cutbacks in their work benefits. To be precise, the economic impacts of the monetary policy adopted by Malaysia in the first year were not favorable at all to the economy. The tight monetary policy led to a series of activities; mostly cutbacks in the economy resulting to a more than 6 percent drop in the real gross domestic product of the country. In spite of this, Malaysia still remained adamant to approach IMF for funding to bail the economy and stabilize the currency (Dornbusch, 2001).
As the economic fundamentals of Malaysia were strong, the country chose to impose control on capital outflows in order to eliminate the speculative demand for the Australian Currency and prevent its internationalization. Thus the country pegged its currency on the US dollar which helped in devaluing the currency and eliminating the speculative demand. This was a replica of international economic behavior since most countries suffering from economic shrinks opt to strict regulation of foreign capital flows. However, this was done in a more liberalized and open way as opposed to the pre-crisis period. The controls were implemented in a selective manner leaving the foreign investments intact. The current accounts were also not interfered with (Sundaram, 2006).Also the country replaced the pursuance of a tight monetary policy with the prescription made in Keynes economics.
A cheap monetary policy was adopted which resulted in a drastic fall in the rate of interests. Effective demand was increased and banking institutions were encouraged to lend more finances to the industry. All this translated to a clear path towards the regaining of performance and financial stability of the economy of Malaysia (Choudhry, Lu and Peng, 2007).
The avoidance of the assistance from the IMF and the adoption of a Keynes economy accompanied by liberalized restructuring programs helped in putting the Malaysian economy back on track. The gross domestic product of the country regained its strength by the end of the year 1998 by registering an over 6 percent growth. The country economy has been operating on a quite stable path since then. Rejecting to approach the IMF for funding is argued to have helped Malaysia to quickly recover from the crisis (Huston and Kearney, 1999).
Being among the countries that had picked up on a strong development path, Singapore was also devastated by the East Asian Financial crisis. Having had strong roots of investment in the neighboring countries, the effects of the financial crunch in the region fell on Singapore with a thud. This resulted in major economic major shocks for instance the shrinking of prices on the stock and securities market of Singapore. Generally the country is argued to have been a victim of the crisis (Choudhry, Lu and Peng, 2007). It suffered from the spill over effect s of the crisis due to strong economic roots in the East Asian trading region.
Singapore is argued to be one of the benchmarks in dealing with the financial crisis that occurred in East Asia. Just like Malaysia, Singapore took an independent or internal approach to averting the crisis and its effects to the economy. The country chose to concentrate on wage instruments and the control of exchange rates in an effective way. Amidst the rise in the speculative demand for the Singapore dollar which, the country used strict controls to manage and check its exchange rate system. Therefore the Singapore dollar was quickly depreciated as a response to the loss of competitiveness in exports due to the collapse of the currencies of the neighboring countries. Direct cost cutting approach was used by the country to maintain competitiveness. Wage and operating costs were cut. Singapore continued withholding to the liberalization of its currency on a long-term basis thus ensuring the competitiveness of the economy. This enabled the country to maintain a strong currency as pegged to other currencies of region like rupiah, the baht, the ringgit and the won. This happened despite the drop of the value of the Singapore dollar to major international currencies like the US dollar, European currencies and the Japanese yen (Choudhry, Lu and Peng, 2007).
Despite the effect of the financial crisis, Singapore which is the economic hub of Southeast Asia had strong economic foundations which sailed it through the crisis. These include the maintenance of strong fundamental in the economy for instance strong financial institutions and the continued use of a well managed exchange rate system. Others are the well established wage system and strong controls on bank lending in Singapore currency (Baek and Jun, 2011). The country had to respond to the loss of competitiveness in international trade by making adjustments to the long withheld economic policies. The country embarked on reducing the costs of doing business, enhancing industry capabilities and improving the efficiency and labor output. All this were pursued with the aim of cushioning the Singapore economy amidst the crisis and maintaining the sustainability of the economy. The country managed to devalue the currency through the combination of exchange rate depreciation and application of cost-cut measures. Also the Singapore economy has been more diversified with the development of more industries and reduction of dependence on a few industries (Jin, 2000). This it can be said that Singapore gained economic grounds after the shocks of the Asian financial crisis and has continued to grow by continued embrace of sound policies (Choudhry, Lu and Peng, 2007).
In this essay, it has been demonstrated that financial crises are a common phenomena that often result from the economic policies that are pursued by states. Countries that fall within a common economic block or region can easily be affected by a financial meltdown that that is occurring in a single country. This is evident in the East Asian financial crisis and resonates from the fact that economies are interconnected in the sense of bilateral and multilateral trade relations. While some states opted for external financial support from IMF, Others like Malaysia chose to pursue independent economic policies which helped them to quickly recover from the crisis. Countries which sought for international funding took quite long to recover for instance Indonesia and Thailand. It cannot be said that the implications of the crisis have been completely eliminated since many gaps still remain in the regional economic policies exposing countries to economic shocks.
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