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The Asian Financial Crisis. Causes and lessons for modernity

Started by Admin, Feb 07, 2024, 01:03 AM

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Topic keywords [SEO] financial-crisisasian-financial-crisis


In this article you will learn:
  • Why this crisis occurred;
  • what impact it had and how it affected the Asian region and the rest of the world;
  • Interesting facts about the crisis;

In the late 1990s, the Asian region experienced one of the worst economic crises in its history. This crisis, which began in Thailand in 1997, quickly spread to the entire Southeast region and had a significant impact on the economies of countries such as Indonesia, South Korea, the Philippines, Malaysia and others. How did this happen and what lessons can investors learn from this crisis? Let's get to the bottom of it.

Unsustainable financial practices
Before the crisis, many Asian countries had unsustainable financial practices. Banks were lending aggressively, often without proper monitoring and risk assessment. This created the illusion of stability, but in reality many companies and banks were overburdened with debt that was not backed by sufficient assets. We saw something similar in the US before the financial crisis and in 2023 with Silicon Valley Bank.

Fixed exchange rates
Some countries in the region have maintained fixed exchange rates for their national currencies. This made them vulnerable to changes in the global economy and the whims of the market. When doubts arose about the sustainability of their economies, the fixed exchange rates were unsupported, leading to sharp currency falls. In principle, the control of exchange rates by a country's government has rather dramatic negative consequences.

Lack of transparency and inadequate regulation
Financial institutions in many countries in the region suffered from a lack of transparency and effective regulation. Inadequate supervision of banks and companies contributed to irrational spending and threatened the stability of the financial system.

Dependence on foreign investment and short-term loans
Many countries in the region relied on foreign investment and short-term loans to sustain their economic growth. As investors began to doubt the sustainability of the region, massive capital outflows occurred, depriving many countries of the funding they needed. The amount of capital lost was too great, and cash injections from governments in the region could not and would not help, as governments do not have that kind of money. Even a rich economy cannot borrow that much money in a crisis, if only because of the lack of confidence in the country due to the crisis itself.

Crisis of confidence
A key element of the crisis was the loss of confidence among international investors. Speculative attacks on currencies, share sales and capital outflows created an atmosphere of panic that deepened the economic downturn.

Lessons learned and subsequent reforms
  • As a result, many countries have improved the regulation of financial institutions and introduced measures to ensure transparency and accountability;
  • Countries in the region have recognized the need to reduce sectoral dependence and economic diversity;
  • Many countries have begun to actively build reserves and develop strategies to ensure economic resilience to external shocks;
  • Strengthening regional cooperation has become a key aspect of overcoming financial challenges and many countries in the region have established mechanisms to support each other in the event of a crisis.

The Asian crisis was a painful but important experience for the region. The lessons learned from this period helped to introduce reforms and strengthen financial resilience in the decades that followed. However, like all crises, it also highlighted the importance of vigilance and risk management in the global economy. The crisis sparked debate and concern about the interconnectedness of the global economy and, consequently, its vulnerability when a weak link in the system emerges. Unfortunately, as we will see later, economic actors in other parts of the world have not taken the lessons of the crisis seriously.

Interesting facts about the crisis:
  • During the crisis, the Indonesian rupiah lost so much value that people started to use it as wallpaper and wrapping paper;
  • In Indonesia, some businessmen had to sell their company names and even street names during the crisis to pay off their debts;
  • In South Korea, a student who wrote his term paper on the crisis was praised and became a hero in the eyes of society for his prophetic work, even though he did not believe in the possibility of a crisis.