The Asian Global Financial Crisis - Term Paper Example

GLOBAL FINANCIAL CRISIS IN KOREA AND THAILAND By Location Global Financial Crisis in Korea and Thailand Introduction The Global Financial Crisis of 2008 caused panic in many countries. Although some critics have highlighted that the financial crisis was predictable and preventable, it shocked many economies. Many countries needed solutions in an effort to save the crumbling economies. The countries that had experienced financial crises in the past had an advantage because of the experience gained in the previous cases. The effects of the crisis were devastating in many regions of the globe, and economists needed to define new strategies of recovering from the recession. Asian countries had faced a critical financial crisis in 1997, which was attributable to a high level of liquidity and volatility in foreign markets. The financial crisis brought down many economies such as Thailand, Korea, Japan, and Indonesia. More specifically, Thailand and Korea are two of the Asian countries affected by the 1997 financial crisis that managed to recover in a shorter time than expected. Therefore, when the global financial crisis of 2008 emerged, these countries had the opportunity to use the strategies developed in 1997 to recover easily from the crisis. This paper will seek to evaluate the responses of both Korea and Thailand during the global financial crisis and whether they reflect important lessons learned in 1997. On July 1997, Asian countries woke up to the reality of a salient economic crisis that threatened many economies in the region. Although it was assumed to become a global financial crisis in the end, it only remained a sectional financial crisis. Countries that were affected by the horrible crisis included, South Korea, Thailand, Malaysia, Indonesia, Singapore and Philippines (Tosompark 2014, p. 63). A close analysis of the history surrounding the Asian financial crisis reveals that it began in Thailand. This was after the Thailand currency, the Baht, registered a high level of devaluation. Initially, the Thailand government hoped that the Baht would recover its previous status without much intervention. Unfortunately, it only continued to register a declining value. The government was compelled to rely on the foreign currency market to fix the standing of the Baht. Notably, the loss of value by the Baht was accompanied by an immense foreign debt huge enough to declare the country bankrupt (Durham 2007, p. 58). Worth noting is the fact that the accumulated foreign debt happened before the collapsing of the Thai currency. These circumstances contributed to the emergence of a financial crisis. The crisis was not limited to Thailand as it slowly spread to other countries in East Asia (Leightner 2007, p. 64). When the Asian financial crisis began, Korea was registering an increase in activity in the foreign market. The collapsing of the Korean economy was because of a liquidity crisis. Korea had exhibited her incapacity to match currencies and capital structures in a mature way. Notably, Korean financial institutions obtained short-term loans from foreign banks and inappropriately gave Korean citizens long-term loans. When the short-term debt was required, Korea was unable to pay. The liquidity crisis that Korea faced compelled it to require hard currency reserves as the only potential solutions (Head 2010, p. 89). Without doubt, the Asian financial crisis threatened to bring down the economies of Thailand and Korea. The two countries needed an urgent solution to the impending crisis, which was threatening the future of the countries (Garten 1999, p. 89). Responses of Thailand and Korea to the Financial Crises In the case of Korea, different situations had fueled the emergence of the financial crisis. Between 1995 and 1996, the country had registered a decline in its macro economic conditions. There were widening current account deficits from 1991 to 1994, a factor, which contributed to short-term foreign debt. Worst still, Koreas export growth had declined immensely. A comparison of debt equity ratios and the levels of profitability in Korea at that time only predicted potential bankruptcy (Sangsubhan & Basri 2012, p. 250). Its currency also collapsed in October 1997. However, the potential bankruptcy of the country resulting from accumulated short-term foreign debt was the real threat to the economy. Notably, Korean financial institutions borrowed heavily from foreign banks in an effort to finance the local projects (Sussangkarn 2012, p. 274). However, the banks did not ensure that the projects were viable. If Korea was to survive this financial crisis, it needed the intervention of a foreign intergovernmental body that would provide it with hard currency (Kritayanavaj 2009, p. 10). The International Monitory Fund (IMF), which operates as a financial security organization offering financial assistance in the forms of bail-out, came to the rescue of Korea. However, the presence of the IMF has been criticized as promoting risky financial behaviour because have the confidence that it will intervene (Nidhiprabha 2010, p. 130). The intervention of the IMF in the Korean intervention presented certain costs, although there was the overall benefit that Korea received the hard currency it required. The IMF presented Korea with a bail-out package of 60 million US dollars. In addition to this amount, the IMF made demands of structural provisions that Korea had to agree with. Notably, Korea adopted a government-led approach in her interactions with IMF in an effort to reform her financial systems (Ammar 2011, p. 70). According to the requirements of the IMF, Korea was required to develop legal and regulatory infrastructures necessary for supervising the reforms that would follow. This led to the formation of the financial supervisory commission in 1998. The second response was the rehabilitation of financial institutions (Warr 2009, p. 337). The efforts of rehabilitating financial institutions contributed to the closure or restructuring of about 32 banks. In addition, Korea promoted capital account liberalization in an effort to ensure an increased mobility of international capital. The corporate governance of banks was also empowered in an effort to ensure that they operated in a more informed manner (Chongvilaivan 2012, p. 319). Finally, Korea adopted prudential regulations that would ensure that institutions considered risk assessment as a priority before making a major decision. These responses occurred in phases as dictated by the IMF (Jau-Shin & Song-Jwu 2011, p. 85). The advantage of the IMF intervention was that Korea was able to address the root causes of the financial crisis. Without doubt, it was a hard time in Korea because many people lost jobs because of the stutural reforms (Lee & Nam 2013, p. 175). However, they were worth the costs because the Korean economy began to register growth after a short while. On the other hand, Thailand also received a funding from IMF of about 17 million US dollars. Just as in the case with Korea, IMF’s interventions required the Thai government to undertake certain structural reforms such as new exchange rate policies, new contractionary monetary policies, regulation of capital outflows, and rigorous restructuring of the financial sector. Similar to the Korean situation, a great percentage of people lost jobs Lee & Rhee 2012, p. 50). Thailand had its rural sector ready to absorb most of the people who lost their jobs. With time, the recovery process began and Thailand soon stabilized its economy. After surviving the critical times of the financial crisis, the two countries learned their lessons. For example, they noted the value of practicing financial supervision and regulation and accessing the level of risks (Young-Sik 2012, p. 117). Moreover, the reforms placed emphasis on the need for capital controls, which was critical in preventing a reoccurring of a financial crisis. New policies were adopted as part of the structural reforms in an effort to reduce the level of vulnerability (Jeon 2010, p. 27). The manner in which both Thailand and Korea responded to the Asian financial crisis served as a preparation for the counties to handle the global financial crisis that occurred a decade later. Many economists expected that both countries would be in a position to recover from the global recession easily (Deok Ryong 2011, p. 110). Korea’s Response to the Global Financial Crisis The emergence of the global financial crisis ten years after Korea had successfully handled the Asian financial crisis; it seemed to have an easier time in its effort to recover from the devastating effects of the global crisis. The global crisis led to a critical decline in trade. Exports levels declined immensely while the globe’s GDP registered a 2.5% decline. Korea was affected by the global situation (Sangyeon & Hyejoon 2009, p. 61). It registered a decline of 13.9% in export levels and a 25.8% fall of its imports. One of the measures that Korea took in an effort to address the global crisis was adopting a new anti dumping measures. During the crisis, measures that ensured that domestic producers had the freedom to file cases for low tariff rates associated with their products were passed (‘Summary of General Discussion on "Implications of the Global Financial Crisis on Koreas Trade’ 2009, p. 84). This was a strategy that Korea applied for three to four years during the Asian financial crisis. Korea was well aware that this strategy had worked previously and tried it out in an effort to address the global crisis (The Korean financial system: overcoming the global financial crisis and addressing remaining problems 2010, p. 70). Prior to the global crisis, anti dumping measures were only applicable in the wood and paper industries. However, the crisis saw Korea increase the targets of these measures to include the plastic and rubber industries and later the stone and glass sectors (Sustaining the recovery from the global financial crisis by promoting Koreas medium-term growth potential 2010, p. 30). The anti dumping measures had specific targets such as China, Japan, and the United states. For many Koreans, recovering from the global crisis was much easier that the recovery from the Asian financial crisis. Considering the fact that the Asian financial crisis had devastating effects on the Korean economy and the MIF intervention led to the closure of industries and banks and the inevitable laying off of employees, the Asian financial crisis was worse (Sussangkarn 2012, p. 67). Since the IMF programs helped Korea solve the root causes of her financial collapse, the country was in a better position to calculate its moves during the global crisis. It had developed resilience when struck by the Asian financial crisis and was able to strategize during the global crisis (Heo 2013, p. 450). Korea had learned how to minimize her vulnerability in the foreign market as well as strategies of handling a financial crisis. This explains why it recovered easily from the global recession (Das 2013, p. 237). Thailand’s Response to the Global Financial Crisis The global financial crisis had far-reaching negative effects because it found the country handling a political turmoil. Its airports were closed down, a factor that affected business. The crisis faced by Thailand during the global recession in 2008 resulted from her economic structure and the long-term development strategy (Kwanho 2009, p. 85). Notably, Thailand exhibited overreliance on exportation and other foreign investment ventures as the greatest contributors to economic growth (Yeonho & Kwangsuk 2012, p. 10). Since there was a decline in trade, cause by the global financial crisis, the export rates of Thailand declined immensely. Moreover, its import rates went down by over 40%. In addition, Thailand was facing a situation similar to the Asian financial crisis because lowered growth rates would eventually compel the laying off of employees in some industries (Jee 2012, p. 65). Contrary to what was expected, the government exhibited a slow response. In 2008, the government had done little to ensure that the global crisis would not affect the country immensely. Considering the fact that Thailand had adopted the approach of letting the private sector lead the structural reforms of 1997, the government did not have the required capacity to handle the global crisis in 2008 (Kudrin 2009, p. 7). Therefore, it appears that Thailand did not exhibit the required level of experience and resilience during the global crisis because of its experience in the Asian financial crisis. It was evident that the lesson learned during the Asian crisis did not register any noticeable impact during the global crisis. Although the political turmoil in the country worsened the situation, the government did not respond as soon as it was expected (Yellen 2007, p. 42). Therefore, it would be wrong to assert that Thailand’s experience during the Asian financial crisis influenced its response during the global financial crisis. Conclusion Evidently, the two Asian countries described above faced a critical situation in 1997, which compelled them to seek intervention. The effects of the Asian financial crisis were strong enough to cause stumbling of the economies in both countries. The IMF intervened by offering funding and helping the countries carry out structural reforms and the adoption of new policies in an effort to recover from the crisis. Korea seems to have learned valuable lessons during the Asian financial crisis, a factor that is evident in its response to the global financial crisis in 2008. The government responded in good time to ensure that the Korean economy did not suffer immensely. 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