International Trade and Finance - The Role of U.S Loans to Mexico in the East Asian Crisis - Essay Example

INTERNATIONAL TRADE AND FINANCE and International Trade and Finance The Role of U.S loans to Mexico in the East Asian Crisis Some people argue that the U.S. loans to Mexico in1995 led to the East Asian crisis. In analyzing the validity of this assertion, it is important to examine the role of the financial system in Mexican and the countries in East Asia, in reference to its role in the East Asian crisis. This necessitates the need to have a comprehensive and insightful interpretation of the events that led to the East Asian meltdown. The East Asian crisis erupted in the mid 1997. It has been described as one of Asia’s most challenging economic events of the 1990s. It is attributed to a number of factors. Economists link it to the bad fundamentals that resulted from the fiscal irresponsibility in Latin America in the early 1990. They have also linked it to the self-fulfilling foreign financial panics that resulted from the slowing economies in Mexico between 1994 and 1995, as well as the riding unemployment in West Europe between 1992 and 1993(Wade, R.1998, p. 36). Scholars have traced the origin of the 1994 Mexican crisis and the role it played in perpetrating the East Asian meltdown. According to them, the East Asian meltdown is attributed to the excessive build-up of bank credit and the lending boom that dominated Mexico during the same period. According to them, this was attributed to the financial market liberalization. According to McKibbin (2008 p. 19), the period prior to the 1994 Mexican crisis and the East Asian meltdown can be expanding in terms of the excessive bank borrowing and lending. Banks through Central Europe, Latin America, South, and East Asia have been deregulated and privatized in the recent years. This allowed them to have a much greater ability to borrow from abroad. Existing evidence reveal that there was much bank borrowing prior to the economic crisis in 1997. In the early 1990s, there was an increase in bank credit to the private sector. This led to unprecedented growth in the ratio of private sector lending to GDP. An analysis of the ratio of private sector lending to GDP in Mexico and the countries in East Asia reveal that there was an upward trend between 1990 and 1996.Between 1990 and 1994, the lending boom in Mexico, Brazil and Argentina was 116%, 68 % and 57 percent respectively. Among the counties in East Asia, the magnitude of lending boom between 1990 and 1996 was 115% in the Philippines, 58 percent in Thailand and 31 percent in Malaysia. Other countries such as Korea, Hong Kong, Indonesia, and Singapore also recorded an increase in their landing. Much of the money lend to the banks in these countries came for the United States. The counties with the highest lending booms such as Malaysia, Thailand, and the Philippines were the first to be hit by the currency speculation that hit Asia in 1997. The economic crisis in Asia in 1997 is directly linked to the growth rate of the landing to GDP ratio. According to Chinn, M.(1998 p. 118), this increased growth rate of lending to GDP ratio is an implication of the increased quantity of loans. However, it is evident that most of the loans made by banks and non-banks in these countries were of low quality. Most of them were financing various investments of dubious profitability and speculative purchase of various financial assets. Economists contend that it is highly risky to overinvest in risky and poorly performing projects as was the case in Mexico and the East Asian countries mentioned in the foregoing discussion. The period before the 1994 crisis in Mexico and the 1997 crisis in Asia was characterized by underdevelopment of bonds and equity markets (Pomorleani, M.2002 p. 56). This implied that financial intermediation took place through the banks. Therefore, the capital inflows financing these countries were largely intermediated by local banks. Consequently, domestic banks borrowed largely from foreign banks, especially those in the United States. This money was in turn lent to domestic firms. When the domestic banks were hit by financial difficulties during the economic crisis, the domestics economies were adversely affected The over-borrowing and over-lending within the undercapitalized banking system in Mexico and the Asian countries are attributed to the adverse effects of severe institutional and policy deficiencies. A host of evidence ascertains that the Asian banks and financial systems were extremely fragile. They were characterized by poor supervision and poor regulation. For this reason, they were in shaky condition way before the beginning of the crisis. In Mexico for instance, there was initially regulation of commercial banks. However, the 1990s financial liberalization of commercial banks led to the growth of other unregulated non-banking intermediaries that had the ability to circumvent credit limits. This explains why most commercial banks increased their lending to property and real estate sector. They were heavily financed by borrowed loans from foreign financial institutions, mostly in the United States. This was also the case with the counties in Asia such as Thailand, Korea, Indonesia, and Malaysia. In conclusion, the US excessive lending to Mexico, which instigated the Mexican crisis, is often cited as the major cause of the East Asia crisis of 1997. It involves a series of financial bubbles as well as a decline in returns to investments. Other factors that involved the East Asia crisis include bad banking, misguided macro-management, panics in the external financial markets, unsound fundamentals as well as international capital markets, financial under-regulation and speculative attacks that dominated Mexico and the East Asian countries between 1990 and 1996. References McKibbin, W.J. (2008). The crisis in Asia: An empirical assessment. Brookings Discussion papers in international economics, 136(2): 1-39. Print. Wade, R. (1998) The Asian Crisis and Capital Triumphalism. Washington DC.:ODC Press Chinn, M.(1998). Before the fall: were Asian currencies overvalued? National Bureau of Economic Research Working Paper No. 6491. Pomorleani, M.(2002). The East Asia crisis and corporate finances. Emerging Markets Quarterly. 12(3), 114-123. Analysis of Brazil, Chile, and Mexico In a bid to establish a new factory in Latin America, there is a great need to examine various features about the countries to be selected. This paper provided an insightful examination of Brazil, Chile and Mexico in terms of their foreign direct investment climate and regulations. Mexico The U.S-Mexico bilateral commercial relationship was boosted by the enactment of the North American Free Trade Agreement in 1994 which created the free trade for the U.S, Mexico and Canada. This explains why the Mexico is currently the U.S third largest trade partner as well as the second largest export market for United States products. One salient feature about Mexico is that it has a wide range of market opportunities for U.S firms. This is attributed to its geographical proximity to the United States. However, a number of challenges characterize the Mexican market. These include: U.S firms find it difficult to use a single distributor to cover the large Mexican market. This is attributed to Mexico’s large size and diversified population, a factor that is often overlooked by U.S exporter and marketers The second challenge lies in the differences in the legal systems. Evidently, the U.S legal system differs with that of Mexico to large extents. It is therefore important to U.S firms to seek adequate legal counsel before entering the Mexican market and carrying out business activities with Mexican investors. The Mexican custom regulations, labor laws as well as product standards differ with those of the United States. Consequently, U.S farms that wish to invest in Mexico need to carry out an intensive research regarding these aspects. The third challenge is the stagnation in the banking system in Mexico. The Mexican banking system is characterized by high interest rates. This makes it difficult of small and medium-sized enterprises to obtain loans in the country. The final challenge with the Mexico is that it is marred by organized criminal organization. This threatens the security of some places in the country. Chile In an overview, Chile and the United States have good economic ties. The U.S is currently the largest direct investor in Chile. It is described as one of the most stable and prosperous developing counties in Latin America. This is linked to its efforts of expanding global commercial ties and participating in free trade. The country also has a number of business opportunities open to U.S investors. However, Chile has its challenges as well. The first is the high magnitude of competition. The second challenge is the conservative nature of Chilean business people. Thirdly, the country still has some restrictions to foreign investors. These include stringent processes in opening or closing bank account as well as getting approval. Brazil Finally, Brazil is the largest economy in Latin America and the fifth largest in the world. It has managed to maintain effective macroeconomic policies that promote economic growth and control inflation. The country also has a number of market opportunities that can be exploited by U.S firms. Based on its excellent economic profile, few market challenges and large market opportunities, I recommend the opening of a new factory in Brazil. This is mainly due to the following feature that characterize the country: According to the U.S Department of Commerce, Brazil’s economy is based on a well-developed agricultural, manufacturing, mining, and service sectors. The country’s economy is the largest among all the countries in South America. This is reflected in the way Brazil is expanding its presence in the world market. Statistics reveal that the country has steadily improved its macroeconomic stability since 2003. It has also increased its foreign reserves and reduces its dept profile. It was severely hit by the global financial crisis of 2007 and 2008.Howevr, Brazil was among the first emerging markets to begin quick recovery. Moreover, Brazil enjoys good cooperation with the United States. A number of bilateral agreements have been signed between these two countries. They are aimed at intensifying the bilateral engagement in a number of areas of mutual interest between the two countries. In terms of bilateral economic relations, the United States and Brazil have steadily increased their economic relations in the recent years. This has significantly improved the movement of people and goods between these counties. It has also increased business opportunities. This has consequently fostered regional and global economic development. Some of the bilateral agreements that have enhanced economic relations between the US and Brazil include the Economic Partnership Dialogue, the Commission on Economic and Trade Relation, the Commercial Dialogue, the Economic and Financial Dialogues, the 2011 Air Transport Agreement and the Consultative Committee n agriculture. These agreements are aimed at increasing economic relation between these two countries. Finally, Brazil a prominent merchandise-trading partner of the United States. Its main imports from the US include computers, machinery, chemicals, electric products, and aircraft. On the other hand, the U.S is Brazil’s second largest export market. It is also the leading foreign investor in Brazil. In 2012, the United States had an accumulated Foreign Direct Investment Stock of $79 billion. In terms of membership to international organization, Brazil is a prominent member in the UN, Organization of American States, the IMF, the World Bank, as well as the WTO. Despite its appealing nature, The Brazilian market has also a number of challenges. The first challenge of that the Brazilian market is highly diversified. This implies that U.S investors need to have an extensive knowledge of the features characterizing the local environment. Secondly, establishing a business in Brazil is relatively costly. This is attributed to the many direct and indirect costs of opening and running business in the country. Such costs include the costs incurred during governmental procedures, distribution costs, adherence to environmental laws, employee benefits as well as the complex tax structure in the country. Thirdly, Brazil has an insufficient infrastructure. This poses a logistical challenge for businesses in the country. Finally, the country has complex customs as well as a legal system that differs from that of the United States to large extents. References US Commercial Service (2013). Doing Business in Brazil: 2013 Country Commercial Guide for U.S Companies. Retrieved from This is the Commercial Guide for Brazil US Commercial Service (2013). Doing Business in Chile: 2013 Country Commercial Guide for U.S Companies. Retrieved from http://www.buyusainfo.net/docs/x_9171609.pdf US Commercial Service (2013). Doing Business in Mexico: 2013 Country Commercial Guide for U.S Companies. Retrieved from http://www.buyusainfo.net/docs/x_5309176.pdf Read More