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Financial collapse - Essay Example

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Financial collapse

Prior to the crises ,about half of the overall capital inflow to developing countries was directed towards Asia. This was precipitated by high interest rates that made these economies attractive to foreign investors with attendant increase in asset prices. the economies of Malaysia, Indonesia and Thailand particularly experienced high growth rates of between 8 and 12 per cent in the late 1980's and early 1990's.This feat was lauded far and near by economic institution of repute the IMF and World Bank Inclusive.
One of the reasons advanced for these crises was recovery of the U.S economy from a recession it had suffered in the early 1990's.To checkmate inflation ,the U.S through its federal reserve bank at the time began to raise interest rates. This move naturally attracted lots of investors to the detriment of the fledging Asian economies. This move also grew the value of the dollar against which the currencies of these economies were pegged .This caused a slow down in the export activities of the Asian economies as it became less competitive.
Malaysia witnessed a transition from its traditional mining and agriculture driven economy to manufacturing in the 1970's with assistance coming from Japan and western countries .The result of this was the establishment of heavy industries that became the economic driving force with concentration on exportation .There had been fluctuations in the country's current GDP per capita over time that rose to 59% in the 1990's courtesy of the export-oriented industries .However following the massive pull-out of capital by foreign investors in 1997.A chain reaction was set-off that caused major changes within the economy, particularly the substantial depreciation of the country's currency-the Ringgit from its MYR2.50 per USD to levels of up to MYR4.80 per USD,loosing about half its value within the period. The composite index of the country's market fell drastically within a few weeks. There was a 7.5% drop in GDP in 1998.The government responded by pegging the ringgit at MYR3.80 per USD.While also implementing a capital control regime. Unlike its Asian neighbours Indonesia ,Thailand and other Malaysia rejected a relief package in the form of economic aid from International Monetary Fund(IMF) because of the attached austere lending conditions .This singular act differentiated Malaysia and the rest of its Asian neighbors in the sense that the rest of its neighbours were affected to a larger degree than Malaysia .Furthermore in the quest to revive the economy, the government kept injecting funds into it which resulted in budget deficit for a number of years, in addition it has maintained a low interest rate policy through the country's central bank. In terms of the its post-crises economy, it has enjoyed a faster economic recovery compared to its neighbours ,with a strong exports sector with the United States as its principal trade and investment partner. In 1999 the country's GDP grew by 5.6% with analyst predicting an 8% -and- above growth for the year 2000.A managed floating system ...Show more

Summary

There may have been various causes of the Asian financial and economic crises of 1998.The enormity of the crises was such that currencies were devalued ,stocks markets were affected along with other asset prices in the economies within this region.Earlier on in 1994 an economist with Princeton university(formerly MIT) Paul Krugman had given a hint about the superficial nature of the supposed Asian economic miracle…
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