Financial Crisis in Asia - Essay Example

Economics Introduction: Economics is generally considered the science of a business as it has a wider and greater application in the modern context and includes various aspects like production, distribution and marketing. Traditional business and the related activities have suffered dilemma of different types due to the lack of infrastructural facilities. However, in the modern situation, as a result of the introduction of advanced methodology, appropriate communication is possible which results in the accessibility of apposite information regarding the products and business nature, compliant with the recent trends and changes. Asian currency crisis 1997 It is remarkable that the role of economics in the modern world has increased tremendously. In every segment of the economy, finance enjoys a crucial role as it is the back bone of every business and economy. Currency crisis is considered as one of the major problems that the economic sector faces in the modern situation. Attributable to the financial crisis, a country suffers problems of various nature including issues like unemployment, inflation and the like. "Two theories of the causes of currency crises prevail in the economic literature. The first traces currency instability to countries' structural imbalances and weak policies; the second identifies arbitrary shifts in market expectations as the principal source of instability" (Pesenti & Tille 2000). IMF (International Monetary Fund) is agency that enjoys a wider role in relation to the macro economic policy development. It is an organisation established at international level, which gives great priority to the financial systems and other implementations globally, which is especially dealing with the foreign exchange rates and balance of payments. In addition, IMF also plays a principal role in consideration of economic policies and their impact. "The main function of the I.M.F is to (a) Arrange international deposits from banks. (b) Help to solve balance of payments problems of member countries. (c) Act as a private sector lending arm of the World Bank. (d) Finance investment loans to developing countries" (Functions of IMF. 2007). IMF provided a guiding role for recovering the currency disaster being suffered by the Korean Government. More over, it was very keen about the effective functioning of money market globally. The countries though suffered the crisis approach IMF for getting certain loans and assistance. Even though the assistance is being provided by the IMF was good enough to recover the impact of Asian crisis, it is still suffering a lot. More over, IMF is also offering assistance to reduce the crisis faced by NICs (New Industrialising Countries). The macro economic policy gives the major focus on its monetary and fiscal policies. Fiscal policy is related to the two major concepts of the allocation of resources and the proper distribution of income. The proper implementation of fiscal policy is extremely essential in order to maintain a constant price level, elimination of job redundancy and, thereby, the fulfilment of effective economic growth. Consequently, the fiscal policy has an exceptionally important role in the proper accomplishment of economic objective. For the effective implementation of an economy, the fiscal policy stresses on certain major concepts like effectiveness and efficiency, in order that the policy is stable and goal-attainable in nature. Monetary policy is one of the great tools and a major technique adopted by the Government in order to improve the economic growth. This policy emphasizes the two concepts of the rate prevailing for the borrowal and the supply of money, which are based on the accepting of deposits and lending of money. But the inflation force and monetary policy is related in respect of economic development. Asian economy can be best termed a developing economy and still faces various economic issues. "The Asian financial crisis involves four basic problems or issues: (1) a shortage of foreign exchange that has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies, (3) effects of the crisis on both the United States and the world, and (4) the role, operations, and replenishment of funds of the International Monetary Fund" (Nanto 1998). One of the major reasons for the Asian financial crisis is the inequality in the macro economic concepts. It is necessary to maintain a proper and stable economic balance which is substantial for the overall growth of the economy. When the financial scenario of a country is considered, the global macro economic imbalance is a serious problem, and it is crucial to overcome such problems for the growth of economy as a whole. Moreover, during the period of crisis, the reaction of the investors in equity markets also changed a lot. Rather than this, the impact of Asian financial crisis affected the economic performance all over. The fundamental reason behind the crisis is due to lack of strong financial sector, and other problems related externally. In addition, hedging is another prominent concept in this regard. When we analyse we can exactly find that there is a direct relation between finance and hedge. Hedging can be comprehended as an investment form which helps to minimize the risk factor related to another investment context. It is an important and effective measure that is utilized by the business organisations in order to reduce the risk factor to a great extend. The risk in relation to hedge may be either the risk of hedging credit or of hedging cash. It is an important process of counterbalancing the risk of price movement and its fluctuations in the market place. "The lack of hedging also added to the instability in Asian financial markets once the crisis hit. The high cost of abandoning currency pegs induced policymakers to adopt harsh contractionary measures (involving skyrocketing interest rates) to defend the exchange rate, even when the pegs were unsustainable in the face of adverse market sentiment" (What caused East Asia's Financial crisis 2006). It is a general fact that if there is any change taking place in the economy, the effect of which will reflect in the country's economic, political, social, environmental, and legal factors tremendously which may turn in favour of the economy. The proper and effective implementation of relevant economic principles and theories are essential for the attainment of the global economic development. It is necessary that the application of an effective economic policy is made use of in order to surmount the financial crisis and other economic issues. The financial crisis that occurred in Asia in 1997 brought countless changes in the overall economy of the various nations in the form of deflation. It also affected the foreign exchange. This financial crisis greatly hit the global market and economy and many other countries also suffered in the East Asian crisis. The significant ones among them are Hong Kong, Thailand, Taiwan, and South Korea. These countries involved in almost all major economic and financial transactions in an effective manner, which requires the application of adequate economic policies and a sufficient balance of payment procedures. The ultimate impact of the Asian financial crisis that not only affected the economies of Asia, but also it had great impact on the global economy. "The Asian financial crisis caused the baht out of the country, and the Thai government ran out of foreign exchange reserves. As a result, capital became scarcer, the baht devalued by 20% as measured against the U.S. dollar, and interest rates on borrowed money sharply increased." (Asian Financial Crisis. 2008). Moreover, due to this crisis the Government of Thailand suffered a lot; because the quantum of output attained by the country reduced sharply, this turned out for the job redundancy also. But this problem of unemployment should be reduced to certain extend with the application of effective policies and measures. Problem of job redundancy will lead to create an imbalance in the stable level of economy. It is not possible to attain an overall economic growth due to this problem. Appropriate implementation of macro economic policies is very relevant in this context. Hence, this policy is crucial for the economic stability and financial viability. It is necessary to evaluate the level of employment to analyze the rate of unemployment, in order to find whether it is minimal or not. The growth rate of employment will correspondingly improve the economic growth as well as the total productivity of the labour force. In addition to this, the economy also gives stress on the concepts of trade, inflation, and economic growth of the country. The monetary and fiscal policy had resulted in more employment, better economic growth, low inflation, and improved trade. It is because the macro economic policy had impacted the country for improving its GDP percapita growth. The favourable tax rate support the business organisations to operate at a high growth potential, and thereby contributing to the attainment of economic development. In addition to this, it is helpful to take an appropriate decision in the matter of investment criteria, and the analysis of the policies related to foreign exchange rates and other trade balance system. As a result of the Asian financial crisis, several countries faced the losses in business operations, and insolvency. Other than these, the economy of South Korea also faced major economic disaster due to the financial crisis in Asia. "As such, the weaknesses in the international financial institutions would be examined, as exposed by the East Asian financial crisis, and that they are in dire need of restructuring. In this situation, the country's currency may be forced to depreciate to a level that seriously damages its domestic economy and the problems may spread to other countries" (International Finance. 2008). Due to this financial crisis, great depression occurred in the economy, especially in the form of currency deflation and bank ruptcy. Asian financial crisis seriously affected the financial and economic sectors of the country, which ultimately created a numerous problems that brought down the economic development. In addition to this, the great impact of globalization also affects the macro economic policy environment. It is because both fiscal and monetary policies are very significant towards the contributions of the overall economy. As a result, it is clear that the impact of stock exchange promotes the economic growth and overall productivity of the country. Due to the lack of proper regulation of markets, sometimes, the stock markets and its working procedures decline, which also leads to the global financial or economic crisis. In earlier days, before the financial crisis, Asian economy enjoyed a marvellous position in terms of its business operations. But after the crisis the overall trade performance of the economy declined to certain extend. "Analyzing the financial crisis from an economic perspective was usefully laid out by studying the technical and multidimensional problems, beginning with an overview of the foundations of the crisis, the mechanism of the crisis-how the crisis played out from a market perspective-and why the crisis was not foreseen" (Financial Crisis in Asia. 1998). Implications of Financial Crisis As a result of the Asian financial crisis, the economy has suffered a lot of problems that ultimately reflected in the trade performance of the nations. The crisis has brought down the overall productivity and created a situation of unemployment, and insolvency. In addition to this, the financial crisis in Asia affected the banking system of Japan adversely. This is because of the fact that the devaluation of rupees resulted in the quantum of bad debts in Japanese banks enhanced. Moreover, this crisis also effected the functioning of capital markets also. Like wise, the impact of deflation of currency due to the crisis obstacles the global trading operations. The sales volume of those business entities held in Asian economy also fell down. The problem of job redundancy is mainly suffered by countries like Japan and Europe. The IMF and World Bank had undertaken several measures to improve the overall financial system in a reasonable manner. In addition to this, the impact of global investment in the Asian economies also discussed, this is because during that period, the economy of Asia suffered the problem of economic destruction. Due to the crisis majority of the investment operations exhausted. "IMF's demands for the restructuring of the East Asian economies, so as to break down all barriers to the movement and domination of international capital, even though this entails the destruction of industries and banks." (The driving forces of the crisis. 1998). More than this, the over all profitability and financial viability of the economy also adversely affected. IMF helped a lot to improve the situation suffered due to the crisis through the effective implications of reformation of arrears. More over, certain matters that made the situation so bad indeed, they are debt, deflation of currency, decrease in the quantum of out put, etc. Among all other countries, it is South Korea who suffered a lot due to the financial crisis. The Korean economy suffered a lot due to this financial crisis, because of its inflation of currency, lack of evaluation about the credit range by banks, etc. Likely, the amount of loans taken by the country was quiet huge. The quantum of investment made by the investors fell down. During these times, Korean economy suffered the level of liquidation. The amount of overseas debt and short term credit were also gone up. The economy suffered big trouble and the Government of Korea approached the IMF for getting adequate help for recovering their debts. The IMF responded well, and they provided the credit to the country for recovering the situation of liquidation, and to save the country. With the help of credit, country had undertaken certain developments by restructuring the areas of finance, and markets. "Due to the necessary, but predominantly unpopular measures, Koreans are not talking of the "Asian crisis"but of the so-called "IMF-crisis." (Langanke and Hildebrand 2007). After a decade of the Crisis, it is clear that the Korean economy resolved the situation to a great extend. Not only this, but also it is clear that the crisis helped certain Korean industries; because some of the enterprises are highly concentrating in both local and overseas business. After the happening of crisis, the Korean economy concentrated to develop and retain their domestic market and demand, as a defensive measure for saving their economy. Due to the development in the economy, that motivated the investors to improve their savings. Now the economy is very keen to avoid the occurrence of such risky situation again in future. Even though the country recovered from the crisis, still they are suffering with their export context due to the depression of US dollar. This is because the major growth of the economy is derived from the export business. The major reasons for the crisis of the Asian economy are that of its poor application of elementary economic policies and procedures. Due to the lack of effective policy measures, the problem of imbalances, fiscal scarcity, extensive inflation etc. take place. Likewise, certain other issues like liquidity or insolvency, the concept of investment, return and risk etc. are also affecting the economic decline. In addition to this, the country's GDP rate also has declined as a result of the crisis. For the reason that the return on investments is not satisfactory, the Gross Domestic Product (GDP) and the total revenue are also adverse in nature. But it is very clear that there is a relation between the economic development and other liabilities which are external in nature. As far as the developing countries are taken in to account, such countries should depends mainly on the loans and borrowings from outsiders for improving their existing capital requirements. "The crises helped bring about a fundamental reassessment of the merits of fixed but adjustable exchange rate regimes, regimes that try to exist somewhere in the middle between the opposite extremes of irrevocably fixed and purely floating." (Geithner 2007). The impact of Asian financial crisis minimizes the rate of GDP, as a result of which most of its current account should have a debit balance. Not only this, the Asian economy is dealing with a massive amount of overseas debt. The Asian economy undertaken certain relief measures for over coming the difficulties suffered due to the 1997 crisis, as a result of which the economic environment improved a lot. (Kim 2007). Conclusion At present, the economic growth and development of the Asian economy is quiet satisfactory. This is due to the effective implementation of the relevant macro economic policies and procedures. The size of investment improved a lot, and the functioning of stock exchange also outstanding in nature. For accomplishing the economic development, it is necessary to implement the major economic policies in an effective manner by mitigating several issues related to economics, marketing and other relevant areas supporting the country's development. In order to develop the over all economy of Asia, the Governments have undertaken various strategic and economic policies. For this, it is necessary to enhance trade and investment both in domestic as well as in global markets. Maintenance of relevant economic policies and the practicability of doing economical concepts liberally are the essential sources behind the economic development of a nation. Therefore, it is necessary to maintain a proper macro economic balance for the development of the global economic growth. Bibliography Asian Financial Crisis. (2008). [online]. Mega Essays.com. Last accessed 07 January 2008 at: http://www.megaessays.com/viewpaper/68545.html Financial Crisis in Asia. (1998). Economic Assessment of the Financial Crisis in Asia. Summary of the Asia pacific Economics and security conference. Last accessed 07 January 2008 at: http://www.apcss.org/Publications/Report_Economics_98.html Functions of IMF. (2007). [online]. All Interview.com. Last accessed 07 January 2008 at: http://www.allinterview.com/showanswers/55242.html GEITHNER, Timothy (2007). 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