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Assess competing theories of the causes of financial crisis against evidence from one of the countries impacted by the Asian financial crisis - Essay Example

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Assess competing theories of the causes of financial crisis against evidence from one of the countries impacted by the Asian financial crisis

Alon and Kellerman (1999) substantiate this theory in that they state that the crisis was a reminiscent of the 'Domino Theory' of 1960's. There are other view points attributing different reasons for the financial crisis in Asian economies. This paper analyzes the competing theories that examine the causes of the Asian financial crisis in the light of several theoretical models established by research studies on the crisis and its causes.
Before discussing the causes and effects of the Asian financial crisis, it is important to study the background for the evolution of the financial crisis in the Asian economies. The default of a large amount of debts by Hanob Steel Corporation of South Korea started off the financial crisis in the region. This default by the steel major was followed by many business failures in the country. (Amitava Chatterji 2003)
Following this there was an uneasy feeling for the speculators about the economic and political developments in the region. Hence in May 1997 they initiated heavy capital outflows from Thailand putting the baht - the currency of Thailand under pressure. Though there were assurances from the Thai government that there would be no devaluation of baht, Bank of Thailand in July 1997 announced the free float of baht which virtually devalued the currency by 20 percent. (Amitava Chatterji 2003)
This had triggered the suspicion in the minds of the investors on the Asian regional capital and currency markets and the investor confidence suffered a marked deterioration. Following the act of Thailand, countries like Philippines, Malaysia, and Singapore allowed free float of their respective currencies and the values of all the currencies took a slump. In the mid of August 1997 Indonesia also followed suit and its currency took a downward plunge. (Amitava Chatterji 2003)
The Hong Kong stock market suffered a heavy loss of nearly 25 percent of the value of the stocks during a three day business in the month of October 1997. South Korea had no other alternative except to allow its currency also be allowed to float and in mid-November, the country allowed the currency won to float freely which faced a sharp drop in its value. All the economies as a result of the devaluation had to face a heavy recession as an aftermath of the crisis. (Amitava Chatterji 2003)
This has necessitated the intervention of International Monetary Fund (IMF) to chalk out bail out plans in the form of cash and credit monetary assistance for the affected countries with the assistance of the World Bank and the Asian Development Bank. (Amitava Chatterji 2003)
Fundamental Reasons for the Crisis

Several reasons are being found and discussed by various scholars and authors for the financial crisis in the Asian region. However all of them agree on the following basic reasons which may be considered as the root cause for the financial crisis in the Asian region.
(1) The countries had resorted to excessive borrowings in foreign funds on a short-term basis. These funds were utilized by the countries in offering excessive long-term lending domestically with ...Show more

Summary

There have been a number of studies on the Asian financial crisis analyzing the causes of the crises and most of them agree on some broad reasons. Asian economies grew dramatically during the early and mid 1990s. Starting from the year 1997, the Asian economies were affected badly due to the sudden collapse of the East Asian currencies and the economies were subjected to a wide spread recession…
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Assess competing theories of the causes of financial crisis against evidence from one of the countries impacted by the Asian financial crisis essay example
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