The financial crisis that hit Asian countries in late 1997 was caused by the implementation of financial policies by the International Monetary Fund. The IMF had formed programs meant to support the economy of Asian countries; Korea, Indonesia and Thailand. These programs were successful in restoring economic growth by stabilizing financial markets. Continued implementation and maintenance of these programs were necessary for sustaining a long-time economic recovery in these countries. Although the affected countries had different financial problems, they all suffered from macroeconomic imbalances with poor development programs in other countries. Their commercial systems were weak despite the fact that their respective governments had balanced budgets. Private funds and domestic venture rates were high as was evidenced in the appreciation of the U.S. dollar. Weak financial assets and a general lack of techniques to reduce financial risks were the major cause of poor corporate financial growth. Risky borrowing of foreign currency had posed a threat to domestic investments considering the possibility that domestic currency was on the verge of depreciating (Bello 1).
Despite all these circumstances, the government did not take its regulation role. With the increased capital inflow in the private sector as well as the growing domestic credit situation, the implementation of the financial programs by the IMF changed marketing strategies which resulted in the fall of domestic currency and elevated loss of capital. With time, all affected financial institutions were financially ruined. The IMF was to financially support the most affected countries which were: Thailand, Korea and Indonesia. The IMF offered some funds to help in the adjustment of the financial programs as capital outflows from the private sector were monitored as well. Macroeconomic policies were reformed to prevent future currency depreciation as well as economic inflation. However, exchange rates were lowered soon after the stabilization of external markets. Structural reforms were made to tighten the corporate financial sectors aimed at initiating financial growth. However, financial growth was not achieved but went down with percentage GDP dropping in an all those three countries.
The reform programs by the IMF were not successful in restoring the economy in the three countries. Loss of domestic capital, as well as monetary loss of value, was still evident after the programs had been implemented. The IMF, therefore, did contribute to the worsening of the financial crisis. The uncertainty of the IMF to implement the programs was one of the factors that caused its failure. Some political aspects contributed to the failure as there were doubts that the policies would work and this caused the delay which paved way for the worsening of the situation. External investors had become aware of the crisis due to the increased imbalances in debts and assets. As a result, external investments and cash flow decreased.
The IMF may have failed because it had offered financial support to the Asian countries aiming at meeting their payment needs just like the fund does to other countries faced with financial problems. However, the crisis facing Asian countries was different in that their governments generally lacked budget balances. The reforms by the fund required the affected countries to cut down their expenditure, a policy that contributed to slow economic growth. Another cause of the failure was the inability of the IMF to control and manage loans forcing the government to offer private debts as an assurance to the foreign creditors. The overall results of the IMF were destructive to all Asian countries that had been involved. For instance, unemployment levels elevated in South Korea with many IMF workers losing their jobs. Poverty increased in Indonesia as the GDP declined year after year. As a result of poverty conditions, many children suffered from malnutrition due to a lack of proper diet. The Asian crisis has been related to unregulated financial operations. However, financial markets and corporations stabilized in early 1998; exchange rates were reduced and economic activities were restored. With support from the IMF, Asian countries strategized the attraction of foreign investments and maintained a high domestic interest rate.
Consequences of the crisis in Asia
Since the 1997 financial crisis, employment opportunities in the formal sector have reduced drastically leaving millions of people jobless which has caused them to venture into the informal sector. Unemployment has resulted in poverty in the affected Asian countries. Microfinance borrowers have therefore increased over the years due to the inability to raise private capital. Small businesses have experienced low profits due to competition and low demand for their products. Government resources were reduced to leaving no room for poverty alleviation programs (McGuire 1). General weakness in all financial systems has also been a result of the recession. Indonesia has been more affected with its currency losing value and inflation increasing drastically. External creditors, as well as investors, have withdrawn due to inflation and low exchange rates. International oil prices from Indonesia decreased a great deal since the crisis occurred at a time when the country was faced with adverse drought.
Many people especially those living in poverty are unable to obtain basic needs such as food due to increased prices and unavailability of markets. Reduction in exchange rates led to the collapse of locally produced goods in the exterior markets. The rural areas were the most affected by the economic decline in the urban areas with more effects felt due to the prolonged drought that faced Asia during that time. Payments from urban areas to rural areas decreased as well. At the same time, urban workers returned to rural areas due to unemployment and the expensive lifestyle in the urban centers. This resulted in overcrowding of the informal sector as rural dwellers needed to be provided with opportunities for self-employment. However, the effect of the economic crisis was much less on small market traders since they do not borrow money from microfinance institutions, unlike the small-scale businesses that are important micro-borrowers. Microfinance institutions in Indonesia raised their maximum amounts of loans to help in coping with the crisis despite the decrease in repayment rates. Rural banks were the most affected by the poor repayment rates. The financial crisis led to political disturbance and disorder resulting in the resignation of the president of Indonesia as well as Thailand’s Prime Minister (Leightner 1). The increased inflation led to the weakening of Indonesia’s president authority as people had lost faith in him and questioned his leadership capabilities.
Consequences of the crisis outside Asia
However, there have been positive impacts that have resulted from the 1997 crisis in Asia. The IMF in partnership with Asia has made reforms in place to help member countries when faced with the financial crisis. The fund is offering financial advice and monitoring of economic policies in all member countries. The Asian crisis has opened up the necessity of financial policies in international financial institutions as well as in individual countries. The IMF is currently focusing on monitoring the financial policies in Asia. By working in partnership with Asia, the IMF is in a better position to effectively assess member countries. Asia has also been participating in assessing financial programs in some of the IMF’s member countries. Since the 1997 crisis, IMF has improved its technical assistance in order to sustain the expansion of resource utilization in member countries (Hunter 1). Technical assistance by the fund has also been improved from centralized operations to the regional provision of services.
The IMF has increased its capacity of lending money in its efforts to combat the global financial crisis. However, international financial institutions became insecure in lending money to developing countries. This resulted to slow economic growth in developing nations worldwide which are dependent on international assistance. The amounts of loans that the fund is offering currently are way above the previous amounts. Some negative effects outside Asia where institutions that are partnered with IMF have experienced increased operational costs and lower returns (Prado 1). This has forced the partner institutions such as the Catholic Relief Services to reduce their loan lending opportunities. Oil prices were drastically reduced causing financial instability in countries that rely on oil exports. The crisis also tarnished the name of IMF and World Bank in the developed countries which have turned to regional financial institutions in place of global institutions such as the IMF. Countries such as Japan and China introduced exchange reserves as a way of preparing for any attack on economic growth. Many countries as well restructured their finances for currency build up ready for any future financial crisis.
The financial crisis that hit Asia in 1997 was a very severe experience that caused a lot of distress to many citizens. The effect of the Asian 1997 financial crisis has been felt practically by all population groups. The most affected were the groups that work in factories since their only source of income was cut out. Inflation in prices for consumer goods, however, affected the urban population more than the rural dwellers. The poor members of the society are always adversely affected by the financial crises since the government has to cut down its social expenditure during such unfortunate times. It is therefore clear that the poor and vulnerable groups such as children should be prioritized in short-term assistance as well as protection against the crisis in the future.
In order to avoid such occurrences again, it is recommended that nations should adopt the western way of managing finances, especially in Cultural Revolution by building economic power in ethnic communities. It is important to prevent the crisis from occurring by ensuring currency value is maintained and most importantly by avoiding debts on short time loans. Another possible solution could be the creation of tax capital inflow to attract long-term investments to help maintain constant interest rates. This solution is more recommended since the government has the right to impose taxes. The government could also help prevent external debts through the promotion of domestic money borrowing by mandating banks to lower their interest rates on domestic loans. Maintenance of exports is important since exports form a major source of cash inflow in many countries.
Bello, Walden. “IMF’s role in the Asian Financial Crisis”. 1998 – 2011. Web.
Hunter, William. “The Asian Financial Crisis”. 1999 – 2011. Web.
Leightner, Jonathan. “Thailand’s financial crisis, consequences, and implications”. 2010 – 2011. Web.
McGuire, Paul. “Effects on microfinance of the 1997-1998 Asian Financial Crisis”. 1998 – 2011. Web.
Prado, Mark. “The 1997 Asia Economic Collapse”. 2010 – 2011. Web.