Crisis of South Eastern Countries in an Open Economy framework Content of the Assignment Rise of the Asian Economies Causes

auses of Crisis Effects of Crisis various south eastern Countries and on World Bail Out Packages by IMF and Actions taken by Governments Conclusion

I.

Rise of the Asia Economies The economic development of the South Eastern Economies (Thailand, Malaysia, Indonesia, Philippines, Singapore) started in the 1980s. The development of these economies started through a structural adjustment programs with the help of IMF. The structural adjustment program was initiated as these economies had a massive balance of payment problem due to rising imports and falling exports. The program was initiated for liberalisation of the economies in financial sector and to increase the flow of Foreign Direct Investment (FDI). The opening up of the sector was followed with a massive investment by countries like Japan, Taiwan, Korea and Hongkong. It was an ideal investment scenario to set up a production facility in these South Eastern Economies due to availability of cheap labour force and low cost of operations due to devalued currency. The high inflow of the FDI into these countries resulted in a high growth rate for almost a decade (1980 to 1990). As these investments were primarily into productive sectors it ensure that the was a sustained growth momentum maintained due to rising exports, high employment, increase in the standard of living. The sustained growth of these economies resulted in a high standard of living, rising middle class, low unemployment level in these countries. The double digit growth maintained by these South eastern economies attracted foreign capital investments. During the period from 1980 1995, the regions contribution increased nearly 1/4th of the total world output. The high rate of return was also an attractive incentive to the developed economies such as Japan, US

II.

Causes of Crisis Reduction in the Export growth The South eastern economies were having a sustained export growth after opening up their economies in the mid-eighties. However, the export growth rates started falling in the mid-nineties. There were various factors which contributed to the reduction in the exports of these countries. The key factors contributing to the slowdown in the export are: Slow down in the economies of the developed nations such as US, Japan which were the major importers from these economies. Japan which had the major investment in these countries had gone into a recession during the mid-nineties contributed to the reduction in the export sales of these economies. There was growing competition with the emerging BRIC economies, primarily from China which was emerging as a major exporting nation. China due to certain inherent factors such as cheap labour force, devalued currency and huge investment by the government by creating Special Economic Zones had emerged as a major export hub for the world. The currencies of these economies were pegged to the US dollar, due to which any appreciation in the US dollar resulted in the appreciation of these currencies. During the period 1990-96, the currencies has appreciated in a range of 20%-44% due to the appreciation of the US dollar, this resulted in the reduction the export competiveness of these economies.

Mismanagement of Borrowed Funds The amount of borrowings has risen over a period of time in these economies to sustain the economic development. This had resulted in a massive foreign debt burden on these economies by the mid-nineties. The loan borrowed by these countries where originally for tenure of 12-15 years which came up for repayment during the period 1995-96. The servicing of these debts was affected due balance of payment crisis due to decline in the export growth. The borrowings in these economies were primarily done by private sectors. The private sector due to the booming economy had done massive borrowings which was short term in nature. This resulted in a debt trap for these economies due to servicing these high interest bearing short term loans.

Further, the borrowing done by these private players have been invested in non-productive investments such as real estate, equities etc resulting in an asset bubble and re-payment crisis. Due to re-payment crisis, fresh borrowings dried up, as the foreign investors were not willing to provide the funds for servicing the old debts and started removing the available funds from the South eastern economy markets. This resulted in a liquidity crisis for the domestic borrowers, who defaulted in their debt servicing.