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Thursday, July 2, 1998 Published at 08:13 GMT 09:13 UK


Business: The Economy

Meltdown in Asia - part 1: the origins of the crisis



One year on, the Asian crisis shows no signs of abating. Indeed during the last couple of months it has begun to seriously damage Asia's biggest economy, Japan, and threatened to engulf China. Across Asia financial markets have not recovered, and the region's economies are suffering too. Yet just two years ago the World Bank was celebrating the Asian miracle. What went wrong? How will it affect us? And what are the lessons?

This special report will examine

  • the origins of the crisis,
  • its impact on the world economy,
  • the lessons which can be drawn from the crisis,
    and look at
  • the chronology of the crisis.

    The Origins of the Crisis


    [ image: Financial crisis leads to social crisis]
    Financial crisis leads to social crisis
    The Asian crisis began innocuously enough with a currency crisis in Thailand - one of the Asian tiger economies which were growing very fast. The situation was typical for the Asian economic miracle. Foreign investment was pouring in, attracted by cheap labour for assembly plants.

    The growth of the capital Bangkok stoked a property and stock market boom, which was largely financed by money borrowed in dollars. Stability was seemingly assured, as Thailand's central bank had pegged the country's currency to the dollar. This in turn encouraged foreign investors to buy into Bangkok's buoyant stock market.

    But the perceived threat of a rise in Japanese interest rates suddenly made the cost of keeping money in Thai baht look expensive. Large institutions, and then speculators, began moving money out and buying US dollars.

    The Thai central bank, whose reserves had been depleted by a big trade deficit (as Thais bought luxury goods), had little chance of buying back enough baht to stem the capital flight. But its intervention on the market was a boon for speculators who snapped up the dollars spent in the defence of the baht.


    [ image: Confidence takes a long time to recover]
    Confidence takes a long time to recover
    Once one currency was attacked it was easy for speculators to spot others. The Philippines was next, but soon all the currencies in the Asia-Pacific region came under attack, from Malaysia to Indonesia and eventually, by autumn, South Korea.


    Andrew Wood reports from South Korea where unemployment has doubled in the past year.
    What the currency crisis revealed, however, was the fragility of the financial system that was underpinning growth in these countries. Companies that had borrowed heavily in US dollars found themselves unable to repay their debts.

    In some countries, like South Korea and Indonesia, private company debt turned out to be extremely high. As firms failed to repay their dollar debts, banks faced a cash crisis. This led to a credit crunch, which then crippled the economy.

    To stave off the worst, banks had to reschedule their debts. As the economy slumped and currencies tumbled, more and more governments realised - albeit reluctantly - that they were in dire need of massive international assistance.

    The social cost of the crisis continues to be high. Unemployment has tripled in Korea and Japan and risen even more in Southeast Asia. High prices for imported food have hit poor consumers in countries like Indonesia and were at least partly responsible for the downfall of President Suharto.

    But even in countries which did not devalue the cost was not negligible. Hong Kong was forced to raise its interest rates to damaging levels to defend its currency's link to the US dollar. For the first time the administration's budget will see a deficit to finance a large economic rescue package.

    And China's growth rate has been cut by competition with other Asian producers and weak export markets in Japan.


    Meltdown in Asia:
  • the impact on the world economy;
  • the lessons which can be drawn from the crisis;
  • chronology of the Asian economic crisis.



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  • The Economy Contents

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