The Asian financial crisis of 1997 provided some valuable lessons about the global financial systems. What are three of those lessons? Use references and examples in answering this question. The Asian financial crisis of 1997 was a global phenomenon that acted as a fundamental learning curve for nation-states, graphic regions and ultimately the global economy. This crisis became increasingly baneful as it caused widespread economic and social turmoil to several emerging market economies, and even had negative effects on industrial economies.
The effects of the crisis have raised concerns about the stability and efficiency of the global financial system as well as inquiries about the lessons learned and adopted from this event. However according to Salient Policy Lessons from the Asian Crisis: A View from 1999 (2000) ‘learning these lessons will not eliminate the onset of a financial crises, however, it is good to gain a thorough understanding of them because these crises have an increasingly high fiscal costs and thus the lessons learned will minimize the impact of the crises”.
The Asian crisis has revealed that there are certain mechanisms that can be put in place to hinder the full effects of a crisis and prevent financial panic. Strengthening and implementing early system warning models is a valuable lesson that has been learned and adopted since it has the potential to avoid financial crises by identifying potential triggers which in turn prevents investor panic, another economic recession and to strengthen ones financial system. According to Could We Have Learned from the Asian Financial Crisis of 1997-98? 2011), prior to the onset of the Asian financial crisis in 1997, investors and policymakers misinterpreted some early warning signs of unsustainable lending booms, such as high corporate debt-to-equity ratios which reached 310 per cent in Indonesia and 518 per cent in Korea. Early Warning systems in the Republic of Korea: Experiences, Lessons, and Future Steps (2011) states that because of the Asian crisis, the Republic of Korea learned to adopt an effective early warning system model.
Beforehand during the crisis, Korea lacked the effective structure to predict the onset of a financial crisis because their old early system warning model focused on government external finances and ignored private debt stocks (Could We Have Learned from the Asian Financial Crisis of 1997-98? (2011). Therefore in response the Korea Centre for International Finance, whose sole purpose is to operate an Early warning system and monitor the possibility of crisis recurrence, was established.
Since then, there has been a widespread approach by many countries to improve the models designed to predict the onset of a financial crises and to develop policies to minimize losses, increase the recovery process, and minimize a countries susceptibility to a crisis, whether it originates internally or spreads across financial and goods markets. Overall, countries have learned that effective early system warning models are needed to target the dangers of high leverage ratios and credit growths (Could We Have Learned from the Asian Financial Crisis of 1997-98? 2011) and thus it is essential to adopt as it has the potential to minimise and avoid the full effects of the crisis on the global financial system. Due to the substantial impact of the financial predicament on global financial systems the Asian region and other countries have learned to embrace several domestic reforms and policies to destabilise the global financial system such as building vast foreign exchange reserves and implementing greater transparency, involving more and efficient data which is critical in financial market economies.
This is essential as it identifies the main causes of the crisis and its outcomes, as well as open opportunities for medium-term growth. Bank regulators in Asia were obliged to adopt greater transparency and supervise lending activity more strictly as it would enhance their ability to avoid currency and maturity mismatches. According to website The Asian Financial Crisis. What have we learned? (1999) the core of the structural reforms was in the financial and corporate sectors, where the strategy had two main parts.
The first part was to eliminate the aftermath of the crisis. This involved insolvent institutions embracing stability, with unstable ones being shut down and potentially well structured ones being enhanced. Moreover, the second part involved placing the system in a effective position, by improving financial supervision and regulation to help minimize the likelihood that these problems would occur again. For example Five years on (2002) states that South Korea’s recovery can be contributed towards a thorough reform and restructuring process on the domestic banking system.
Social sector reforms on the other hand aimed to strengthen and broaden existing social safety nets over those less fortunate, including the poor and those vulnerable (The Asian Financial Crisis. What have we learned? 1999). However according to the website debt and development: time to act, again (1998) stability and transparency alone cannot deliver growth and tackle poverty. Countries need to improve employability and to decrease social exclusion to become better prepared for the onset of a crisis.
Overall the question remains on the appropriateness of the effectiveness of structural reforms to counteract and overcome the hardships of the crisis as, over time, the programs became more sharply focused on financial and corporate reform, as well as social issues. In the wake of the Asian crisis, countries have learned to increase their efforts to intensify monitoring on cross-border capital flows through capital controls. Countries experienced large capital inflows and outflows, which raised questions to whether international capital movements are a major source of financial instability.
Lessons learned from the Asian crisis (1999) advocates that analysis of the crisis suggests that international capital movements can heighten the risk of creating financial instability, but due to the presence of a government safety net with ineffective supervision of banking institutions this can encourage capital inflows, which lead to a lending boom and excessive risk-taking on the part of banks. In addition capital outflows which can be highlighted as a source of foreign exchange crisis, can also conjure financial instability within emerging market countries.
In this view, individuals from different nations pull their capital out of a country which in turn causes the capital outflow to force a country to devalue its currency. For example The case of Chile and Malaysia (Capital controls) 2003 advocates that during the period of the Asian crisis which spread to Malaysia, the country’s foreign capital was leaving the country which in turn put a downward pressure on the exchange rate.
To prevent this situation from reoccurring, the Malaysian government avoided such depreciation by increasing the domestic interest rate, however this made consumption and investment deteriorate. Ultimately controlling capital in this case was considered a respective solution to their policy predicaments. However, in relation to the foreign exchange crisis in Asia, a leading factor in this issue was the problems associated in the financial sector which led to the speculative attack and capital outflows.
Therefore countries affected by the Asian crisis have learned to adopt an advanced exchange rate regime and capital controls suited to its local characteristics to help assist in monitoring capital flows as rigid and inflexible exchange rate regimes will be an easy target of international speculation (Lessons we should learn from the Asian financial crisis 2007). These capital controls are mandatory to identify financial weaknesses within the global financial system to enhance its efficiency rather than hindering it.
In conclusion, the financial crisis in Asia had a severe impact on the economies of countries in and outside this region and also placed the global financial system under tremendous pressure. In the aftermath of the crisis countries have learned to build a more sophisticated early system warning models and mechanisms to counter-act the onset of a financial crisis by identifying potential triggers and organizing capital and it’s channelling into productive activities.
In addition the adoption of capital controls like exchange controls is another lesson learned to help assist in monitoring capital flows to minimise the impact of a financial crisis and to lessen the effect that it will become a recurring phenomena. Moreover by embracing several structural reforms, countries have benefited from stronger financial and social sector surveillance. Overall these lessons are necessary to embrace in order to tackle future financial crisis and to strengthen the global financial system to be more prepared to decrease a countries vulnerability to the impacts that these crisis bring about.
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