Following this review of the major economic crises that are so widely cited in the media today, the following will be the one that occurred in Southeast Asia from 1997. Due to the procedures of economic science, there is no consensus on the causes of such depression. Broadly speaking, this crisis was due to the unsustainability of currencies appreciated with trade deficits, although it was not the same in all countries.
The economic background did not show at first glance indications of a possible crisis: low budget deficits, moderate inflation … and large inflows of capital in the short term because countries in general had undertaken financial liberalization. The Southeast Asian coins were linked to the dollar (they had a more or less fixed parity with respect to it). When in the 1990s the US began to raise interest rates to reduce inflation, these countries were no longer attractive to foreign investment, and their currencies appreciated, and their exports were reduced, not only by the appreciation, but because more competitive countries emerged, such as China.
When investors began to realize the weakness of these countries, withdrew their investments, causing an effect known as flight to quality (exit of investments looking for places with security). There was a significant reduction in credit, triggering major bankruptcies. The economic leaders tried to make investment in their countries attractive by raising interest rates and accumulating foreign exchange reserves. This could not be maintained for a long time, so it was necessary to let the national currencies (which quoted on the market) float . The trigger for the crisis (not the main cause) was the depreciation of the Thai baht. The foreign debts were still fixed in foreign currencies. If the Thai baht depreciated, it made the dollar loans more expensive to repay (it is easier to cover a $ 1000 loan if a dollar is worth 34 baht instead of 50 baht). This increased the bankruptcies
Other economists defend positions based on the fact that financial liberalization greatly increased private credit. The declining profitability of investments, as mentioned above, meant that these loans were destined for the stock market and real estate speculation. Increased, therefore, the leverage (term that refers to debt).
The help of the International Monetary Fund came into play at this point. [I have not talked about this institution here. It was created after the Second World War in order to maintain the system of fixed exchange rates (dollar-gold system), and ensure international payments by giving aid to countries with problems. When the US abandons the convertibility of its currency into gold, this organization continued to operate by giving loans to emerging countries with problems of macroeconomic stability.]. This aid was based on neoliberal economic ideas (budgetary austerity to balance deficits, and confidence that corporate bankruptcies would only be a step towards rebalancing the market). The IMF gave financial support to the three most affected countries in this crisis: Korea, Indonesia and Thailand. For them, 35,000 million dollars were allocated in adjustment programs and aid. It sought to stop depreciations with restrictive monetary policies and regulation of financial markets.
The exit from the depression could be seen throughout 1998, when interest rates fell to normal levels and economic activity recovered (somewhat later).
The criticisms that came over the IMF were due to the fact that it could not predict this crisis, just as it could not do with the Mexican crisis ( Tequila effect , in another blog post). This crisis may be the one that initiated the criticism of economic globalization, the problems of the liberalization of short-term capital inflows in emerging countries, and how economically insignificant events (the devaluation of the Thai currency, a small country) could provoke a crisis of such dimension. Globalization promotes greater efficiency in allocation and favors growth (this is what the faculties say) but it also makes countries more vulnerable to such capital flight. The “Asian tigers” hung on the investor’s trust and it vanished.