Asian financial crisis of 1997 Summary

  • Last updated on November 10, 2022

The Asian financial crisis demonstrated the risks of speculating in foreign currencies. As a result of the crisis, American businesses and private citizens became hesitant to invest in developing countries. Growth in such countries slowed, and U.S. investors were forced to reevaluate their options and priorities.

The Asian financial crisis emerged when traders in foreign currencies became convinced that several Asian Currency;Asiancurrencies were overvalued. As a result, the value of ThailandThailand’s currency, the baht, fell by 50 percent against the U.S. dollar in the summer of 1997. Not long after this, the MalaysiaMalaysian ringgit, the Indonesian rupiah, and the Philippine peso also sharply depreciated. By autumn, the South Korea, SouthKorean won dramatically decreased in value as well.Asia;financial crisis of 1997

The significant decline in the value of these currencies led to a major economic downturn in much of the region. Although the ability of Asian nations to export products increased because of their weak currencies, the cost of their imports skyrocketed. Thus, these nations received less money despite the increase in their foreign sales, while their ability to purchase foreign goods drastically diminished. Multiple Asian countries had zero or negative economic growth during the crisis, thus falling into recession. Thailand was perhaps in the worst condition, as its economy contracted by 12 percent in 1998. Furthermore, unemployment rates increased, and some countries in the region experienced record levels of business failures.

The impact of the Asian financial crisis was not limited to Asian economies. As a result of the crisis, these economies, which had experienced significant economic growth since the late 1960’s, reduced their demand for expensive imports, including petroleum. This led to a decline in the price of oil, which in turn threatened the economies of oil-producing nations. Russia was especially vulnerable, as it was attempting to make the transition to capitalism after stagnating under a government-owned, centrally planned economy for decades.

Individuals and businesses from the wealthy, Western countries suddenly became reluctant to invest in developing nations, even in those nations that had experienced major economic growth for a few decades. Political leaders and economists feared that what started as a currency issue in Asia could lead to a severe, global economic downturn. American investors lost a significant growth market and had to look elsewhere for investments that would balance potentially high returns with an acceptable level of risk.

The International Monetary Fund responded to the situation with an economic assistance package that provided approximately $120 billion in loans to the countries most affected by the crisis. The package was controversial, as it placed conditions on the loans that would be painful in the short term to their recipients. These conditions included privatization, deregulation, and reductions in government spending. Although the affected economies eventually came out of their recession, some experienced long-term decreases in their standards of living. Also, the tough conditions associated with the loans caused tensions between some recipient nations and the United States.

Further Reading
  • Goldstein, Morris. The Asian Financial Crisis: Causes, Cures, and Systemic Implications. Washington, D.C.: Institute for International Economics, 1998.
  • Haggard, Stephan. The Political Economy of the Asian Financial Crisis. Washington, D.C.: Institute for International Economics, 2000.
  • Sharma, Shalendra D. The Asian Financial Crisis: Crisis, Reform, and Recovery. New York: Palgrave Macmillan, 2003.

Asian trade with the United States

Bretton Woods Agreement

Currency

Financial crisis of 2008

International economics and trade

Organization of Petroleum Exporting Countries

Petroleum industry

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