Premium Essay

Asia Crisis

In: Business and Management

Submitted By dohoi1001
Words 7371
Pages 30
The financial crisis which began in July 1997 in the East Asian countries, Thailand, Indonesia, Malaysia and Korea, has had devastating effects on their economies. Growth rates in these countries which were in excess of five percent before 1997, turned sharply negative in 1998 and, at the time of this writing it is not yet clear when these economies will turn the corner and resume positive rates of growth. This paper examines why these countries, which were part of what has been termed

"the Asian miracle" and were able to eradicate so much poverty, are now undergoing severe economic contractions, with such harmful effects on their populations. A breakdown of information in financial markets is the key factor that has driven this crisis. After laying out an asymmetric information view of the Asian financial crisis, this paper goes on to use this framework to explore lessons from this crisis.

1. An Asymmetric Information View of the Asian Crisis

The financial system plays a critical role in the economy because, when it operates properly, it channels funds from those who have saved surplus funds to those who need these funds to engage in productive investment opportunities. The major barrier to the financial system performing this job properly is asymmetric information, the fact that one party to a financial contract does not have the same information as the other party, which results in moral hazard and adverse selection problems. An asymmetric information view of financial crises, which I have described in more detail elsewhere in Mishkin (1996a, 1997), defines a financial crisis to be a nonlinear disruption to financial markets 1

in which the asymmetric information problems of adverse selection and moral hazard become much worse, so that financial markets are no longer able to efficiently channel funds to those who have the most productive investment…...

Similar Documents

Premium Essay

Crisis Asia

...liberalization became a top priority. Whereas previous governments had pushed for the liberalisation of Japan, one of Clintons main foreign policy objectives was the liberalisation of the Asian economies. This process was pushed forth in Asia with such vehemence because the region held a lot of investment opportunities for American Banks, Brokerages, and other financial sector businesses. Unfortunately, Asia�s economies were not structurally ready to deal with the influx of capital that was headed their way. They had weak banking and legal systems that were unable, or unwilling, to regulate the flow of foreign capital in the country. The Americans eventually persuaded Koreato relax its capital flow regulations by giving it the option of joining the Organisation for Economic Co-operation and Development. Even then, Korea was concerned that its financial institutions may not be able to deal with an influx of foreign capital. One fatal mistake that Korea, as well as other Southeast Asian countries made, was that they opened their capital markets in the wrong way. They did not allow long term investments in Korean companies, but rather, only short-term investments that could be removed easily. One example of the sort of quick investments that were being made in Asia can be seen in the Japanese. In Japan the interest rates were very low, so investors would borrow at 2 percent and then convert their currency into Thai baht. Due to the interest rate differential, they were able to......

Words: 906 - Pages: 4

Premium Essay

Asia is possible to understand because Toyota almost used the same theoretical models and perspectives when seeking oversea market. As we know, car sales declined steadily after Asian financial crisis, which is why Toyota wanted to seek oversea market. How? Toyota decided to design the affordable cars rather than high quality cars, which can satisfy the market’s needs. Besides, Toyota has good supplier networks since it find many developing countries like Thailand and Indonesia as suppliers. It is helpful for the localization of component sourcing. IMV vehicles are five models with three body vehicles and those shared a common platform. It is a fast way to reduce costs and gain profits. 2. Toyota has hedged against disruption of the supply chain by building in a degree of inventory, which is in contrast to the norm of eliminating waste found in Toyota’s Japanese, North American and European facilities. What other risk factors are present with the management of a regionally constructed and globally linked production structure? First, all production does not have to rely on components sourced, which is expensive. Second, operating in emerging economies can also bring associated risks, particularly with regard to disruption of the supply chain. Moreover, Toyota’s in East Asia has emerged from the necessity of dealing with the complex nature of the regional division of labor and of a need for better coordination of supply chains and parts complementation under AFTA...

Words: 367 - Pages: 2

Premium Essay

Air Asia

...2001, and this is where the real story begins. Their vision, under the slogan "Now Everyone Can Fly", is “To be the largest low cost airline in Asia and serving the 3 billion people who are currently underserved with poor connectivity and high fares”,(ii) and their mission is, under the banner of 'Affordable Airfares', “To attain the lowest cost so that everyone can fly with AirAsia,” without any compromise to Flight Safety Standards, as well as, creating a world wide recognizable brand with a ‘family’ atmosphere within working conditions for employees. (iii) These statements clearly show AirAsia’s value. Cost advantages through operational effectiveness and efficiency; coupled with strong brand marketing, go straight to the customer. Within two years, Tony Fernandes had gained recognition with numerous awards, including ‘CEO of the Year’ by Business Times and American Express and ‘Developing Airline of the Year 2003’ by Airfinance Journal. (iv) 4. Industry Framework Analysis. 4.1 Porter’s 5-Forces Model (Appendix 1) From the analysis model, it is possible to conclude that supplier power is high due to monopolization of the industry by Boeing and Airbus. However, this is countered by the relative poor performance of airlines in the recent past. Although there are only two companies to purchase or lease airplanes from, the global crisis has limited new entrants into this market and reduced upgrading of planes for the immediate future. Buyer power is reasonably high......

Words: 3613 - Pages: 15

Free Essay

How Volatile Capital Flows and Increasing Credit Could Lead to Another Crisis in Asia

...How volatile capital flows and increasing credit could lead to another Crisis in Asia We have seen since the global financial crisis that there has been a surge in capital from the developed world to the developing world. As returns rates are lower in the developed world due to expanding monetary policy, more opportunity for higher investment is overseas. This increase in liquidity to the emerging Asian market has several implications if not managed could have drastic consequences. As the Asian market is experiencing rapid domestic growth, higher international credit flows into the region tends to hamper the ability of policy makers to constrain credit, especially if most of the credit is extended from foreign institutions. This has concerns as if local firms and households shift from domestic currency liabilities to avoid possible monetary tightening; it could negate the ability of domestic monetary policy makers. This in turn exposes domestic firms and households to currency risk. (Avdjiev, McCauley, & McGuire, 2012). This is a concern as this can affect the exchange rate as borrowers exchange foreign for domestic currency for the purpose of purchasing domestic goods affecting the trade balance of Asian economies. If we look at the impact of the western worlds monetary policy on Asia, the imminent reduction of quantitative easing in the US could lead to a retraction of investment. This could seriously lead to a deterioration of growth and a problem of paying......

Words: 617 - Pages: 3

Free Essay


...TEMA X ASIA-PACIFICO ESQUEMA En su momento varios analistas internacionales pronosticaron que en la ultima parte del siglo xx, Asia-pacífico constituiría en su conjunto la principal potencia política y económica. Considera usted que esta hipótesis ha sido confirmada o estaría en vías de confirmación, o es errónea. Fundamente su respuesta. DIMENSIÓN ECONOMICA A.1. Antecedentes del surgimiento de Japón, los tigres asiáticos, los países de reciente industrialización y China. • El llamado milagro del Sudeste Asiático tuvo lugar desde finales de la Segunda Guerra Mundial; donde países que pertenecieron al Tercer Mundo lograron en un corto tiempo un crecimiento alto y sostenido sin precedentes en la historia mundial. • La definición de HPAE “high performance Asian Economies” (es decir, economías asiáticas de altos resultados) por parte del Banco Mundial contiene tres grupos de países cuyos milagros comenzaron en momentos diferentes. -Japón, después de IIGM -60´ cuatro economías asiáticas más pequeñas, conocidas como “Los Cuatro Tigres”: Hong Kong, Taiwán, Corea del Sur y Singapur. -Finalmente, a finales de los 70´y 80comenzó un rápido crecimiento de tres países de reciente industrialización, Malasia, Tailandia, Indonesia, y de forma más espectacular, encontramos a China • La orilla asiática del Pacífico es la región que ha registrado el mayor crecimiento económico del mundo en los últimos treinta años, el resultado ha sido el aumento......

Words: 6737 - Pages: 27

Premium Essay

Asia in the World

...Asian Studies and International Relations. Considering both traditional and contemporary times, it seeks to place Asia’s diverse cultures in a global context. It examines issues such as how to define Asia, how Asian states related to each other, and how Western ideas of international relations have transformed these relations. The unit has two strands, each considering a set of ideas. First it examines the great religions/philosophies of Asian societies – Buddhism, Hinduism, Islam, Christianity and Confucianism – have influenced them. It then considers international relations theory and how theories can help us understand the complexities of Asian states’ relations with each other and the wider world. Credit point value 10 Pre-requisites Nil Co-requisites Nil Unit/s incompatible with and not to be counted for credit Nil Unit level 1 Assumed knowledge None Attendance requirements Attendance below 80% at tutorials without due cause may constitute grounds for failure. Non-attendance in tutorials for illness or misadventure or other reasons should be documented and submitted to the unit coordinator upon return. Enrolment restrictions Nil Unit learning outcomes Students who successfully complete this unit will be able to: • identify of the diversity and complexity of Asia; • explain the social manifestations and international political impact of Islam, Hinduism, Christianity, Buddhism and Confucianism in an Asian context; • evaluate the balance between......

Words: 1247 - Pages: 5

Premium Essay


...Porter Five Forces of Air Asia Porter’s Five Forces Threat of new Entrants Threat of new entry is moderate, because it requires high capital to support and government barrier is high such as the air service agreement can build barriers to those new entrants. The degree of barriers to entry depends on the strength of:- • Customers have a little bit of brand loyalty. If customers of AirAsia do not have brand loyalty, then the threat of new entrants will be very high. But the higher numbers of competitors in the industry also will decrease AirAsia’s customer loyalty. Due to most of the travelers prefer low cost. New competitors which want to come in the industry need to spend a little to compete with AirAsia. • Higher Capital Requirement The airline industry needs large volume of start-up capital. The cost of setting up of offices, buying or leasing air craft, hiring pilots and others staffs like air stewardess and etc incur a high start-up cost. So that, the threat if AirAsia is low. • Offered different product AirAsia offer different product to compare with other competitors in Asia, for example, Bangkok Airways, Tiger Airways, and Air Philippines. • Government Legislation Air Asia very difficult gets a new route from government because Malaysian Airlines System (MAS) has been protected by Malaysia government on the route to Sydney and Seoul Incheon. Therefore, it will affect the time line set by AirAsia and the most important is also influence their profit.......

Words: 335 - Pages: 2

Premium Essay

The Expansion of Asia

...general. East Asia on the other hand, were on the verge of collapsing. Indeed, the Korean War made hundreds of thousands of dead and destroyed the country entirely, making it prone to reconstruction, Japan was hit by the nuclear bomb which impacted its economy and China was still a communist country with a political system that gave no rights whatsoever. However, the tables seem to turn these past few years as the United States is collapsing little by little, and East Asia got more and more acknowledged as an international power The United States of America, which was always known as the principal source of power has known its downfall since the 9/11 bombings, which proved that the country wasn’t indestructible. Indeed, that event was a breach to the political force that was America, making it more vulnerable and breakable. Also, the country’s government has been involved by issues such as the Syrian issue, and much more which lowers its trust in the eyes of the citizens. Things don’t seem to get better even with the change of presidents in 2008. Another controversy about the United States is the economic crisis hitting the country. Walter Adams explained that “reports on the state of the American Economy are filled with anxiety and unease” (1). Job growth has been minimal with unemployment rate being at 6%. The difference between the social classes is enormous as the United States holds some of the poorest people and also richest people in the world. After the crisis, a......

Words: 968 - Pages: 4

Free Essay

Trigger, Aggravator, or Rescuer? Criticisms on the Controversial Roles of Imf in East Asia Financial Crisis

...the controversial roles of IMF in East Asia Financial Crisis Introduction Now and then, nation to nation, financial crises are inevitable: Mexico in 1994, the whole East Asia region in 1997, Brazil in 1999, and the most recently Argentina in 2001. Looking back to the victims of such financial crises, we found that most of them are labeled as the developing countries, whose financial sectors were still weak at that time yet were impetuously exposed to the advocated ‘Liberal financial market’ which was supported by the Neoclassical Liberalism social economists. Among all these financial crises, the financial storm in East Asia, starting from the year of 1997, wreaked beyond doubt the greatest havoc on the Asia and the world economy as a whole, dragging down the ‘Asian tigers’ (Thailand, Malaysia, Indonesia, Philippine, Hong Kong, Korea, Taiwan and Singapore) from the peak of the glorious ‘Economic Miracle’ in the past few years. Because of the severity and contagion of the East Asia Crisis, important questions have been raised such as the causes of the crisis, the role of the International Monetary Fund (IMF), and the financial architecture of international capital markets. As one of the most important international organizations, IMF has its great impact on the world economy. In this paper, the influence of IMF before the eruption of the crisis and its role in the recovery of East Asia economy will be presented. The......

Words: 2781 - Pages: 12

Premium Essay

Air Asia

...Air Asia: The World’s Lowest Cost Airline Air Asia is a Malaysia-based low cost airline which builds its business on the LLC model created by Southwest airlines in the U.S. Air Asia’s mission statement is to be the Asia's leading low fare no frills airline and first to introduce "ticketless" traveling. Now Everyone Can Fly clearly describes Air Asia’s value. Cost advantages created by Air Asia through operational effectiveness and efficiency go directly to the customers. The customers now enjoy much more surplus than before as the fare falls dramatically and Air Asia captures some of the ‘dead weight losses’ by capturing segments of customers that previously cannot afford the airlines’ fare. The cost drivers in the industry are scale, technology, product and process design, input costs, and capacity utilization. The nature of the operational structure of low cost carriers provides them with initial cost advantages. This lean cost structure translates itself into high turnaround time, basic amenities, standard operating procedures and a lean distribution system To maintain a low flight fare, Air Asia uses many sources of cost advantages. First one should be economies of scale. In many activities, increases in output do not require proportionate increases in input. This can be applied to the airline industry. Air Asia offers a single class, which allows more seats per plane. As mentioned in the case, the Boeing 737 can be equipped 12 more seats per plane in the single class...

Words: 1193 - Pages: 5

Free Essay

Business in Asia

...Introduction In this essay, we will discuss about Asian financial crisis. This crisis happened in 1997. Thailand, South Korea, and Indonesia are the worst countries that affected. There are two views that created the crisis, one is fundamental view and the other one is panic view. Hot money is money that flows between financial markets to get the highest short-term interest rates possible. Capital inflow is increase in the amount of money available from foreign sources for the purchase of local capital assets such as buildings, lands, and machinery. IMF intervention until now still become controversial, two of well-known economist which are Stiglitz and Sachs said that because of IMF intervention the crisis has become much worse rather than before. Moreover, we will discuss about global crisis, this crisis happened in 2007. This started in US because of housing mortgage, and also credit crunch. The difference between Asia crisis and the Global crisis also will be discussed. Asian Crisis Hot money is “Money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. Hot money will flow from low interest rate yielding countries into higher interest rates countries by investors looking to make the highest return” (Investopedia, 2011). Capital Inflow is “increase in the amount of money available from foreign sources for the purchase of local capital assets such as buildings, lands, and......

Words: 2871 - Pages: 12

Premium Essay


...THE AIRLINE INDUSTRY is in deep crisis.  Losing over 100,000 jobs since September 11, 2001, and suffering major wage and benefit cuts, workers are in shock and looking for new leadership.  The recent U.S. invasion and occupation of Iraq, the outbreak of the SARS epidemic and the economic downturn exacerbate the impact of the crisis on labor.  Airline workers are in the forefront of discussions about their own industry and more general questions as political and social consciousness changes under the impact of the restructuring crisis.  These experiences are valuable for all workers. While 9/11 and subsequent events greatly worsened the crisis, the dire state of this industry pre-dated the 9/11 attacks.  The major carriers were losing millions of dollars and facing possible bankruptcy filings because of broken business models that were no longer profitable.  In the capitalist system that generally means businesses fold. Bankruptcy as a Weapon Government aid still flows to the airlines, as it did after 9/11.  But Wall Street and Washington are pushing the restructuring process.  Meanwhile some important facts indicate the depth of the crisis and the challenge facing rank-and-file workers and their unions. Last summer US Airways, the seventh largest carrier, filed for bankruptcy and began slashing jobs, wages and benefits.  It emerged from bankruptcy in the spring as a smaller carrier with lower labor costs than most of its competitors, but US Airways is still not out of......

Words: 5323 - Pages: 22

Free Essay


...INDONESIA: The Causes, Effects and Lessons of the 1997 East Asian Financial Crisis by Zara Ahmed Julia Dreier Frank Ro April 9, 2007 FSPP 556: Macroeconomics Professor Kathryn Dominguez [pic] Introduction Following its independence in 1945, the Indonesia economy deteriorated drastically as a result of political instability, a young inexperienced government, and ill-disciplined economic nationalism. However, the New Order administration in the 1960s, brought about a new degree of discipline to economic policy that quickly brought inflation down, managed foreign debt, but more importantly, attracted foreign investment through financial liberalization. As massive inflows of foreign investment poured into the country, problems soon arose with regulation and oversight. These structural weaknesses created instability and ultimately multiplied the effects of the Asian Financial Crisis in 1997. With strong encouragement of the IMF, Indonesia adopted a set of policies to protect currency values and penalize insolvent companies, in order to restore investor and creditor confidence in the country. Despite assistance from the International Monetary Fund, the Crisis devastated the Indonesian economy and brought on massive social unrest. This paper consists of six parts. We intend to analyze pre, during, and post-crisis trends utilizing such macroeconomic models as the Mundell-Fleming model, the IS-LM model, and the open economy model for......

Words: 4046 - Pages: 17

Free Essay

Business in Asia crisis has highlighted its flexibility. This flexibility, in part, arises from transformations undertaken in response to the Asian financial crisis a decade earlier.” Student Name: Eric Rodrigues Student Name: Mehmet Edib Unal Introduction The Asian Financial Crisis occurred during the year 1997-1998, and is explained well in brief by Galina Hale “East Asian countries experienced severe banking crises. Nonperforming loan ratios skyrocketed because of prior excessive risk taking and most banks had to be recapitalized by their governments.” (Hale 2011, p.3) After ten years, The Asian Financial Crisis was followed by The Global Financial Crisis in 2008. “The precise genesis of the global crisis remains subject to debate. (Lin 2012, Treichel 2012, p.3) “We will argue that global imbalances were the result of the large excess demand in the U.S. over an extended period—the financing of which was made possible by the reserve currency status of the US dollar. “This excess demand resulted from both the public debt” and “the overconsumption by households.” (Lin 2012, Treichel 2012, p.3) “As shock waves of the global financial crisis (GFC) reached East Asia in autumn 2008 immediately after the collapse of Lehman Brothers in September, the region faced the task of evaluating and reassessing the economic cooperation efforts of the previous ten years” (Katada 2011, p.274) Thus by evaluating and reassessing the economic cooperation of those previous ten years East......

Words: 4023 - Pages: 17

Premium Essay

The Impact of Asia Crisis on Us Industry

...Harrigan The Impact of the Asia Crisis on U.S. Industry: An Almost-Free Lunch? • The large devaluations experienced by Korea, Malaysia, Thailand, and Indonesia beginning in the summer of 1997 raised concerns that imports from these countries would soar while demand for U.S. exports weakened, causing U.S. industries to suffer. W • As it turned out, manufactured imports from the four countries rose only slightly, and the decline in U.S. exports was not large enough to have a significant effect on trend output for most industries. • The one exception to this pattern was the steel industry: there, sharply rising imports and falling exports led to a drop in output and prices. • Overall, the United States enjoyed an “almost-free lunch” in the wake of the Asia crisis. Cheaper imports benefited consumers, and domestic production and employment were largely unhurt. hen the Asia crisis erupted in the summer of 1997, many forecasters predicted that one effect would be an end to the economic boom in the United States. Surely, it was argued, the drop in demand for U.S. exports combined with surging import volumes would finally be enough to slow the U.S. economy. It did not happen. Indeed, the Asia crisis’ overall effects on the United States were small.1 In terms of trade flows, total manufactured imports from the Asian countries affected by a currency collapse—Indonesia, Korea, Malaysia, and Thailand, which I will refer to as the “Crisis 4” countries—grew only......

Words: 4681 - Pages: 19

Read More.. | Yugami-kun ni wa Tomodachi ga Inai | Sousei no Onmyouji