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Asian Crisis 1997

In: Business and Management

Submitted By ayab06
Words 4114
Pages 17
| Asian Crisis of 1997 | | | Prepared by:Azra Becirovic and Sanela Bilalic | |

April 21, 2012 |

Long before Asian financial crisis has started, South Korea, Thailand, Indonesia, and Malaysia had an increasing economic performance; economy was fast growing, saving rates were high, and inflation low. Turning point in Asian economy was 2 July 1997, the day when Thai Baht fell around 20 % against the $US. “It all began in Thailand’ summarizes the conventional explanation of the early stages of the crisis.” (Hill, p.3) How it all began, what factors caused the crisis, what segments were affected the most, what was the backup plan, and what policies should have been taken to prevent the crisis are the points that this paper will cover.
First and Second-Generation Models
According to 1996 annual report of Bank for International Settlements (BIS), pre-crisis fundamentals exhibit economic performance of Asian countries. They’ve experienced moderate inflation rates of about 6%, high savings rate of 32%, and trade openness indicators of 39%. Table 1: East Asian Economic Conditions Before Crisis

Although accounting and macroeconomic analytics have failed to foreseen the currency crisis, which is inevitable, first and second-generation models explain us was it due to weakening macroeconomic fundamentals or financial contagion.
In accordance to first-generation model developed by Krugman 1979, market-speculative movements, in response to policies, are incompatible with fixed exchange rate regime. What it means is that “speculators who want to make a profit can buy foreign exchange reserves causing its exhaustions and forcing the country to devalue or abandon the exchange rate peg.” As many studies have argued, the Asian crisis represents the consequence of its own acts in corporate as well as financial sector. “The weak-post crisis performance has...

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