Introduction
For several decades, Asia was an economic giant which many developing countries wanted to emulate. The region was financial stable with high level of per capita and estimated growth of 5% – 7% per annum. Research has established that during this period the education level, growth around market economy, and living standard was made possible (Xion, 2010, p. 15). The Asian countries had high savings, government’s incentives in entrepreneurship activities and investment in human capital was high. In almost Asian nations the export industry was core driver of the economy. It was estimated that Asia could be the new frontier in growth and development. In 1990, there was high inflow of capital investment from Europe and Japan. As stated by Xion (2010, p. 30), things started to change in the mid 1990, when the Asian’s economy started to look weak, and accumulated debts could not be served.
However, things eventually changed during 1997, the Asian giants started to feel the heat of economic downtown. The financial problems started in Thailand and spread to other countries in Asia. According to Xion (2010, p.45), the high debts accumulated by Asian countries started to overheat them and corporations became much leveraged and average export levels started to drop. The financial crisis generated due to financial vulnerability of the region. It was difficult to predict the future of the region after the end of the market financial liberation which was taking place in Asia during 1997. Most corporations predicted that the high growth rate would not be maintained and such perceptions scared away investors and made the financial institutions to fall (Chowdhry & Amit, 2000, p. 15). The effect of Asia economic crisis of 1997 affected all countries in the region and it is one of the longest economic crisis ever happened in Asia. Therefore, it is worth study so that it causes, effects and the way it was resolved can be understand to address recent economic problems.
Several hypotheses have been derived to explain the cause of Asia economic crisis of 1997. But according to Allen and Douglas (2012, p. 24), the economic turmoil was caused by abrupt shift in market expectation and confidence. Research has indicated that during 1990s European and Japanese corporation and other investors moved to Asia and investor (Allen & Douglas, 2012, p. 12). Later, most corporations moved out leaving most Asian countries with debts and the move also cause lack of confidence and therefore, it was the beginning of economic problems in Asia. The effect of the market shift which triggered economic turmoil in Asia negatively affected Asian’s financial institutions and financial market. Wang (2007, p. 15) noted that the interest rate increased and the growth per capita reduces as well. The increase in interest rate scared away investors and in return reduces the number of borrowers. Research has established that the currencies and asset price in several nations dropped by an average of 30% to 40% and much more in hard hit countries like Thailand. Banks and other financial institutions in Asia region experience serious financial problems. It forced Thailand, Indonesia and Korea to request the International Momentary Fund for help in addressing financial market problems (Jeon, 2012, p. 12).
The interest rate abruptly increased making it impossible for investors and other businesses to access long term loans. Based on short interest theory, the increase of interest rate affect the stock market since banks and other financial institutions automatically registered loan application and the default rate also increases as well. According to Rigg and Lotte (2009,p. 20), high interest rate caused several banks across Asia profitable which in return made banks to send several employees home resulting to high rate of unemployment in Asia region. It is also noted that the event changed the inflation rate and stock market of several financial institutions and other corporation was affected making several organizations to register loses (Julian, 2000, p. 12).
It is also reported that the export rate reduces and most Asian countries started to import goods or product from other countries. According Corsetti (1999, p. 15), the decrease in exports and imports affect the supply of goods or products in the market. This affected the demand of products since the supply became low and demand became high. As a result of imbalance demand and supply, the rate of inflation increases since the price of several products increased (Corsetti, 1999, p. 17). Research has also indicated that the crisis ended up forcing devaluation of currency in Indonesia, and Thailand compelling local businesses and foreign companies to shift to foreign currencies since it was difficult to predict the future value of local currency in the market. Within months of crisis, the speculation was high and regional currency was under attack and the exchange rate was being corrected quickly to make sure that the crisis did not last long. This made it to take international dimension forcing reputable organizations like IMF and the World Bank to intervene to help the region address their financial problem.
Some analysts predicted that the financial market of Asian nations would be affected and growth being realized would decline suddenly. The economic crisis increases the inflation rate, unemployment rate increased and the economy of most countries shrink. For instance, the Organization for Economic Cooperation and Development (OECD) stated that the economy of Thailand shrinks by 1% the end of 1997, and other institutions like industrial Finance Corporation of Thailand (IFCT) forecasted indicated that the most Asian countries economy declined by almost 5.6% (Wang, 2007, p. 23). However, some analysts believed that the economic impact on the financial market were deeper than what was being reported. According to a report by Far Eastern Economic Review dated July 22, 1999, the economy of Thailand shrank by almost 1.4%, Indonesia, 1.2%, Korea by 1percent. It is noted that almost all countries in Asia region were affected (Rosengren, 2008, p. 12).
The economic crisis also resulted to fall in market crisis which scared away investors. It is stated by Rigg and Lotte (2009,p.15), the decline in market confidence made investors to decline from investing and started to shift to other nations in Europe and North America. This caused low rate of saving since the future of banks could not be predicted. Analysts pointed that the scramble for the future of Asia made it impossible to invest and therefore, it decreased the rate of investment (Rigg & Lotte, 2009, p. 45). Several financial institutions and banks closed in Thailand and Indonesia and other companies applied for a bailout so that they can sustain their operations and fund their strategy so that they can realize growth again (Mishkin & Stanley, 2016, p. 123).
In conclusion, the Asia financial crisis negatively affected financial institutions, and financial markets. The study established that a number of banks closed and several financial institutions and firms applied to bailout. It also increased the inflation rate, reduce the per capita and GDP of the most countries in the regions such as Indonesia, Thailand, Korea and China. In order to address the crisis the region was bailout with IMF and banks and other companies also receive bailout so that it can improve its businesses and earn profit. The Asia nations also reinvented trade amongst themselves to improve business and grow the economy as well.
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