Title: Globalization, Emerging Market Economies and Currency Crisis in Asia: Implications on Economic Reform and Development
Abstract: Recent experiences in Latin America and Asia provide ample evidence that countries in the process of integration are increasingly exposed to internal and external economic shocks. More importantly, this growing vulnerability of particularly developing economies has the potential of undermining decades of development efforts. The Asian crisis clearly demonstrates that we are increasingly unable to predict the triggers of such crises, and certainly lack the institutional arrangements to contain them. This translates into the fact that our ability to manage the interaction between domestic and international economic forces is limited or undermined by certain factors. This practical outcome has the potential to delay the process of globalization and integration of developing economies into the world economy. INTRODUCTION Emerging economies of Asia and Latin America have experienced a phenomenal growth throughout the 1980s and 1990s. Much of the credit has been attributed to increasing liberalization and growing integration of these economies to triad economies of North America, Europe and Japan. Alleged integration progressed in two separate yet interrelated fronts: in real sectors of these economies through trade and foreign direct investments and in financial sectors through portfolio investments. Asian strategies involving a governed market created impressive economic growth in the last twenty years. Mexico experienced the first severe currency crisis in the post-liberalization period in December 1994, and contagion effects were quickly felt in the region (particularly in Argentina). The second crisis started in Thailand in the summer 1997, and contagion took effect immediately bringing a large number of Asian economies to the brink of a collapse. Since then, other countries have followed like Russia and more recently Brazil. A number of Latin American countries are even considering replacing their national currencies with the U.S. dollar. By analyzing the globalization of the world economy, this paper will shed light on the causes of Asia's currency crisis. Finally, some concluding remarks on the challenges faced by emerging nations will be presented. ASIAN CURRENCY CRISIS 19971998 The Asian crisis has quickly attracted the attention of the academic community and financial press due to its widespread implication on the global economy. Economists and analysts presented a range of competitive and/or complimentary perspectives on the crisis. These explanations can be grouped in four categories. The first perspective stresses deterioration of the macroeconomic conditions in the region. A particular emphasis is placed on the external sectors and growing current account deficit as a percentage of GDP. The second perspective focuses on the fundamentals of Asia's economic model and questions the effectiveness of the governed market approach in the long run. The third perspective attracts attention to the destabilizing nature of capital flows and potential power of global financial markets in inflicting damage on fundamentally sound economies. And finally the fourth perspective questions the efficiency of financial markets and describes the working of a panic in financial markets with reference to the Asian contagion. Deterioration in Macroeconomic Fundamentals A quick review of macro economic indicators in Malaysia, South Korea, Indonesia and even Thailand does not lend immediate support to macroeconomic decay or weakness arguments. Although some governments in the region had committed to ambitious infrastructure investment programs, public sector balances did not point to rampant fiscal imprudence. Even though higher than industrialized country averages, inflation rates were moderate, and did not concern investors or analysts. On the other hand analysis of private sector balances indicated that investments in excess of domestic savings created a fundamental imbalance. …
Publication Year: 1999
Publication Date: 1999-10-01
Language: en
Type: article
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Cited By Count: 2
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