Essay : [Financial Crisis In Asia]
English Essay on "Financial Crisis In Asia"Financial Crisis In Asia
The Asian financial crisis cries out for superlatives. Here, after all. Is a crisis that has hit the most successful developing economies in the world It has prompted the largest financial bailouts in history. It Is the sharpest financial crisis to hit the developing world since the 1982 debt crisis. It is certainly the most surprising and least anticipated crisis in decades. Almost no observers, we Included, gave much chance a year ago that East Asian growth would suddenly collapse.
The search Is on for culprits within Asia – corrupt and mismanaged banking systems, lack of transparency in corporate governance, the short-coming of state managed capitalism. Much attention should be focused on the International system. The crisis Is also testament to the shortcomings of under regulated International capital markets and their ability to allocate global saving on a reliable basis.
One Ironic similarity between the Mexican and Koran crises Is that both countries fell Into acute financial crisis Just months after Joining the organization for economic cooperation and Development, the exclusive club of “developed” economies. There Is a hint of explanation In that bizarre fact. Both countries collapsed after a prolonged period of market euphoria. In the case of Mexico, a high ti quality technocratic team had led the country through stabilization, privatization, liberalization, and even free trade with the United States; indeed, the supposed cornerstone of Mexico’s coming boom was admission to NAFTA, which occurred in November 19S3, just months before the collapse. In Korea a generation long success story of Industrial policy and export led growth had culminated In Korea’s admission to the exclusive club of advanced economies.(4essay.blogspot.com) Korea had even succeeded in democratization without Jeopardy to Its enviable growth record. In both countries, collapse came not mainly because of a darkening economic horizon within the national economy, but because of a reversal of the euphoric Inflow of foreign capital that preceded the crisis.
The shift of focus from all that Is wrong In Asia to the Instability of the International markets is important. We will not only be better able to predict crises-something that the IMF has had embarrassingly little success In achieving since the launch of Its vaunted early warning mechanism following the Mexico crisis – but be able to put In place policies, to head off such crises In the future. The current naive belief In Washington that each crisis should be followed willy-nilly by accelerated capital market liberalization misses the point. The problem Is not the lack of capital mobility, but the problem of capital mobility. In under-regulated financial systems with in emerging markets, and within the International system generally, there is a substantial case for tightened prudential polices to make it harder for markets to create crises through wild wings of euphoria and panic.
The Asian crisis was not anticipated by market participants. Every indicator shows this to be the case market risk premier on loans to Asia remained low until the crisis erupted; flows of new loans remained strong In the months leading up to the crisis; credit-risk, agency ratings remained favorable unfiled the outbreak of crisis; investment bank projections remained optimistic until the crisis arrived; and IMF reviews of the region continued to paint a rosy picture.
What happened In the early 1990s In Asia that set up the (unrecognized) risks of crisis The key factor was a sharp Increase in capital Inflows Into East Asia, provoked by a combination of capital market liberalization In the East Asian developing countries; policies of pegged nominal exchange rates; low Interest rates and expansionary credit In the US and Japan; and the liberalization of capital outflows In the advanced economies. The large capital Inflows had predictable consequences; currency appreciation, a widening current account deficit, a shift of production towards tradable goods, a sharp Increase In credit In the banking system, and a shift in bank financing to non-traded-goods projects, especially real estate. The capital Inflows were used mainly for Investment, rather than consumption. Still, they increased the financial fragility of capital importing economies.
The financial panic is not a reflection of weak fundamentals In Asia. After all, the Asian economics remain characterized by strong fiscal policies, market orientation, strong export sectors, low tax rates, and other features that have supported rapid economic growth. Rather, the financial panic reflects three considerations. First, and most Importantly, Is a fulfilling crisis caused by ‘the sudden withdrawal of foreign credits In which each creditor Is fleeing because the other creditors are also fleeing. This kind of “rational panic” was made possible by the sharp buildup in short-term debts during the first half of the 1990s. Second, financial markets In the capital importing Asian countries were poorly regulated, and the lack of adequate prudential regulation has added the vulnerability of panic. Third, the specific features of short term macroeconomics policy, especially the pegging of exchange rates, contributed to the onset of crisis.
The financial panic Is leading to a classic debt-deflation cycle, in which financial collapse Is worsening the lending capacity of the domestic banking sector, which In turn Is leading to a downward spiral of production. The failure of the domestic banking sector becomes the paramount key to the growing crisis. In this regard, the IMF role In policy management is creating more harm than good. The IMF has the wrong diagnosis and the wrong remedies for Asia. It has contributed to the rapid collapse of Internal credit, and hence the collapse of confidence in the economy. The IMF’s record in other recent financial panics, especially Argentina and Mexico in 2.995 and Bulgaria In 1996, give special cause for concern.
Appropriate steps for East Asian countries In overcoming the current crisis Include emergency Injections of capital In the banking sector; collective roll overs of short term debt and their conversion Into longer term debt; conversions of debt to equity In highly leveraged enterprises such as the Korean Chabol, and an reform of the domestic financial system to make it more compatible with the International market place. IMF remedies of tight credit, bank closures, and fiscal tightening should be reconsidered under the current circumstances, lest they add to the massive deflationary force now being felt by the East Asian economies.
These lessons are relevant for Pakistan’s economic and financial policy. They Include
The commitment to capital adequacy standards even more stringent than the Basic Standards, though Implemented gradually In order to avoid a sharp credit squeeze; Prudential control and limits on short term capital Inflows from abroad, especially Into the domestic banking sector and other leveraged financial Institutions;
The general determination to avoid a reliance on short term foreign capital, whether for the budget, public enterprise, private enterprise, or the banking system.
The attraction of foreign branch banks Into the domestic economy, to reduce the chances of a sudden cutoff of lending from foreign Investors;
Improve standards and financial market disclosure;
The development and strengthening of the non-banking sectors of the financial system, In order to relieve the chances of banking panic;
Clear and appropriate standards for deposit Insurance;
Redesigning of IMF programs, to reflect realistic approaches to financial market crises.
The search Is on for culprits within Asia – corrupt and mismanaged banking systems, lack of transparency in corporate governance, the short-coming of state managed capitalism. Much attention should be focused on the International system. The crisis Is also testament to the shortcomings of under regulated International capital markets and their ability to allocate global saving on a reliable basis.
One Ironic similarity between the Mexican and Koran crises Is that both countries fell Into acute financial crisis Just months after Joining the organization for economic cooperation and Development, the exclusive club of “developed” economies. There Is a hint of explanation In that bizarre fact. Both countries collapsed after a prolonged period of market euphoria. In the case of Mexico, a high ti quality technocratic team had led the country through stabilization, privatization, liberalization, and even free trade with the United States; indeed, the supposed cornerstone of Mexico’s coming boom was admission to NAFTA, which occurred in November 19S3, just months before the collapse. In Korea a generation long success story of Industrial policy and export led growth had culminated In Korea’s admission to the exclusive club of advanced economies.(4essay.blogspot.com) Korea had even succeeded in democratization without Jeopardy to Its enviable growth record. In both countries, collapse came not mainly because of a darkening economic horizon within the national economy, but because of a reversal of the euphoric Inflow of foreign capital that preceded the crisis.
The shift of focus from all that Is wrong In Asia to the Instability of the International markets is important. We will not only be better able to predict crises-something that the IMF has had embarrassingly little success In achieving since the launch of Its vaunted early warning mechanism following the Mexico crisis – but be able to put In place policies, to head off such crises In the future. The current naive belief In Washington that each crisis should be followed willy-nilly by accelerated capital market liberalization misses the point. The problem Is not the lack of capital mobility, but the problem of capital mobility. In under-regulated financial systems with in emerging markets, and within the International system generally, there is a substantial case for tightened prudential polices to make it harder for markets to create crises through wild wings of euphoria and panic.
The Asian crisis was not anticipated by market participants. Every indicator shows this to be the case market risk premier on loans to Asia remained low until the crisis erupted; flows of new loans remained strong In the months leading up to the crisis; credit-risk, agency ratings remained favorable unfiled the outbreak of crisis; investment bank projections remained optimistic until the crisis arrived; and IMF reviews of the region continued to paint a rosy picture.
What happened In the early 1990s In Asia that set up the (unrecognized) risks of crisis The key factor was a sharp Increase in capital Inflows Into East Asia, provoked by a combination of capital market liberalization In the East Asian developing countries; policies of pegged nominal exchange rates; low Interest rates and expansionary credit In the US and Japan; and the liberalization of capital outflows In the advanced economies. The large capital Inflows had predictable consequences; currency appreciation, a widening current account deficit, a shift of production towards tradable goods, a sharp Increase In credit In the banking system, and a shift in bank financing to non-traded-goods projects, especially real estate. The capital Inflows were used mainly for Investment, rather than consumption. Still, they increased the financial fragility of capital importing economies.
The financial panic is not a reflection of weak fundamentals In Asia. After all, the Asian economics remain characterized by strong fiscal policies, market orientation, strong export sectors, low tax rates, and other features that have supported rapid economic growth. Rather, the financial panic reflects three considerations. First, and most Importantly, Is a fulfilling crisis caused by ‘the sudden withdrawal of foreign credits In which each creditor Is fleeing because the other creditors are also fleeing. This kind of “rational panic” was made possible by the sharp buildup in short-term debts during the first half of the 1990s. Second, financial markets In the capital importing Asian countries were poorly regulated, and the lack of adequate prudential regulation has added the vulnerability of panic. Third, the specific features of short term macroeconomics policy, especially the pegging of exchange rates, contributed to the onset of crisis.
The financial panic Is leading to a classic debt-deflation cycle, in which financial collapse Is worsening the lending capacity of the domestic banking sector, which In turn Is leading to a downward spiral of production. The failure of the domestic banking sector becomes the paramount key to the growing crisis. In this regard, the IMF role In policy management is creating more harm than good. The IMF has the wrong diagnosis and the wrong remedies for Asia. It has contributed to the rapid collapse of Internal credit, and hence the collapse of confidence in the economy. The IMF’s record in other recent financial panics, especially Argentina and Mexico in 2.995 and Bulgaria In 1996, give special cause for concern.
Appropriate steps for East Asian countries In overcoming the current crisis Include emergency Injections of capital In the banking sector; collective roll overs of short term debt and their conversion Into longer term debt; conversions of debt to equity In highly leveraged enterprises such as the Korean Chabol, and an reform of the domestic financial system to make it more compatible with the International market place. IMF remedies of tight credit, bank closures, and fiscal tightening should be reconsidered under the current circumstances, lest they add to the massive deflationary force now being felt by the East Asian economies.
These lessons are relevant for Pakistan’s economic and financial policy. They Include
The commitment to capital adequacy standards even more stringent than the Basic Standards, though Implemented gradually In order to avoid a sharp credit squeeze; Prudential control and limits on short term capital Inflows from abroad, especially Into the domestic banking sector and other leveraged financial Institutions;
The general determination to avoid a reliance on short term foreign capital, whether for the budget, public enterprise, private enterprise, or the banking system.
The attraction of foreign branch banks Into the domestic economy, to reduce the chances of a sudden cutoff of lending from foreign Investors;
Improve standards and financial market disclosure;
The development and strengthening of the non-banking sectors of the financial system, In order to relieve the chances of banking panic;
Clear and appropriate standards for deposit Insurance;
Redesigning of IMF programs, to reflect realistic approaches to financial market crises.
No comments:
Post a Comment