1997 Asian Financial Crisis Research Paper

AF-5308: ECONOMIES OF SEA.

A Study on the Asian Financial Crisis of 1997: What triggered the crisis?

Introduction:

This paper attempts to explore the potential reasons that triggered the Asian financial crisis in 1997. As quoted by some observers, “there are a number of explanations for the 1997 financial crisis but none is adequate to completely understand it”. According to Dowling and Valenzuela (2010), the weaknesses of financial sector are somewhat contributing to the severity of the financial crisis. This paper intends to look at to what extent does the statement is reliable in explaining the occurrence of crisis.

Prior 1997:

According to Rigg (2002), since 1960s up to 1997 several East and Southeast Asian countries had experienced

As mentioned above, some scholars in culturalist position believed that the ‘Asian miracle’ was literally the result of ‘the Asian way’ – the belief in hardworking, loyalty/respect for authority, scholarship and learning and so forth - for the development of Asian politics and economics. The continuous success of ‘Asian way’, to some extent, had resulted in a form of Asian hubris – believing that as long as the doctrine was maintained, the Asian economic would not have fallen. Due to such feeling of pride and over-confidence, little attention was given to warn or predict about the coming crisis through research scheme (Rigg, 2002: 139/144). Thus, such careless attitude is somewhat part of the potential reasons as to why Asian financial crisis was able to take place in

Crony capitalism in the region was no doubt played a role before the 1997 crisis as a major player in Asian miracle. According to Akyuz (2002), the closer relationship between government and business institutions was also seen as a key element in economic development - the guiding role of the government to manage economic rents and prevent market failures due to possible information and coordination problems. However, extensive government in financial systems later years had altered the Asian economies. Wade and Veneroso (1998) equate ‘crony capitalism’ in the region with corruption and favoritism that led to the distortion of market. The government-support-businesses can be viewed as a puppet by which their activities or decisions were controlled or influenced by the government. The government had control over external borrowing and it guided the private investment. For example in Korea, they had tapped external finance in its industrialization through borrowing from international banks, but this was subject to government approval and guarantee. Moreover, according to Akyuz (2002), policy in financial sectors is also always important in coordinating private investment decisions – to avoid capacity and competition. However, when the government had control over financial systems/policies, misallocation of resources and over-investment tend to take place. This explain why the country