The Asian Currency Crises Essay Research Paper

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The Asian Currency Crises Essay, Research Paper Introduction The average Canadian has become conditioned to rising prices, however it is impossible to ignore the impending threat of a sustained decline in prices and wages. Roger Bootle, a respected British analyst, points out that the chronic inflation experienced by Western economies in recent decades is unusual, as in the past centuries prices tended to fall as often as they rose. Today, however inflation has almost disappeared, due to globalization and changes in technology that have made markets more competitive and decreased the power of unions. For millions of consumers, the resulting drop in interest rates has made mortgages, car loans and other major expenses more affordable. Investors have benefited as well, because

lower corporate borrowing costs and increased consumer demand have contributed to big profits and generous returns for shareholders. Unable to raise prices at will, companies have endeavored to improve productivity, which ultimately leads to a higher standard of living for all. Asian Crisis Background Was Asia’s economic boom a miracle, or just a mirage? That is the overriding question facing economists today. For nearly a decade, Asian economies grew rapidly where industries such as textiles and semiconductors took over fishing villages. This impressive growth was the result of the natural flow of capital to regions with cheap land. Government built infrastructure, which aided in the production of goods and their transport to market, as well as inexpensive labor were also

factors. Gradually, costs rose and time exposed weaknesses, such as the misuses of capital, in the Asian economic shell. Corruption, greed and government interference directed capital to uses that were unproductive or wasteful, such as property development and security speculation. Moreover, because of this overinvestment, the remarkable economic growth in the early years went overboard, producing excess capacity in a wide range of industries as well as weighing companies down with unserviceable debt. The outcome was that the price at which these companies thought they would sell their product came up short. The net result was that the Asian currencies pegged to the U.S. dollar became overvalued. When speculators realized that some currencies were overvalued, they began attacking

those Asian currencies they thought were most vulnerable; the Thai baht was the first to fall under the attack. Several of Southeast Asia’s currencies have lost nearly half of their values against the U.S. dollar after foreign exchange turmoil broke out on July 2, 1997, with the devaluation of the Thai baht. In turn, with the collapse of one economy, another followed. The most significant was Japan. Japanese banks are the biggest lenders to Southeast Asia and Japanese manufacturers are the region’s largest investors. As foreign markets collapse, the Japanese banks struggled to absorb large collections of domestic bad debt. Moreover, Asian corporations had been drastically overborrowed in foreign currencies (mainly the US$) on the assumption that their own currencies were

either stable relative to the US$ or pegged to that currency. Many of these borrowers were huge conglomerates using high debt leverage. With the decline in their currencies, those conglomerates are now looking at average debt ratio’s of eight-to-one. All in all, the Asian crisis has raised many questions as to it’s effects on the Canadian economy. Will consumers be able to bargain-shop with lower priced goods, which stocks are the safest bet for investors, will Canadian importers and exporters benefit? The situation is fraught with differing opinions, but one effect is quite certain in that the Asian crisis represents less of a threat to the economy as a whole than it would have been 50 years ago. Inflationary (and more importantly deflationary) pressures due to an