1997
Asian Financial Crisis

Angelica M. Montefalcon
4FM2

I. Introduction

For about twenty years, East-Asian countries were held up as economic idols. They were hailed as the ideal models for strong economic growth of developing countries because of their high savings and investment rates, autocratic political systems, export-oriented business, restricted domestic markets, government capital allocation, and controlled financial systems.

They were even stories about “The East Asian Miracle" because of the extraordinary growth rates they achieved and the speed with which they have transformed themselves from poor countries into industrial powerhouses. Western leaders were impressed by their ability to continue to achieve growth rates …show more content…

Unfortunately, as I have stated a while ago, much of the so-called investments they have made was spent on property development that resulted in an oversupply and redundant manufacturing capacity rather than improvement in the quality and competitiveness of their exports.

The rapid growth of Asia covered the weaknesses in their financial sector but the reason behind its growth will eventually prove to us that it was also one of the reasons why the crisis started. In 1994, renowned economist Paul Krugman published an article attacking the idea of an "Asian economic miracle". He said that East Asia's economic growth had historically been the result of increasing capital investment and that total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. This is the reason why Asia’s economy’s success was short-term and temporary only because they have increased their capital investments but not their productivity.

The fixed exchange rates to the US dollars by some of the Asian currencies also affected the 1997 Asian financial crisis. Economic theory suggests that a pegged exchange rate system can become in danger when cross-border capital flows are highly movable. A central bank that pegs its exchange rate to a