Page 296 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes Self-Assessment
1. Choose the correct options:
(i) The Asian financial crisis is generally considered to have started on July 2
(a) 1988 (b) 1997
(c) 1999 (d) 1990
(ii) By the end of 1990s, a handful of East European economies including-----had made successful
transitions to the capitalist order.
(a) Poland (b) Hungary
(c) Czech Republic (d) All of these
26.3 Summary

• The most surprising result of several studies was that the bulk of Asian output growth could be
explained simply by the rapid growth of production inputs—capital and labor—and that there
had been relatively little increase in productivity, that is, in output per unit of input. Thus in
South Korea, for example, the convergence toward advanced-country output per capita appeared
to be mainly due to a rapid shift of workers from agriculture to industry, a rise in educational
levels, and a massive increase in the capital-labor ratio within the nonagricultural sector. Evidence
for a narrowing of the technological gap with the West was unexpectedly hard to find.
• In Asian economies, however, bankruptcy law was weak, in part because the astonishing growth
of the economies had made corporate failures a rare event. When times did turn bad, a destructive
impasse developed. Troubled companies would simply stop paying their debts. They then could
not operate effectively because nobody would lend to them until the outstanding debts were
repaid. Yet the creditors lacked any way to seize the limping enterprises from their original
owners.
• The Asian financial crisis is generally considered to have started on July 2, 1997, with the
devaluation of the Thai baht. Thailand had been showing signs of financial strain for more than
a year. During 1996 it became apparent that far too many office towers had been built; first the
nation’s real estate market, then its stock market, went into decline. In the first half of 1997
speculation about a possible devaluation of the baht led to an accelerating loss of foreign exchange
reserves, and on July 2 the country attempted a controlled 15 percent devaluation.
• Asia’s woes sparked a general flight by investors from emerging markets, putting severe pressure
on the economic policies of distant developing nations. Russia was affected soon after.
• The emerging market crisis that started with Thailand’s 1997 devaluation produced what might
be called an orgy of finger-pointing. Some Westerners blamed the crisis on the policies of the
Asians themselves, especially the “crony capitalism” under which businesspeople and politicians
had excessively cozy relationships. Some Asian leaders, in turn, blamed the crisis on the
machinations of Western financiers; even Hong Kong, normally a bastion of free market
sentiment, began intervening to block what it described as a conspiracy by speculators to drive
down its stock market and undermine its currency.
26.4 Key-Words

1. Financial crisis : The term financial crisis is applied broadly to a variety of situations in which
some financial assets suddenly lose a large part of their nominal value. In
the 19th and early 20th centuries, many financial crises were associated with
banking panics, and many recessions coincided with these panics. Other
situations that are often called financial crises include stock market crashes
and the bursting of other financial bubbles, currency crises, and sovereign
defaults.

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