Friday, October 28, 2011


1997 Asian Financial Crisis
Another major factor was that these countries became excessively dependent upon exports for their economy. Indonesia, Philippines and Thailand had seen their exports to GDP ratio grow from average 35% in 1996 to over 55% in 1998. Such huge dependence upon trade made these countries susceptible to currency movements. At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. In the mid-1990s, two factors began to change their economic environment. As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia, which had been attracting hot money flows through high short-term interest rates, and raised the value of the U.S. dollar. For the Southeast Asian nations which had currencies pegged to the U.S. dollar, the higher U.S. dollar caused their own exports to become more expensive and less competitive in the global markets. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position.
A Note on the U.S. Comparative Advantage in the Sale of "Political Risk Insurance" by DeLong

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