The Asian Debt Crisis

Paper Summary:

The paper states the four principle causes for the financial crisis and explains them. The writer discusses the International Monetary Fund bailout of the Asian nations. The writer cites and explains suggestions of how to deal with the crisis, with emphasis on the suggestions of George Soros, as seen in his article "Avoiding a Breakdown", Financial Times, December 31, 1997. In conclusion, the paper states that it is important for the United States to support IMF activities even though they may be flawed, while reserving the right to revisit the issue at a later time. Table of Contents: Exchange Rate Misalignment Weak Financial Institutions Export Slowdown Moral Hazard Impact on the U.S. The International Monetary System

From the Paper:

"Conventional wisdom is that the events in Asia will reduce US growth by 0.5-1.0 percentage points relative to baseline over the next two years or so. Regardless of which statistics are employed, the impact will most assuredly be felt quite differently in different sectors of the economy. Import-competing sectors, such as light manufacturing, are likely to experience declines in output and employment. Obversely, non-traded, interest-sensitive sectors, such as, real estate and construction should benefit. One could think of this situation as similar to the mid-1980s when the term "Rust Belt" entered the popular lexicon, while the "Sunbelt" experienced a construction boom - though compared to the mid-1980s, the impact of the events in Asia will most likely be one half to one third as large. "The increase in trade deficits is likely to worsen trade tensions with countries such as South Korea. As the world's sole superpower, US leadership will be crucial to constructively resolve this crisis. Any move to close the US market in response to the rising deficits would set a horrible example for the rest of the world. Past experiences show clearly that there are links between trade and finance, and policy can have an enormous impact on outcomes."

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