TWE was the AFC a result of economic mismanagement by SEA states?

Between June 1997 and January 1998 a financial crisis swept like a brush fire through the
"tiger economies" of SE Asian. Over the previous decade the SE Asian states had registered
some of the most impressive economic growth rates in the world. This Asian miracle,
however, appeared to come to an abrupt end in late 1997 when in one country after
another, local stock markets and currency markets imploded. The seeds of the 1997 AFC
were sown during the previous decade when these countries were experiencing
unprecedented economic growth but had gross economic mismanagement.
SEA governments intervened to promote economic growth. However, in the process, there
were much undesirable ramifications that created problems for the economy, laying the
foundation for the crisis to strike. Particularly, government intervention to promote Import
Substitution industries resulted in growth stagnating and declining over the long-term
because of an over-reliance on primary exports. For instance, in Indonesia, Government
support for ISI through the nationalized oil industry resulted in the country becoming overly
dependent on oil exports; when the oil boom ended, economic growth was stifled. The
value of oil per barrel declined US$35 in 1981 to below US$10 in 1986.
In addition, intervention to promote export-oriented industrialization and private sector
growth in the 1990s resulted in growing economic instability, which eventually brought
about the Asian Financial Crisis. In Thailand, the governments promotion of foreign
investment in the 1990s through state institutions like the Bangkok International Banking
Facility resulted in an inflow of speculative, short-term foreign investment, which becomes
heavily indebted in the years leading up to 1997. Non-performing loans amounted to US$4
billion at the start of 1997. This invited currency speculation against the baht and eventually
triggered the AFC in July. Likewise, in Indonesia, Deregulation and privatization meant that
crony-run companies could obtain credit beyond legal means and at low interest rates.
Private sector bad debt was RP 10.4 trillion in November 1996 and meant that when the AFC
struck Thailand, investor confidence in Indonesia was severely crippled.
Hasty development in the economy has led to economic mismanagement in the financial
system. In the years prior to the crisis, the Asian Tigers were praised for its efforts to open
up its financial markets. However, on hindsight, experts believe that the development of
financial systems had not kept pace with the rapid liberalization and deregulation of
financial markets. Lending standards were lenient, governments supervision and regulation
of the financial sector were weak, there was a culture of inter-connected lending, some
banks were undercapitalized, and financial safety nets were not in place. Hence, the volume
of that investments ballooned during the 1990s had declining quality, thereby creating
problems in the future. Often, the investments were made on the basis of projections about
future demand conditions that were unrealistic. The result was the emergence of significant
excess capacity. In Thailand, a building boom resulted in the emergence of excess capacity
in residential and commercial property. By early 1997 it was estimated that there were
365,000 apartment units unoccupied in Bangkok. With another 100,000 units scheduled to
be completed in 1997, it was clear that years of excess demand in the Thai property market
had been replaced by excess supply. By one estimate, by 1997 Bangkoks building boom had
produced enough excess space to meet its residential and commercial need for at least five
years.
Another reason is the hasty liberalization of the SEA economies by their governments.
Liberalisation in Southeast Asia took place primarily in two steps. The first liberalisation
actually went a long way in reducing the reliability of banks. Investments were made
without paying proper heed to their long-term returns and the credit worthiness of the
parties. This combined with illegal activities made the banking system extremely susceptible
to any sort of external pressure. In Thailand, and in much of Asia, this liberalisation
consisted of the removal of foreign exchange controls, interest rate restrictions,
encouragement of nonbank (private) capital markets, and the adoption of the capital
adequacy standard for bank supervision. This liberalisation led to intense competition in the
Thai market. Banks competed on the size of their portfolios, and this led to some of the
frivolous, short term, investment that became synonymous with the region. They also
competed to generate off-balance sheet transactions and quasi-banking operations, all of
which added to the vulnerability of the region. In Indonesia, as well, there was a removal of
banking regulations. With the removal of these regulations, the number of banks in the
country more than doubled in a period of six years. Many of these banks were owned by
large industrial groups, which used them to manage their own financial affairs. Banks also
created Offsure accounts in order to conduct illegal activity. One example of this type of
short sighted activity can be seen in the expansion of bank portfolios to include a large
number of property companies. Property companies would borrow from banks and then
float shares for the property in the stock market. The money made in this way would be
enough to pay the banks and make a profit.
On the other hand, the economic woes were an inevitable product of economic growth,
rather than one of economic mismanagement. The investments in infrastructure, industrial
capacity, and commercial real estate were sucking in foreign goods at unprecedented rates.
To build infra-structure, factories, and office buildings, SEA countries were purchasing
capital equipment and materials from America, Europe, and Japan. Boeing and Airbus were
crowing about the number of commercial jet aircraft they were selling to Asian airlines.
Semi-conductor equipment companies such as Applied Materials and Lam Materials were
boasting about the huge orders they were receiving from Asia. Reflecting growing imports,
many SE Asian states saw the current account of their Balance of Payments shift strongly
into deficit during the mid-1990s. By 1995 Indonesia was running a current account deficit
that was equivalent to 3.5% of its Gross Domestic Product (GDP), Malaysias was 5.9%, and
Thailands was 8.1%. With deficits like these starting to pile up, it was becoming increasingly
difficult for the governments of these countries to maintain the peg of their currencies
against the US dollar. If that peg could not be held, the local currency value of dollar
dominated debt would increase, raising the specter of large scale default on debt service
payments. The scene was now set for a potentially rapid economic meltdown. In Thailand,
Somprasong Land was the first victim of speculative overbuilding in the Bangkok property
market. The Thai stock market had already declined by 45% since its high in early 1996,
primarily on concerns that several property companies might be forced into bankruptcy. In
1997, market fell another 2.7%.
However, the governments could have intervened earlier to ameliorate the deficit but did
not do so, thereby escalating the consequences. Thai authorities were unwilling to intervene
to take control of their current accounts deficit. They felt that it was inappropriate for a
government to intervene on behalf of a deficit that was caused purely by the private sector.
Similarly, in Indonesia also the current account deficit started becoming a representation of
private investments.
In conclusion, the TFC was largely a consequence of economic mismanagement, especially in
the years of economic boom. It led to a weak economic structure with many problems that
festered and culminated in the crisis.