Asia the victim of a vicious financial cycle

By Martin Khor, in South News
28 November 1997

Last week saw more turmoil in Asia's financial markets. South Korea, until recently touted as the strongest East Asian Tiger economy, fell into the clutches of the IMF. A vicious cycle, triggered by speculative attacks and a drastic fall in the local currency, has developed in the affected Asian economies. Will the IMF's increasing powers in Asian countries lead them to their rescue or into even deeper waters?

WHAT a tumultuous week it was for Asian countries, where the financial crisis seemed to be spiralling downwards with no end in sight. In Malaysia, we suffered from further declines in the currency and stock market levels and this added to the drama of a week which also saw Parliament expressing confidence in the Prime Minister and making it clear to the visiting US State Department official William Ramsay that Malaysia rejected the application of the US law sanctioning firms like Petronas for investing in Iran.

But what was really stunning was the speed with which South Korea's financial situation deteriorated, to the point where it was forced to seek help from the IMF. It has become difficult or even impossible for countries to control the value of their currencies. The Asian countries have opened up their economies, including the flow of funds, to the outside world.

Due to financial deregulation and liberalisation, foreign funds have been able to participate increasingly in the trading of Asian currencies, in the stock market and in the provision of foreign loans to local companies. With speculators and investors (whether of the manipulative or the serious type) controlling such big blocks of funds, and with their being able to move in and out of the East Asian markets so freely, these countries have increasingly lost control of their currencies to "the market." Looking at the current problems in South-East Asia and South Korea, it is the sharpfall in currency that has been the trigger setting off a vicious cycle of eventsthat have led to "financial meltdowns" at such a terrifying speed.

Thus, currency speculation contributes greatly to and magnifies the conditions that cause sharp and sudden drops in a currency's level. Compounding the problem is the fact that the three financial markets (the currency, stock and money markets) are now inter-related and developments in one affect the condition of the others