The Impact of Financial Crises and Economic Growth of East Asian Countries

Abstract

In last quarter of 1997, the economic crises came in the East Asian countries. However, the countries those are affected by these crises are Malaysia, South Korea, Indonesia, Japan, Philippians, Thailand and Taiwan. The reason behind these crises were due to miss management of economic system and bankruptcy because mostly bank became corrupt during these crises and real GDP effected by these crises, whereas GDP in some countries are less effected as compared by the remaining countries after the crises in 2000. But the investment ration fell during that period, whereas, a comparative analysis are done in this paper that showed the investment ratio decreased during the period but slightly recovered after the crises. We explored the growth of the Asian economy and determinants of the economic growth before and after the crises. In the first part of the paper, we review the East Asian economy before 1997 while in second part we discuss the crises development of East Asia countries after the crises. The crisis resulted in the stock market values have failed to pre-crisis values retain is supported by the result. A picture of currency and banking crises exhibited a slightly different image study in the result.

Full text

The Impact of Financial Crises and Economic Growth of East Asian
Countries
Shabbir MS* and Rehman AK
International Islamic University Islamabad, Pakistan
*Corresponding author: Shabbir MS, Lecturer, International Islamic University Islamabad, Pakistan, Tel: 00966536469744; E-mail: Mshahzad786.pk11@gmail.com
Received date: Jan 04, 2016; Accepted date: Feb 02, 2016; Published date: Feb 08, 2016
Copyright: © 2016 Shabbir MS, et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted
use, distribution, and reproduction in any medium, provided the original author and source are credited.
Abstract
In last quarter of 1997, the economic crises came in the East Asian countries. However, the countries those are
affected by these crises are Malaysia, South Korea, Indonesia, Japan, Philippians, Thailand and Taiwan. The reason
behind these crises were due to miss management of economic system and bankruptcy because mostly bank
became corrupt during these crises and real GDP effected by these crises, whereas GDP in some countries are less
effected as compared by the remaining countries after the crises in 2000. But the investment ration fell during that
period, whereas, a comparative analysis are done in this paper that showed the investment ratio decreased during
the period but slightly recovered after the crises. We explored the growth of the Asian economy and determinants of
the economic growth before and after the crises. In the first part of the paper, we review the East Asian economy
before 1997 while in second part we discuss the crises development of East Asia countries after the crises. The
crisis resulted in the stock market values have failed to pre-crisis values retain is supported by the result. A picture of
currency and banking crises exhibited a slightly different image study in the result.
Keywords: Economic crises and growth; East Asian countries;
Eective strategies; Investment
Introduction
e Asian nancial crises was started in July 1997, these crises
spread in many East Asian countries like Philippines, Malaysia,
Singapore, china, south Korea, Indonesia, ailand, Taiwan and Hong
Kong. However, it is observed that mostly East Asian countries
devalued their currencies during these crises. ese crises were
occurred due to bankruptcy of east Asian countries banks, such as the
Singapore dollar also devalued in August, Taiwan dollar in October
and south Korea depreciation started in November, Japanese currency
devalued in July 1997 china was less aected by these crises the
purpose of this study investigated the nancial crises on Asian
economies, where some of countries depreciations more the 50% from
1997 to 1998 and these countries were ailand, Philippines, Malaysia,
South Korea and Indonesia in 1997, the nominal interest rate reached
at 25% of other countries eected by less than 25% depreciation and
nominal interest rate below 20%. However, some people think
dierently about the reasons of these crises and it is dicult to
understand because these are unpredictable crises. On some extent the
Asian development bank and the international monetary fund [1] are
failed to anticipate the nancial problem. What lesson learns by policy
makers of these countries from these crises and eective strategies for
these economies to overcome such crises eectively?
ere is no consensus of the diagnosis of the crises. Whereas, some
people have idea about these crises that the crises were start due to
mismanagement of resources and capital outow. e World Bank
committed about these crises that it was dicult to sustain the
economies aer the crises only very couple of the countries sustained
the economy through industrialization in few years and the growth
rate was the 70% and uctuate 7% per year in 1990. Before 1990, there
were big private cash ow in countries but aer 1996, it was fell down,
aer the rapid growth of the economy than double decrease and some
countries face large current account decits. It also showed the
structural issues and stopped the fast growing economy, whereas the
overall exports recovered on the rst half of the 1997. Azis [2] is noted
that a large current account decit is due to high ow of private
investment rather than the limited domestic savings although there are
some private concerns about the banking system and its results the risk
of banking trust, the most of the Asian countries have more rapidly
grow of their scal position as compared to others. Whereas, Shabbir
[3,4] elaborates that market innovation is a comprehensive tool in
order to meet the demands of their target customers.
Due to exports led in 1980 the labor shortage will become low and it
caused sharp increases in real wages and average wages in from 1997 to
1981 in Korea and Taiwan. It rosed by 60% these wages and stimulate
the private consumption the problem facing by the countries are the
rapid growth in consumption as well as in the investment and face the
ination before the crises, there were little bit eect of the ination.
e banking insolvency increased through some years due to this and
the currency crises start aer the crises of ve Asian countries
Indonesia, Korea, ailand, Malaysia and Philippines have managed
the crises eectively aer the 1997. In Korea the economies have
bottom aer mid of the 1998. e growth rate in 1990 was turnaround
-6.7% in 1998.
Literature Review
e growth rate is improved by higher schooling and life
expectation, lower productivity and lower government expenditure
better preservation of the rule of law, lower ination and
improvements in the conditions of trade. For known values of these
and extra variables, growth is harmfully related to the rst level of real
per capita GDP [5]. e initial excitement centered on “endogenous
growth” theories, in which the long term growth rate determined by
government policies and other forces. Succeeding analyses argued that
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technical development generated by the nding of new ideas was the
only means to avoid withdrawing returns in the long run. e
purposive manners that underlay innovations hinged on the vision of
monopoly prots, which provided individual incentives to carry out
costly research [6]. Whereas higher ination goes along with a lower
rate of economic growth ination also eect the economic growth if
ination increases then deantly the growth will decrease.
ere are some growths theories like neoclassical and endogenous
developed by Ramsey et al. [7-11]. e lower the initial level of real per
capita gross domestic product (GDP) is higher than the expected
growth rate. e growth rate will be high if the starting per capita GDP
low in case of long run. If the population is growing, then a section of
the economy’s investment is used to give capital for new workers,
rather than to increase capital per worker, due this the high rate of
population growth have negative impact on economic growth and
higher productiveness rate means that increased resources must be
devoted to childrearing, rather than to production of goods. e rules
of law also have big impact of economic growth [12]. Dierent kinds of
laws indexes are also responsible economic growth and it attracts the
international investors to free come and increase the growth rate. e
intercepts enclosed comprise quality of the administration, political
corruption, probability of government repudiation of contracts, risk of
government and overall maintenance of the rule of law. e
attractiveness of country is depending upon the laws and rules and
regulation imposed by the country. However, terms of trade also aect
the overall imports and exports inuence in the developing countries.
Some empirical studies of cross-country growth have also reported an
important positive role for the investment ratio.
ASIA: A Historical Perspective
Asian review of economic history has an open area that will show
since the modern era to compete in the global economic system. Even
when China and Japan, 15th and the 17th century respectively, appear
to Close Boundaries of International and foreign trade, the data did
not show complete closure. It has expanded his empire and became a
great world power during the rst industrial economy of Japan reached
on its peak during the Second World War.
In the early 1960s, the British colony of Hong Kong, strong textile
production from developing economies and in the 1970s became the
rst four Asian Tiger economies as a global nancial center and quickly
established itself as a progressive
“I changed world economy”
. By 1997,
four Asian Tiger economies of East Asia, such as Japan advanced
economies joined. In 2012, as Japan, Hong Kong and Singapore the
most developed markets in the economic indicators are the only
countries in Central Asia Historians believe that the world economy in
recent years has come from more than a Eurocentric point of view
[13]. In the last century, Asia is now recognized and discovered only a
part of the world and for Europe, but not the most open Prior to his
arrival had only one economic system.
In fact, this system can be Europe and Asia for growth as Europe's
economic growth has contributed the most. Lughod [14] examined as
the time period between 1250 and 1350 focuses on an international
business, developing economy that has been fully stretched. “Of
Northwest China, traders and producers involved in a worldwide
network is congested exchange.” Frank [15] explains that there is a
claim Labor and the multilateral trading with the world, ASEAN plus
as a variety of regional institutions Asia and the Pacic in one of three
dierent groups. Historical economic literature is a photograph of an
emergency late expansion of the global economy, trade and
institutions, which includes not only this is supported by the system.
e system is important in this world and the main focus of this
certain point of view, is Asia. While many of the area, the countries
that make up the states and cities of Asia, the region has changed over
time, and prominence in partnership, global economy can be denied.
Asian Growth in Global Prospective
Economic growth in china and Asia are much faster as compared to
others developing countries and grown fasters then the industrial
countries, for example the over the 1987 to 1994 the real GDP growth
rate in developing countries were 2.75% per annum more than in the
industrial countries and this growth system is estimated by 3% in 1995
and 1996 during this period the population growth was 0.5% in
developed countries and 2% in less developed countries the growth
rate was faster in developing countries then the industrial countries.
e stunning growth of lots of economies in East Asia above the past
30 years has surprised the economist profession and caused an
avalanche of books and articles that attempt to explain the experience
[16]. Articles on why the common successful economies in the area of
Hong Kong, Korea, Singapore and Taiwan state of China have
increased, to say the least, with vigor always mention the incident as
"amazing." When doctors resort the dismal science to a higher power,
the reader knows he is in problem.
Since 1960, Asia became a major and most heavily populated
continent in the World. Of course, this increase did not occur at the
same rate throughout the continent. e western element of Asia has
increased in this period more or less the same speed as the rest of the
world but in common, the eastern half ten countries: Malaysia, China,
Hong Kong, Japan, Korea, Indonesia, Philippines, Singapore, Taiwan
and ailand twisted in a better performance, even though the
variation in results can also be seen here. e worst performance was
the Philippines, which has increased by about 2 percent per year (per
capita), approximately equivalent to the average non-Asian countries.
Whereas, Japan, China, Indonesia, Malaysia, ailand were reaching
better growth rates of 3.5 percent. is striking result is still small as
compared to the impressive development of Hong Kong, Korea,
Singapore, Taiwan and Province of China, as the "four tigers" because
of the strong economic performance and intimidation. e Tigers had
yearly growth rates of production per person over 6 percent; these
growth rates became constant above the period of 30 years. While the
average occupant of non-Asian countries in 1990 was 72 percent better
o than his parents in 1960, the gure for Korean media is not less
than 63.8 percent. Everybody agrees that the East Asian economies, in
particular the four tigers have risen dramatically over the previous
generation, but no one looks to agree on this. e debate, over which
they grew so ne in the past, raises dicult questions of regional
development in the future and the desire of countries elsewhere to
repeat the success of East Asia. e topics at the center of the
discussion are based on theoretical Concepts of Growth accounting.
e key factor behind the performance of Management is based as
team work, while the progress of employee’s depending upon
leadership of the management. However, the term management is not
only consisting on rm level but also for Institutions, Economy and
State levels respectively [17,18].
is method of accounting deals with three fundamentals that
supply to the manufacture of goods and services: labor, capital, Labor
and assets are known as "input", refers in this situation to the work
force and capital goods (buildings, machinery, vehicles) that the labor
force used in producing a product or providing a service. e
Citation: Shabbir MS, Rehman AK (2016) The Impact of Financial Crises and Economic Growth of East Asian Countries. J Internet Bank
Commer 21: 155.
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technology refers to all methods used by labor and capital to make a
good and depends on the progress or achievement of useful skills to
nd the job completed faster and more capably. Nobody denies that
the three elements must be present in a certain extent, if the nancial
system is to grow. Some consider that the increased use of labor and
resources make clear the whole development; others are convinced that
the answer to development is the use of more ecient technologies.
In the context of the development of accounting can be described
mathematically using an easy equation, the assistance of the three
mechanism in the total production of the economy [19]. Dividing the
equation by the amount of people in the world of work, we can obtain
an active equation that shows how production per individual increases
within time. is equation mathematically explain the donation to
GDP growth in the growth rate of participation in the labor market,
capital per worker, and the technology (the end also identied as the
development of total factor output). If implemented empirically
denite economies and this equation can give a good idea of what rate
of productivity growth is the result of increased participation in the
labor market and a superior use of capital and this rate is the result of
technological development. e conventional formulation of this
equation looks to be a strong and steady pace of technological progress
is only possible in the long term, for an economy to achieve a constant
rate of increase in output per person. Because the participation rate in
the labor market can grow for a while 'and increases production, but,
of course, cannot increase indenitely (all eventually be used). And
more capital growth than the work eventually guide to withdrawing
returns to capital, leading to a decline in output growth, even if the
fund keep on to grow at a stable pace. Hence, in order to accomplish
sustainable progress, the economy must constantly improve its
technology, this type of development called "intensive development".
Dierence of intense development, increase production, growing
inputs of labor and assets (wide growth) can only work for a limited
period of time, but it can last a long time. In a famous study, Solow
accomplished a performance increase of accounting, as described
above.
It is noted that the growth of capital and the growth rate of
participation in the labor market have had a relatively limited impact,
while technological progress accounted for the majority of the growth
in output per worker. Further studies have conrmed the validity of
these conclusions. In this vision, these economies have succeeded
because they have learned to use the technology more quickly and
capably than their competitors have done. Asian economies have
grown faster than the rest of the world and search of the lessons that
may be transferable to other countries the literature contain several
types of arguments.
However, Growth deal is great deal from decade to decade for each
country. Some appropriate allowances has been made for the large
increase in labor force participation rates and for investment levels,
whereas the rates of total factor productivity increase in the four
triggers not unusually high specially compared to those in the
industrial countries during three convergences in 1960 and 1970. e
eight high performance Asian economies do provide a remarkable mix
regionally concentrated and sustain high growth, which combined and
sustain high growth. It combines with low and declining levels of
income inequality [20]. e World Bank study attributes to growth to
high rates of accumulation of physical and human capital goods,
macroeconomic management which declining population growth and
market friendly government policies, perhaps aided in some countries
by number of market leading interventions to promote growth and
export.
Economic growth in East Asia with Annual GDP
growth
e growth in the East Asia uctuate year by year but it rapidly fall
in the year of 1998 the some countries are les eected and some highly
eected by these crises the real GDP fall 16% in Indonesia, 12% in
ailand and 10% in Malaysia and Philippines 3% and 8% south Korea
the gure show that the other countries are less eected in 198 the
growth rate -5% in Hong Kong 7% in china -2% in Japan aer this in
1999 the growth recovery started and it was positive aer the 1998.the
growth rate aer 1998 was in south Korea 8% Malaysia 5% ailand
3% and 1% in Philippines and Indonesia.
Figure 1 shows the growth rate uctuate from 1982 to 2000 and
GDP growth rate of china is -2%, this is less value because the china is
less eected by the crises and aer the 1998 the curve goes upward
because it sustain the GDP growth. It is also investigated by the
researchers that China is less import country rather than other’s that’s
why it had fewer aected.
Figure 1: China.
Figure 2 shows that Korea GDP growth from 1982 to 2000 whereas,
growth rate of Korea is 8% during the crises in 1998 the GDP growth
was -3% and aer that it increased slowly.
Figure 2: Korea.
Figure 3 shows the Hong Kong GDP showed the growth rate of
Hong Kong and it was -5% in 1998 then GDP curve downward it
shows that its GDP had decreased.
Citation: Shabbir MS, Rehman AK (2016) The Impact of Financial Crises and Economic Growth of East Asian Countries. J Internet Bank
Commer 21: 155.
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ISSN:1204-5357 JIBC, an open access journal Volume 21 • Issue 1 • 1000155

Figure 3: Honk Kong.
Figure 4 shows ailand GDP growth fell with 12% during the crises
as it shows in the gure and its shows a downward curve, whereas the
GDP in 1998 was -10% that was highly aected by these crises.
Figure 4: ailand.
Figure 5 shows growth rate of Japan fell by -1% this showed that the
GDP growth was -5% in 1998. However, it is noted that Japan is less
aected as compared to ailand in crises year.
Figure 5: Japan.
Investment Ratio
Investment ratio of the countries Malaysia, Indonesia, South Korea
and ailand decrease in 1998 and the annual investment ratio in
Malaysia was 26.675 % in 1998 and Taiwan 25.994 % ,Korea 25% and
ailand 20.447% Indonesia 16.7% Philippines 23% investment in the
1998.
Figure 6 shows GDP fell in Philippines was just only 3%, which is
less aected by the crises.
Figure 6: Philippines.
e Figure 7 shows that investment ratio of Indonesia decreased in
1998 and it was much less than the previous years.
Figure 7: Investment ratio in Indonesia.
e investment ratio in South Korea also falls, whereas it was highly
aected by the crises in 1998 and the curve of South Korea was small
as compared to previous years (Figure 8).
Figure 8: Investment ratio in South Korea.
Stock Market Indexes
e ratios of data from January 1997 to December 2000 were 0.18
for ailand, 0.16 for Indonesia, 0.22 for the Philippines, 0.37 for
Malaysia, and 0.52 for South Korea.
Whereas, other ve East Asian economies were also declined in
stock-market valuation. e ratios of values for December 2000 to
Citation: Shabbir MS, Rehman AK (2016) The Impact of Financial Crises and Economic Growth of East Asian Countries. J Internet Bank
Commer 21: 155.
Page 4 of 6
J Internet Bank Commer
ISSN:1204-5357 JIBC, an open access journal Volume 21 • Issue 1 • 1000155

those for January 1997 were 0.60 for Taiwan, 0.74 for Singapore, 0.75
for Japan, 1.00 for Hong Kong, and 2.21 for China.
Conclusion from the analysis of stock-market data is that, from the
perspective of the nancial markets, events from 1997 through 2000
had permanent negative consequences in these all East Asian
Countries.
e investment ratio in Malaysia was also low and the curves were
so small as compared to the previous years in 1998 (Figure 9).
Figure 9: Investment ratio in Malaysia.
In Philippines the curve was less fall as compared to other countries
because its investment ratio less aected by the crises as compared to
other countries (Figure 10).
Figure 10: Investment ratio in Philippines.
e investment ratio in china was less aected by the crises in 1998
and investment ratio increased as compared to previous year (Figure
11).
Conclusion
e Asian nancial crises were due to sharp reduction of the
economic growth in the East Asian countries, which has great impact
on economy. Financial crisis, especially in the ve countries were
directly aected by the crisis in economic development in East Asia,
however, a signicant reduction were associated with them. Economic
growth in East Asia has rebounded 1999-2000, and the strength of the
recovery is uncertain. e annual reports of aects countries in crises
clearly indicate the failure and unable to recover the investment in the
long term period. e crisis showed a negative eect in these countries.
e crisis resulted in the stock market values have failed to pre-crisis
values retain is supported by the result. A picture of currency and
banking crises exhibited a slightly dierent image study in the result.
Analysis of economic growth and investment with discounted prices
for simultaneous currency and banking crisis substantiates. However,
the eected size in Asian crisis recently viewed and generally it has less
than others.
Figure 11: Investment ratio in China.
e investment ratio in Hong Kong is not much aected in 1998
because this country was not much dependent on others imports, due
to this reason, this country was little bit eected (Figure 12).
Figure 12: Investment ratio in Hong Kong.
Most important test of these crises was negative currency and
economic growth, which continually inuence the wider banking
crisis. Whereas, Investment banking crisis continues there is some
indication of adverse eects. According to the Asian crisis, it provides
ample evidence that the crisis is likely that in the absence of a return to
growth.
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