The region under scrutiny happens to be among the most impoverished countries in the world, though allowing for so much growth that is has made them among the fastest growing countries in the world. The region with all this potential is South and Southeast Asia, and the countries holding 40% of the world’s poor are Bangladesh, Thailand, Pakistan and India. How is it that South Asia has grown so much over the past decade with 35% of its men and 59% of its woman being illiterate? Or how is it that half a billion of the people in South Asia are living off less than a dollar a day? So much of the information I have found for this paper is hard to swallow, though I will try and tell it to you straight and in this sequence:
1. What is believed to be the beginning of the crisis that South Asia is faced with now?
2. Who is supporting growth and development in South Asia?
3. Through all this support, how much debt is being created?
4. What are individual weaknesses facing certain countries in South Asia?
5. Can these countries be of success in the long run?
The beginning of the crisis
Since July of 1997 Southeast Asia has been hit by an economic crisis of major proportion. The economic crisis was originally limited to Thailand’s financial sector, when the central bank of Thailand devalued its currency, the baht. Like so many other currencies the baht had been pegged to the all so valuable U.S. dollar to help ensure stability. Though because of the major success in the U.S. economy the dollar has been seen as strengthening, leading many investors to feel that the baht and many of the other currencies pegged to the dollar were overvalued. Because of this created concern many of the investors fearing an unstable currency chose to exchange it’s currency for dollars. As the confidence in the baht dwindled, companies operating in Southeast Asia scrambled to get rid of its currency as well. Thailand’s central bank was hoping that this devaluation would stop and eventually restore confidence in it’s currency, how would this happen of course? I would assume that Thailand was hoping for a lowering in the price of goods in dollar terms, which would make those products competitive in foreign markets. This in turn would attract new investments into the country. Though this did not happen, and a monsoon of loan defaults and debt resulted, and much of Asia’s financial sector was headed for bankruptcy. With the threat of economic collapse looming Thailand officials sought international help.
Who is supporting the growth
In order for many South Asian countries to survive they had to seek help in the form of loans, luckily for them the International Monetary Fund was able to help. The IMF and several Asian countries have so far pledged to provide more than a $100 billion in loans to help save Southeast Asia’s struggling financial systems. Though in return for these loans, recipient countries must implement a series of austerity measures designed to contain the crisis and improve their free-market economic policies. Some of these austerity measures are to increase certain taxes, implement policies to discourage banks from making risky loans and to shut down many of the insolvent financial firms that had planned on being bailed out. Therefore the Asian crisis and the IMF bailout has created a wide-ranging debate on the merits of Asia’s economic model. Though with the debate on how to fix the crisis, it really seems to be just two competing versions of capitalism. The Asian model, set to resemble Japan’s economy, is based on the belief that leaders must take a direct and active role in the free market to assure rapid growth and high employment. The other version is the Western model, modeled after the U.S. economy, which is set to discourage government intervention in the marketplace and largely place faith in the free market to determine the countries course of economic development. To many observers, the glaring economic inequalities and high levels of unemployment in the West would be signs of the deficiencies in the Western style of capitalism. Though it is easy for people of the Asian model to point to Southeast Asia’s current economic collapse as evidence that the Asian system has failed.
One of the immediate goals of the IMF bailout package to Thailand was to prevent further currency instability in the region. Yet much of the damage had already been done; after the devaluation of the baht, other currencies in Southeast Asia plunged. Most governments in the region were able to prevent their currencies from tumbling, though many countries used their multi-billion dollar reserves of foreign currency to buy back their declining domestic currencies.
The debt that is rising
Out of all the loans that have been taken out, you have to be asking yourself how much debt has South Asia created and how has this happened? The general consensus is that Asia’s debt stems largely from overzealous domestic investment. Being optimistic that Southeast Asia’s remarkable economic growth would continue, companies in the region borrowed huge amounts of money and poured it into investments such as real estate. When those investments didn’t profit, companies simply borrowed more money or extended their loans to cover outstanding debt. In some extreme cases, banks extended enormously risky loans because they were partly owned by the businesses that needed the funds. After all this risky borrowing those businesses that were not already bankrupt were looking at debts that were three to six times the total amount of cash invested in their companies. The comparison to this would be the U.S., which has a debt-to-equity ratio of one to one as opposed to the six to one in South Asia. Debts quickly led to bankruptcy when currencies fell and no one was willing to extend any more loans in Asian countries.
Another major problem that helps with debt in South Asia is corruption. Corruption has contributed to many problems in South Korea and elsewhere in Southeast Asia, as prominent businessmen, bankers and politicians are often found embezzling funds and pressuring banks to make illegal loans. These types of corrupt business practices have become commonplace in many of the financial markets in South Asia.
Individual weaknesses facing South and Southeast Asian countries
One of the major weaknesses facing the world is the lack of energy to support the amount of people living within in it. This is the weakness in India, as economic growth and the welfare of its people is hindered by power supply constrains. India’s power sector is continually being hit by capacity shortages resulting in blackouts along with deteriorating physical and financial conditions. India has found ways to possibly fix this dilemma though the World Bank had to be involved by providing a $350 million dollar loan in 1996. India has mainly used coal, which was its least-cost source of primary energy and still meets two-thirds of the country’s energy needs. Though the average households access to electricity is forty six percent, which drops to thirty three percent in rural areas. So the need for another form of power is evident, though the International Finance Corporation has invested in one of the first private coalmines in India.
Another major weakness that seems to be facing many countries is the literacy of the people in that country. This happens to be the major weakness in Bangladesh where 59% of woman and 35% of men are illiterate. The World Bank has attempted to help Bangladesh through approving a $53.3 million dollar credit for a project to improve and expand the literacy education in Bangladesh. This new project is designed to benefit newly literate adults, who are among the country’s poorest people. This will hopefully help the country reduce poverty and, in the social sectors, to promote faster and more equitable human development. The five-year project that has been constructed is expected to benefit 1.6 million learners, with half of them being woman.
Can these countries be of success
With taking a look at Thailand, India and Bangladesh it is apparent that money is more than just the issue. The issue is can these countries overcome the debt, the lack of power and the percentage of illiterate looming in their country? Many of the reforms implemented since the crises has actually appeared to have a large impact on national morale. Though can it be believed that 1.6 million will be taught to read and write, or that enough coal will be found to power an entire country at more than seventy five percent efficiency. What about the value of the baht? Will that suddenly increase because billions of dollars are being lent to saving this almost bankrupt country? The truth of the matter is that I don’t know the answer to any of these questions. How do I even begin to weigh the consequences of some of these countries actions, and are these reforms things that I would spend my money on. I would hope so; I wouldn’t want an illiterate country, or a country continually dealing with power shortages. Though will these issues go away, is time the only true answer.
This paper has really tried to focus on the crisis that South and Southeast Asia is in, I looked at it from a larger standpoint while still keeping the topics small. I did this because currency is something that nearly every country has trouble controlling. Plus there are a lot of troubles that come with a collapsing currency, as far as market instability and fear of investing. This was just a few of the problems that effected every country used in this paper, every country that was spoken about was among the poorest countries in the world though still receiving recognition for being among the fastest growing countries in the world. That in it’s self is hard to explain; how would this happen to this specific region of the world. These are the types of questions that were attempted in this paper. The specific answers are not given in this paper however because I personally cannot answer them. But what it will take for these countries to succeed has been answered and the funding is there for them to do that. If the progress continues in the direction that all these countries are facing, it is possible for all these countries to survive and pull themselves out of poverty.