Can you think of another instance of economic crisis that came as a surprise to government, business, financial, and academic observers? What does it have in common with the Asian financial crisis? What are the dissimilarities?
Another instance of economic crisis that came as a surprise to the government, business, financial, and academic observers was the COVID-19 recession. Just like the Asian financial crisis, it brought a domino effect on the economy of many countries — contagion. Both started from a single country (Thailand for the Asian financial crisis, and China for the COVID-19 recession), and have spread through the neighboring countries — making the Asian financial crisis continental, and the COVID-19 recession global. Although these two points resulted in financial crises, they have dissimilarities when it comes to their cause and effects.
Three reasons were reviewed as for the Asian financial crisis: first is the bubble economy; second, external sector difficulties; and third, globalization and financial integration. According to Will Kenton (n.d.), “a bubble is an economic cycle that is characterized by the rapid escalation of market value… This fast inflation is followed by a quick decrease in value, or a contraction, that is sometimes referred to as a ‘crash’ or a ‘bubble burst.’” This concept is reflected by the Asian financial crisis when all of the Southeast Asian countries grew rapidly in 1994 and 1995. When inflation, real-estate prices and wages started rising, and a buildup of short-term debt denominating in foreign currency occurred, the severity of the Asian crisis also started — depicting the bursting of the bubble.
External sector difficulties were also the reasons of the outbreak of the financial crisis. These external sectors led to a rapid growth in current-account deficits, overvaluation of exchange rates, and a collapse or a decline in competitiveness in exports. Taken these sectors together, they led to a crisis by which the size and extent shook everyone.
Liberalization of trade in capital occurs when governments decide to move back toward free trade (Hillman, 2008); by which free trade refers to when countries decide to reduce imports and exports restrictions. This concept exposed corporations to disequilibrium in capital market. The outcome of the process of liberalization and financial integration is called globalization, which provides a linkage between the markets of different countries. However, since there are high restrictions in financial markets of Asian countries, they were less integrated into the world economy.
On the other hand, the COVID-19 recession was caused by the outbreak of the COVID-19 global pandemic. After the spread of the SARS-CoV-2, the virus that causes COVID-19, travel bans and multiple lockdowns have been imposed in almost every country. Travel ban caused the economy to fall into recession, in such a way that free trade was halted. Furthermore, multiple lockdowns caused a domino effect to the economy: Businesses that were not able to cope up with the situation were shut down, thus, causing economies to suffer from a rapid decrease of GDP; the business shutdown caused the rapid increase in the unemployment rate, which also caused many to suffer from a domestic financial crisis.
Given these points, I, therefore, conclude that economists should not be complacent when it comes to forecasting. I suggest that it is better to adapt the ‘worst-case scenario’ mentality or catastrophizing, or being pessimistic, for us to be ready for the worst aspect of things. We should also be educated when it comes to preparing for the unexpected in the economy, and handling personal finances better, so that we may survive the shocks in the market.
Do you know how can i save posts??