Asian Financial Crisis

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The paradox of thrift is defined as “ a change in the amount household wish to save at each income leads to a change in equilibrium income, but no change in equilibrium saving, which must still equal planned investment” (Begg, Fisher, Dornbusch, 2009). Increase in savings is actually the consumption foregone by the consumer. Domestic saving increases investment in a country which fuel the economic growth. But could savings be a cause for the financial crisis in Asian countries? As told by Dr Zhou Xiaochuan, Governor of the People’s Bank of China, “ the East Asia countries are influenced by Confucianism, which value thrift, self-discipline, zhong yong or Middle Ground (low-key), and anti-extravagancy” ( 2009). Could this Confucius value be one of the reasons behind the financial crisis that occurred in 1997?

On July 2, 1997, Asian countries were struck by waves of financial crisis when the Thai baht was devalued (Delhaise, 1998). The unexpected crisis of Thai’s economy has caused several other nations’ currencies to depreciate as shown in figure 1. Why did it happen? However, before we begin to analyze the cause of crisis, let’s look at why was the crisis contagious. Radelet and Sachs (1998) as cited in Sharma (2003) have contributed their opinion. With the advance in technology, investors are able to obtain information on macroeconomic data, asset prices and exchange rates. Technology is used in capital market in order to move the funds to increase the rate of return. However, unconvincing news about health of financial institution or country will lead to down fall of the capital market. For example, it may trigger a rational investor to withdraw funds with just a click on the computer screen.

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