The Asian Financial Crisis

Executive Summary

After a period of economic upturn in the beginning of the 1990s, Asia has been concussed by a severe fiscal crisis in 1997. As the name implies the Asian Financial Crisis happened in Asia, more precisely in the Eastern Pacific Part of Asia (see Appendix A). Countries that have been affected most by the crisis are Indonesia, South Korea and Thailand. But also the Philippines, Malaysia, Laos and Hong Kong and even Australia had to deal with the unfavorable situation.

Merriam-Webster Online Dictionary defines a crisis as “an unstable or crucial time or state of affairs in which a decisive change is impending; especially: one with the distinct possibility of a highly undesirable outcome” (2008).

The Asian-Pacific region counts to the leading tourism destinations in the world because of its rich biodiversity, beautiful beaches, cultural curiosities, a great interpretation of hospitality and nevertheless affordable prices. This report investigates the economic factors which led to the crisis. Further the impacts on the tourism industry are demonstrated and suggestions are made how the crisis probably could have been prevented combined with improvements for the future.

TABLE OF  CONTENTS  

  COVER PAGE  i

  EXECUTIVE SUMMARY  1

TABLE OF  CONTENTS  2

  I INTRODUCTION  3

  II MAIN PARAGRAPH  4

  Factors that caused the Crisis  4

  Impact on Tourism  5

  Crisis Management  7

  III CONCLUSION  9

  IV REFERENCES  10

  Appendices  

  A Map Asia Pacific  12

  B Contribution of Tourism to Economic Growth  13

  C Changes in visitor arrivals 1996 1998  14

  D Baccarat monthly drop October 1997 September 1998  15

Introduction

Tourism is the leading industry in many East Asian countries. Among them Thailand, Singapore and Hong Kong are still the most frequently visited by tourists, but destinations such as Indonesia, the Philippines, South Korea, Malaysia and China have already closed the gap and successfully developed a strong brand recognition by attracting more and more tourists (Davies, 2003).

Meanwhile Asia has been suffering some severe crises during the last decade, affecting the region as a tourism destination and hence the overall economic performance. Alongside terrorism threats as a result of the attacks in Bali, the area also went through a period of economic instability in the late 1990s, known as the Asian Financial Crisis. Lasting only a bit longer than two years nobody saw it coming, although there have been similar crises before since the 17 ^th century, one of the latest in Latin America in the 1980s (Prideaux, 1999).

I chose the topic because I think it will be interesting to investigate the impact of an economic crisis on the traveling behavior of tourists. It is obvious that tourists are scared of terrorism, diseases like SARS or natural disasters such as the Tsunami because they fear injuries or death. But does an economic crisis influence their attitude towards a tourism destination? To be honest, I didn’t know anything about the Asian Financial Crisis until I wrote this report, but since assignments should have the outcome to broaden the student’s knowledge about a particular topic, I take this homework as a challenge by investigating an issue that I have never heard about before.

Since there are a lot of reliable resources within the research databases nowadays, I used the internet as a main source for my research. In my opinion the World Wide Web provides the most up-to-date information since there are things happening every day and the web can easily be updated. But it was quite difficult to find research papers addressing the tourism issue in their reports. Prideaux also comments in his paper that the impacts of the crisis on tourism have not been investigated that closely. He sees that as a "lack of detailed economic analysis in the tourism literature" (1999).

Factors that caused the Crisis

The bad financial situation did not occur because of only one reason. There were many

simultaneous factors that led to the disaster. According to Dr. Bruce Prideaux, the crisis began on 2 July 1997 with the decoupling of the Thai Baht from the US Dollar forced by the government of Thailand resulting in devaluation of the currency (1999). Further, most East Asian countries were lacking appropriate monetary and fiscal policies or if they had one, they failed to respond to upcoming difficulties. As in many developing nations all around the world, cronyism and corruption is still an issue in Asia. When economic factors began to change the governments of those countries did not react to those changes. Prideaux also states that the area’s banking system contributed to the misery. Another cause for the crisis can be seen in the private sector relying on foreign debt to develop infrastructure. There was an overall problem of handling foreign debts that led to the crisis. In fact, a lot of Asian commercial banks went bankrupt during those two years because of mismanagement of too excessive loans (1999).

For example Korea' s government failed in using the correct strategy in terms of their financial and industrial performance. Another reason for the crisis in Korea as well as in all other effected East Asian nations was also the failure of their foreign exchange policy.

Prideaux also describes the Asia-Pacific region as "Victims of their own success", because most Asian nations showed a good economic performance since the late 1980s and thought they would be immune to severe changes in economic factors and disregarded the upcoming pressure (1999). According to him, Thailand for example totally ignored the advice of the International Monetary Fund (IMF) which had warned the nation of a foreign exchange crisis. Of course, when Thailand requested assistance from IMF it was too late because their exchange rate reserves have already been exploited. He also sees the crisis “as a predictable event resulting from overproduction in the absence of centralized planning" (1999). The crisis even expanded to Russia and Brazil. In my research I found out that Hong Kong for example has noticed a period of negative growth lasting 5 consecutive quarters (Berg, 1999). Also Malaysia and Philippines experienced a period of recession as you can see in the table in Appendix B. Other resources state that Lao PDR and Cambodia have also struggled with the impacts of the fiscal crisis.

According to Okonjo-Iwela, Kwakwa, Beckwith and Ahmed, the reasons for the crisis in Lao PDR and Cambodia lie in political uncertainties and the disability of the government to respond