The Asian Financial Crisis

TABLE OF CONTENTS

EXECUTIVE SUMMARY

I. INTRODUCTION

II. MAIN PARAGRAPH
Factors that caused the Crisis
Impact on Tourism
Crisis Management

III. CONCLUSION

IV. REFERENCE

Appendices

A. Map Asia Pacific

B. Contribution of Tourism to Economic Growth

C.Changes in visitor arrivals 1996-1998

D. Baccarat monthly drop, October 1997 – September 1998…..15

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.

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 17th 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

to failures in the mobilization of revenue (1999). All those factors have led to negative interest rates and inflation. Most Pacific Asian nations had gone through an interminable process to reach a certain level of financial stability and economic growth. The more disappointing for them it was to be pulled back into a stage of inflation and internal fiscal instability (Okonjo-Iwela, Kwakwa, Beckwith, Ahmed 1999). Especially countries like Cambodia and the Lao People’s Democratic Republic (PDR) began experiencing a significant real GDP growth on their way towards a market economy. The authors also stated that during the crisis, the decline in foreign investment reached 91% in the Lao PDR in 1997 (Okonjo-Iwela, Kwakwa, Beckwith, Ahmed, 1999). According to Prideaux, The late 90s crisis in Asia had a lot in common with the classical monetary crises that occurred since the 17th century (1999). For example in Korea, when the demand for cars and electronic devices dropped, the manufacturers did not reduce production leading to an oversupply. The crisis lasted until the end of 1999.

Impact on tourism

Dr. Bruce Prideaux states that "Tourism researchers have generally ignored the crisis while studies originating from other disciplines have largely overlooked the impacts on tourism" (1999). He also states that Papers examining the topic found out "that the crisis had a negative impact on the short-term viability of tourism in East Asia" (Prideaux, 1998). According to him, the only fact why Australia has not been affected by the crisis that much, is that it immediately implemented fiscal reforms suggested by the IMF (1998). But as I am going to examine later in the paper, it still has had some severe impacts on Australian tourism. Because of a decline in money value of several Asian currencies, destinations like Indonesia became more attractive to Australian tourists since they received "more value" in exchange for their Australian Dollar. However, outbound travel for Asian tourists has declined as other parts of the world became more expensive for them to travel (Prideaux, 1998). Further, due to flight cancellations by airlines like Ansett International Airlines and Qantas to Korea, Australian outbound tourism to Korea declined. According to Okonjo-Iwela, Kwakwa, Beckwith and Ahmed in 1997, Cambodia noticed a 14% decline in tourism receipts (1999).

Hong Kong experienced a period of steady economic growth in tourism receipts since the late 1980s, reaching its peak performance in 1996 with tourism receipts of US$10.58 billion, noticing a 95% increase in only seven years. As a consequence of the Asian Financial Crisis tourism receipts in Hong Kong dropped to US$6.95 billion in 1996 (Tse, 2001)

The financial crisis did not only affect the tourism industry in Asia and Australia. According to a report issued by the Asian Pacific Bulletin, Canada suffered a 7.1% decline due to Asia’s tense situation. Even the war in Iraq did not have that much impact on Asian travelers (2003).

The instant impact of the Asian crisis was to increase the cost of outbound travel for residents of those nations which suffered from a decline in the value of their currency.

Appendix C shows the changes in tourism arrivals between 1996 and 1998 in several Asian countries.

Having a closer look at the tourism activity in Australia, there was a decline of 33% in Asian visitor arrivals (Gu, 1999). Destinations in the United States such as Los Angeles also suffered from the declining spending power of East Asian tourists. According to Gu, LA experienced a turn down of 800,000 tourists per year only from South Korea and Japan with a remaining spending power of Asian visitors of only 61.3% (1999). Appendix C demonstrates the monthly drop of Asian gambling activities in Las Vegas, looking at the probably most popular game with Asian tourists: Baccarat (Gu, 1999). Singapore also noticed a negative effect with arrivals declining in 1997 of (-1.3%) and in 1998 of (-13.3%), (Prideaux, 1999).

Crisis Management

Due to declines in tourism arrivals the industry had to respond in order to recover from the crisis and the nations that have been affected by the crisis had to change some of their promotional strategies. But since the value of currencies dropped, the spending power of the tourism industry fell as well. Prideaux found that Indonesia even closed down its international tourism promotion activities and left the entire touristic promotion to the private sector. For the purpose of reducing governmental expenditures Indonesia also withdrew from the Pacific Asia Travel Association (PATA).

The successful implementation of problem solving strategies was dependent on the competitiveness among the East Asian countries. New product development and cooperation between government and tourism industry have been essential at that time. In his investigations, Prideaux mentions some major factors contributing to a fast recovery of the industry. Those include the replacement of international travel for domestic tourism activities and the ability to keep direct links with the air travel industry.

Due to financial difficulties a lot of Asian countries could not implement those strategies straight after the crisis. Some of them responded negatively with reducing the funds for promotional activities and increasing hotel rates to offset the decreasing revenue resulting from less tourism receipts. Another way to increase revenue was also to increase taxes.

Another strategy that was implemented successfully in Korea, Australia and Thailand was to prioritize tourism from nations that have been less affected by the crisis. Thailand regained its popularity as a tourism destination very fast, also because of the support from the private sector by contributing to the ‘Amazing Thailand’ campaign and supporting the destination management with private funding (Prideaux, 1999). I think at this stage, it can be seen that private destination management companies are more than essential to a destination.

Online- or E-Marketing is also a very effective strategy today to promote tourism in a destination. And countries that are not affected by terrorism or natural catastrophes can still maintain their good image through normal marketing activities, underlining safety and security for that particular region. As I said in the beginning, I didn’t even know about the Asian Financial Crisis and it would definitely not have had an influence on my plans since it does not address any safety issues.

For countries suffering from weak exchange rates the strategy above may not apply. When experiencing a decline in tourism arrivals, those destinations need to offset their situation by generating more revenue. This could be realized by the introduction of new products and coverage of new markets. Australia for example shifted its target market from low-revenue Asia to high-revenue Europe and North America during the period of recession (Prideaux, 1999). He found that Australia's Tourism Forecasting Council (TFC) foresaw a period of slow recovery from the misery, but what happened was that in 1999, based on evidence from figures of several fast-recovering Asian countries, a forecast with 7.3% growth in tourism arrivals per year was published (1999).

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