Fighting the Asian Contagion: Causes, Containment, and Consequences of the Asian Financial Crisis

The topic of "War and Peace" is inexorably linked to the study of economics. Economic factors inevitably play a large role in determining the political fate of a nation or region. Thus, to examine the greatest threats currently facing the United States and the rest of the world, it is necessary to evaluate contemporary economic trends. The single greatest economic event in the past few years has been the Asian Financial Crisis. Many Asian nations have been economically crippled by the financial crisis, and the crisis has spread across the globe. This paper attempts to unravel the Asian Financial Crisis in order to examine its causes and consequences.

In order to tackle this problem, the paper will first explore in depth the financial crisis in South Korea as an example of the greater epidemic. The problems which weakened South Korea will then be extrapolated to the rest of the East Asian region and beyond to the United States. The Financial Crisis raises some provocative, if not often mentioned, questions about the moral hazard of Western banks in dealing with Asia and other precarious markets, which the paper will then explore. Finally, the paper will examine the scope and success of the attempts by the International Monetary Fund to bring Asian nations out of recession. The paper will conclude by looking forward to the future of global financial markets in light of the Asian financial crisis.

South Korea has often been cited as one of Asia's strongest "tiger" countries. The world's 11th largest economy (in a country roughly the size of the state of Ohio) with a population of 45.95 million ^l, South Korea is known for its strong work ethic and economic growth. However, South Korea has endured recent troubles and now is considered a paper tiger by some. During the recent Asian financial crisis, many of the weak points within its economy came under attack. One of its most essential structural elements, the chaebol has been cited as a key cause for economic troubles. Chaebol² are the largest of Korean companies, having been the beneficiaries of industrial planning by the Korean government. In light of IMF restrictions, the question of restructuring these conglomerates is a thorny issue. This paper attempts to trace the role of these conglomerates in the crisis and to evaluate various strategies and their feasibility for restructuring these companies. Important to consider before embarking on this task are South Korea's economic background, creation of the chaebol, and the country's lot in the overall Asian crisis.

South Korea's post-war economy was built upon the theory of the chaebol. After the

Korean War, Major General Park Chung-Hee established a centralized power structure intent on economic growth and development.³ The government planned industrial development on the national level, so government and business kept a close relationship that led to the nickname "Korea Inc." This system of "favored business partners" allowed accumulation and allocation of scarce capital needed to create the basis for an industrial society. Moreover, the South Korean government took full advantage of its cheap labor force, using government planning to create strong export industries. In addition, the South Korean government established strong import barriers to protect these infant industries on domestic markets. As South Korea grew in prosperity, its middle class also grew, establishing a strong protected domestic consumer market that benefited the chaebol. The following graph shows the growth of per capita GDP in Korea over time. It can be seen that the Korean domestic market has increased in value over time.

Most chaebol expanded at a tremendous rate, powering an average GDP growth rate of 6% a year since the end of the Korean War. The following charts show the progress of real GDP and GNP over time.

Korea 1975-1982 1983-1989 1990 1991 1992 1993 1994 Basic Economic Data (expressed as percent of GDP unless otherwise indicated)

Total Firms (#) 68,872 435,966 157,965 497,740

Small and Medium

Firms 67,679 423,128 155,263 485,247

Share 98.3 99.1 98.3 98.7

Total Output (billion Won) (billion Yen) (100 million NT$) (million $)

Total 175,234 323,129 37,136 1,960,206

Small and Medium

Firms 74,634 167,232 20,063 1,054,146

Share 42.6 51.8 54 5@).8

Value added (billion Won) (billion Yen) (I 00 million NT$) (million $)

Total 70,935 118,910 10,258 824,118

Small and Medium

Firms (4) 31,432 65,947 4,828 441,184

Share (%) 44.3 54.9 47.1 53.5

Source: Hankook Ilbo, August 11, 1993, page 31

A lack of exposure to free market forces (especially in the financial sector) failed to provide the chaebol with incentive for profitability and efficiency. With more loans, these companies proceeded to expand further relying on government intervention to prevent bankruptcy, further exacerbating the problem. Once overextended, these companies depended on sustained growth to stave off obligations such as tremendous short-term debt. The accepted ratio of debt-to-equity is roughly 200%¹⁰; the Korean chaebol varied from 300% to 3600%.¹¹ An extreme case is the Shalla group which a debt-to-equity ratio of 3,600%, meaning that the company's assets consisted of 2.7% equity and the rest debt. ¹² At a certain point, investor and lender confidence was shaken. The severe debt loads of these companies made western banks more concerned about loans already extended; further loans were denied and repayment was demanded.

South Korea entered into the Asian financial crisis in January 1997 when Hanbo Steel Industry Co. Ltd. of the Hanbo group (14th largest chaebol) became insolvent; having accumulated US $5,800 million in debt. Among its leading creditors were Korea First Bank, Sohing Bank, and Korea Exchange Bank. Later in March 1997 the Sammi group of Korea (26th largest chaebol) declared bankruptcy with debts totaling US $2,200 million--of which $1,600 was owed to commercial banks. In April 1997 the 6th largest chaebol Ssangijong Motor group faced illiquidity problems and sale of assets to fund debt payments as much as US $4,200 million.¹³ Creditors began to demand repayment of loans and further loans were not extended. Foreign investors sensed long-term economic weakness within these companies. In addition, the high exchange backed by the Korean government became increasingly suspect. As foreign investors panicked and sought to retrieve their investments, the devaluation of the won occurred as Korean banks did not have adequate foreign reserves to fend off runs on the currency. The following chart shows the progression of the Korean won against three foreign currencies before, during, and after the crisis period:

Barclays Bank PLC Economics Department

Forecast Profile South Korean Won

Period Averages (W/$) (Wlf-) (w/-YIOO) 1-YearLoanRates

1995 Annual 771 1217 825 10.8

1996 Annual 804 1257 740 11.7

1997 Annual 953 1563 785 11.8

1997 Q2 892 1459 747 11.4

1997 Q3 899 1461 763 11.4

1997 Q4 1155 1918 916 1-@1.0

1997 Dec. 1505 2498 1160 12.3 (e)

1998 Jan. 1697 2776 1310 15.0 (e)

1998 Feb. 1622 2658 1294 16.0 (e)

Latest (23/2/98) 1661 2730 1299 16.0 (e)

Forecasts

1998 June 1600 2624 1230 17.0

1998 Sept. 1500 2415 1210 16.0

1999 March 1400 2184 1186 15.0

Struggling with roughly $110 billion in short-term debt, the depreciation of the won further increased the debt troubles of the chaebol and of the country. After failure of bilateral aid talks with Japan and the U.S., South Korea had little choice but to petition for a IMF bailout package.

There are a few reasons why South Korea is so dependent on foreign investment. First, unlike Japan, South Korea doesn't enjoy a low cost of capital.¹⁴ Domestic financial markets were underdeveloped due to the lack of competitive environment created by governmental planning, coercion, and favoritism. Equity and bond offerings are highly restricted within Korea to the point of not being viable sources of capitals. Because of the highly restricted capital market, both domestic and foreign bank loans are extremely important for investment capital. Due to the low performance levels of loans extended by Korean domestic banks, interest rates should be high because of the higher levels of risk on outstanding loans; however, interest rates were regulated by the government and kept abnormally low. Thus, cheap sources of capital were maintained by the government. Although the personal savings rate in South Korea is highest among all OECD countries, 1 5 the short-sighted expand-at-all-costs policies of the chaebol contributed to long-term unprofitability and sustained borrowing, increasing the nation's debt load and credit crunch. A series of bankruptcies triggering the currency run. Eventually, the government was forced to request IMF aid for South Korea.

II. Expansion to the Region

The problems which surfaced in South Korea can also be found in other East Asian nations. Bad loans, high debt, and a lack of transparency of information plague the entire region. The future of the region depends on how nations deal with these problems. This section will address these common problems and other key factors which will determine the economic fate of East Asia.

Bad loans generally arise during a booming economy and are one of the main culprits in the Asian financial crisis. When a country is undergoing an economic expansion, questionable loans are more likely to be approved than during an economic downturn. This allows corporations to expand their businesses; however, Asian corporations often take this opportunity to over-extend themselves and diversify into unprofitable businesses. When the economy slows down, it is likely that the company will not be able to cover the loans.

An issue relating to bad loans is that there is no agreed upon definition on exactly what qualifies as a "bad loan". Countries within the region all have differing standards by which they define bad or secure loans. Even within Japan, the fourteen major banks do not share the same standard for bad loans. It is estimated that Japanese banks have 72 trillion Yen in "problem loans"; however, the amount of problem loans depends on the definition that one uses to categorize the loans. ¹⁶

Another common thread in the Southeast Asian financial crisis is high debt. Debt can be measured in different ways, one of which is the debt/equity ratio. The problem with the Southeast Asian conglomerate's debt/equity ratios is two fold: (1) the ratios are extremely high and (2) the structure of the debt is very unfavorable to the companies. The first point is intuitive. It clearly strains a company financially when it has a high debt in relation to the equity of the company. The latter point is a little subtler - the fact that a large percentage of the debt is short-term debt.

Short term debt is a much greater financial burden to the company because the interest rate is usually higher and a portion of the company's capital is always used to service the debt. The accumulation of short term debt in these countries can be attributed to the rapid growth 'in the absence of established financial and capital markets. This, along with a large government presence has left the corporate sector very dependent upon financing long-term investment with short-term debt. This debt is compounded when the risky business ventures fail. For example, the top 30 Korean Chaebol average more than 400% debt to equity ratio in 1996 as compared to the US average of 150% for a Blue Chip company.¹⁷ This statistic clearly illustrates that the chaebol were suffocating under a tremendous debt load.

Vulnerable Asian countries also have large foreign debt as well. For example, Indonesia had US$140 billion in external debt as of 1997. Indonesia's GDP is US$ 214.6 billion.¹⁸ This means that the dollar equivalent of over 65% of Indonesia's GDP is external debt. Clearly a country is headed for financial ruin when debt is allowed to reach such astronomical levels.

The lack of transparency of information is a more discrete, yet equally dangerous, problem that plagues southeast Asia. This means that countries do not readily make available financial information. Also, when it is released, the accuracy of the information cannot be relied upon. As the IMF states:

Although private sector expenditure and financing decisions led to the crisis, it was exacerbated by governance issues, notably government involvement in the private sector and lack of transparency in corporate and fiscal accounting and the provision of financial and economic data.¹⁹

A good example of this is China, which will be discussed in greater detail later. Due to the fact that China does not make publicly available most of its financial information, opinions vary widely on the state of its economy.

The mechanism for the Asian financial crisis is the same in every country. The rapid growth in Asian markets leads corporations to make risky investments. To finance these investments, companies take out extensive foreign loans (both short and long term). When the economy starts to slow down (i.e. consumption and production decline), foreign investors begin to lose confidence in the loans and, as a result, they begin to call the loans. When foreign investors panic and call loans, banks tend to run out of foreign currency relatively quickly due to their low foreign currency reserves. When this occurs, they are no longer able to defend the exchange rate. At this point, other banks and speculators determine the exchange rate. This causes a run on the currency because the new exchange rate is artificially high (too many won to the dollar). Thus, the currency is devalued. When currencies devalue, the foreign debt load effectively increases because the debt is measured in foreign currency (e.g. US dollars, German marks, etc) but the companies pay in their own domestic currency. This makes it almost impossible for the companies to pay off their loans. Since the economic fortunes of the Southeast Asian countries are so closely tied with those of the giant corporations, they cannot afford to let the companies go bankrupt. In order to save their economies, the governments bail out the corporations through IMF aid.

What lies ahead for the East Asian region? The future of the region seems to depend on the performance of the Chinese and Japanese economies. The success of the region's economy relies on Japan since Japan has the second biggest economy in the world, and is a major source of trade for other countries in the region. Japan imported US$329 billion in 1997 and their Gross Domestic Product reached $2.85 trillion^2O. However, these imports are down over the last year, as many companies are laying off workers, who in turn do not spend as much money. As Marcia Kunstel, an American reporter, states:

Until the Japanese start spending again, returning confidence to their own corporations and recreating vital markets for neighboring countries, Asia will be unable to heave itself up and out of the regional economic crisis ... ²¹

Thus, Japan must renew its economic prosperity, or at least remedy its current recession, in order to help itself and the region.

The United States has taken an active role in attempting to sort out Japan's weakened economy, which is plagued by the same bad loans and governments inability to allow large companies to fail which doomed South Korea and other Asian nations. President Clinton recently remarked: "Now the health of Asia's economy -and indeed the world-depends on Japan."22 Like South Korea, Japan concentrated resources after wartime into a few companies which are now bringing the rest of the nation's economy down with debt. Japan must follow South Korea's lead and reorganize the interaction between corporations and the government in order to bring Japan out of its recession and prevent the rest of the region from sliding further into financial crisis.

China also is a major key to the future of the East Asian economic region. As The Chinese Business Review asserts, "World leaders now look to China to help lift Asia out of its economic doldrums."²³ However, as discussed earlier, opinions are mixed as to China's ability to aid the region, as some analysts believe China to be in a world of financial trouble itself. China has attempted to stave off the type of financial crisis other nations underwent by limiting foreign debt, and instead promoting "foreign direct investment," a way to infuse foreign investment into the economy without the short term debt with which such investments normally come. In contrast to the foreign debt accumulated by the chaebol of South Korea, "China has generally exercised caution in restricting enterprises and local entities from incurring foreign debt, primarily by requiring government approval for foreign-exchange transactions."²⁴ From this point of view it seems China's economy is in good shape and could represent the economic stability that the region desperately needs.

However, many experts are critical of China's economy. The problem of a lack of transparency of information discussed earlier arises, as "...a number of analysts and international organizations believe that official PRC [People's Republic of China] statistics underreport the country's true level of foreign indebtedness."²⁵ In fact, Standard and Poor's credit rating agency estimates China may have as much as US$500 billion in bad foreign loans.²⁶ As an example of the lack of clarity in economic data in the region, the People's Republic of China estimates its foreign debt load at US$904 million.²⁷ It is thus evident the difficulty in assessing the viability of China's economy. Even if China's economy sustains its success, China will not have the rebuilding effect that Japan could have on the region, since China only imports about $US 142 billion a year (about one third of Japan).²⁸ Even though China may not be able to revitalize the East Asian region, it is clear that a collapse in China's economy would be catastrophic for the region, and for the world.

With several of the world's major economies in recession or crisis, the question arises of whether the United States, the world's largest economy, is vulnerable to similar financial crises? A close inspection of the Savings and Loan Crisis in the 1980s shows that the United States is indeed vulnerable to the same forces causing the Asian financial crisis, namely risky investments, bad loans, and an overvaluation of the economy. Savings and Loans in the 1980s were not subject to rigorous regulation, and thus made many risky investments, especially property loans. As in South Korea, the government allowed Savings and Loans too much leeway in their ability to loan out large amounts of money with little equity to back the loans.²⁹

The major legislative instrument of this government leeway was the Garn St. German Act of 1982, which allowed Savings and Loans to loan money at a high loan to value ratio and without having to deposit money with the Federal Reserve (restrictions which ordinarily restrict risky loans). The goal of the act was to stimulate a real estate boom, which did temporarily occur. However, as in Asia, the success was built on a house of cards which collapsed once the true lack of value was realized in the commercial real estate market. As in the Asian countries, the government was forced to bail out the Savings and Loans and absorb all of the defaulted property. The RTC was established to sell off this property, but the government earned a minimal amount of money compared to what was absorbed into the United States debt as a result of the Crisis.³⁰ The Savings and Loan Crisis taught, or should have taught, Americans that although we have a relatively stable economy, we are not immune to the type of financial crisis which has brought East Asia to economic collapse.

III. Moral Hazard of Western Banks

Often overlooked in determining responsibility for the Asian financial crisis is the role of the global banking system and western banks. There exists a power vacuum when it comes to governing international financial transactions, as countries can rarely agree on foreign policy issues. With agreement between governments so hard to come by, it is highly unrealistic to gain enough consensus to form an international watchdog organization. Indeed, one need only to look at the difficulty of forming a League of Nations and the subsequent United Nations. The same holds true for financial regulation. The regulation of banks within specific countries usually falls to the authority of those specific countries. In the United States, the domestic banking system is monitored by the Securities and Exchange Commission among others. However, their authority ends at the borders. In 1994, the value of Mexican stocks came under attack as investor confidence waned in the Mexican economy. U.S. banks invested heavily in Mexican companies. When these companies were on the verge of defaulting, the Mexican government intervened, printing pesos as fast as possible and turning to the IMF for bailout. While the specifics differ in the Mexican crisis, there was a clear message sent to the western banking establishment--risky investments in foreign countries would likely be bailed out by the governments if the troubled companies are important.

There usually exists an inverse relationship between return on investment and the risk of the investment. Banks usually have to face risky decisions (bad loans) and losses associated. With the introduction of governmental interference, these bad loans to foreign countries are essentially guaranteed not to default. Without having to face the consequence of their bad loans, western banks had serious incentive to invest in the "hot" growing region of Asia. After all, real GDP growth in the region was the highest in the world during the 80's and early 90's. With the lack of international monitoring, western banks did well on good loans and were rescued on bad ones. In economics, there is a term used called "moral hazard." Moral hazard refers to a situation where people have incentives to behave differently, usually for the worse. It is safe to say there exists moral hazard within the global banking system.

The sequence of events which happened in South Korea also illustrate another aspect of moral hazard. Once the crisis had occurred, Korean domestic companies suffered terribly both due to stock devaluation and increased foreign debt load. Given their dire short-term liquidity situations, Korean firms were vulnerable to takeover. Foreign companies and banks were presented with an excellent opportunity to go in and buy Korean companies on the cheap. Indeed, many US companies bought out former business partners. For example, Coca-Cola bought out Doohang distribution and bottling and bought into Korean business structure. Merrill Lynch bought a sizable piece of equity in Nomura Securities, keying into Japanese markets.³¹ These are just a few of the examples of increased foreign ownership of Asian companies.

If one was to look at the overall picture of western banks and moral hazard, the following could be a possible scenario. Western banks extend questionable loans to Asia countries. When things go bad, the debt is restructured and the opportunity to buy into Asian business is cheap. Such a scenario is a perfect example of many of the less glamorous conflicts that occur on the world stage. These conflicts are ones of economics and business. Essentially, there exists incentive to sink competitor economies and then move in at a fraction of the cost.

There is significant reason to believe that Asian banking practice will reform for the better. In the late 1980's the United States underwent the aforementioned Savings & Loans Crisis. The lack of regulation among certain branches of the U.S. domestic banking led to bad loans and $300 billion in cleanup CoStS.32 The take-home point is that failure of regulation in absence of market forces leads to trouble. Another key point is that Asia is younger in terms of economic and financial development. Many of the key aspects that made Asia a dynamic economic environment worthy of foreign investment are still present. Some of these elements are: cheap labor, an educated workforce, infrastructure, and a capitalistic mindset.

Given that there exists moral hazard within banking and some structural elements within Asian companies and countries that just will not work in the long term, it begs the question what is the best solution to the problem. So what are we to do? One possible answer is for the Asian countries to take charge of watch dogging their respective companies in both domestic and international transactions. Another answer is try to change the dominant paradigm of international finance. The west has traditionally been the sources of capital abroad. Much of the foreign lending came from concentrated sources--your "major player" banks like Citigroup and Chase Manhattan. Roughly 70% of loans to the region came from six major western banks.33 These large institutions wield enormous influence in their home countries and abroad. However, the states of the Middle-East have sizable reserves of capital from oil profits. Moreover, there exist significant labor relationships between the Middle-East and the East. If the OPEC states could serve to replace/compete with the Western banks, one could see market forces acting to restore equilibrium. The solution used currently by most governments and companies is to call in the aid of the IMF.

IV. IMF Restructuring

International Monetary Fund, the primary instrument used in attempting to solve large-scale financial crises, aid does not come without conditions. Many of IMF conditions revolve around the notion of austerity measures. These measures include tightening of fiscal and monetary policy and reduction of debt. Originally created after World War 11, the IMF was intended to help countries with short-term balance of payments. Among the strongest criticisms of the IMF is that it uses a cookie-cutter approach when dealing with situations that vary both in nature and severity. The IMF is best suited to curb the excesses of government spending (fiscal policy)--excess public debt and balance of payments.³⁴ The weakness within Asia's situation stems from the excesses of the private industry and insufficient domestic capital markets. Companies were often extended questionable loans by domestic banks due to governmental coercion; they were extended questionable foreign loans due to the presence of implicit governmental guarantee of the companies' private debts. There was no way Asian governments were going to let so many people go out of work. Moral hazard was present as companies came to rely on and expect bailout loans, making reckless expansion possible. This juxtaposition of crisis characteristics begs the question is the IMF pursuing proper measures for Asia and her companies?

The IMF demands include double-digit interest rates on repayment loans to the IMF. Their rationale hinges on the downgrading of Asian country debts to "junk" status by Standard & Poor and Moody³⁵; high rates must be charges to compensate for greater risk. Unfortunately, Asia is in no position to bargain as it doesn't want to default on its loans. If it did, extension of credit in the future would be difficult. Those foreign banks like Citigroup that have extended sizable loans are taking advantage of a situation they helped to create, renegotiating favorable loan ⁹ roll-overs. High interest rates could delay economic recovery as more companies would default under such austere rates, reinforcing the "risky" status of such loans. Remember that much of the companies' troubles stem from foreign debt. To further increase the weight of such a load could prove disastrous as the sudden devaluation of many Asian currencies has already increased the foreign-denominated debt load.

While the situation is delicate, compassion must be tempered with the desire to insure that companies won't squander the loan money. High interest rates would force them into only sound investments or risk default. Unfortunately, there are other effects of higher interest rates on Asian companies. Those economically sound companies that were not recipients of questionable loans suffer from higher interest rates. These companies cannot undertake expansion efforts that would have occurred with lower costs of capital. Thus, efficient companies will suffer because of the inefficiencies of other companies. High repayment rates are not the only questionable aspect of the IMF.

IMF measures often serve as a signal to the world business community. Contraction of fiscal and monetary policy as demanded by the IMF often sends the troubled nation into a recession, creating greater economy problems such as unemployment.³⁶ In addition, these policy demands signal investors that the Asian business climate is still unfavorable, worsening the problem and slowing recovery. As Jeffrey Sachs of Harvard University claims, it is possible that the IMF created a climate of investor panic in Asia with its measures. Given that the IMF's goal is to restore currency stability, would it not make more sense for the IMF to introduce measures that increase investor and lender confidence? Extension and restructuring of Asia's short-term debt would be one such measure, and the IMF played an extensive role in the renegotiating process.

Asia while suffering short-term debt problems, still enjoys prominence in many industries such as electronics, textiles, and manufacturing. An opposing view is that undertaking of IMF measures by Asia is a signal to other regions that sound macroeconomic policies are being implemented. Thus, investor confidence will be restored. The delicate balance of reform with a minimum of short-term shocks is hard to reach. The IMF is not always correct in its policy. In June 1996, Bulgaria and the IMF signed a program projecting a 2.5% GDP increase and 20% inflation growth for 1997. Bulgaria has suffered a collapse of GDP to the tune of 10% and inflation in the I 00%'s. ³⁷ Indeed a recent Heritage Foundation study found that more than half of the 89 lesser-developed countries that received IMF loans are no better off economically, and 32 are actually worse off.38 Currency depreciation triggers inflation; to curb inflation monetary policy is tightened. The ensuing tax raise brakes economic growth.

Along a different line of thought, there is worry that the IMF not only sets the goals of reform but also policies to reach them. The IMF is concerned with good governance--specifically reducing corruption. When Kenya needed a loan, the IMF forced President Daniel arap Moi to fire a specific minister.³⁹ However, the IMF's Articles of Agreement states that the IMF cannot interfere in domestic affairs of a country. The issue of sovereignty is a thorny issue; one that the IMF must steer clear of. When Korean presidential elections were occurring, IMF president Michael Camdessus wanted all three major candidates to sign a document promising to honor all IMF guidelines. Needless to say, this demand was not well received, and renegotiation took place. The perception that IMF might be infringing upon sovereignty could be an impediment to the negotiating process and policy implementation.

Among specific IMF requirements 'are the following points. First, cut in public expenditure must occur. The reduction in fiscal policy is supposed to slow down the flow of money within the economy, curbing inflation. Second, foreign investors must be allowed to own larger shares of Asian companies. This measure hinges upon the belief that more foreign ownership will bring more foreign business practices. Third, a 8% capital adequacy must be maintained by Asian domestic banks. The purpose of this measure is to insure a minimum level of liquidity within domestic financial institutions. Fourth, foreign companies must be able to acquire Asian financial institutions. Foreign control of domestic financial institutions will hopefully alleviate the cozy and pressured relationships between companies and their respective governments. Fifth, Asia must establish greater independence for its central banks to set monetary policy and create watchdog institutions for domestic banks. Sixth, reduction in overcapacity within Asian companies must occur. This move implies mass-layoffs but is intended to push Asian industry towards profitability in business. Seventh, large Asian companies are to reduce the scope of their business, concentrate only on core businesses, and reduce their debt loads. Eighth, increased regulation and greater financial transparency within Asian companies must occur.

The IMF needs to evaluate the real basis for both legitimate and perceived economic weakness within Asia. During the post-war expansion boom, which has lasted until the early 1990's, these industrial groups have followed their recipe for economic success, often producing themselves out of a market. As part of the cost leader strategy, it makes sense for Asian companies to drive prices lower and to drive competitors out of business. The blind extension of loan help from the government and banks has diminished. Banks have gone insolvent, and export markets are more competitive. The sustained growth needed to support such a network is not present. Thus, the IMF reforms aimed at bringing the Asian financial markets into market conditions are needed. One worry is that foreign control of Asian banks could lead to abnormally high interest rates as foreign investors realize how important domestic bank loans are as investment capital sources. A counter to this argument is that competition from foreign banks should drive rates down to market levels. Suffering from a dependence on foreign investment and credit, Asia must reexamine the economic and fiscal policies that created the current business structure.

The Asian Financial Crisis is far from over, as many East Asian nations are still attempting to restructure their economies and others are still trying to prevent the crises that have rocked other Asian economies. China and Japan appear to be the keys to the economic future of East Asia. If Japan can renew its standing as the economic leader of Asia and China can continue to ward off impending financial trouble, the region may be able to experience again the economic boom of previous years.

The role of the International Monetary Fund will also be a decisive factor in future economic crises. For the time being, the United States, and most vocally chairman of the Federal Reserve Alan Greenspan, have spoken out in favor of the IMF and of the United States be' mg the major benefactor of the IMF. Many notable economists, like Stanford's own Milton Friedman, however, have discounted the value of the IMF in the worldwide economy.

What lies ahead for world economies? The Asian Financial crisis has spread into Brazil, which is the latest target of a large-scale IMF aid package. Economists are uncertain as to the future of the crisis, as Europe may or may not be next on the financial crisis horizon. The ability or inability of nations to control economic factors discussed in this paper, like bad loans, high debt, and conflicting data, will determine those nations' ability to stave off financial doom.

1 Barclays Bank Count@ Report March 1998

2 Chaebol can be defined as "a business group consisting of large companies which are owned and managed by family members or relatives in many diversified business areas." The Chaebol, Richard Steers-, Ballinger Publishing Company, New York, NY page I 1

3 The Chaebol, Richard Steers; Ballinger Publishing Company, New York, NY page 13

7 Korea at the Turniny- Point, Branscomb and Choi-, Praeger Publishing, Westport, CT Copyright @1996

8 The Chaebol, Richard Steers; Ballinger Publishing Company, New York, NY page 76

9 Barclays Bank Country Report March 1998

10 "Chaebol Sink Deeper into Debt, Seoul Reports" Don Kirk International Herald Tribune Oct. 14, 1997 Finance page 13

11 "President Kim must revolutionize the chaebol attitude towards competition rather than plow deeper into debt" South China Morning Post April 26, 1998 Business section page 3

12 "President Kim must revolutionize the chaebol attitude towards competition rather than plow deeper into debt" South China Morning Post April 26, 1998 Business section page 3

13 Working Paper, Professor Lusignan; Stanford University

14 The Chaebol, Richard Steers; Ballinger Publishing Company, New York, NY page 76

15 "Rebuilding South Korea's House of Cards" Steve Mufson-I Washington Post Foreign Service Dec. 22, 1997 page AO 1

16 "Japanese Banks Seek to Double Government Handout to Cover Bad Loans." Evening Standard. 11 Nov.

1998

17 World Bank homepage (http://www.worldbank.org)

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20 Marcia Kunstel, "Ailing Asia." The Atlanta Journal and Constitution 15 November 1998: 02G.

21 Kunstel.

22 Kunstel.

23 T.K. Chang, "SAFE and Sound" The Chinese Business Review. 17 July 1998: 3 1.

24 Chang.

25 Chang.

26 "China: a most favored nation facing major domestic problems" The Washington Times. 23 March 1998: AI S. 27 Chang.

28 Kunstel.

29 "The S&L Crisis: a chrono-bibliography" The FDIC

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32 FDIC

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34 A New Colonialism for Asia?, David Francis; Christian Science Monitor 1/26/98 page 8b

35 A New Colonialism for Asia?, David Francis; Christian Science Monitor 1/26/98 page 8b

36 A New Colonialism for Asia?, David Francis; Christian Science Monitor 1/26/98 page 8b

37 "Binge of Failed Bailouts" Larry Kudlow; The Washiny-ton Times Dec. 12, 1997

Part A Commentary page A20 Copyright News World Communications, Inc.

38 "Binge of Failed Bailouts" Larry Kudlow; The Washing-ton Times Dec. 12, 1997

Part A Commentary page A20 Copyright News World Communications, Inc.

39 A New Colonialism for Asia?, David Francis-, Christian Science Monitor 1/26/98 page 8b

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