Financial globalization, in recent years, has been met with a series of crises, and two of the most glaring crises are the EME, or what is known as the “East Asian Financial Crisis of 1997,” and GFC, or the “Great Financial Crisis of 2008.” During both crises, the international financial system became exposed to downsides not guarded against by the economic basics, including critical elements of the financial sector. This paper is devoted to cracking down on the core of the problems, analyzing the role of the financial sector’s weakness in their magnification, and discussing how the International Monetary Fund (IMF) reacted to these epochal events.
1.0 The East Asian Financial Crisis of 1997: Origins and Impact
The EME crisis happened in 1997 due to predominantly two types of problems: the devaluation of a currency in Thailand and the second one is spreading of the contagion effect in other East Asian countries. The crisis’s roots lie in the complex interaction of unfavorable factors such as heavy domestic borrowing, currency pegs, and weak supervision of financial institutions (Lai, Lin, and Sidaway, 2020). Countries like Thailand have sizeable current account deficits, usually financed by short-term capital. This was a cause of concern because of the risk of capital volatility (Erten, Korinek, and Ocampo, 2021). The giants on the market reacted quickly by withdrawing their funds, further accelerating the transfer of currencies and, hence, the economic decline.
1.1 Role of Financial Sector Weaknesses
The financial sector weaknesses in the crisis countries intensified the situation, and this caused a substantially less positive effect on their economies. Specific financial vulnerabilities included a high portion of non-performing loans and a deficient regulatory framework that facilitated the contamination of external dimensions (Naili and Lahrichi, 2022). Furthermore, among the weaknesses at financial institutions, insufficient transparency and risk management were the enablers of market uncertainty, which ultimately tore out investor confidence and boosted capital outflows (Shipalana, and O’Riordan, A.L.E.X.A.N.D.E.R., 2022).
1.2 IMF Response to the EME Crisis
The IMF’s early reaction to the crisis of EMEs was attacked for its principle of “one size fits all,” which focused on fiscal tightening and monetary discipline. The IMF, however, realized the need for more conventional liquidity measures in solving financial crises. Thus, it implemented new reforms to identify and address financial sector weaknesses (Meier, Gonzalez, and Kunze, 2021). Among these reforms is the creation of the Financial Sector Assessment Program (FSAP) program to review countries’ vulnerabilities and financial sector conditionality linked with loan programs (Kim and Lee, 2021).
1.3 Assessment of IMF Response
Despite the IMF reforms mentioned above serving as a stride forward in revealing the indivisibility of financial sectors’ deficiencies, their effectiveness remained blurred. Critics remarked that IMF conditionality tends to deliver short-sighted structural in place of long-term reforms, considering the worsening of downturns the effect results in (Pascual, Singh, and Surti, 2021). Moreover, the statement of the IMF about its market-based solutions and deregulatory measures was sent to those who were against money instability and the fragility of financial conditions.
2.0The Great Financial Crash of 2008 Origins and Impact
Financial sector vulnerability was evident and led to a crisis that emerged from weak points in the global financial system due to divergence from the US subprime mortgage market. The lifting of regulatory junkets and the advent of new financial tools that catered to complex financial risk products caused the wide dispersion of these products whose risk profiles lacked transparency (Notteboom, Pallis, & Rodrigue, 2021). After investing in precarious subprime mortgages, the bubble burst, triggering a series of chain reactions of bank failures, the shortage of cash, and a further collapse of the financial market, resulting in the worldwide recession.
2.1 Role of Financial Sector Weaknesses:
In the GFC, financial system weaknesses were one of the factors behind the crisis, as those susceptibilities between the banks proved to be amplifiers of illiquidity and systemic risks (Taskinsoy, 2020). Given the intricacy of global financial connections, including derivatives and inter-bank lending, one can easily envision how a problem in one segment can quickly jump into every other sector of the whole financial system (Wang et al., 2021). Besides, limited capital taxation and hazard planning made banks vulnerable to shocks, leading to liquidity shortages and a barrier to confidence in the banking sector.
2.2 IMF Response to the GFC
The IMF’s response to the GFC was multifaceted, encompassing a range of policy measures aimed at re-establishing stable financial markets and asserting economic growth (Borio, Shim, & Shin, 2023). Its additional intervention of providing financial assistance to crisis-affected countries, mainly from the World Bank and the G20, was done in collaboration with other international institutions. Liquidity support and technical assistance in strengthening financial regulation and supervision were offered to crisis-affected countries (Meier, Gonzalez, & Kunze, 2021). Furthermore, the IMF proposed concerted policy responses at the global level, highlighting the importance of economic expansion and financial services reforms in restoring stability and a long-term recovery framework.
2.3 Assessment of IMF Response
Even though the IMF’s involvement in the GFC was globally appreciated for its immediate and centralized character, its critics assured that the depth and usefulness of its intervention measures are questionable (Ray, Gallagher, and Kring, 2020). Some argue that IMF programs should focus more on fiscal consolidation and structural reforms, disregarding necessary comprehensive measures for the financial sector to ensure bank stability and lending credibility (Matthijs, 2022). Also, the problems were brought forward by the IMF’s governance structure and representation, which, once again, brought to the surface the need for more inclusive and transparent decision-making processes (Petrone, 2022).
3.0 Lessons Learned from the EME and GFC Crisis
The teaching points of the East Asian Financial Crisis and the Great Financial Crash emphasized the critical role of resilient financial sectors, underscoring the need for robust regulatory oversight, risk management, and high transparency (Olaniyi & Shah, 2023). The crisis also emphasized the necessity of regional development banks in Africa as well as American and Asian continents, which worked on the establishment of regional financial stability mechanisms, the support of structural reforms, and the provision of capacity-building support (Ocampo and Ortega, 2022). The epidemics brought to the fore the degree of interconnectedness in the global finance markets, highlighting the need for internationally coordinated response measures and heightened surveillance mechanisms (Hynes et al., 2020). They illustrated problems in dealing with turbulent capital flows, showing why it is essential to master prudent management of capital accounts (Murdipi, Baharumshah, & Law, 2023). The policy responses reiterated the need for flexible frameworks. They addressed the conditionality tailored so that the balance between short-term stabilization and long-term structural reforms was achieved. (Ansell, Sørensen, & Torfing, 2023). Furthermore, the disasters demanded reforming global governance to be more comprehensible, open, and transparent (Larionova & Shelepov, 2022).
4.0 Conclusion:
The 1997 EME crisis and the 2008 GFC demonstrated why financial sector weaknesses should be addressed to enhance the financial stability and resilience of the economy. Although the IMF’s efforts in dealing with the financial crises have marked remarkable progress in recognizing that such crises stem from systemic vagaries in financial markets, the challenges in implementing efficient policy measures to prevent such occasions in the future remain. However, there is room for more partnership efforts to build a more robust regulatory framework and inclusive growth to help contain the aftermath of global financial instability. Membership in regional development banks like the African Development Bank and the Asian Development Bank, which provide financial assistance, specialized knowledge, and capacity-building support to member countries, is a potent instrument for accelerating efforts that intend to strengthen the financial systems and at the same time propel the sustainable development in their regions.
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