Globalization & ‘The Lexus and the Olive Tree’
To introduce us to globalization, Thomas Friedman begins The Lexus and the
with a synopsis of the Asian Crisis of 1997/1998 and how it resulted in the
first global financial crisis of the new era of globalization.
Before the Asian crisis,
Thailand's finance houses would borrow U.S. dollars and then lend those dollars out to
The financial houses thought that they were safe with their practices
because they thought that the Thai government was going to hold the baht, Thai
currency, at a fixed rate against the U.S. dollar.
When global speculation against the
baht mounted and the Thai government failed to keep the rate fixed, the financial
houses quickly learned that they should have more thoroughly considered the risks
associated with the arrangement, such as those discussed by Robert Simon in "How
Risky is Your Company?".
Businesses could not pay the financial houses, who were
then unable to repay their foreign loans.
In 1997, the defaults resulted in the virtually
overnight closing of 56 out of 58 of the top finance houses in Thailand. This initiated a
rush of investors looking to pull capital out of practically every emerging market in
As the leading consumer of gold, copper, aluminum, and crude oil, Southeast
Asia's resulting recession triggered a worldwide commodity price drop, which, in turn,
sent Russia into crisis, as they were heavily dependent on export sales.
invested in Russia began encountering substantial losses.
In an effort to compensate
for their losses, hedge fund managers started liquidating any assets possible, including
those in financially stable countries, which transmitted the crisis to other emerging world
markets, Brazil in particular.
As Brazil saw frightened investors pulling out of their
markets, they raised the interest rates to keep the capital inside of their borders.
emerging markets worldwide were in decline during the Asian Crisis, people rushed to
the low-risk protection of U.S. Treasury Bonds.
As the demand grew, so did the value
of U.S. T-bond, which pulled down the associated interest rate.
The drop of the interest
rate crushed more hedge funds and investment banks.
The most notable hedge fund
hit was the LTCM which had to be bailed out by U.S. banks before it liquidated all of its