The Asian Financial Crisis: Causes and Implications for Australia's Tourism Industry.

Abstract

The 1997 Asian financial crisis was an unexpected detour from Asia's otherwise rapid rise in economic prosperity. An immediate impact of the crisis was a fall in the number of Asians travelling abroad. Effects were felt in both Asia and Australia. This paper examines the causes of the crisis and assesses the impact on Australia's tourism industry. Strategies that could be adopted to mitigate further effects on Australia's inbound tourism industry are discussed.

Keywords: Asian Financial Crisis, Australian Tourism, Government Policy

Introduction

Prior to the Asian financial crisis that began in July 1997, Australia's tourism industry was experiencing a rapid increase in Asian inbound tourism, based on growing Asian prosperity. Optimistic forecasts of double-digit annual inbound growth caused a resurgence of interest in tourism investment in Australia, mirroring high levels of investment in hotels and resorts in the late 1980s. By the end of 1997 the financial crisis, which began in Thailand, had spread to South Korea and Indonesia and the first evidence of the impact of the crisis on Australia's inbound tourism industry was beginning to emerge, as arrivals from most East Asian nations declined. This paper will examine reasons suggested for the emergence of the crisis as well as highlighting its short-term impact on Australian's tourism industry. Strategies to reduce the adverse effects of the crisis in the long-term are also considered. For the purpose of this paper, an expansive definition of the tourism industry is taken to include the private sector and those elements of the public sector that provide the range of goods and services necessary for the operation of the tourism industry.

Literature Review

The speed with which the crisis emerged and engulfed East Asia caught most commentators by surprise. As late as May 1997, Joseph E. Stiglitz (1998), Chief Economist of the World Bank, was describing East Asia's economic success as the engine of growth for much of the rest of the world. Given the severity of the crisis and its possible long term implications for tourism in the Asia Pacific region, it is surprising that few tourism academics have published detailed analyses of the crisis from a tourism perspective. Apart from a special edition of Current Issues in Tourism devoted to the crisis, analysis of the causes and the possible effects of the Asian financial crisis have been largely confined to the business press and academics active in economics, finance and business research. This paper will rely on the business press, conference proceedings (both published and unpublished), government reports, World Tourism Organisation reports (WTO 1998a, b), industry reports, web publications, the initial books on the crisis and references to the crisis in the tourism literature.

Published comments on the crisis have been prolific in the business press, in particular, and the wider popular press in general. Articles appearing in the popular press range from predictions of a speedy resolution of the problem to expressions of gloom and continuing problems. Comment in the business press has generally been more considered and analytical. In the academic press, Mules (1998) observed that Australia may have to reinvent its tourism industry to balance the traditional fare of sun, sea, sand and wildlife with new products that appeal to more diverse markets if it is to cope with the anticipated (at the time of writing) impacts of the Asian financial crisis. Prideaux (1998a) briefly discussed the impact of the financial crisis on inbound Korean tourism into Australia, noting that there was a need to maintain strong links with the Korean industry throughout the crisis period, while at the same time developing new tour options for the next wave of Korean tourists in the post-crisis period. Prideaux and Witt (1999) observed that the Asian financial crisis highlighted the need for additional research into tourism forecasting methods, such as contingency planning and scenario development. The same article also highlighted the need for the development of a greater understanding of the role that economic forces (including the relationship between tourism demand and the business cycle in respect to changing demand patterns of holiday travel) have on the operation and health of the tourism industry. Prideaux (1998b) assessed the impact of the crisis on bilateral tourism between Australia and Indonesia, noting the reduction in Indonesian arrivals in Australia was due to the crisis as well as associated civil disturbances. Kim and Prideaux (1999) observed that the crisis, resulted in a substantial reduction in Korean outbound tourism in 1998 typified by a 28.2 percent decline in Korean arrivals in Japan and a fall of 71.4 percent in Korean arrivals in Australia.

Muqbil (1998) examined the impact of the crisis on East Asian tourism in the period 1997 to 1998, assessing the role of government policy. Leiper and Hing (1998) assessed the impact of the crisis on the region, finding that the crisis was only one of a number of problems faced by the tourism industry in East Asia. Pine, Chan and Leung (1998) examined the impact of the crisis on the region's hospitality industry.

A number of books on the Asian financial crisis (Far Eastern Economic Review 1998a, Henderson 1998, Gough 1998, Godement 1999; Mallet 1999) have also been published, although their primary value will lie in presenting a short term `as it happens' commentary, rather than a more considered reflection of the inter-weaving of cause and affect from the long term perspective. It is in the closeness of the writing to the unfolding of events that the contents of these books may prove the most valuable. Denied the luxury of the wisdom of hindsight, these books are able to reflect the views and contemporary wisdom of commentators and analysts during the unfolding of the crisis. In this way, such publications are able to provide future commentators with a valuable reference point to the reasoning behind strategies implemented to reduce the impact of the crisis as it unfolded. An understanding of how decisions were made in the heat of crisis and in the absence of knowledge of the future impact of policy decisions is an important body of knowledge from which to extract ideas for strategies that may be of use in reducing the impact of future crises, whatever their nature. This is particularly relevant to many of the comments where predictions of further meltdowns and global spread of the crisis were made on what now appears to be flimsy evidence. Works written after the crisis have abated will in all probability offer a different interpretation, as knowledge of the causes of the crisis and the success or otherwise of policies developed to combat the crisis emerge and are more fully debated. Unfortunately, books on the crisis published to date primarily cover financial and economic aspects and omit reference to the tourism industry.

Chronology of the Crisis

Although originally seen as an Asian phenomenon, events in the period July 1997 to October 1998 indicate that the Asian financial crisis was the first visible symptom of a much deeper problem in the structure and operation of the international financial system. By October 1998 it was evident that the financial crisis had developed over three stages. Stage 1 commenced with the devaluation of the Thai baht on 2 July 1997 and lasted until mid-1998. Stage 2 saw the spread of the …