The Asian Financial Crisis: Crisis, Reform, and Recovery

The Asian Financial Crisis: Crisis, Reform, and Recovery

The Asian Financial Crisis: Crisis, Reform, and Recovery

The Asian Financial Crisis: Crisis, Reform, and Recovery

Synopsis

The Asian financial crisis of 1997-98 shook the foundations of the global economy and what began as a localised currency crisis soon engulfed the entire Asian region. What went wrong and how did the Asian economies long considered 'miracles' respond? How did the United States, Japan and other G-7 countries respond to the crisis? What role did the IMF play'. Why did China, which suffers many of the same structural problems responsible for the crisis remain conspicuously insulated from the turmoil raging in its midst'. What explains the remarkable recovery now underway in Asia? In what fundamental ways did the Asian crisis serve as a catalyst to the current thinking about the "new international financial architecture"'. This book provides answers to all the above questions and more, and gives a comprehensive account of how the international economic order operates, examines its strengths and weaknesses, and what needs to be done to fix it.

Excerpt

During the period of economic growth, we were too complacent. In good
times we forgot many important truths and neglected many important tasks;
we opened up our economy, but our stated plans to pursue discipline were not
followed up; we attracted massive flows of cheap foreign capital, which we did
not always spend or invest with enough prudence… we did not examine the
fundamentals of our politics and governance or tackle issues such as bureau
cratic inefficiency, lack of transparency and lack of accountability… naturally
we were quickly and severely disciplined by the market (Chuan Leekpai, Prime
Minister of Thailand, in a speech on March 11, 1998).

When Thailand, the paradigmatic economic success story, fell victim to the crisis, many analysts were dumbfounded–instinctively blaming the pervasive cronyism and corruption for the country's troubles. However, as it turned out, cronyism, corruption, clientelism and weak corporate governance were only part of the problem. After all, these problems existed while Thailand notched up impressive growth rates for more than a quartercentury before the financial meltdown in July 1997. Rather, this chapter argues that it was the volatile convergence of a mounting current account deficit, a sharp export slowdown, currency and maturity mismatches among Thai commercial banks, the maintenance of a rigid exchange rate, a rapid build-up of private short-term foreign-debt liabilities, an overheated investment bubble in real estate and stock markets, and an external environment that unexpectedly turned sour in 1996–97, that led to the crisis. All that this convergence needed was a trigger. The trigger was provided by a loss of confidence on the part of the owners of short-term capital in the Bank of Thailand's capacity to maintain its fixed exchange rate. Most tragically, this convergence was neither foreordained nor sudden–but had been building up since mid-1996, roughly one year before the baht's devaluation.

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