History and institutions
What happened in Asia in 1997? Countries such as South Korea, Thailand, Indonesia, Singapore, and Hong Kong whose economies had previously been the envy of the world experienced crises. Banks and other financial intermediaries were put under great strain and in many cases collapsed. Stock markets and currencies plunged. Their real economies were severely affected and their GDPs fell significantly. What were the causes of these dramatic events?
To many people these crises were a new phenomenon. There had been crises in other countries such as Mexico and Brazil but these could be attributed to inconsistent government macroeconomic policies. In those cases taxes were too small relative to government expenditures to maintain a fixed exchange rate. This was not the case for the Asian crisis. Other causes were looked for and found. The institutions in these countries were quite different from those in the US. Many had bank-based financial systems. There was little transparency either for banks or corporations. Corporate governance operated in a quite different way. In many cases it did not seem that managers' interests were aligned with those of shareholders. In some countries such as Indonesia corruption was rife. These factors were seen by many as the cause of the crises. However, they had all been present during the time that these countries were so successful.
Others blamed guarantees to banks and firms by governments or implicit promises of [bail-outs] by organizations such as the International Monetary Fund (IMF). Rather than inconsistent macroeconomic policies being the problem, bad microeconomic policies were the problem. Either way it was governments and international organizations that were to blame.
In this book we will argue that it is important not to take too narrow a view of crises. They are nothing new. They have not been restricted to emerging economies even in recent times. The Scandinavian crises of the early 1990's are examples of this. Despite having sophisticated economies and institutions, Norway, Sweden and Finland all had severe crises. These were similar in many ways to what happened in the Asian crisis of 1997. Banks collapsed, asset prices