ABSTRACT
This chapter presents the genesis of the East Asian crisis and its implications for the future of East Asia and India. The financial explosion of East Asia raises several questions: Why did it happen? How could it, especially the contagion, occur? The chapter explores answers to these questions and addresses the problems and prospects of India, a major Asian country which escaped the crisis. It examines the causes of the crisis: managed exchange rates, crony capitalism, asset bubbles, Japanese devaluation, and capital account liberalization. A model of capital flows is developed which outlines the incentives for both flows into, and out of, emerging markets. Capital flows into a country originate via the decisions of an investment trader based outside the country. There is no need to change the international monitoring system and, domestically, instead of under-regulation, the problem is more the operation of a fixed exchange rate regime. The chapter considers the example of non-performing assets, or banking sector problems.
