ABSTRACT
At one level of generality, an explanation for the misadventure that befell many East Asian economies in 1997-98 is straightforward. The devastating (if, save for Indonesia, short-term) reversal of economic growth was the product of mutually reinforcing currency and banking crises. These quickly spilled over into the real economy when the collapse of financial institutions led to the non-renewal of loans and/or companies were unable to service their debts under a higher interest rate regime. The proximate cause of the crisis was a massive reversal in capital flows – with net international bank and bond finance for the five most severely affected economies (Indonesia, Korea, Malaysia, the Philippines, and Thailand) moving from an inflow of $54 billion in the 12 months from the fourth quarter of 1996 to the third quarter of 1997, to an outflow of $68 billion in the fourth quarter of 1997 and the first quarter of 1998 (Grenville 2000: Table 2.3, p. 42). The turnaround in bank lending between 1996 and 1997 was equivalent to 9.5 percent of the combined GDP of the five crisis economies (Radelet and Sachs 1998: 6)
Moving beyond this level of generality is like peeling the layers of skin from an onion – or perhaps, given the interrelated character of many of the factors contributing to the crisis, akin to attempting to understand the atomic composition of a DNA molecule. For the straightforward explanation of the crisis presented above hides a multitude of questions. Why did economies whose fundamentals were widely regarded as sound (and therefore would not be identified as vulnerable under conventional modelling of financial crises)1 collapse in 1997? Why were financial systems so fragile? Why did countries with among the highest rates of domestic savings in the world come to depend so heavily on foreign lending? Why was so large a portion of foreign capital inflows short term in nature and denominated in foreign currency? Why did the process of liberalization that had occurred in financial sectors in East Asian economies over the previous decade produce such flawed outcomes? Would controls over short-term capital inflows have reduced the vulnerability to crisis? Were the close relations between the state and business that many commentators – including even the World Bank in its “miracle” study (World Bank 1993) – had identified as a positive factor in East Asia’s rapid economic growth, a hindrance in an era of financial liberalization? What was the relationship between weaknesses in the financial sector and prob-
3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3
and international economic and political contexts? How can demand for investment funds in rapidly growing economies best be met? Was the crisis exacerbated by inappropriate responses? If so, to what extent was this the fault of the IMF? What is an appropriate exchange rate regime for small rapidly-growing East Asian economies heavily dependent on extra-regional markets?
