ABSTRACT
The impact of the 1997 financial crisis on the economic activities of the East Asian economies proved to be considerably more severe than expected, both reflecting and revealing weaknesses in domestic financial and corporate institutions, and inappropriate government policies. Output in the most affected economies of Southeast Asia fell dramatically in 1998 (CEIC Database). External borrowing, particularly by the private sector at the outset of the crisis, has often been cited as one of the key factors responsible for the severity of the crisis (Bhagwati 1998, Corsetti et al. 1999, Kawai 2002, Rajan and Siregar 2002). In Indonesia, corporations were the principle borrowers from foreign sources, while in South Korea banks were the primary borrowers from the external markets. Despite the varieties in the patterns of borrowing among the crisis-affected economies in East Asia, the combination of rigid exchange rate policies and high domestic interest rate policy was, however, inarguably an important factor for massive offshore borrowing by the domestic financial institutions, particularly in the late 1980s and early 1990s.
