Two Different Policy Responses to the Asian Financial CrisisDuring the1990s, Asian businesses in developing nations acquired short-term funds in global markets. Much of this dollar denominated debt was unhedged. Over time, the quality of the investments made with these funds deteriorated. For example, short-term borrowing was used to acquire assets with a long-term payoff, thereby creating a mismatch between loan maturities and asset maturities. The lack of adequate financial oversight and objective financial data obscured what was happening. Thailand's economy was the first to falter. By mid-1997, doubts emerged about the ability of Thai borrowers to repay their loans and lenders started to withdraw capital from the country. With insufficient dollar reserves to defend its currency, the baht, the Thai government cut it loose from the dollar and allowed it to depreciate. In the wake of the Thai currency crisis, the value of the Philippine peso, the Malaysian ringgit, and the Indonesian rupiah also depreciated as those currencies were converted into dollars for safety (Stiglitz, 1998). Greene (2002) notes that capital flight from the region caused developing countries like Indonesia, Malaysia, the Philippines and Thailand, each of which had experienced real growth exceeding 5 percent annually for much of the 1990s, to experience real declines in GDP during 1998.As the crisis deepened, the affected countries asked the International Monetary Fund (IMF) for help. In exchange for this aid, the IMF insisted that these countries liberalise their capital accounts, move toward flexible exchange rates, recapitalise their banking systems, raise interest rates and increase taxes in order to generate budget surpluses. Thailand was asked to run a budget surplus equivalent to 1.0 percent of its GDP, increase its value added tax from 7 to 10 percent, privatise government enterprises, implement civil service reform and move from a pegged currency to a managed float. The Thai economy subsequently deteriorated further and the ensuing social unrest forced the IMF to relax some of these measures. In February 1998, it allowed Thailand to run a budget deficit equivalent to 2.0 percent of its GDP, thereby permitting a higher level of social spending. In May 1998 it allowed further reductions in interest rates, faster monetary growth Volume 11 Number 4 2004