The East Asian Financial Crisis: Diagnosis, Remedies, Prospects

Abstract

"HISTORY," JAWAHARLAL NEHRU famously observed, "is almost always written by the victors. " I Financial history, it seems, is written by the creditors. When a financial crisis arises, it is the debtors who are asked to take the blame. This is odd, since a loan agreement invariably has two parties. The failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself. The East Asian financial crisis has so far been true to form. As soon as the crisis hit in mid-1997, the International Monetary Fund (IMF), which led the official international response, assigned primary responsibility to the shortcomings of East Asian capitalism, in particular, the East Asian financial markets. The IMF's principal strategy for the three countries hardest hit-Indonesia, Korea, and Thailand-was to overhaul their financial systems. The basic diagnosis was that East Asia had exposed itself to financial chaos because its financial systems were riddled by insider dealing, corruption, and weak corporate governance, We are grateful for excellent research assistance from Mumtaz Hussain, Dilip Parajuli, Amar Hamoudi, and Gopal Garuda, and for valuable input from Frank Flatters. We also thank very much our discussants, Richard Cooper and Barry Bosworth, for their comments and suggestions. This work was partially sponsored by the Office of Emerging Markets, Economic Growth Center, Bureau for Global Programs, Field Support and Research, U.S. Agency for International Development, under the Consulting Assistance on Economic Reform (CAER) II project (contract PCE-0405-C-00-5015-00). The views and interpretations in this paper are those of the authors and should not be attributed to USAID. 1. Nehru (1946, p. 287). 1 7. Sachs (1984); Cooper and Sachs (1985). 8. Diamond and Dybvig (1983).

Real and financial shocks, exchange rate regimes and the probability of a currency crisis

“…This implies that capital controls can mitigate the effects of the W-shock on the probability of currency crises in de facto pegged exchange rate 21 regimes. This finding is consistent with the conventional view that pegged regimes under liberalized capital accounts increase the risk of currency crises (Radelet and Sachs 1998). The results for the other variables do not change substantially from those in Table 2.…”

On currency crises and contagion

“…Only few such policy proposals, such as calls for the creation of a global lender of last resort, the imposition of certain capital controls, contingency funds and debtor-in-possession financing (e.g. Eichengreen et al 1995, Radelet and Sachs 1999, Rodrik 1998, have been implemented so far. Therefore, the difficult challenge still faced by emerging markets is how best to reap the benefits of a more open economy while minimizing the risk of becoming the victim of a potentially devastating financial crisis inherent in the liberalization process.…”

Global recession and higher education in eastern Asia: China, Mongolia and Vietnam

“…However, the Asian economies had begun to initiate financial sector reforms in the 1990s, which unfortunately were only partially completed. This meant the Asian economies were carrying increasingly fragile financial systems, and as (Radelet et al 1998:3) pointed out: "growing short-term foreign debt, rapidly expanding bank credit, and inadequate regulation and supervision of financial institutions." As panic set in, it was further intensified by governments and the IMF, whose disregard to the root problem imposed additional costs on Asia's recovery prospects and their higher education systems.…”