The Asian Crisis: a Perspective after Ten Years

This paper presents a simplified overview of the causes of and policy responses to the East Asian financial crisis, focusing on the four principal countries involved, namely, Thailand, Indonesia, Malaysia and Korea. The main point is that there was a prolonged investment boom in these countries and an ending to the episode in the form of a 'hard landing' was neither inevitable nor predictable, but was set off by events in Thailand and reinforced in Indonesia’s case by political factors. There was a clear relationship between severity of the exchange rate crises and the short-term foreign borrowing that was denominated in foreign currency, usually dollars, and was unhedged. There were several policy responses, notably efforts to rescue the banks and various private corporations. Only in the Korean case was there a systematic attempt to get foreign creditors to reschedule the payments they were owed. There were some special features of each of our four countries. In particular, in Indonesia, there was an interaction of a political with an economic crisis, Malaysia did not incur significant short-term debts unlike the other three countries, while Thailand adhered too long to a fixed exchange rate.