The East Asian Crisis and Macroeconomic Adjustment

This paper reviews the adjustment processes of the 5 East Asian countries since the currency crisis erupted in Thailand in 1997. The cross-country differences and similarities in macroeconomic policies were compared. After the initial free-fall, signs of recovery became visible only from the end of 1998, even though recovery has been mild and uneven across countries. We argue that such economies as Korea and Thailand, which are quite open, private sector oriented, and have a very high leverage ratio in the corporate sector, could respond more sensitively to macroeconomic policy. Therefore, a careful balance should be maintained between the conflicting goals of stabilizing the exchange rate market and preventing massive bankruptcies and rapid aggravation of financial instability. The Malaysian experience demonstrates that tight policy alone is not sufficient to calm down the panic and that resumption of capital inflow is essential for fast recovery. On the other hand, the Indonesian case shows that the expansionary policy alone is ineffective in bringing recovery if fundamental structural problems remain unresolved.