The Asian financial crisis of 1997-98 shook the foundations of the global economy and what began as a localised currency crisis soon engulfed the entire Asian region. This book explores what went wrong and how did the Asian economies long considered 'miracles' respond, among other things. The combined effects of growing unemployment, rising inflation, and the absence of a meaningful social safety-net system, pushed large numbers of displaced workers and their families into poverty. Resolving Thailand's notorious non-performing loans problem will depend on the fortunes of the country's real economy, and on the success of Thai Asset Management Corporation (TAMC). Under International Monetary Fund's (IMF) oversight, the Indonesian government has also taken steps to deal with the massive debt problem. After Indonesian Debt Restructuring Agency's (INDRA) failure, the Indonesian government passed the Company Bankruptcy and Debt Restructuring and/or Rehabilitation Act to facilitate reorganization of illiquid, but financially viable companies. Economic reforms in Korea were started by Kim Dae-Jung. the partial convertibility of the Renminbi (RMB), not being heavy burdened with short-term debt liabilities, and rapid foreign trade explains China's remarkable immunity to the "Asian flu". The proposed sovereign debt restructuring mechanism (SDRM) (modeled on corporate bankruptcy law) would allow countries to seek legal protection from creditors that stand in the way of restructuring, and in exchange debtors would have to negotiate with their creditors in good faith.
The Asian ﬁnancial crisis 5 The domino that did not fall: why China survived the ﬁnancial crisis When the ﬁnancial crisis unexpectedly hit the high-performing East and Southeast Asian economies in mid-1997, it was widely believed that the People’s Republic of China (PRC) would be the next domino to fall. China’s extensive intra-regional trade and investment linkages with the rest of Asia, and the fact that the Chinese economy suffers from many of the same debilitating structural problems that long plagued (and ultimately did incalculable damage) to the
self-fulﬁlling panic that led to market overreactions, which were not necessarily warranted by the economic fundamentals.31 The other related view, articulated by Furman and Stiglitz (1998), argues that although some macroeconomic and other fundamentals may have worsened in the Asian economies in the mid-1990s, the extent and depth of the crisis cannot be attributed to a deterioration in fundamentals, but rather to the panicky reaction of anxious domestic and foreign investors. In a similar vein, Radelet and Sachs (1998; 1998a) argue that in Asia the problem was one
feelings of let-down and betrayal. At the same time it was widely believed that the United States (through the IMF) was not only dictating ﬂawed policy responses to the crisis, but also that these self-serving policies had worsened the crisis by pushing Asian economies into a deeper economic recession. As Bergsten (2000, 24) notes: The single greatest catalyst for the new East Asian regionalism, and the reason it is moving most rapidly on the monetary side, is the ﬁnancial crisis of 1997– 98. Most East Asians feel that they were both let down and put upon by the West. In
-up of unhedged foreign-currency positions. Thus, it is argued that regulating short-term capital inﬂows – on the basis of prudential requirements on ﬁnancial institutions – and regaining maneuvering room for monetary policy is highly beneﬁcial. Speciﬁcally, it is often pointed out that Asian economies that did not experience a severe crisis during the Asian crisis had controls on capital ﬂows. For example, China had extensive capital controls. Singapore had not internationalized its currency, given the restrictions on the usage of the Singaporean dollar and on
. For example, Korea, like many other Asian economies, provided implicit guarantees to the banking system. This meant that banks were often engaged in lending practices that favored ﬁnancially connected (and not always unqualiﬁed) borrowers – in particular, the chaebols or big family-controlled conglomerates. These implicit guarantees led banks to lend recklessly. This, in conjunction with poor corporate governance, created a stock of non-performing loans, thereby risking bank collapses (Corsetti, Pesenti and Roubini 1998). The Economist (1997, November 15, 33) is
consistently been much lower than those of other high-growth Asian economies, including Indonesia and Malaysia, and have also lagged behind low-income countries such as India.13 Rather, the impetus for the expansion of manufactured exports in Thailand came from outside – in the form of foreign capital. Indeed, in the 1980s capital inﬂows doubled, rising to US$4.5 billion per year, and between 1990 and 1996 they tripled to US$14 billion per year (Mahmood and Aryah 2001, 256). First, Thailand needed foreign capital, since its domestic savings were not high enough to ﬁnance the
experienced the most severe economic collapse recorded for any country in a single year since the Great Depression of the 1930s. What happened? Why did Indonesia (and the other high-performing Asian economies) collapse like hollow dominoes? In the numerous post-mortems that have followed, analysts have identiﬁed a number of related factors behind the region’s dramatic reversal of fortune. In the case of Indonesia, 123 The Asian ﬁnancial crisis the variable that soon acquired particular salience was “crony capitalism.” Initially popularized by The Economist (1998), the term