Lessons of Asian Financial Crisis for Africa by Tarun Das

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Asian Financial Crisis and Lessons for Africa

Tarun Das

Economic Adviser, Ministry of Finance, India and

Consultant to UN-ECA, Addis Ababa.

1 Anatomy of the crisis

South East Asian economies - Indonesia, Malaysia, Philippines, South Korea andThailand recorded very high growth rates during 1980s and early 1990s. However, theseeconomies had also large current account deficits as a result of very large trade deficitsand interest payments on foreign debt. In fact, in most of these countries the currentaccount deficit was as high as or even higher than that in Latin American economies.

These current account deficits were financed by short term capital inflows that led to asharp accumulation of foreign currency denominated and largely unhedged foreignliabilities. These imbalances reflected a demand boom driven by excessive investmentinto speculative and unproductive assets.

In all of these affected economies, there was a boom bust cycle in the asset markets thatpreceded the currency crisis. Stock and property prices soared, then plunged leading tothe currency and financial crisis, and plunged even more after the crisis leading to deepand wide spread economic crisis. The financial intermediaries, both banks and non-bank,were the creators of this asset cycle.

Liabilities of these financial intermediaries were perceived as having an implicitgovernment guarantee, but they were essentially unregulated. These institutions borrowedshort term money, often in dollars, then lent money to highly leveraged speculativeinvestors, largely in real estate. The excessive risky lending of these institutions createdinflation of asset prices. The overpricing of assets was sustained partly by a sort ofcircular process, in which proliferation of risky lending drove up the prices of riskyassets, making the financial condition of the intermediaries seem sounder than its realbalance sheet position.

Subsequently when the price bubble burst, the effects of the fall in the asset cycle beganto show by early 1997, the macroeconomic variables had already seriously deteriorated in

most of these economies. As the asset prices fell further, it became increasingly doubtfulwhether governments would really stand behind the deposits and loans that remained.Both the depositors and lenders rushed to withdraw their money. Foreign investorsstampeded to recover their loans and investments, forcing currency devaluation, whichworsened the crisis even further as banks and companies found themselves stuck withassets in devalued baht or rupiah, but with liabilities in US dollars.

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The crisis has led to dramatic depreciation of the nominal exchange rates (Table-9.1). Thesharp movement of the exchange rate has greatly complicated the macroeconomic policychoices by raising the cost of repaying foreign debt, weakening the financial andcorporate sectors. Remarkably, the CPI inflation rate since June 1997 has been in therange of 5-12 per cent with the exception of Indonesia. Mexico, by way of comparison,

experienced a 40 per cent surge in inflation during first ten months of its crisis in 1995.Despite large increases in nominal interest rates in some countries, only Korea andThailand have been able to maintain real interest rates as a significantly higher levels thanthose before the crisis.

Table-1.1 Exchange rate changes and inflation rate in Asian crisis economies

In June 1997 - May 1998 (in per cent)

Items Indones

ia

Korea Malaysi

a

Philippin

es

Thailan

d

Mexic

o*

CPI inflation rate 54.5 9.8 6.4 8.4 11.5 50.5

Change in US dollarexchange rate

-7.4 -35.6 -33.9 -33.0 -33.4 -48.5

Import share in CPI 30 18 20 16 30

Percent change in Realeffective exchange ratesince June 1997

-57.1 -30.9 -29.0 -25.3 -28.5

Percent change in realeffective exchange ratesince Jan 1998

13.6 13.4 12.1 10.5 19.8

Source: Kalpana Kochhar, Prakask Loungani, and Mark R. Stone (August 1998).

Table-1.2: Annual growth rates of broad money supply, 1996-1998

In Asian crisis countries (in per cent)

Country December

1996

January

1997

December

1997

January

1998

April

1998

Indonesia 30 38 27 206 156

Korea 16 17 15 14 10

Malaysia 21 27 20 16 -1

Philippines 16 36 10 26 -3

Thailand 13 15 0 21 -1

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Source: Kalpana Kochhar, Prakask Loungani, and Mark R. Stone (August 1998).

Economic activity has slowed more sharply than expected in all affected countries due tolack of both internal and external demand (Tables-3.3 and 3.4). Crisis countries includingJapan account for 45 to 55 per cent of the exports to the region. Imports have declined by

4 to 13 per cent in volume.

Most countries have experienced sharp slowdowns in money and credit growth byvarying intensity and duration during the adjustment period (Table-9.2). These reductionsin monetary growth reflect the declines in demand and more cautious lending behaviourby the banks. Banks attempt to strengthen their balance sheets in the context of droppingcollateral guarantees, more stringent credit rating of loans, stringent provisioningrequirements, improved credit risk assessment techniques and generally more riskyfinancial environment.

2 Origins of the crisis

The crisis unfolded against the backdrop of several decades of outstanding economicperformance in Asia, and the difficulties that the East Asian countries face are notprimarily the result of macroeconomic imbalances. Rather, they stem from weaknessesin financial systems and, to a lesser extent, governance. A combination of inadequatefinancial sector supervision, poor assessment and management of financial risk, and themaintenance of relatively fixed exchange rates led banks and corporations to borrowlarge amounts of international capital, much of fit short-term, denominated in foreigncurrency, and unhedged. As time went on, this inflow of foreign capital tended to be usedto finance poorer-quality investments.

Although private sector expenditure and financing decisions led to the crisis, it wasexacerbated by governance issues, notably government involvement in the private sectorand lack of transparency in corporate and fiscal accounting and the provision of financialand economic data. Developments in the advanced economies, such as weak growth inEurope and Japan that left a shortage of attractive investment opportunities and keptinterest rates low in those economies, also contributed to the build-up of the crisis.

After the crisis erupted in Thailand with a series of speculative attacks on the Baht,contagion spread rapidly to other economies in the region that seemed vulnerable to anerosion of competitiveness after the devaluation of the Baht or were perceived buyinvestors to have similar financial or macroeconomic problems. As the contagion spreadto Korea, the worlds eleventh largest economy, the possibility of default by Korea raiseda potential threat to the international monetary system.

The build-up to the difficulties in east Asia, which eventually lead to the presenteconomic and financial crisis in these economies and elsewhere can be traced in fourmajor factors. They relate to:

high growth and commendable economic success resulted in underestimation of risk;

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various features of their external economic environment that at first were favourable,

but that turned sour in several respects in 1996-97;

shortcomings and inconsistencies in domestic macroeconomic and exchange rate

policies; and

various structural weaknesses, particularly in the financial sector, that made these

economies and especially their financial systems increasingly fragile and vulnerableto adverse developments.

(a) Victims of their own economic success

During 1992-95, the group of countries known as the ASEAN-4 (Indonesia, Malaysia,Thailand and Philippines), Singapore and Korea experienced unparalleled impressiveGDP growth rates. Inflation was moderate, at least by developing country standards.

The absence of significant fiscal imbalances in most cases confirmed the discipline ofmacroeconomic policies. Rapid, outward-oriented growth attracted large foreigninvestment. With fiscal positions healthy in most cases, the sizeable current accountdeficit being run up persistently in some cases - most notably in Malaysia and Thailand -reflected shortfall of private saving relative to private investment and a significant part ofthis investment was being financed by foreign capital attracted by relatively high return.This brought mixed blessings. Absorption of the capital inflows posed challenges interms of their productive deployment and their prudent intermediation through financialsystems that were not well developed. These challenges were more severe with short-term flows, especially flows into banks and other financial institutions. The scale ofdifficulties that arose therefore depended on macroeconomic policies and the soundness

of financial system.

(b) Changes in External Environment

The surge in capital inflows to emerging markets in the early 1990s was contributed bythe decline in asset yields in the industrial economies. There was also sharp narrowing ofasset yields. Apart from contributing to the surge in inflows and associated challenges,these developments magnified the potential reversal when yields turned upward in theindustrial countries in early 1997. Movements in exchange rates among the majorcurrencies in recent years have been another significant external factor. When the USdollar weakened during 1994 and 1995, especially against the Japanese Yen, these

economies generally gained competitiveness as their currencies depreciated in tradeweighted terms. Conversely, when this decline in dollar was reversed over the two yearsbeginning in mid-1995, these countries suffered substantial losses in competitivenesswith adverse effects on net exports and growth. These swings in competitiveness havetended to affect the current and capital accounts of BOP and investors expectations offuture exchange rate changes. Besides, a number of developments contributed to theslowing in export markets. Among them, a widespread deceleration of imports by the

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industrial countries, a glut in the global electronic markets that resulted in a sharp fall inprices, and a slow down of growth in much of the Asian region itself.

(c ) Macroeconomic Management and Exchange Rate Arrangements

The macroeconomic performance of the Southeast Asian economies raised commonconcern about the risk of overheating, which in turn raised questions about thesustainability of exchange rate policy. There were signs of higher inflation in outputprices, substantial and growing external current account deficits. These indicated that thegrowth of demand was indeed pressing on resources, and possibly also thecompetitiveness problems were building. But a more important source of demandpressure was the growth of financial system credit to the private sector. The increasinggrowth of private sector credit was largely attributable, in turn, to burgeoning capitalinflows, including directly into the banking system, which were reflected in rising officialforeign exchange reserves, increasing commercial bank liquidity and expanding foreignliabilities of commercial banks. Among the incentives encouraging borrowing from

abroad were the relatively high domestic interest rates by international standards andexchange rate policies that appeared to provide assurance that the price of foreigncurrency would not increase to outweigh the interest differential.

(d) Financial Sector and other Structural Weaknesses

As events unfolded, weaknesses of the financial sector became particularly stark inThailand, Indonesia, and Korea, although lack of transparency delayed public realisationof the scale of the problems. Inadequacies in the regulation and supervision of financialinstitutions as well as limited experience among financial institutions in the pricing andmanaging of risk, lack of commercial orientation, poor corporate governance, and laxinternal controls - all in the face of movements toward liberalisation and increasedcompetitive pressure , had contributed to imprudent lending, including lending associatedwith relationship banking and corrupt practices. Non-performing loans, net of reserves,relative to equity were very high. Another source of vulnerability was the investment of banks in non-bank financial institutions with large-scale exposure to the domesticproperty market. Encouraged by the relatively fixed exchange rate system, the financialintermediaries borrowed on a large scale from the international capital market in order toextend credit to domestic borrowers. Thus, there was serious problem of currencymismatch in the asset-liability structure, in that a substantial fraction of liabilities of thesecompanies was denominated in US dollars, while their assets consisted of loans in termsof local currency. The borrowers from the international market did not hedge themselvesby entering into forward contract or ensuring future flow of earnings in terms of foreigncurrency. Besides, the structure of foreign debt had become highly unbalanced with apreponderance of short-term borrowing.

3 Onset of the crisis

The financial crisis that began to erupt in Asia in mid-1997 has resulted in sharp declinesin the currencies, stock markets, and other asset prices of a number of Asian countries;

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threatened these countries financial systems; and disrupted their real economies. Inaddition to its severe effects in Asian, the crisis has put pressure on exchange rates inemerging markets outside of the region, and is expected to knock somewhat more than 1per cent off the rate of world growth in 1998.

The economic and financial crisis that erupted in Southeast Asia in July 1997 hascontinued to deepen and broaden through December 1997. In early 1998, there wereencouraging signs in the Asian crisis countries that financial market confidence wasbeginning to return. In May and June 1998, however, there was renewed volatility infinancial markets with exchange rates depreciating significantly in Indonesia because ofpolitical turmoil and in Japan amid persistent policy uncertainties. As a result, economicconditions in Asia have weakened considerably, with repercussions elsewhere. Theeconomies most affected directly by the crisis experienced drying up of private foreignfinancing, together with large currency depreciation and decline in asset prices. Largeexchange rate depreciation and falling equity prices in turn have exposed and exacerbatedfinancial sector fragility in many countries. Between July 1997 to July 1998, currencies

of Southeast Asian countries depreciated in the range of 4 per cent (Singapore) to 70 percent (Indonesia) in real effective exchange rate terms (using INS weights). The crisis iscausing sharp contraction in domestic demand in these countries, with decline in realGDP and lowering of near-term growth prospects.

The contagion and slipover effects have affected the outlook for other emerging marketcountries, including Latin America and Russia. Reduced availability of foreignfinancing, increased interest spreads on foreign borrowing, lower stock market prices,and policy tightening to reduce vulnerability to disruptive changes in market sentimenthave generally weakened near-term growth prospects for emerging market countries in allregion, including some of the transition countries. The scope for speculative pressures tospread across countries and the degree of contagion / slipover effects tend to depend:

on domestic economic conditions and policies (such as overborrowing for

unproductive uses, a fragile financial sector, or an inflexible exchange rate system);

on trade and capital market linkages (for example, a devaluation in one country

adversely affecting the international competitiveness of other countries);

because of inter-dependence in creditors portfolios (for example, liquidity in one

market forces financial intermediaries to liquidate assets in other markets);

creditors change in sentiment to re-evaluate the fundamentals of other economieswith a view to reducing the risk of their portfolios and or simply herding by investorsresulting from bandwagon effects.

4 Spread of the crisis

The world output growth in 1998 is projected to decelerate to 2.4 per cent in comparisonwith the growth of about 4.2 per cent each in 1997 and 1996. The sharp deceleration in

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projected world output growth is mainly because of the sharp decline / deceleration inreal GDP growth rates of the Southeast Asian economies. Table below gives theprojections of real GDP growth rates for countries most affected in the region:

As noted above, the drying up of private foreign financing, large currency depreciation,

and decline in asset prices in these countries are causing sharp contraction in domesticdemand, which will be only gradually counterbalanced by increased net exports.

Contagion and slipover effects have been felt by many emerging market countries inother region in the form of declining stock markets and intense pressures on exchangerates and have adversely affected the outlook for these economies. In general, theadverse effects seem likely to be moderate, with growth remaining positive, but there arerisks of a sharper slowdown if the crisis in Asia were to deepen or other adverse internalor external disturbances were to affect these economies. The effect of the crisis are alsobeing felt through weaker commodity prices, including oil. For developing countries thatare net importers of these products, there will be a helpful terms of trade gain, but for

many net exporters there will be negative impact on growth, and on current account andfiscal positions, that will be significant in some cases. Contributing to the pressures wasthe growing evidence that output in Japan, having faltered in 1997, was falling quitemarkedly in the first half of 1998, and that activity was slowing more sharply throughoutmuch of Asia, including China and Hong Kong SAR.

The sharp slowing of world growth predominantly reflects developments in Asia, whilegrowth in the rest of the world generally has been well sustained. In the United States,consumer spending and business fixed investment have remained buoyant. In WesternEurope, recovery has taken firmer hold in Germany and France and in most other casesgrowth remains robust. The encouraging strength of domestic demand in North Americaand Europe is underpinned by low inflation, high equity prices, generally supportivemonetary conditions, improved fiscal position, and strong business confidence.

Japan, which is the market for about one sixth of the exports of the ASEAN-4 andKorea bears a particular responsibility to support recovery in Asia by ensuringresumption of solid growth in domestic demand. The authorities have taken measures inthe fiscal, monetary, financial sector, and other structural areas in order to further therevival of the economy, but policy design and implementation are assessed to have fallenshort in clarity, timeliness and forcefulness.

Indonesia has barely begun to re-establish financial stability. Macro-economicconditions remain very difficult, with output expected to contract sharply in 1998 andprice pressures continuing. The rupiah has strengthened somewhat in recent weeks inlarge part due to a tight monetary stance, progress in bank re-structuring, and additionalexternal financial assistance from the IMF and other multilateral and bilateral donors.The task ahead - including the rehabilitation of the financial system, restoration ofconfidence to foster the reversal of capital flight, restructuring of the corporate sector, andthe repair of the distribution system and market mechanism - are formidable, requiring

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bold action across a range of policy areas. Assuming that the current programme isimplemented as planned, output is expected to bottom out toward the end of the year.

In Korea, the recession has deepened considerably and unemployment has risen sharply.The Korean won has depreciated recently, but remains stronger than several months ago.

Interest rates have already come down sharply, but cautious monetary policies willcontinue to be needed to maintain exchange market stability. Significant progress has been made in financial sector restructuring and in corporate debt work-outs.Consolidation of merchant banks is well advanced, that of commercial banks is underway, but the restructuring of large banks and corporations is yet to be initiated.

Malaysia is better positioned externally than the other crisis countries, because of asmaller short-term debt burden. Economic growth has contracted sharply in 1998, butinflation has remained low. The authorities response to the deteriorating situation hasincluded a reversal of earlier fiscal tightening, combined with efforts to stimulate privatesector credit partly by lowering banks reserve requirements and also by dealing with

non-performing loans and recapitalization needs. It will be important to ensure thatincreases in public spending are productive. More active use of interest rate policy isconsidered desirable to defend and strengthen the exchange rate and guard against risinginflation. A key uncertainty is financial sector fragility in the face of a sharp downturn inactivity and asset prices.

Philippines has been affected to a lesser degree by the Asian crisis, but the economicconditions seem to have deteriorated recently. The growth projection for 1998 has beenrevised downward, fiscal deficit is widening, and market pressures have pushed upinterest rates. The focus of structural reforms is on the banking sector and the plans toreform public finances and strengthen the banking system need to be firmly implementedto reduce the economys vulnerability.

Singapore has been hit less hard by the regional turmoil, reflecting the countrys strongmacro-economic positions and sound financial sectors. A fiscal stimulus packageintroduced in late June 98 should help growth remain positive.

Thailand is in the midst of severe recession. Relative exchange rate stability in the pastfew months has allowed an easing of the policy stance, with interest rates decliningsharply. Structural reforms have focused on bank and corporate debt restructuring. Afinancial sector restructuring package announced in August 98 deals with insolvent banksand recapitalization of viable banks.

Chinese economy has been subject to significant strains, despite the currency remainingstable. In China, growth in 1998 is expected to slow significantly, because of bothweakening of external demand and evidence of overbuilding and excess inventoryaccumulation in the past. Further cuts in interest rates in recent months and proposedincreases in infrastructure spending will provide worthwhile support for activity in the period ahead. The slowing of growth has heightened the importance of acceleratingstructural reforms, especially in the financial and public enterprise sectors.

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Hong Kong SARhas suffered a much more severe weakening of activity, reflecting theeconomys greater openness, the reversal of the previous sharp runup in asset prices, andthe temporary tightening of monetary conditions that have been required to maintain the peg under the currency board arrangement. The authorities have introduced fiscal

measures to support activity, and the flexibility of domestic wages and prices and thestrength of the banking system, together with a gradual return of confidence, should helplimit the slowdown and promote recovery.

Latin America: The risk of the contagion spreading to Latin America is real. A numberof Latin American countries are now running current account deficits as large as those ofthe afflicted Asian countries before their collapse (for example, Chiles is 7.5 per cent ofGDP, Brazils is 4.1 per cent of GDP, Colombias is 7.7 per cent of GDP). In Brazil andMexico, the ratios of short-term debt to foreign exchange reserves are similar in those ofadversely affected Asian economies. The ratio of short-term debt plus amortisation as percent of foreign exchange reserves is 196 per cent for Mexico and 159 per cent for Brazil.

Brazil is the key since it accounts for 45 per cent of Latin Americas GDP. US $12.7billion of capital fled the country in September. The foreign exchange reserves lost inlast few months has been of the order of about US $20 billion. The fiscal deficit has been7.8 per cent of GDP over the past year. Interest rates have been increased to 50 per centto support the currency, and this is considered to be unsustainable.

Russia: There have been intense recurrent financial market pressures in Russia andUkraine, as a result of persistently large fiscal imbalances, significant short-term foreignliabilities and delays in implementation of structural reforms. In Russia, marketsentiments have been weakened further by concerns about the effect of the decline in oilprices on the current account position. Substantial hike in interest rates have at timesbeen needed to defend the rouble; but interest rates have been left for long periods atextremely high levels that have limited confidence in the sustainability of confidence.This has contributed to sharp losses in stock market values.

5 Current economic and social situation in crisis economies

Five crisis countries: Indonesia, Thailand, Korea, Philippines and Malaysia areimpacted to different degrees; also, all countries in the region are affected (Indochina,PNG), and China is more and more involved, both the problems and the solutions. Theeconomic situation has continued to deteriorate since last July 1998, the forecast for end1998 appears somber and outlook for 1999 is uncertain. Nevertheless, the economicpolicies continue to evolve in the right direction. Further, though the IMF and the WorldBank have not been able to stop the economic decline, they have certainly shown theability to respond quickly.

All the countries are now in the midst of an important recession that will strongly affectthe economies in 1998. The forecast for 1999 is uncertain.. As of August 1998, stockmarkets are down between 58 percent (Korea) and 38 percent (Indonesia). Exchangerates are down between 84 percent (Indonesia) and 35 percent (Korea). After a long slide

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down in the months to January of this year, exchange rates and stock markets had startedto recover (with the major exception of Indonesia which took a 40 percent hit within afew days early January). But further shocks reappeared in 1998 as concern at the situationin Japan impacted more and more negatively the markets. On the whole, the markets havestrongly reacted both regional and local events.

After a slowdown in growth in 1997, but still positive, (second half the year compensatedby first half of the year) negative growth is forecast for 1998 with the Philippines andperhaps Malaysia less adversely affected than others. Thailand and Korea are likely to seenegative growth of around 5 percent, while for Indonesia the number is likely to bebetween negative 10 and negative 15 percent.

Main causes of economic recession

Three main factors as indicated below are responsible for the current recession:

(a) Lack of external demand as a result of several factors such as:

An effective collapse of the regional market. Imports are down between 4 and 13

percent in volume. The crisis countries including Japan 45 and 55 percent of theexports to the region This explains that the performance in volume is not at the levelit should be (between negative 0.6 percent for Indonesia, 5 percent Malaysia and 24percent Korea).

Prices of exports are going down significantly. So, performance in value is very low,

given the decline in exchange rates: (decline in Malaysia and Indonesia, positive 1.4percent in Thailand, positive 5 percent in Korea).

9(b)Lack of internal demand as a result of several factors such as:

impact of loss of wealth (market capitalisation down by 16 percent in Indonesia, to

145 percent in Malaysia);

capital flight equivalent to about 10 percent of GDP;

unemployment and losses of revenues in the working population.

None of this has been compensated so far by sharp increases in public demand, either interms of investment or current expenditures.

(c ) Problems on the supply side: The corporate sector face considerable difficulties inresponding to demand, mainly due to collapse of financial sector. There is also theproblem of trade finance and internal credit crunch due to various factors such as:

lack of competitiveness, and industrial restructuring taking time (Korea, Thailand);

corporate distress due to sharp increase of foreign debt (Indonesia) or high real

interest rates (everywhere but in Indonesia) and lack of trust on the banks side; banks

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reducing their exposure because of capital adequacy requirements, and not enoughcapital to bring in ;

No credit available for specific categories of enterprises such as SMEs because banks

supporting them have collapsed and nobody wants them. In general SMEs have beenhit more than large exporting corporate.

Each country is, in effect, exporting its recession to its neighbours. At the same time, thereis no obvious engine of growth to pull the region from recession. Recent speculation aboutthe devaluation of the yuan and constant fears regarding possible collapse in Hong-Kong,with a resulting devaluation of its currency, have fueled destabilising fears of anotherround of devaluation. Recent interventions and events around the Japanese yen andRussian ruble have also created further problems in international trade and capital flows.

Political and social factors

Political and social events have played a significant part in the crisis. Political changes in

Thailand and Korea have assisted in stabilising of the exchange rate, with theestablishment of a clearly understood and supported reform programme. Politicaluncertainty in Indonesia played an important role in the opposite direction. Sustainabilityof the reform effort depends heavily on real progress being achieved on the social front.There are signs of social unrest almost everywhere, though to different degrees.

Unemployment rates are now between 3 percent (Malaysia), 6 percent (Korea) and 15percent (Indonesia). Poverty is therefore increasing at an alarming rate. Indonesia, whichhad such an impressive record of poverty reduction, is the most worrying case with realfears that the proportion of the population under the poverty line could increase to 11 or 12percent in 1998. This is compounded by drought impacts, not only in Indonesia.

The greatest concern is the real fear of major reversals in the achievements of East Asianover the past generation. Social areas, including ensuring food and medicine supplies,keeping children in school, and protecting womens health are key targets for interventionsby the government and multilateral funding agencies.

6 Role of multilateral financial institutions

The IMF is charged with safeguarding the stability of the international monetary system.Thus, a central role for the IMF in resolving the Asian financial crisis was clear, and hasbeen reaffirmed by the international community in various multilateral forum. The IMFs

priority was also clear to restore confidence to the economies affected by the crisis. Inpursuit of its immediate goal of restoring confidence in the region, the IMF respondedquickly by:

helping the three countries most affected by the crisis Indonesia, Korea, and

Thailand to formulate and implement programs of economic reforms that couldrestore confidence. The Philippines extended and augmented its existing IMFsupported program in 1997, and arranged a stand by facility in 1998;

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approving in 1997 about US$35 billion of IMF financial support 1 for reform

programs in Indonesia, Korea, and Thailand, and spearheading the mobilization ofsome US$77 billion of additional financing from multilateral and bilateral sourcesin support of these reform programs. In July 1998, committed assistance for

Indonesia was augmented by an additional US$ 1.3 billion from the IMF and anestimated US$5 billion from multilateral and bilateral sources.

The reform efforts have been invaluably aided by the World Bank, with its focus on thestructural and sectoral issues that underpin the macroeconomic, and the AsianDevelopment Bank (ADB), with its regional specialization.

The IMFs immediate effort to reestablish confidence in the affected countries entailed:

the introduction of flexibility to exchange rates, where it did not already exist;

a temporary tightening of monetary policy to stem pressures on the balance ofpayments;

concerted action to correct the obvious weaknesses in the financial system, which

constituted the major element in the crisis;

structural reforms to remove features of the economy that had become impediments

to growth (such as monopolies, trade barriers, and nontransparent corporate practices)and to improve the efficiency of financial intermediation and the future soundness offinancial systems.

Efforts to assist in reopening or maintaining lines of external financing; and

The maintenance of a sound fiscal policy, including through providing for rising

budgetary costs of financial sector restructuring, while protecting social spending.

Forceful, far-reaching structural reforms are at the heart of all the programs. As financialsector problems were a major cause of the crisis, the centerpiece of the Asian programshas been the comprehensive reform of financial systems. While tailored to the needs ofindividual countries, in all cases the programs have arranged for:

the closure of unviable financial institutions, with the associated write down of

shareholders capital;

the recapitalization of undercapitalized institutions;

close supervision of weak institutions; and

increased potential for foreign participation in domestic financial system.

To address the governance issues that also contributed to the crisis, the reform of thefinancial systems is being buttressed by measures designed to improve the efficiency of

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markets, break the close links between business and governments, and prudentlyliberalize capital markets. Transparency is being increased, both as regards economicdata (on external reserves and liabilities in particular) and in the fiscal and corporatesectors, as well as in the banking sector.

7 Summary of Structural Reforms in Crisis Countries

The IMF supported programs and policy advice to the crisis countries have placedparticular emphasis on broad ranging structural reforms of the financial and corporatesectors, competition and governance policies, and trade regimes. In broad terms thesuggested reforms may be summarized as follows:

(a) Financial and Corporate Sector Reforms

Closure of insolvent financial institutions, with their assets transferred to a resolution

or restructuring agency (Korea, Indonesia and Thailand); together with

recapitalization and mergers of other (all countries). The reform programs inMalaysia and Thailand place particular importance on the finance company sector.

Announcement of limited use of public funds for bank restructuring actual funds used

to be made explicit in the budget (all countries)

Measures to significantly strengthen prudential regulation, including loan

classification and provisioning requirements, and capital adequacy standards (allcountries).

Measures to strengthen disclosure, accounting and auditing standards, and the legal

and supervisory frameworks (all countries).

Liberalization of foreign investment in domestic banks (Korea, Indonesia and

Thailand)

The introduction of more stringent conditions for official liquidity support (Indonesia,Malaysia and Thailand).

Strengthening of prudential regulations on loan exposure (all countries).

Introductions of funded deposit insurance scheme (planned in Indonesia and

Thailand; under consideration in Malaysia, already in place in Korea and thePhilippines)

Restructuring of domestic and external corporate debt (Indonesia, Korea, Thailand)

and closure of nonviable firms (Korea).

(b) Competition and Governance Policies

Liberalization of restrictive marketing arrangements for a variety of key commodities

(Indonesia)

Establishment of competitive procedures for privatization of government assets and

for procurement (Indonesia, planned in Malaysia and Thailand)

Announcement of bans on limits to the use of public funds to bail our private

corporation ( Indonesia, Korea, Malaysia and Thailand)

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Introduction or strengthening of bankruptcy laws and exit policies (Indonesia, Korea,

and Thailand)

Acceleration of privatization or closure of non-viable public enterprises (Indonesia)

Strengthening of corporate disclosure standards (Korea)

Liberalization of foreign investment in ownership/management in sectors other than

the financial sector (Korea, Indonesia, Malaysia and Thailand)

(c) Trade Reforms

Reduction of import tariffs and export taxes (Indonesia).

Easing of quantitative import and or export restriction (Indonesia and Korea).

(d) Social Policies

Labour intensive public works programs (Indonesia, Thailand), and expansion of

unemployment insurance system (Korea). Protection of low income groups from increases in prices of food and other essential

(Indonesia, Malaysia, the Philippines, Thailand).

Provision of higher spending for health and education (Indonesia) and reallocation of

budgetary expenditures to health programs for the poor (Thailand).

Expansion of scholarship and loan programs to minimize number of student dropouts

(Thailand, Malaysia)

Provision of subsidized credit for small and medium size enterprises (Indonesia,

Malaysia).

8 Thailand: The IMF-Supported Program of Economic Reform

The financial crisis first started in Thailand, with the baht coming under a series ofincreasingly serious speculative attacks and the markets losing confidence in theeconomy. On August 20, 1997, the IMFs Executive Board approved financial supportfor Thailand of up to US$4 billion, equivalent to 505 per cent of Thailand' quota, over a34-month period.

The initial program of economic reform envisaged:

financial sector restructuring initially focusing on the identification and closure of

unviable financial institutions (including 56 finance companies), intervention inthe weakest banks, and the recapitalization of the banking system;

fiscal measures equivalent to about 3 per cent of GDP to correct the public sector

deficit to a surplus of 1 per cent of GDP in 1997/98, support the necessaryimprovement in the current account position, and provide for the costs of financialrestructuring including an increase in the VAT tax rate from 7 per cent to 10 percent.

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A new framework for monetary policy, in line with the new managed float for the

baht, and

Structural initiatives to increase efficiency, deepen the role of the private sector in

the Thai economy, and reinforce its outward orientation, including civil servicereform, privatization, and initiatives to attract foreign capital

The program was modified on November 25, 1997, in light of a larger than expecteddepreciation of the Baht, a slowdown of the economy that was sharper than anticipated,and severe adverse regional economic developments. The modifications included:

additional measures to maintain the public sector surplus at 1 per cent of GDP.

Establishment of specific timetable for implementing financial sector

restructuring including strategies for the preemptive recapitalization andstrengthening of the financial system, and

Acceleration of plans to protect the weaker sectors of society.

The program was further modified on February 24, 1998, to give clear priority tostabilizing quickly the exchange rate while limiting the magnitude and negative socialimpact of the larger than expected economic downturn, and to set the stage for Thailandsreturn to the international financial markets. Among the modification were;

accelerating financial system restructuring including the privatization of the

intervened banks;

adjusting fiscal policy targets from a targeted public sector surplus of about 1 per

cent of GDP to a deficit of 2 per cent GDP in response to the weaker economicactivity and larger than anticipated improvement in the current account in part tofinance higher social spending;

ensuring an adequate availability of credit to the economy to help foster an

economic recovery, while maintaining a tight monetary stance in support ofexchange rate stability;

strengthening the social safety net; and

further deepening the role of the private sector, including initiatives to attract

foreign capital

The program was again modified on May 26, 1998, with main priority minimizing anyfurther decline of the economy and bringing about an early recovery, while preservingprogress made in stabilizing the exchange rate and fostering confidence. The modified

program called for:

allowing further cautious reductions in interest rates and somewhat higher

monetary growth rates, in line with recovering money demand;

adjusting the fiscal target by increasing the public sector deficit target to 3 per

cent of GDP in view of the larger current account surplus and in order tominimize any further decline of the economy;

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implementing concrete measures to strengthen the social safety net and allocating

an additional 0.5 per cent of GDP in the budget for this purpose;

accelerating corporate debt restructuring by strengthening the legal and

institutional framework including through reform of the bankruptcy act,foreclosure procedures, and foreign investment restrictions with the latter

intended to increase resources for restructuring. Continuing to focus financial sector reforms on the need for the banking system to

strengthen its capital; and

Designing strategy to strengthen the finance company sector and resolving the

status of the four intervened banks to minimize the need for any future publicsupport for these institutions.

9 Indonesia: The IMF Supported Program of Economic Reform

The shift in financial market sentiment that originated in Thailand exposed structuralweaknesses in Indonesia's economy, particularly the size of short-term foreign debt

owned by the private corporate sector. On November 5, 1997 the IMF approved financialsupport of up to US$10 billion equivalent to 490 percent of Indonesia's quota over thenext three years.

Initial reform programmes included the following measures:

financial sector restructuring, including closing unviable institutions, merging state

banks, and establishing a timetable for dealing with remaining weak institutions andimproving the institutional, legal, and regulatory framework for the financial system.

Structural reforms to enhance economic efficiency and transparency, including

liberalization of foreign trade and investment dismantling of domestic monopolies,and expanding the privatization program.

Stabilizing the rupiah via the retention of a tight monetary policy and a flexible

exchange rate policy; and

Fiscal measures equivalent to about 1 per cent of GDP in 1997/98 and 2 per cent in

1998/99 to yield a public sector surplus of 1 per cent of GDP in both periods, tofacilitate external adjustment and provide resources to pay for financial restructuring.The fiscal measures included cutting low priority expenditures, including postponingor rescheduling major state enterprise infrastructure projects removing governmentsubsidies, eliminating VAT exemptions; and adjusting administered prices, includingthe prices of electricity and petroleum products.

Against a background of continuing loss of confidence in the Indonesian economy andfurther sharp declines in the value of the rupiah, the Indonesian authorities announced areinforcement and acceleration of the program on January 15, 1998. Key reinforcingmeasures included:

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Adjustments to the 1998/99 budget that would result in a public sector deficit of about

1 per of GDP, in order to accommodate part of the impact on the budget of theeconomic slowdown;

The cancellation of 12 infrastructure projects and the revoking or discontinuation of

privileges for the IPTNs airplane projects and the National Car project;

Further bank and corporate sector restructuring including the subsequent

announcement of a process to put in place a framework for creditors and debtors todeal on a voluntary, case by case basis with external debt problems of Indonesiacorporations; the establishment of the Indonesian Bank Restructuring Agency(IBRA): and a government guarantee on bank deposits and credits;

Limiting the monopoly of the national marketing board to rice, deregulating domestic

trade in agricultural produce, and eliminating restrictive market arrangements; and

Measures to alleviate the suffering caused by the drought, including ensuring thatadequate food supplies are available at reasonable prices.

Due to policy slippage and other developments, the rupiah failed to stabilize, inflation picked up sharply, and economic conditions deteriorated. The government issued aSupplementary Memorandum of Economic and financial Policies on April 10, 1998. Themeasures included the following:

A strong monetary policy to ensure stabilization of the rupiah;

Accelerate bank restructuring with IBRA to continue its take over or closure of weak

or unviable institutions and be empowered to issue bonds to finance the restoration offinancial viability to qualified institutions the elimination of existing foreignownership restrictions on banks; and the issuance of a new bankruptcy law.

A comprehensive agenda of structural reforms to increase competition and efficiency

in the economy, reinforcing the commitments made in January and including thefurther privatization of six major state enterprises and the identification of seven newenterprises for privatization in 1998/99.

Accelerated arrangements to develop a framework with foreign creditors to restore

trade financing and to resolve the issue of corporate debt and inter-bank credit.

After the economic situation was worsened and the economic program driven off trackby social disturbances and political change in May, 1988, the government issued aSecond Supplementary Memorandum of Economic and Financial Policies on June 24,1998. The envisaged measures are given high priority to strengthening the social safetynet comprehensively restructuring the banking system and include:

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Increasing social expenditure to a level equivalent to 7.5 per cent of GDP with

measures comprising the provision of food, fuel, medical, and other subsidies, theexpansion of employment generating programs, supported by the World Bank, ADBand bilateral donors.

Taking measures to limit the budget deficit to 8.5 per cent of GDP, a level that can befinanced with foreign funds, including cuts in infrastructure projects andimprovements in the efficiency of state run operations.

Rehabilitating and strengthening the distribution system following the disruption

caused by social disturbances, to ensure that there are adequate supplies of essentialcommodities, including the establishment of a special monitoring unit to identifypotential shortages of foodstuffs or distribution bottlenecks;

Restructuring the banking system through measures to strengthen relatively sound

banks partly through the infusion of new capital while moving swiftly to recapitalize

merge or effectively close weak banks while maintaining the commitment toguarantee all depositors and creditors. A high level Financial Sector AdvisoryCommittee to advise on the coordination of actions for bank restructuring is beingestablished;

Establishing an effective bankruptcy system, as an essential part of the corporate debt

restructuring strategy.

10 Korea: The IMF Supported Program of Economic Reform

Over the past several decades, Korea transformed itself into an advanced industrial

economy. However, the financial system had been weakened by government interferencein the economy and by close linkages between banks and conglomerates. Amid the Asianfinancial crisis, a loss of market confidence brought the country perilously close todepleting its foreign exchange reserves. On December 4, 1997 the IMF approvedfinancing of up to US$21 billion, equivalent to 1,939 percent of Koreas quota, over thenext three years. The initial program of economic reform assumed a growth rate of 2.5per cent in 1998 and included the following measures:

Comprehensive financial sector restructuring that introduced a clear and firm exit

policy for financial institutions, strong market and supervisory discipline, andindependence for the central bank. The operations of nine insolvent merchant banks

were suspended. Two large distressed commercial banks received capital injectionsfrom the government and all commercial banks with inadequate capital were requiredto submit plans for recapitalization;

Fiscal measures equivalent to about 2 per cent of GDP to make room for the costs of

financial sector restructuring in the budget, while maintaining a prudent fiscal stance.Fiscal measures include widening the bases for corporate, income and VAT taxes.

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Efforts to dismantle the nontransparent and inefficient ties among the government

banks and businesses, including measures to upgrade accounting, auditing, anddisclosure standards, require that corporate financial statements be prepared on aconsolidated basis and certified by external auditors, and phase out the system ofcross guarantees within conglomerates.

Trade liberalization measures, including setting a timetable in line with WTO

commitments to eliminate trade related subsidies and the import diversificationprogram, as well as streamlining and improving transparency of import certificationprocedures.

Capital account liberalization measures to open up the Korean money, bond, and

equity markets to capital inflows, and to liberalize foreign direct investment.

Labor market reform to facilitate the redeployment of labour.

On December 24, 1997, the program was intensified and accelerated as the financialcrisis in Korea worsened and concerns about whether international banks would roll overKorean short term external debt placed additional pressures on international reserves andthe won. The revised measures, whose announcement was followed by a significantvoluntary increase in rollovers and extension of claims by international bank creditors onKorean financial institutions, included the following:

Further monetary tightening and the abolition of the daily exchange rate band;

Speeding up the liberalization of capital and money markets, including the lifting of

all capital account restrictions on foreign investors access to the Korean bond marketby December 31, 1997;

Accelerating the implementation of the comprehensive restructuring plan for the

financial sector, including establishing a high level term to negotiate with foreigncreditors and reducing the recourse of Korean bank to the foreign exchange windowof the central bank; and

Speeding up trade liberalization measures, including making binding under the WTO

the liberalization of financial services as agreed with the ORCD.

The macroeconomic framework revised on further on January 7, 1988 and February 5,1998 with projection of lower growth at 1 per cent for 1998 included the following:

Targeting a fiscal deficit of around 1 per cent of GDP for 1998 to accommodate the

impact of weaker economic activity on the budget and to allow for higher expenditureon the social safety net,

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Moving forward to implement a broader strategy of financial sector restructuring

having contained the immediate dangers of disruptions to the financial system.

Increasing the range and amounts of financial instruments available to foreign

investors, increasing the access of Korean companies to foreign capital markets, and

liberalizing the corporate financing market (e.g. mergers and acquisitions); and

Introducing a number of measures to improve corporate transparency, including

strengthening the oversight functions of corporate boards of directors, increasingaccountability to shareholders, and introducing outside directors and external auditcommittees.

On May 2, 1998 the Korean authorities updated the program of economic reform in viewof the progress made in resolving the external financing crisis and the even weakeroutlook for economic activity. Positive developments included the conclusion of therestructuring of US$ 22 billion of Korean banks' short term foreign debt, a successful

return to international capital markets through a sovereign global bond issuance of US$4billion, improvement in the current account to a substantial surplus, and an increase inusable reserves to more than US$30 billion. The measures included:

The accommodation of a larger fiscal deficit of about 2 per cent of GDP in 1998 in

light of weaker growth and through the operation of automatic stabilizers andmeasures to strengthen the social safety net;

Measures to strengthen and expand the social safety net including through a

widening of the coverage of unemployment insurance and increases in minimumbenefit duration and levels.

Formation of an appraisal committee including international experts, to evaluate the

recapitalization plans of undercapitalized commercial banks.

The publication by August 15, 1998 of regulation to bring Koreas prudential

regulations closer to international best practices, including through strengtheningcompliance with existing guidelines concerning foreign exchange maturitymismatches; and

Further phased liberalization of the capital account including loosening restrictions onforeign exchange transaction, foreign ownership of certain assets, and ceiling on foreignequity investment in nonlisted companies.

11 Early Results and the Outlook

The crisis in Asia is still unfolding and new disturbances cannot be ruled out. Themarkets began in early 1998 to distinguish better among the different country situations,with progress in implementing economic reforms being seen by the markets as lesssteady in Indonesia than in Korea and Thailand. In the latter two countries, exchange

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rates have stabilized and the external financing situation has improved. In Indonesia, thesocial disturbances and political uncertainty in May 1998, which were among the factorsimpeding economic reform in Indonesia and had impacts that further worsened economicconditions, have subsided.

The IMF World Bank, ADB and bilateral donors have augmented, in July 1998, thefinancing for Indonesias revised program of economic reform. It takes into account theneed to urgently repair the countrys distribution system and strengthen the social safetynet, as well as to act quickly to stabilize the economy and restructure the banking system.While the global effects of the East Asian crisis appear to have been contained to date,devaluation of the Russian Ruble, the recession in Japan and the weakness of the yenhave introduced some new uncertainties.

Additional measures are being undertaken in the affected countries in terms off economicrestructuring to mitigate the adverse effects on output and employment. These measuresinclude the following:

budgetary flexibility so as not to worsen the output loss;

mitigating the effect of credit tightness and reductions in trade financing on

exporters and small and medium enterprises; and

alleviating the social costs of adjustment, including through strengthening the

social safety net and encouraging a social dialogue among employers, employees,and government.

Targeted fiscal positions have been eased over time to allow for greater social spending inall three affected countries. In Indonesia, for example, the overall budgetary cost ofsocial safety net programs is new estimated at about 7.5 per cent of GDP. It includes

funding of food, fuel, and medicine subsidies; employment-generating programs targetedto poor and vulnerable regions and households; health expenditure, including on villagehealth centers and immunization programs, and student aid to minimize the decline inschool enrollment.

12. LESSONS FROM EAST ASIAN CRISIS FOR AFRICA AND OTHER

DEVELOPING ECONOMIES

12.1 Nature and causes of Asian financial crisis

The international community has been surprised by the dramatic reversal of the economicfortunes and the speed at which some of the most successful economies in the East andSouth East Asia have been derailed by volatile financial flows. The Asian crisis, whichhas been lingering on for a little over a year now, shows that globalisation has broughtboth ample opportunities and risks. Indonesia, together with Thailand and Korea in particular, and other countries have benefited substantially from the openness of therespective economies as well as the huge inflows of capital since the beginning of thenineties. However, weak financial systems and sudden changes in market sentiment from

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an optimistic to a pessimistic outlook seem to strengthen the external shocks to create acurrency and banking crisis, and then a total economic crisis, including social andpolitical chaos, in a short time.

In fact, during 1990s the world economy has witnessed various bouts of financial

instability at roughly two-yearly intervals. First, there was debt deflation in the UnitedStates, followed by the European Monetary system crisis in Europe in 1992-1993. Thiswas soon followed by the Mexican currency crisis in 1994-1995, and most recently bythe East Asian currency and financial crisis of 1997-1998.

As financial markets' expansion and integration deepen, each episode of crisis comeswith greater force and density and inflict greater damage on the real economy. The cost ofthe present crisis in East Asia is an estimated loss of about 1 per cent global GDP in 1998or some $260 billion, equivalent to the annual income of the sub-Saharan Africa(UNCTAD 1998). As for individual countries, output is projected to decline by 10-15 percent in Indonesia and by 6-8 per cent each in Thailand and the Republic of Korea. With

the exception of China and Taiwan, China , no country in the region can expect toregister satisfactory growth in 1998. Prospects for the years ahead are uncertain, althoughthe risks may appear to be on the downside. Any policy errors at this stage might drivethe world economy into a deep recession for a prolonged period.

A proper understanding of the nature and causes of the crisis is necessary for its bettermanagement and formulation of policies to reduce the likelihood of its reappearance.While each crisis had its own special characteristics, UNCTAD (1998) has identified anumber of common features as follow:

They have typically been preceded by financial deregulation, and where there was

currency instability, by liberalisation of capital transactions.

Banking crises have been associated with excessive lending on certain categories of

assets such as property and stocks and with speculative bubbles. Such lending hasbeen associated with weak financial regulation and supervision.

Currency crises typically been preceded by periods of excessive capital inflows,

irrespective of their maturity, attracted by a combination of an interest rate differentialand relatively stable exchange rate. While capital inflows in the East Asian countrieswere basically international bank lending having short-term maturity, in the Mexicancrisis a large share consisted of portfolio investment in equities and bonds of the

Mexican government.

A large increase in liquidity in the banking sector resulting from capital inflows led

to an over-extension of lending, a decline in quality of assets and laxity in riskevaluation and portfolio management.

The capital inflows generate tendencies to currency appreciation and depreciation of

the current account balance.

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Much of he impetus for the increased capital flows is related to the crisis of

commercial banking in the major industrial countries to find alternative sources ofbusiness and to enhance returns of capital.

Reversals of capital flows are often associated with a deterioration of macroeconomicconditions resulting from the effects of the inflows, rather than with shits in profits.

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12.2 Lessons from the Asian Crisis and the Way Forward

The Asian financial crisis is still unfolding and new disturbances cannot be fully ruledout. Nevertheless, there are clear signs that the crisis countries are beginning to emergefrom the initial stages of the crisis and other countries are taking appropriate precautions

to prevent such crisis. The experience so far provides policy lessons from the origin andspread of the crisis on how to lessen the frequency and severity of future economicdisturbances, and how to stabilise in the face of severe crisis of confidence and set thestage for economic recovery.

The Asian crisis has once again highlighted the importance of a sound macroeconomicpolicy framework, and the dangers of unsustainable large current account deficits. Broadpolicy conclusions that emerge from this study include the following:

General policies

Basic lesson from the crisis is that the sooner the problems are identified, recognisedand properly treated, the better the chances for being successful, and the smaller theeconomic and social costs involved. The problems are always worse than expected.This seems to be true for both monetary policy and financial and banking reforms.

The probability of financial crises can be reduced by better macroeconomic

fundamentals, complemented by appropriate legal, regulatory and institutional set-upfor effective prudential regulation, monitoring, surveillance and supervision of thefinancial system and improved corporate governance. These entail structural reformswith an unavoidably long-time scale. Industrial countries spent decades to completesuch reforms and to build up the institutions and regulatory authourities needed.

The main responsibility for taking appropriate measures to contain the economic

damage lies with the countries directly affected. Hesitation in the implementation ofneeded adjustments and reform measures can only worsen the crisis, cause markets toovershoot even further than they have done and exacerbate contagion both to theemerging market countries and to the advanced economies.

Financial sector reforms

The linchpin of the crisis is the weak banking and financial system, which has

constrained the monetary authority in conducting monetary policy and banking

supervision as well as facilitating payments system.

A few lessons for the financial sector reforms are now evident. First, worst time to

reform a financial system is in the middle of a crisis. Second, when currency turmoilis associated with financial difficulties, raising interest rates over an extended periodmay simply worsen the situation by bringing about widespread corporate and bankinsolvency. Third, currencies should not be left to sink while funds are used to bailout the international creditors.

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Sequencing capital account convertibility

It is necessary to foster orderly and properly sequenced capital account liberalization

(supported by a sound financial sector and appropriate macroeconomic and exchange

rate policies) in order to maximize the benefits from and minimize the risks of freecapital movements.

A worldwide effort needs to be made to promote good governance and fight against

corruption, and to enhance the accountability and credibility of fiscal policy as a keyfeature of good governance.

International cooperation

International economic and financial co-operation is essential to contain the crisis.

The major advanced economies should seek to maintain supportive conditions in

international financial markets. In particular, in Europe and North America, therecould be a need for timely monetary easing to arrest an escalating downturn.

Collaboration and consultation at the regional level are also capable of contribution to

the prevention of financial crisis. Their potential role is particularly important withrespect to the prevention of currency disorders and contagion effects.

A favourable external economic environment is particularly important because the

adjustment process for many emerging market economies necessarily entailssignificant improvement in current account positions in response to declining capitalflows. For the global expansion to be reasonably well sustained while this adjustmentis occurring in a number of emerging market economies, growth of domestic demand

in other countries needs to be sufficiently robust and some deterioration in the currentaccounts of these other countries need to be accepted.

11.3 Policy lessons for crisis resolution and crisis prevention

In a comprehensive study of the East Asian crisis, Kochhar, Loungani and Stone (1988)have grouped policy lessons into two categories: policy lessons for crisis resolution andthose for crisis prevention. The lessons for crisis resolution include the importance oftight monetary policy early on for exchange rate stabilisation, flexible fiscal policy, andcomprehsnsive structural reform. Crises are avoided by prudent macro-economicpolicies, diligent bank supervision, transparent data dissemination, strong governance,

and forward-looking policy, even in good times.

Crisis resolution

Tight monetary policy is necessary to reduce initial speculative pressures and

contribute to exchange rate stability, with interest rates used flexibly to support theexchange rate and curb inflationary pressures.

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A pragmatic and forward looking approach to policy making in which problems are

addressed early, decisions are taken promptly and pollicies implemented quickly.

Selected Bibliography

Asian Development Bank (1995). Asia : Development Experience and Agenda, ADBTheme Paper 3, Asian Development Bank, Manila.

______(1997). Emerging Asia - Changes and Challenges, Asian Development Bank,Manila.

Brooks, D.H. and Leuterio, E.E. (1997). Natural resources, economic structure and Asianinfrastructure, in Investing in Asia, ed. C.P. Oman et. el. 1997, OECD.

Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for

investment, in Investing in Asia, ed.C.P.Oman et.el.1997.

Chia, Siow Yue; and Tsao Yuan Lee (1994). Economic Zones in Southeast Asia, in AsiaPacific Regionalisation: Readings in International Economic Relations, ed. R. Garnautand P. Drysdale, Pymble, Haeper Educational Publishers.

Das, Tarun (1993). Macro-economic Framework, Special Economic Zones and ForeignInvestment in India, Ad-Hoc Working Group on Investment and Financial Flows: Non-Debt Creating Finance for Development, Country Report No.TD/B/WG.1/Misc.3/ Add3/UNCTAD, United Nations, Geneva, pp.1-75, June 1993.

______(1996). Policies and Strategies for Promoting Private Sectors Role in Industrialand Technological Development, Including Privatisation in South-Asian Economies,ST/ESCAP/1696, United Nations, New York.

_______(1997), Promoting Industrial Investment - Technology Transfer - Growth NexusTowards Greater Regionalisation and Complementation of Manufacturing Production andTechnology Upgrading, United Nations, New York.

Dasgupta, Biplab (1996). New Political Economy and the East Asian DevelopmentExperience, mimeo, December 1996, New Delhi.

ESCAP (1993). Economic and Social Survey of Asia and Pacific 1992, Part 2, Expansionof Investment and Intraregional Trade as a vehicle for Enhancing Regional Economic Co-operation and Development in Asia and Pacific, United Nations, New York.

______(1994a) Proceedings of the Regional Seminar on Investment Promotion andEnhancement of the Role of the Private Sector in Asia and the Pacific, United Nations,New York.

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______(1994b) Privatisation: Issues and Prospects, ST/ESCAP/1439, United Nations,New York.

______(1996) Policies and Strategies for Promoting Private Sectors Role in Industrialand Technological Development, Including Privatisation in South-Asian Economies,

U.N., New York.

______(1997) Economic and Social Survey of Asia and the Pacific 1997- Asia and thePacific into the Twenty First Century: Development Challenges and Opportunities, U.N,New York.

Fischer, Stanley; Hernandez-Cata, Ernesto, and Khan, Moshin S. (1998) Africa - Is Thisthe Turning Point?, IMF Paper on Policy Analysis and Assessment, No.PPAA/98/6,International Monetary Fund, May 1998, Washington, D.C.

Glen, Jack D. and Sumlinski, Mariusz A. (1995) Trends in Private Investment in

developing Countries 1995 - Statistics for 1980-1993, International Finance Corporation,Washington, D.C.

Harrold, Peter; Jayawickrama, Malathi and Bhattasali, Deepak (1996) Practical Lessonsfor Africa from East Asia in Industrial and trade Policies, World Bank Discussion Papers,African technical Development Series, The World Bank, Washington, D.C.

Industrial Bank for Reconstruction and Development (IBRD) 1995, Bureaucrats inBusiness: The Economics and Politics of Government Ownership, June 1995,Washington, D.C.

International Finance Corporation (IFC), 1995. Privatisation - The IFC Experience,Washington, D.C.

International Monetary Fund (1997). World Economic Outlook - Globalisation,Opportunities and Challenges, May 1997, Washington, D.C.

______(1998) World Economic Outlook - Financial Crises Causes and Indicators, May1998, Washington D.C.

Khatkhate, Deena R. (1992) The Regulatory impediments to the Private Industrial SectorDevelopment in Asia - A Comparative Study, World Bank Discussion Papers, No.177,World Bank, Washington, D.C.

Kochhar, Kalpana; Loungani, Prakash, and Stone, Mark R. (1998) The East Asian Crisis:macroeconomic developments and policy lessons, IMF Working Paper No.WP/98/128,International Monetary Fund, Washington, D.C., August 1998.

Oman, C.P., Brooks, D.H. and Foy, C. (1997). Investing in Asia, Development Centre,The Organisation for Economic Co-operation and Development (OECD).

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Documents

Lessons of Asian Financial Crisis for Africa by Tarun Das