A PROJECT

SUBMITTED AS A PARTIAL REQUIREMENT FOR M.COM.- I DEGREE

BY

(YOUR NAME)

UNDER THE GUIDANCE OF

PROF. DIPIKA BAKSHI

Assistant professor – Department of Commerce

RAMANAND ARYA D.A.V. COLLEGE

BHANDUP (E)

MUMBAI – 400 042

September, 2014

1

Title of the Project :

Name of the Candidate : Your Name

Name and Designation of the Guide : Prof. Dipika Bakshi

Assistant Professor,

Department of Commerce

Place of Research : Ramanand Arya D.A.V. College,

Bhandup (E)

Mumbai -400 042

Date of Submission : Dated: --/--/2014

Signature of the Student :

Signature of the Guide :

Signature of External Examiner :

2

Certification

This is to certify that the project Titled “-----------------------------“is being submitted by me in

partial fulfilment of the course in Economics of Global Trade and Finance at M.Com. Part I

during 2014-15.

Date: Signature

‘Name’

3

DECLARATION

I, Miss. Priyanka A Shinde, the student of M.Com Part 1 (2014-15) hereby declare that I

have completed the project on “ASIAN ECONOMIC CRISIS”.

The information submitted is true & original to the best of my knowledge.

………………..Signature of Student:

Name of the Student:

Priyanka A Shinde

4

ACKNOWLEDGEMENT

I would like to express my greatest gratitude to the people who have helped

& supported me throughout my project. I thanks my Principal Mrs. Dr. Sane, and

grateful to the course coordinator Madhubala Swami mam for their continuous

support to the project, from initial advice & contacts in the early stages of

conceptual inception & through ongoing advice & encouragement to this day.

Special thanks go to my colleague who helped me in completing the project

& they exchanged their interesting ideas, thoughts & made this project easy &

accurate.

I wish to thanks my parents for their undivided support & interest who

inspired me & encouraged me to go our own way, without whom I would be

unable to complete my project. At last but not the least I want to thanks my

friends who appreciated me for my work & motivated me & finally to God who

made all the things possible.

5

INDEX

SR No. TITLE Page No.

1

1 Introduction

1.1 Credit Bubbles and Fixed Currency

Exchange Rate

1.2 Overview

8

9

10

2

2 Implications of the Crisis

2.1 The Asian Economic Model

2.2 Implications for Exchange Rate Policy

2.3 Implications for Business

2.4 Causes

11

11

12

12

13

3

3 Effects and Factors Affecting Asian Crisis

3.1 Introduction

3.2 Methodology Design

3.3 Value Creation

3.4 Factor Affecting on the value Creation

3.5 Macroeconomic and Financial lesson

16

16

16

17

17

18

4 4 IMF Role

4.1 Economic Reforms

4.2 IMF and High Interest Rates

4.3 IMF Conditionality

4.4 Overview Asian Crisis

23

23

24

29

31

5 5 Globalisation, hot money and the search for profitable

investments: Is the East Asian Crisis a global crisis

32

6

6 6 Conclusion 35

7 7 Reference 36

CHAPTER 1

7

1 INTRODUCTION

“A situation in which the economy of a country experiences a sudden downturn brought on by

a financial crisis. An economy facing an economic crisis will most likely experience a

falling GDP, a drying up of liquidity and rising/falling prices due to inflation/deflation. An

economic crisis can take the form of a recession or a depression. Also called real economic

crisis.“

An economic crisis refers to the period of depression which is characterised by a long-term

economic hardships during which there are massive rates of unemployment, low prices of goods

and low levels of trade and investment.

The Asian financial crisis was a period of financial crisis that gripped much of East Asia

beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial

contagion.

The crisis started in Thailand (well known by the Thais as literally translated as Tom Yam

Kung crisis) with the financial collapse of the Thai baht after the Thai government was forced

to float the baht due to lack of foreign currency to support its fixed exchange rate, cutting

its peg to the US$, after exhaustive efforts to support it in the face of a severe financial

overextension that was in part real estate driven. At the time, Thailand had acquired a burden

of foreign debt that made the country effectively bankrupt even before the collapse of its

currency.  As the crisis spread, most of Southeast Asia and Japan saw slumping

currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt

Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong

Kong, Malaysia, Laos and the Philippines were also hurt by the

slump. China, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered

from a loss of demand and confidence throughout the region.

The effects of the crisis lingered through 1998. In 1998 the Philippines growth dropped to

virtually zero. Only Singapore and Taiwan proved relatively insulated from the shock, but both

suffered serious hits in passing, the former more so due to its size and geographical location

between Malaysia and Indonesia. 

8

The economies of Southeast Asia in particular maintained high interest rates attractive to foreign

investors looking for a highrate of return. As a result the region's economies received a large

inflow of money and experienced a dramatic run-up in asset prices. At the same time, the

regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced

high growth rates, 8–12% GDP, in the lates 1980s and early 1990s. This achievement was widely

acclaimed by financial institutions including IMF and World Bank, and was known as part of the

"Asian economic miracle."

1.1 CREDIT BUBBLES AND FIXED CURRENCY EXCHANGE RATES

The causes of the debacle are many and disputed. Thailand's economy developed into

an economic bubble fueled by hot money. More and more was required as the size of the bubble

grew. The same type of situation happened in Malaysia, and Indonesia, which had the added

complication of what was called "crony capitalism".[7] The short-term capital flow was expensive

and often highly conditioned for quick profit. Development money went in a largely uncontrolled

manner to certain people only, not particularly the best suited or most efficient, but those closest

to the centers of power

hailand, Indonesia and South Korea had large private current account deficits and the

maintenance of fixed exchange rates encouraged external borrowing and led to excessive

exposure to foreign exchange risk in both the financial and corporate sectors.

Some economists have advanced the growing exports of China as a contributing factor to

ASEAN nations' export growth slowdown, though these economists maintain the main cause of

the crises was excessive real estate speculation.[10] China had begun to compete effectively with

other Asian exporters particularly in the 1990s after the implementation of a number of export-

oriented reforms. Other economists dispute China's impact, noting that both ASEAN and China

experienced simultaneous rapid export growth in the early 1990s

1.2 OVERVIEW

Prior to the 1997 Asian financial crisis, the growth of these four Asian tiger economies

(commonly referred to as, ‘The Asian Miracle’) has been attributed to export oriented policies

and strong development policies. Unique to these economies were the sustained rapid growth and

high levels of equal income distribution. A World Bank report[7]suggests two development

9

policies among others as sources for the Asian miracle: factor accumulation and macroeconomic

management.

By the 1960s,levels in physical and human capital amongst the four countries far exceeded other

countries at similar levels of development. This subsequently led to a rapid growth in per capita

income levels. While high investments were essential to the economic growth of these countries,

the role of human capital was also important. Education in particular is cited as playing a major

role in the Asian miracle. The levels of education enrollment in the four Asian tigers were higher

than predicted given their level of income. By 1965, all four nations had achieved

universal primary education. South Korea in particular had achieved a secondary education

enrollment rate of 88% by 1987. There was also a notable decrease in the gap between male and

female enrollments during the Asian miracle. Overall these progresses in education allowed for

high levels of literacy and cognitive skills

The 1997 Asian Crisis

The 1997 Asian financial crisis had an impact on all of the four Asian tiger economies. South

Korea was hit the hardest as its foreign debt burdens swelled resulting in its currency falling

between 35-50%. By the beginning of 1997, the stock market in Hong Kong, Singapore, and

South Korea also saw losses of at least 60% in dollar terms. However, four Asian tiger nations

recovered from the 1997 crisis faster than other countries due to various economic advantages

including their high savings rate (except South Korea) and their openness to trade

CHAPTER 2

IMPLICATIONS

2 Implications Of The Crisis

10

Although the economic storm that swept through Asian in 1997 has now abated, the wreckage

left in its wake will undoubtedly take years to repair. By indulging in a debt binge that ultimately

bought its high flying economies crashing to the ground, Asia may have lost a decade of

economic progress. Beyond this, however, the crisis has raised a series of fundamental policy

questions about the sustainability of the so called Asian Economic Model, the role of the IMF,

and the virtues of floating and fixed exchange rates. The crisis also has important implications

for international businesses. For a decade, the Asian Pacific region has been promoted by many

as the future economic engine of the world economy. Businesses have invested billions of dollars

in the region on the assumption that the rapid growth of the last decade would continue. Now it

has come grinding to a halt. What does this mean for international businesses with a stake in the

region, and for those that compete against Asian companies? Below we discuss each of these

questions in turn.

2.1 The Asian Economic Model.

Back in the late 1980s and early 1990s a number of authors were penning articles about the

superiority of the Asian Economic Model or Asian Capitalism. According to its advocates, the

countries of the Asian Pacific region, as exemplified by Japan and South Korea, had put together

the institutions of capitalism in a more effective way than either the United States or Western

European nations. The so called Asian Model of state directed capitalism seemed to combine the

dynamism of a market economy with the advantages of centralized government planning (see

Chapter 2 for details). It was argued that close cooperation between government and business to

formulate industrial policy led to the kind of long-term planning and investment that was not

possible in the West. Informal lending practices were credited with giving Asian firms more

flexibility than allowed for by the rigorous disclosure rules imposed on similar transactions in the

United States. And Western admirers praised government policies designed to encourage exports

and protect domestic producers from imports.

2.2 Implications for Exchange Rate Policy.

As outlined in chapter 10 of this book, there is a long running debate in international business

and economics between those who favor fixed exchange rate mechanisms, and those who favor a

floating system. Since the collapse of the Bretton Woods’ fixed exchange rate system in 1973,

the world has functioned with a floating exchange rate system (see Chapter 10). However, there

11

are variations to this theme. Most Asian countries tried to peg the value of their currency against

the US dollar, intervening selectively in the foreign exchange markets to support the value of

their currency. This practice, know as a managed float, is an attempt to achieve some of the

benefits associated with a fixed exchange rate regime in a world of that lacks such a regime.

Critics argue that such a policy is vulnerable to speculative pressure. The events that unfolded in

the fall of 1997 have given the critics additional ammunition. The value of the Korean,

Indonesia, Thai, and Malaysian currencies did not just decline against the dollar, they collapsed

in spectacular fashion, illustrating the sometimes extreme results of speculative attacks on a

currency in a world of floating exchange rates.

 If local inflation rates remain higher than the inflation rate in the country to which the currency

is pegged, the currencies of countries with currency boards can become uncompetitive and

overvalued. Moreover, under a currency board system government lacks the ability to set interest

rates. Interest rates in Hong Kong, for example, are effectively set by the American Federal

Reserve. Despite these drawbacks, however, Hong Kong’s success in avoiding the currency

collapse that afflicted its Asian neighbors suggests that other developing countries may adopt a

similar system in the future

2.3 Implications for Business.

The Asian financial crisis throws the risks associated with doing business in developing

countries into sharp focus. For most of the 1990s, multinational companies have viewed Asia as

a future economic powerhouse, and invested accordingly. This view was not without foundation.

The region is home to 60% of the world’s people and a number of dynamic economies that have

been growing by nearly 10% per year for most of the past decade. This euphoric view was rudely

shattered by the events of late 1997. It would be wrong to conclude, however, that the impact

upon companies doing business in the region will be purely negative. On closer examination,

there is a silver lining to many of the storm clouds hanging over Asia

To make matters worse, many Asian companies will now be looking to export their way out of

recessionary conditions in their home markets. This may lead to a flood of low priced exports

from troubled Asia economies to other countries. United States and European steel companies,

for example, are bracing themselves to deal with the adverse impact on demand and prices in

12

their home market of an increased in the supply of low cost steel from South Korea. The fall in

the value of the Korean won against the dollar has given Korean steel companies a competitive

edge in global markets that they lacked just six months ago.

Finally, it is worth emphasizing that despite its dramatic impact, the long run effects of the crisis

may be good not bad. To the extent that the crisis gives Asian countries an incentive to reform

their economic systems, and to initiate some much need restructuring, they may emerge from the

experience not weaker, but stronger institutions and a greater ability to attain sustainable

economic growth

2.4 Causes

The Asian financial crisis resulted from the sudden flight of large amounts of capital from Asian

countries that lacked adequate systems of prudential regulation, and whose foreign exchange rate

proved disastrously brittle. The crisis was unique in its unprecedented severity of corporate

distress and banking sector problems, and its quickness in recovery from the crisis. While

technical improvements in the financial system were institutionalized, the crisis did not bring

fundamental structural revisions, in both political and economic arena. Doughty resistance from

entrenched ideologies and interests in the U.S, the U.K, and the IMF prevented the reforms and

rearrangements in the international financial system from happening.

The East Asian crisis---the severest jolt to the world economy since the Oil Shock in early

1980s.

Asian Crisis ---spread from Thailand to Indonesia, the Philippines, Malaysia and Korea.

Sequences---Export decline à loss of investors’ confidenceà Currency devaluation due to

lack of foreign reserveà IMF emergency fund requiring tight budget and monetary policyà

increase in non-performing loans and damage in domestic industries

Drastic increase in international private capital inflow in the ‘90s was key to understand this

crisis.

Liberalization within a flawed policy framework

Inadequate regulation to cope with capital inflow---lack of experience and expertise, the

13

predominance of short-term debt (which made economies vulnerable to speculative attack),

newly-licensed banks (with risky lending practices, and unproductive, speculative

investments.

Fixed exchange rages exacerbated vulnerability of economies to crisis---uncontrolled capital

inflow invited over-money-supply and inflation. Currency appreciation harmed export

competitiveness. It also created moral hazard to domestic borrower with no risk of exchange

rate.

Distinguishing crisis and non crisis economies

China and Taiwan were not affected as much as Thailand, Indonesia and Korea.(see Table

1.1 p202/p7) The combination of capital account liberalization and an inflexible exchange

rate were the common characteristics of heavily affected countries. Less-affected countries

held prudential regulation.

Causality? Two opposing view---fundamentalists vs panic-striken.

For fundamentalists, root causes of crisis lay in misguided economic policies, e.g. “Crony

capitalism”, and analyze that liberalization of their financial system was not enough.

The panic-striken argue, in contrast, that fundamentals of the Asian economies were sound

and that hasty liberalization of their financial system, followed by the asset bubbles, was

root cause. (Jagcish Bhagwati, Joseph Stiglitz together with Japan, some European and

Australian governments expressed skepticism about the benefits of liberalizing short-term

capital inflows.)

The politics of financial policy: Behind the fundamentals

Why reform in financial sector difficult?

Influences on financial arrangements in Asia--- (i) Relative strength of social coalitions and

economic sectors. (eg. In Korea, major conglomerates’ presser on the government for

preferential loans), (ii) The degree of concentration of the financial sector (e.g. Thailand),

(iii)The particular links between individual financial institutions and state organs. (e.g.

Indonesia), (iv) The degree of foreign participation in the financial sector.

Supply-side approach --- (i) MOF and the central bank are powerful and insulated from

social and political forces. (ii) Intervention of parties and elections into financial sector.

Liberalization of financial sector is politically difficult, creating few opportunities for

14

political entrepreneurship.

How this crisis effected on political systems? --- mixed results. More stable in Korea, the

Philippines and Thailand, while Indonesia saw more corruption and cronyism. Inappropriate

policy responses by governments succeeded in turning severe challenges into a crisis.

Domestic Responses

Financial liberalization carries substantial risks as well as benefits.

Capital controls (e.g. exit controls and entry taxes) would decrease the speculative money,

but opposition to capital control grew, e.g. IMF. Reintroduction of capital control would be

difficult in its implementation and discourages investment and growth. (e.g. Chile’ case with

tax on investment and Malaysia’s case with control on short-term capital inflow.)

Selective actions to limit trading currencies and derivatives (Taiwan, the Philippines, and

HK)

Measures to improve prudential regulation, e.g. increase in the ratio of banks’ capital relative

to risk-adjusted assets to 8% or higher, increase in stronger assessment of non-performing

loans, increase in independence and unity of oversight agencies.

The extent of financial and corporate restructuring in the most severely affected economies

remained limited.

Regional Responses

Propos al for establishing AMF (Asian Monetary Fund) by Japan and Taiwan, which was

killed by the US opposition. This idea is unlikely to come true

Bilateral programs by Japan (New Miyazawa Plan by the Export-Import Bank of Japan1)

The crisis has drawn East Asian economies together, realizing that they do not have an

effective voice in the governance of the monetary system. This led to the effort to establish a

representational organization or regime, the outcome remains to be seen.

CHAPTER 3

3 The Effects from Asian Crisis:

1

15

3.1. Introduction

The Asian’s financial crisis began when the Thai government decided on devaluation of the Thai

baht on July 2, 1997, a date generally considered to be the starting point of the crisis. The July

beginning point also corresponds to the date when the movement of composite stock indexes for

all five countries from 1995 through 1999 beganmoving downward together. The ending point of

the crisis period, August 1998, corresponds with the date on which the indexes began a sustained

upward trend (Mitton, 2002).

In 1998, the world economy has entered a slowdown, which originated in South East Asia. The

Asian Crisis has caused severe economic turbulence in the economies of South East Asia since

the summer of 1997. There have been two distinct phases to the Asian Crisis: the first from July

- December 1997, when the first international assistance was provided, and the second since mid-

1998, when the turbulence has spread beyond the region as Russia, China and Brazil have shown

signs of contagion. This crisis was initially a financial one as speculation caused funds to drain

out of Thai and Korean currencies and stock markets. The crisis eventually caused economic

growth rates to collapse in several South East Asian countrie

3.2. Methodology Design

This paper is documentary research. Secondary data was examined in order to construct a

proposed the model of the linkage between value creation and factors affecting on the value

creation.

3.3. Value Creation

Value Creation are management generates revenue over and above the economic costs or

creating the firm’s value or creating maximize shareholder wealth. The strategies for creating

value shifted from managing tangible assets to knowledge-based strategies that create and deploy

an organization's intangible assets. These include customer relationships, innovative products

and services, high-qualityand responsive operating processes, skills and knowledge of the

workforce, the information technology that supports the work force and links the firm to its

customers and suppliers, and the organizational climate that encourages innovation,problem-

solving,and improvement.

16

3.4. Factors Affecting on the Value Creation

3.4.1 Corporate Social Responsibility

Corporate Social Responsibility (CSR) is a company’s obligations to be accountable to all of its

stakeholders in all its operations and activities. There are four parts of CSR, categorized in terms

of economic, legal, ethical, and philanthropic responsibility (Carroll, 1991). CSR has increased

significantly during the last decade. Many firms started reporting about their ethical, social and

environmental conduct. And in marketing, being green and social is positioned as a relevant

product and firm characteristic. In academic research, CSR has become a topic of interest to

3.4.2 Corporate Governance

Corporate Governance (CG) is the process of supervision and control intended to ensure that the

company’s management acts in accordance with the interests of shareholders (Parkinson, 1994).

At its core, corporate governance is concerned with identifying ways to ensure that strategic

decisions are made effectively. Governance can also be thought of as a means to establish

harmony between parties (the firm’s owners and its top-level managers) whose interests may

conflict (Hitt et al., 2011). Agency theory suggests that governance matters more among firms

with greater potential agency costs. Rational investors are unlikely to value safeguards against

unlikely events. Yet, few studies of the relation between governance and firm value control for

investor perceptions of the likelihood of agency conflicts. Firm value is an increasing function of

improved governance quality among firms with high free cash flow. In contrast, governance

benefits are lower or insignificant among firms with low free cash flow

3.4.3 Innovative Organization

Innovative Organization is the implementation of a new or significantly improved product

(goods or service), or process, a new marketing method, or a new organizational method in

business practices, workplace organization or external relations (OECD, 2005). Firms can derive

four basic benefits for Innovative Organization: (1) increased market size; (2) greater returns on

major capital investment or on investments in new products and process; (3) greater economies

of scale, scope, or learning; and (4) a competitive advantage through location (e.g., access to

low-cost labor, critical resources, or customers

17

The conceptual framework of the value creation model is designed based on secondary data from

prior research related to the financial crisis since 1997. This paper identifies the value creation

model that creates a firm’s value and going concern from successful performance of the three

factors: Corporate Social Responsibility, Corporate Governance and Innovative Organization.

Factors and directions of influence have positive direct factors affecting the value creation. The

relationships between the constructs are illustrated in the model in Figure 3.This simple model

depicts the fundamental relationships between key constructs that influence value creation. This

model paves the way for empirical examination of the constructs that bring about value creation.

3.5 The macroeconomic and financial lesson

The first interpretation of the Asian crisis is macroeconomic and financial. As noted in the

previous lecture, many developing and transition countries opened up financially by the early

1990s and became "emerging markets" attracting foreign loans and investments. In developing

East Asia, short-term commercial bank loans were the dominant form of capital inflow (Asian

securities markets were underdeveloped). At first, this caused domestic booms and asset market

inflation. But later, as the market sentiment turned for the worse and foreign investors pulled

their money out, the balance of payments came under a severe pressure. Speculative attacks

rapidly depreciated Asian currencies, and the illiquidity problem--inability to rollover the short-

term bank loans since foreign banks demanded immediate repayment--occurred. The domestic

banking sector froze up and domestic demand fell sharply, causing a serious recession that lasted

for one to two years.

This macro shock was amplified by the balance-sheet vulnerability caused by the weaknesses of

Asian banks, nonbanks and corporations. Firms in developing East Asia were (are) highly

dependent on indirect finance (i.e., bank loans) for working and investment capital and had high

debt/equity ratios. Moreover, the local banks and nonbanks were exposed to two kinds of

balance-sheet mismatches. They borrowed in USD and lent to domestic projects in local

currency (currency mismatch). In addition, they borrowed in short term loans but lent to long-

term domestic projects (maturity mismatch). When the currency depreciation began, the balance

sheets of these financial institutions were immediately hit and bad debt increased. When

18

foreigners demanded repayment, they had no foreign cash. This is a liquidity problem, but as the

crisis deepened, it created insolvency as well.

In addition, the collapsing domestic demand, which was caused by panic, credit crunch

(malfunctioning of the banking sector) and wrong policy prescriptions (in some countries),

damaged the real sector and led to the accumulation of bad debt. This further deteriorated the

quality of the balance sheets of financial institutions.

According to this view, the Asian crisis was primarily caused by the wrong speed and

sequencing of external financial liberalization. Countries liberalized capital accounts too quickly

and without preparation, which caused overborrowing and bubbles. Furthermore, the government

did not properly monitor what was happening. The lesson therefore is: you must open up your

financial sector gradually and in the right order. The pace of financial liberalization must match

the pace of strengthening the domestic financial sector and the monitoring capability. The

government must make utmost effort to improve domestic banks and securities, but this will take

time. A big bang liberalization is dangerous and irresponsible.

China, India, Vietnam, Myanmar and Cambodia were not affected by the Asian crisis as much as

Korea and ASEAN4 (Thailand, Indonesia, Philippines Malaysia). This is not because the

19

productivity and financial institutions of the first group were superior. In many ways, their

domestic systems are much worse than Korea or ASEAN4. They were not directly hit because

they did not open up financially.

The second interpretation of the Asian crisis is structural. On the surface, it is true that this crisis

was a macro and financial phenomenon involving banks, nonbanks and borrowers. But deeper

down, according to this view, the real cause was the structural weaknesses of the developing

economies in East Asia. As long as these weaknesses remain, similar crises can occur in the

future. The real solution must be the removal of these structural weaknesses.

However, one problem with this interpretation is that there are different views as to what exactly

was the structural weakness(es) that caused the Asian crisis? For example, the following

candidates are often mentioned:

--The banking problem and the lack of proper bank supervision [this is the same as the first

interpretation]

--Pre-modern corporate sector: non-transparency, family dominance, non-separation of

ownership and management, archaic accounting, etc.

--Unhealthy relationship between the government and big business (Korean chaebol; corporate

groups in Indonesia, Thailand, etc.)

--Real-sector problems in productivity and competitiveness: low technical absorption, lack of

competent professionals and managers, lack of supporting (parts) industries, etc.

--Heavy dependence on exports (especially on US markets and IT products)

--Political backwardness and lack of true democracy

As an example, the World Bank report East Asia: Recovery and Beyond (June 2000) argued that

East Asian countries would not continue to recover unless they improved in three areas: (i)

managing globalization; (ii) revitalizing business; and (iii) forging social contract and role for

government. Among these, "revitalizing business" means dealing with the under-capitalization of

20

banks and high indebtedness of corporations, and reducing the government ownership of banks

and corporations which were temporarily nationalized after the crisis.

In normal times, it is difficult to introduce bold structural reforms because of political resistance

of interest groups. But when a crisis occurs and people expect changes, it may be politically

easier to implement such reforms. Some people call this the "window of opportunity" [in

Japanese, we say the "opportunity of one thousand years"]. Whether these structural problems

were the true cause of the Asian crisis is less important than the fact that necessary reforms can

now be implemented with popular support. Maybe it was a good thing that the Koreans began to

criticize the triangular relationship among government, banks and chaebol (big business groups

like Daewoo, Samsung, LG...), sell domestic banks to foreigners, and so on.

Current account crisis vs. capital account crisis

The current account crisis is a traditional crisis with which the IMF is well acquainted. It is

caused by inappropriate macroeconomic policy of the government and leads to the balance-of-

payments crisis. Its sequence is typically as follows:

(1) A budget deficit is monetized (i.e., financed by central bank credits) and inflation occurs.

(2) A current account deficit rises and international reserves decline.

(3) The country experiences difficulty in international payments and goes to IMF.

(4) Tight budget and money, together with structural adjustment (liberalization and

privatization), are required as the conditionality for international rescue. The home currency is

devalued to regain competitiveness.

In general, macroeconomic tightening and economic liberalization are the right policy response

to a current account crisis, although the speed and timing of implementation must be judiciously

chosen so as not to unnecessarily damage the economy and people's living standards.

The capital account crisis is a new type of crisis caused by the instability of private capital

flows. It is often observed immediately after the liberalization of the capital account.

21

(1) External financial transactions are liberalized in a country where the domestic banking

system is underdeveloped and the monitoring system is weak.

(2) Domestic banks, nonbanks and corporations overborrow, and foreign investors and

banks overlend.

(3) A domestic boom, asset bubbles and an increase in international reserves are observed.

(4) Reversal comes. Market sentiment changes for the worse and foreign investors suddenly

leave. Currency attacks begin. A huge and uncontrollable depreciation follows.

(5) A severe macroeconomic downturn occurs as demand collapse and banking crisis reinforce

each other.

One salient feature of the capital account crisis is that there are two distinct phases: up and down.

At first, capital flows in, the domestic economy is stimulated, and everything looks rosy. But

after the reversal, economic confusion is inevitable at least for one or two years. As to the current

account crisis, there is no such break; the require very different policy responses, should be

clearly distinguished. The Asian crisis was a capital account crisis. The big problem was that

policy prescriptions for a current account crisis was administered to this crisis. This was a

mismatch between reality and policy problem--overspending--basically remains the same

throughout.

CHAPTER 4

4 IFM Role

Such was the scope and the severity of the collapses involved that outside intervention,

considered by many as a new kind of colonialism,[23] became urgently needed. Since the

countries melting down were among not only the richest in their region, but in the world, and

since hundreds of billions of dollars were at stake, any response to the crisis was likely to be

cooperative and international, in this case through the International Monetary Fund (IMF). The

IMF created a series of bailouts ("rescue packages") for the most-affected economies to enable

22

affected nations to avoid default, tying the packages to currency, banking and financial system

reforms]

4.1 Economic reforms

The IMF's support was conditional on a series of economic reforms, the "structural

adjustment package" (SAP). The SAPs called on crisis-struck nations to reduce government

spending and deficits, allow insolventbanks and financial institutions to fail, and aggressively

raise interest rates. The reasoning was that these steps would restore confidence in the nations'

fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was

stipulated that IMF-funded capital had to be administered rationally in the future, with no

favored parties receiving funds by preference. In at least one of the affected countries the

restrictions on foreign ownership were greatly reduced.

There were to be adequate government controls set up to supervise all financial activities, ones

that were to be independent, in theory, of private interest. Insolvent institutions had to be closed,

and insolvency itself had to be clearly defined. In addition, financial systems were to become

"transparent", that is, provide the kind of reliable financial information used in the West to make

sound financial decisions.

Many commentators in retrospect criticized the IMF for encouraging the developing economies

of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector

(elimination of restrictions on capital flows), maintenance of high domestic interest rates to

attract portfolio investment and bank capital, and pegging of the national currency to the dollar to

reassure foreign investors against currency risk

4.2 IMF and high interest rates

The conventional high-interest-rate economic wisdom is normally employed by monetary

authorities to attain the chain objectives of tightened money supply, discouraged currency

speculation, stabilized exchange rate, curbed currency depreciation, and ultimately contained

inflation.

In the Asian meltdown, highest IMF officials rationalized their prescribed high interest rates as

follows:

23

From then IMF First Deputy managing director, Stanley Fischer (Stanley Fischer, "The IMF and

the Asian Crisis," Forum Funds Lecture at UCLA, Los Angeles on 20 March 1998):

”When their governments "approached the IMF, the reserves of Thailand and South

Korea were perilously low, and the Indonesian Rupiah was excessively depreciated.

Thus, the first order of business was... to restore confidence in the currency. To achieve

this, countries have to make it more attractive to hold domestic currency, which in turn,

requires increasing interest rates temporarily, even if higher interest costs complicate the

situation of weak banks and corporations

Thailand

From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest

economic growth rate of any country at the time. Inflation was kept reasonably low within a

range of 3.4–5.7%.[27] The baht was pegged at 25 to the US dollar.

On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June

1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was

the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht,

which was pegged to the basket of currencies in which the U.S. dollar was the main component,[28] against international speculators.

Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and

construction that resulted in huge numbers of workers returning to their villages in the

countryside and 600,000 foreign workers being sent back to their home countries.[29] The baht

devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56

units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the

largest Thai finance company until then, collapsed.[30]

Without foreign reserves to support the US-Baht currency peg, the Thai government was

eventually forced to float the Baht, on 2 July 1997, allowing the value of the Baht to be set by the

currency market. On 11 August 1997, the IMF unveiled a rescue package for Thailand with more

than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing

and restructuring) procedures and establishing strong regulation frameworks for banks and other

24

financial institutions. The IMF approved on 20 August 1997, another bailout package of $3.9

billion.

By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to

balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai

baht continued to appreciate to 29 Baht to the Dollar in October 2010.

Indonesia

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation,

a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20

billion, and a good banking sector. But a large number of Indonesian corporations had been

borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened respective

to the dollar, this practice had worked well for these corporations; their effective levels of debt

and financing costs had decreased as the local currency's value rose.

In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the

rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack in

August. On 14 August 1997, the managed floating exchange regime was replaced by a free-

floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a

rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts,

massive selling of rupiah, and strong demand for dollars. The rupiah and the Jakarta Stock

Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's

long-term debt to 'junk bond'.[31]

Although the rupiah crisis began in July and August 1997, it intensified in November when the

effects of that summer devaluation showed up on corporate balance sheets. Companies that had

borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and

many reacted by buying dollars through selling rupiah, undermining the value of the latter

further. In February 1998, President Suharto sacked Bank Indonesia Governor J. Soedradjad

Djiwandono, but this proved insufficient. Suharto resigned under public pressure in May 1998

and Vice President B. J. Habibie was elevated in his place. Before the crisis, the exchange rate

between the rupiah and the dollar was roughly 2,600 rupiah to 1 USD

25

South Korea

The banking sector was burdened with non-performing loans as its large corporations were

funding aggressive expansions. During that time, there was a haste to build

great conglomerates to compete on the world stage. Many businesses ultimately failed to ensure

returns and profitability. The chaebol, South Korean conglomerates, simply absorbed more and

more capital investment. Eventually, excess debt led to major failures and takeovers.

For example, in July 1997, South Korea's third-largest car maker, Kia Motors, asked for

emergency loans. In the wake of the Asian market downturn, Moody's lowered the credit

rating of South Korea from A1 to A3, on 28 November 1997, and downgraded again to B2 on 11

December. That contributed to a further decline in South Korean shares since stock markets were

already bearish in November. The Seoul stock exchange fell by 4% on 7 November 1997. On 8

November, it plunged by 7%, its biggest one-day drop to that date. And on 24 November, stocks

fell a further 7.2% on fears that the IMF would demand tough reforms. In 1998,Hyundai

Motors took over Kia Motors. Samsung Motors' $5 billion venture was dissolved due to the

crisis, and eventually Daewoo Motors was sold to the American company General Motors (GM).

The South Korean won, meanwhile, weakened to more than 1,700 per U.S. dollar from around

800. Despite an initial sharp economic slowdown and numerous corporate bankruptcies, South

Korea has managed to triple its per capita GDP in dollar terms since 1997. Indeed, it resumed its

role as the world's fastest-growing economy—since 1960, per capita GDP has grown from $80 in

nominal terms to more than $21,000 as of 2007. However, like the chaebol, South Korea's

government did not escape unscathed. Its national debt-to-GDP ratio more than doubled

(approximately 13% to 30%) as a result of the crisis.

In South Korea, the crisis is also commonly referred to as the IMF crisis.

Malaysia

Before the crisis, Malaysia had a large current account deficit of 5% of its GDP. At the time,

Malaysia was a popular investment destination, and this was reflected in KLSE activity which

was regularly the most active stock exchange in the world (with turnover exceeding even

26

markets with far higher capitalization like the New York Stock Exchange). Expectations at the

time were that the growth rate would continue, propelling Malaysia to developed status by 2020,

a government policy articulated in Wawasan 2020. At the start of 1997, the

KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and

theovernight rate was below 7%.

In July 1997, within days of the Thai baht devaluation, the Malaysian ringgit was "attacked" by

speculators. The overnight rate jumped from under 8% to over 40%. This led to rating

downgrades and a general sell off on the stock and currency markets

Malaysian moves involved fixing the local currency to the US dollar, stopping the overseas trade

in ringgit currency and other ringgit assets therefore making offshore use of the ringgit invalid,

restricting the amount of currency and investments that residents can take abroad, and imposed

for foreign portfolio funds, a minimum one-year "stay period" which since has been converted to

an exit tax. The decision to make ringgit held abroad invalid has also dried up sources of ringgit

held abroad that speculators borrow from to manipulate the ringgit, for example by "selling

short." Those who do, have to purchase back the limited ringgit at higher prices, making it

unattractive to them.[35] In addition, it also fully suspended the trading of CLOB (Central Limit

Order Book) counters, indefinitely freezing approximately US$4.47 billion worth of shares and

affecting 172,000 investors, most of them Singaporeans

Growth then settled at a slower but more sustainable pace. The massive current account deficit

became a fairly substantial surplus. Banks were better capitalized and NPLs were realised in an

orderly way. Small banks were bought out by strong ones. A large number of PLCs were unable

to regulate their financial affairs and were delisted. Compared to the 1997 current account, by

2005, Malaysia was estimated to have a US$14.06 billion surplus.[39] Asset values however, have

not returned to their pre-crisis highs. In 2005 the last of the crisis measures were removed as the

ringgit was taken off the fixed exchange system. But unlike the pre-crisis days, it did not appear

to be a free float, but a managed float, like the Singapore dollar.

Japan

27

he "Asian flu" had also put pressure on the United States and Japan. Their markets did not

collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial plunged 554

points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock

Exchange briefly suspended trading. The crisis led to a drop in consumer and spending

confidence (see 27 October 1997 mini-crash). Indirect effects included the dot-com bubble, and

years later the housing bubble and the Subprime mortgage crisis.[41]

Japan was affected because its economy is prominent in the region. Asian countries usually run

a trade deficit with Japan because the latter's economy was more than twice the size of the rest of

Asia together; about 40% of Japan's exports go to Asia. The Japanese yen fell to 147 as mass

selling began, but Japan was the world's largest holder of currency reserves at the time, so it was

easily defended, and quickly bounced back. GDP real growth rate slowed dramatically in 1997,

from 5% to 1.6% and even sank into recession in 1998, due to intense competition from

cheapened rivals. The Asian financial crisis also led to more bankruptcies in Japan. In addition,

with South Korea's devalued currency, and China's steady gains, many companies complained

outright that they could not compete.[41]

Another longer-term result was the changing relationship between the U.S. and Japan, with the

U.S. no longer openly supporting the highly artificial trade environment and exchange rates that

governed economic relations between the two countries for almost five decades after World War

4.3 IMF conditionality

During and after the Asian crisis, IMF was severely criticized for inappropriate policy advice.

According to the critics, IMF made two big errors:

Ex ante (before the crisis)--IMF failed to prevent the Asian crisis. In fact, it created the

conditions for such a crisis by encouraging financial opening to the countries which were not

ready for it.

Ex post (after the crisis)--IMF failed to contain the Asian crisis after it erupted. In fact, many

contend that the crisis was aggravated and prolonged by IMF's wrong policy advice.

28

In the ex post response to the crisis, what exactly was the problem? The following three points

can be raised:

(1) IMF demanded tight budget and money, although domestic demand was collapsing. This

worsened the recession even more. After several months, IMF changed its advice and permitted

the crisis-hit countries to take more expansionary fiscal and monetary policies.

(2) IMF demanded high interest rates to attract back foreign capital and stop the currency

depreciation. But this worsened the balance-sheet problem and credit crunch of affected banks

and firms.

(3) IMF ordered banking and corporate reforms during the height of the crisis. Many argue that

such reforms should be implemented after, not during, the crisis. Closure of weak banks in

Indonesia during the panic, which led to further bank runs, was particularly harshly criticized.

It appears that the IMF administered the "current account crisis" medicine to the "capital account

crisis" problem. The Japanese Ministry of Finance began to criticize the IMF (Minister Kiichi

Miyazawa and Prof. Takatoshi Ito). Many Japanese economists echoed (including Shinji Takagi,

Eiji Ogawa, Kenji Aramaki, Masaru Yoshitomi, and myself). Jagdish Bhagwati, Jeffrey Sachs, S.

Jomo (University of Malaya), and many others outside Japan also severely criticized the IMF.

Joseph Stiglitz (former World Bank chief economist and now at Columbia University) wrote

scathing articles against IMF, and even wrote a book about it (see below). He said that during the

Asian crisis, the IMF economists, including the former IMF chief economist Stanley Fischer,

were too arrogant and incapable, and took the wrong policies and worsened the crisis.

At first, the IMF (1999) replied that all policies they had implemented were basically right from

the beginning. They refused to apologize. But slowly, they started changing policies not to repeat

the same mistake. In 2003, the Independent Evaluation Office of IMF issued a report which

recognized more frankly that the Fund's policy design and implementation in Indonesia, Korea

and Brazil was inappropriate (IMF 2003). By now, IMF perhaps will not tighten budget or

money, or ask for immediate structural reforms when a similar crisis occurs in the future. But

they may not have relented on the issue of high interest rate policy.

29

After the Asian crisis, the IMF has also worked on the policy of private sector involvement (PSI).

This means that, when a crisis occurs, foreign private investors should not be allowed to pull out

their money freely; instead, they should be asked to stay, rollover the debt, and take some losses.

The IMF also seems now to understand that a big financial rescue package was needed upfront

and unconditionally, rather than conditionally and in small installments, when a crisis like this

occurs.

What should have been done, ideally, at the time of the Asian crisis? As a general principle, we

can say as follows:

--The priority should be stopping the regional currency crisis; structural reforms should be

undertaken later, not during the crisis. Put out the fire first, investigate the cause later.

--Don't apply "current account crisis" measures.

--Calm the market. This is a delicate psychological game against market traders, and you must

know very well how financial markets work. Timing and sequencing are the key.

We recommend the appropriate combination of the following international measures (some of

these measures may not have to be implemented depending on the situation):

1 A big emergency money should be offered, immediately and unconditionally

2 Private sector involvement (PSI)--see above

3 Joint intervention to support and stabilize regional currencies

4 Regionally coordinated fiscal and monetary expansion

In addition, the following domestic measures should be taken as necessary:

5Unlimited and unconditional provision of liquidity (this is called the lender of last

resort(LLR) function of the central bank)

6 Compulsory bank recapitalization (with forced restructuring later)

7 Temporary suspension of banks' capital adequacy standards

30

8 Provision of emergency credit through public channels

4.4 Overview the Asian Crisis

Outline the Crisis

In the 1990s, Asia's tiger economies--Hong Kong, Indonesia, Malaysia, the Philippines,

Singapore, South Korea, Taiwan and Tailand--grew rapidly. Between 1992 and 1996, the region

generated 60-65 per cent of the growth in world output, a remarkable record. We can find some

details from the following table.

Table for the growth Rates of Real GDP

Country 1992 1993 1994 1995 1996

Indonesia 7.2 7.3 7.5 8.2 7.8

Malaysia 7.8 8.3 9.2 9.5 8.2

Philippines 0.3 2.1 4.4 4.8 5.5

Singapore 6.2 10.4 10.1 8.8 7.0

Tailand 8.2 8.5 8.9 8.7 6.4

Source: International Monetary Fund. World Economic Outlook October 1997:pp. 148 and 155

Such fantastic progresses in fact were achieved by large-scale investment, which expanded at 15-

20 per cent per annum and delivered a huge increase in capacity. The funds came from the

international banking system and international financial markets. Per capita income levels have

increased tenfold in Korea, fivefold in Tailand, and fourfold in Malaysia. And until the crisis

coming, Asia attracted almost half of total private capital inflows to developng countries--over

$100 billion in 1996. " 1997 was the year the financial markets flexed their muscles"1. The East

Asian financial Crisis began in July when Tailand, which had almost exhausted its foreign

currency reserves, floated the baht. The Tai currency plummented, triggering a stock market

crash and the collapse of other asset prices. Soon Malaysia, indonesia and the Philippines were

experiencing similar problems. In Hongkong, the stock market plunged 30 percent in a week in

October 1997,although the currency remained sound, the peg to the dollar being sustained by

massive foreign-currency cover and the backing from the mainland china. In November 1997 the

31

crisis spread to South Korea, which suffered currency and stock market collapses. Japan was

affected too--its stock market fell sharply and there was a rash of failures amongst banks and

securities houses. Yamaichi Securities and Sanyo Securities went bust, the former Japan's largest

corporate failure. So did hokkaido Takushaku, the tenth largest commercial bank

CHAPTER 5

5 Globalisation, hot money and the search for profitable investments: Is the

East Asian Crisis a global crisis ?

The East Asian crisis, which is affecting growth prospects in most developing and developed

countries throughout the world to varying degrees, has just had its first anniversary. On the 2nd

of July, 1997, the Thai currency was devalued, setting off a fire-cracker of subsequent

explosions. Several potential trouble spots for the global economy have been identified. But, as

Mr. Michel Camdessus, Managing Director of the IMF, said at the UN in New York last week,

the most worrying is the state of the Japanese economy. Aptly, he called it a `crisis within a

crisis' Where this drama will end is hard to tell. I, for one, have no wish to play the role of a

prophet. What is clear, though, is that the final chapter of this drama has not yet been written.

No one grasped the full implications of the Thai devaluation, when the baht was cut loose from

its anchor. Typical of the international reaction at the time was the headline of an article in the

Financial Times. `No More than a Blip' it read insouciantly. On the basis of the available

evidence it was not an unreasonable thing to say, although I must admit that UNCTAD --

sometimes stereotyped, unfairly, as a perpetual prophet of gloom and doom û took a somewhat

more sceptical view.

Over the last 12 months, however, divergence over the crisis has substantially increased û on two

levels. At the level of the real economy, the East Asian crisis has, at least for the time being,

called in question most of the best success stories of development - those very few cases of

countries demonstrating the possibility of bridging the income gap separating them from

32

industrial nations, the most solid evidence so far that globalisation has been capable of

generating convergence in the world economy. The crisis has also had the perverse effect of

hitting the poor particularly hard, in terms of sharp falls in commodities and in the export prices

of some of their other goods. By the same token, the crisis has benefitted the wealthy, through

the anti-inflationary impact of cheap imports.

On a different level, over the past year there has been significant evidence of a growing

divergence of perceptions about globalisation. I need refer only to the `fast track' controversy in

the United States, the anti-WTO demonstrations in Geneva last May, and the suspension of the

Multilateral Agreement on Investments negotiations in the OECD, in Paris a few weeks earlier,

to make my point.

Growth in South Asia also declined in 1997, falling to under five per cent, compared with 6.8

per cent the previous year. The crisis further east undoubtedly contributed to this more modest

performance. But restrictions on capital account convertibility and more limited exposure to

short-term foreign debt restricted the damage. The villain of the piece in South Asia was more

that familiar culprit, adverse weather conditions. Although political instability and inadequate

infrastructure will continue to act as brakes on growth in the region, in 1998 UNCTAD expects

that both Pakistan and India will see a return to 1996 levels of growth. As South Asian growth

last year exceeded that in South-East Asia for the first time this decade, the tortoise will have

caught up with the hare.

Contrary to the views of some commentators, who look short-term at the league tables on FDI

attraction that organisations such as UNCTAD publish, India's relatively late start in the FDI

game may well turn out to be a real asset. The rise of major national groups with growing

overseas connections provides an excellent platform for the type of network relationship that is

becoming more the norm among transitional companies than traditional FDI. I could also add

here that, as with China, which has benefitted enormously in recent years from overseas Chinese

money û showing up in its national statistics as FDI û India has its own large pool of successful

entrepreneurs living abroad whose latent interest in their original homeland remains to be fully

33

tapped.

The global ramifications of the crisis have not been felt so acutely in the industrial world, since

the benefits of declining commodity prices and improving terms of trade appear, so far, to

outweigh the loss of incomes and jobs due to reductions in exports to the region. However,

developing countries in most other parts of the world have already started to feel the adverse

consequences of the crisis. Because of the risk of contagion, many emerging markets elsewhere

have undertaken preemptive monetary and fiscal restrictions in order to maintain market

confidence and reduce their vulnerability to a reversal of capital flows. In consequence, they

have choked off domestic demand and lowered overall growth.

Moreover, developing countries are expected to be affected more than the developed countries

by negative trends in the volume and export prices of their goods. From Chile, Cuba, Ecuador

and Peru in Latin America to Angola, Congo, Tanzania and Zambia in Africa, and to

Kazakhstan, Russia and Romania, developing countries in all regions have depended on East

Asia for an important part of their export earnings. The collapse of growth in East Asia has been

the single most important factor in the recent declines in the prices of many commodities,

including oil, agricultural raw materials and metals. For some of these countries, up to a quarter

of export earnings may be lost.

Until appropriate global checks and balances are in place, we should assist and guide the

developing countries in recognizing the need for reforms, but these should be introduced

thoughtfully and progressively. Strong domestic capital markets and a transparent banking

system are, of course, prerequisites. Cleaning up bad debt in line with BIS guidelines and

recapitalizing the banking systems of the worst affected countries of East Asia are vital steps.

Meanwhile, for the less badly hurt, in South Asia for example, it may be worth considering

another look at the regulatory system, to avoid nasty surprises when controls on external

borrowing are eased further.

The same wise combination of realism and determination has to be applied to reforms at the

international level. The adoption of much-improved and effective controls and regulations that

go beyond conventional prudential measures are badly needed, if we want to prevent future

34

crises. Such results can not be achieved in a once- for -all conference, a new Bretton Woods

conference, as some have called for, but will require a long and patient process of consensus-

building on a shared and balanced agenda. Mr. Governor:

The prudent approach India has adopted to integration into the world economic system, moving

at its own pace and following its own compass, is being vindicated. And the investments it has

made in education and in science and technology, creating a world - class cadre of scientists,

software designers and so on, will prove to be money well spent. The wheel turns full circle; and

the country that produced the ancient wisdom of the Vedas and other great works of Sanskrit

culture is now a world leader in a modern language, that of computer software. This will be your

spearhead into the outside world, as India takes its rightful place among the leaders of the twenty

first century

6 Conclusion

A review of East Asia’s experience suggests that while a classic panic may have played a role,

financial sector weaknesses were a major contributor to the recent financial crisis. Such

weaknesses appear to reflect the inability of lenders to use business criteria in allocating credit

and implicit or explicit government guarantees against risk. This implies that it would be prudent

to accompany efforts to spur recovery in East Asia by reforms designed to strengthen the

financial system.

East Asian Crisis Resulted From Financial Panic that Arose from certain emerging weakness in

these economic. If could have been largely avoided with relatively moderate adjustment and

appropriate policy change. There were macroeconomic imbalance, weak financial institutions,

widespread corruption, and inadequate legal foundation.

Abrupt actions by domestic and international policy makers can worsen an incipient crisis, by

helping to trigger the capital outflow.

35

REFERENCE

Delhaise Philippe F. (1998) Asia in Crisis : The Implosion of the Banking and Finance

Systems. John Wiley & Sons. 

Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis: Origins,

Implications and Solutions. Springer. 

Pettis, Michael (2001). The Volatility Machine: Emerging Economies and the Threat of

Financial Collapse. Oxford University Press. ISBN 0-19-514330-2.

Blustein, Paul (2001). The Chastening: Inside the Crisis that Rocked the Global Financial

System and Humbled the IMF. PublicAffairs. ISBN 1-891620-81-9.

Fengbo Zhang: Opinion on Financial Crisis, 6. Defeating the World Financial Storm China

Youth Publishing House (2000)

Noland, Markus, Li-gang Liu, Sherman Robinson, and Zhi Wang. (1998) Global Economic

Effects of the Asian Currency Devaluations. Policy Analyses in International Economics, no.

56. Washington, DC: Institute for International Economics.

Pempel, T. J. (1999) The Politics of the Asian Economic Crisis. Ithaca, NY: Cornell

University Press.

Ries, Philippe. (2000) The Asian Storm: Asia's Economic Crisis Examined.

Tecson, Marcelo L. (2005) Puzzlers: Economic Sting (The Case Against IMF, Central

Banks, and IMF-Prescribed High Interest Rates) Makati City, Philippines: Raiders of the

Lost Gold Publication

Muchhala, Bhumika, ed. (2007) Ten Years After: Revisiting the Asian Financial Crisis.

Washington, DC: Woodrow Wilson International Center for Scholars Asia Program.

Ito, Takatoshi and Andrew K. Rose (2006). financial sector development in the Pacific Rim.

University of Chicago Press. ISBN 978-0-226-38684-3.

36

Ngian Kee Jin (March 2000). Coping with the Asian Financial Crisis: The Singapore

Experience. Institute of Southeast Asian Studies. ISSN 0219-3582

Tiwari, Rajnish (2003). Post-crisis Exchange Rate Regimes in Southeast Asia, Seminar

Paper, University of Hamburg.

Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the

Asian crisis?

S. Radelet, J.D. Sachs, R.N. Cooper, B.P. Bosworth (1998). The East Asian Financial Crisis:

Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity.

Stiglitz, Joseph (1996). Some Lessons From The East Asian Miracle. The World Bank

Research Observer.

Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial

Crisis. Center for Economic and Policy Research.

Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High

Interest Rates" (4-part paper on high-interest-rate fallacies and alternatives, emailed to IMF

and others on 27 January 2009)

37

38