The Asian Financial Crisis

Asian Contagion

Between June 1997 and January 1998 a financial crisis swept like a brush fire through the "tiger

economies" of SE Asian. Over the previous decade the SE Asian states of Thailand, Malaysia,

Singapore, Indonesia, Hong Kong, and South Korea, had registered some of the most impressive

economic growth rates in the world. Their economies had expanded by 6% to 9% per annum

compounded, as measured by Gross Domestic Product. This Asian miracle, however, appeared to come

to an abrupt end in late 1997 when in one country after another, local stock markets and currency

markets imploded. When the dust started to settle in January 1998 the stock markets in many of these

states had lost over 70% of their value, their currencies had depreciated against the US dollar by a

similar amount, and the once proud leaders of these nations had been forced to go cap in hand to the

International Monetary Fund (IMF) to beg for a massive financial assistance. This section explains why

this happen, and explores the possible consequences, both for the world economy, and for international

businesses?

Background The seeds of the 1997-98 Asian financial crisis were sown during the previous decade when these

countries were experiencing unprecedented economic growth. Although there were and remain

important differences between the individual countries, a number of elements were common too

most. Exports had long been the engine of economic growth in these countries. A combination of

inexpensive and relatively well educated labor, export oriented economies, falling barriers to

international trade, and in some cases such as Malaysia, heavy inward investment by foreign

companies, had combined during the previous quarter of a century to transform many Asian states into

export powerhouses. Over the 1990-1996 period, for example, the value of exports from Malaysia had

grown by 18% per year, Thai exports had grown by 16% per year, Singapore’s by 15% per year, Hong

Kong’s by 14% per year, and those of South Korea and Indonesia by 12% per year. The nature of

these exports had also shifted in recent years from basic materials and products such as textiles

to complex and increasingly high technology products, such as automobiles, semi-conductors,

and consumer electronics.

An Investment Boom. The wealth created by export led growth helped to fuel an investment

boom in commercial and residential property, industrial assets, and infra-structure. The value of

commercial and residential real estate in cities such as Hong Kong and Bangkok started to soar. In

turn, this fed a building boom the likes of which had never been seen before in Asia. Office and

apartment building were going up all over the region. Heavy borrowing from banks financed much of

this construction, but so long as the value of property continued to rise, the banks were more than

happy to lend. As for industrial assets, the continued success of Asian exporters encouraged them to

make ever bolder investments in industrial capacity. This was exemplified most clearly by South

Korea’s giant diversified conglomerates, or chaebol, many of which had ambitions to build up a major

position in the global automobile and semi-conductor industries.

An added factor behind the investment boom in most SE Asian economies was the government. In

many cases the government had embarked upon huge infra-structure projects. In Malaysia, for

example, a new government administrative center was been constructed in Putrajaya for M$20 billion

(US$8 billion at the pre July 1997 exchange rate), the government was funding the development of a

massive high technology communications corridor, and the huge Bakun dam, which at a cost of

M$13.6 billion was to be the most expensive power generation scheme in the country.

Throughout the region governments also encouraged private businesses to invest in certain sectors of

the economy in accordance with "national goals" and "industrialization strategy". In South Korea, long

a country where the government played a pro-active role in private sector investments, President Kim

Young-Sam urged the chaebol to invest in new factories. Mr. Kim, a populist politician, took office in

1993 during a mild recession, and promised to boost economic growth by encouraging investment in

export oriented industries. Korea did enjoyed an investment led economic boom in the 1994-95 period,

but at a cost. The chaebol, always reliant on heavy borrowings, built up massive debts that were

equivalent, on average, to four times their equity.

In Malaysia, the government had encouraged strategic investments in the semi-conductor and

automobile industries, "in accordance with the Korean model". One result of this was the national

automobile manufacturer, Perusahaan Otomobil Nasional Bhd, which was established in 1984.

Protected by a 200% import tariff and with few other competitors, the Proton, as the car was dubbed,

sold well in its captive market. By 1989 Perusahaan Otomobil Nasional Bhd was selling 72,000 cars

out of a total market of 117,000. By 1995 it had a 62% share of a market which had grown to 225,000

cars annually. Whether this company could succeed in a competitive marketplace, however, was

another question. Skeptical analysis note that in 1987 an average 1,600cc Proton cost about three times

per capita income in Malaysia; by 1996 a 1,6000cc Proton costs 5.5 times per capita income – hardly

what one would expect from an efficient enterprise.

In Indonesia, President Suharato has long supported investments in a network of an estimated 300

businesses that are owned by his family and friends in a system known as "crony capitalism". Many of

these businesses have been granted lucrative monopolies by the President. For example, in 1990 one

the President’s youngest son, Mr Hutomo, was granted a monopoly on the sale of cloves, which are

mixed with tobacco in the cigarettes preferred by 9 out of 10 smokers in Indonesia. In another example,

in 1995 Suharato announced that he had decided to build a national car, and that the car would be built

by a company owned by Mr Hutomo, in association with Kia motors of South Korea. To support the

venture, a consortium of Indonesian banks was "ordered" by the Government to offer almost $700

million in start-up loans to the company.

In sum, by the mid 1990s SE Asia was in the grips of an unprecedented investment boom, much of it

financed with borrowed money. Between 1990 and 1995 gross domestic investment grew by 16.3%

per annum in Indonesia, 16% per annum in Malaysia, 15.3% in Thailand, and 7.2% per annum in South

Korea. By comparison, investment grew by 4.1% per annum over the same period in the US, and 0.8%

per annum in all high income economies. Moreover, the rate of investment accelerated in 1996. In

Malaysia, for example, spending on investment accounted for a remarkable 43% of GDP in 1996.

Excess Capacity. As might be expected, as the volume of investments ballooned during the 1990s,

often at the bequest of national governments, so the quality of many of these investments declined

significantly. All too often, the investments were made on the basis of projections about future demand

conditions that were unrealistic. The result was the emergence of significant excess capacity.

A case in point were investments made by Korean chaebol in semi-conductor factories. Investments in

such facilities surged in 1994 and 1995 when a temporary global shortage of Dynamic Random Access

Memory chips (DRAMs) led to sharp price increases for this product. However, by 1996 supply

shortages had disappeared and excess capacity was beginning to make itself felt, just as the Koreans

started to bring new DRAM factories on stream. The results were predictable; prices for DRAMs

plunged through the floor and the earnings of Korean DRAM manufacturers fell by 90%, which meant

it was extremely difficult for them to make scheduled payments on the debt they had taken on to build

the extra capacity in the first place.

In another example, a building boom in Thailand resulted in the emergence of excess capacity in

residential and commercial property. By early 1997 it was estimated that there were 365,000 apartment

units unoccupied in Bangkok. With another 100,000 units scheduled to be completed in 1997, it was

clear that years of excess demand in the Thai property market had been replaced by excess supply. By

one estimate, by 1997 Bangkok’s building boom had produced enough excess space to meet its

residential and commercial need for at least five years.

The Debt Bomb. By early 1997 what was happening in the Korean semi-conductor industry and the

Bangkok property market was being played out elsewhere in the region. Massive investments in

industrial assets and property had created a situation of excess capacity and plunging prices, while

leaving the companies that had made the investments groaning under huge debt burdens that they were

now finding difficult to service.

To make matters worse, much of the borrowing to fund these investments had been in US dollars,

as opposed to local currencies. At the time this had seemed like a smart move. Throughout the region

local currencies were pegged to the dollar, and interest rates on dollar borrowings were generally lower

than rates on borrowings in domestic currency. Thus, it often made economic sense to borrow in

dollars if the option was available. However, if the governments in the region could not maintain the

dollar peg and their currencies started to depreciate against the dollar, this would increase the size of

the debt burden that local companies would have to service, when measured in the local currency.

Currency depreciation, in other words, would raise borrowing costs and could result in companies

defaulting on their debt payments.

In this regard, a final complicating factor was that by the mid 1990s although exports were still

expanding across the region, so were imports. The investments in infrastructure, industrial

capacity, and commercial real estate were sucking in foreign goods at unprecedented rates. To

build infra-structure, factories, and office buildings, SE Asian countries were purchasing capital

equipment and materials from America, Europe, and Japan. Boeing and Airbus were crowing about the

number of commercial jet aircraft they were selling to Asian airlines. Semi-conductor equipment

companies such as Applied Materials and Lam Materials were boasting about the huge orders they

were receiving from Asia. Motorola, Nokia, and Ericsson were falling over themselves to sell wireless

telecommunications equipment to Asian nations. And companies selling electric power generation

equipment such as ABB and General Electric were booking record orders across the region.

Reflecting growing imports, many SE Asian states saw the current account of their Balance of

Payments shift strongly into the red during the mid 1990s. By 1995 Indonesia was running a current

account deficit that was equivalent to 3.5% of its Gross Domestic Product (GDP), Malaysia’s was

5.9%, and Thailand’s was 8.1%. With deficits like these starting to pile up, it was becoming

increasingly difficult for the governments of these countries to maintain the peg of their currencies

against the US dollar. If that peg could not be held, the local currency value of dollar dominated debt

would increase, raising the specter of large scale default on debt service payments. The scene was now

set for a potentially rapid economic meltdown.

Meltdown in Thailand The Asian meltdown began on February 5th, 1997 in Thailand. That was the date that Somprasong

Land, a Thai property developer, announced that it had failed to make a scheduled $3.1 million interest

payment on an $80 billion eurobond loan, effectively entering into defaulting. Somprasong Land was

the first victim of speculative overbuilding in the Bangkok property market. The Thai stock market had

already declined by 45% since its high in early 1996, primarily on concerns that several property

companies might be forced into bankruptcy. Now one had been. The stock market fell another 2.7% on

the news, but it was only the beginning.

In the aftermath of Somprasong’s default it became clear that not only were several other property

developers teetering on the brink on default; so where many of the country’s financial institutions

including Finance One, the country’s largest financial institution. Finance One had pioneered a practice

that had become widespread among Thai institutions --- issuing eurobonds denominated in US dollars

and using the proceeds to finance lending to the country’s booming property developers. In theory, this

practice made sense because Finance One was able to exploit the interest rate differential between

dollar denominated debt and Thai debt (i.e. Finance One borrowed in US dollars at a low interest rate,

and leant in Thai Bhat at high interest rates). The only problem with this financing strategy was that

when the Thai property market began to unravel in 1996 and 1997, the property developers could no

longer payback the cash that they had borrowed from Finance One. In turn, this made it difficult for

Finance One to pay back its creditors. As the effects of over-building became evident in 1996, Finance

One’s non-performing loans doubled, then doubled again in the first quarter of 1997.

In February 1997, trading in the shares of Finance One was suspended while the government tried to

arrange for the troubled company to be acquired by a small Thai bank, in a deal sponsored by the Thai

central bank. It didn’t work, and when trading resumed in Finance One shares in may they fell 70% in

a single day. By this time it was clear that bad loans in the Thai property market were swelling daily,

and had risen to over $30 billion. Finance One was bankrupt and it was feared that others would

follow.

It was at this point that currency traders began a concerted attack on the Thai currency, the baht. For

the previous 13 years the Thai baht had been pegged to the US dollar at an exchange rate of around

$1=Bt25. This peg, however, had become increasingly difficult to defend. Currency traders looking at

Thailand’s growing current account deficit and dollar denominated debt burden, reasoned that demand

for dollars in Thailand would rise while demand for Baht would fall. (Businesses and financial

institutions would be exchanging baht for dollars to service their debt payments and purchase imports).

There were several attempts to force a devaluation of the baht in late 1996 and early 1997. These

speculative attacks typical involved traders selling Baht short in order to profit from a future decline in

the value of the baht against the dollar. In this context, short selling involves a currency trader

borrowing baht from a financial institution and immediately reselling those baht in the foreign

exchange market for dollars. The theory here is that if the value of the baht subsequently falls against

the dollar, then when the trader has to buy the baht back to repay the financial institution it will cost her

less dollars than she received from the initial sale of baht. For example, a trader might borrow Bt100

from a bank for a period of six months. The trader then exchanges the Bt100 for $4 (at an exchange

rate of $1=Bt25). If the exchange rate subsequently declines to $1=Bt50 it will only cost the trader $2

to repurchase the Bt100 in six months and pay back the bank, leaving the trader with a 100% profit! Of

course, since short selling involves selling Baht for dollars, if enough traders engage in this practice, it

can become a self-fulfilling prophecy!

In May 1997 short sellers were swarming over the Thai baht. In an attempt to defend the peg, the Thai

government used its foreign exchange reserves (which were denominated in US dollars) to purchase

Thai baht. It cost the Thai government $5 billion to defend the baht, which reduced its "officially

reported" foreign exchange reserves to a two-year low of $33 billion. In addition, the Thai government

raised key interest rates from 10% to 12.5% to make holding Baht more attractive, but since this also

raised corporate borrowing costs it only served to exacerbate the debt crisis.

What the world financial community did not know at this point, was that with the blessing of his

superiors, a foreign exchange trader at the Thai central bank had locked up most of Thailand’s foreign

exchange reserves in forward contracts. The reality was that Thailand only had $1.14 billion in

available foreign exchange reserves left to defend the dollar peg. Defending the peg was clearly now

impossible.

On July 2nd, 1997, the Thai government bowed to the inevitable and announced that they would allow

the baht to float freely against the dollar. The baht immediately lost 18% of its value, and started a slide

that would bring the exchange rate down to $1=Bt55 by January 1988. As the baht declined, so the

Thai debt bomb exploded. Put simply, a 50% decline in the value of the baht against the dollar doubled

the amount of baht required to serve the dollar denominated debt commitments taken on by Thai

financial institutions and businesses. This made more bankruptcies such as Finance One all further

pushed down the battered Thai stock market. The Thailand Set stock market index ultimately declined

from 787 in January 1997 to a low of 337 in December of that year, and this on top of a 45% decline in

1996!

On July 28th the Thai government took the next logical step, and called in the International Monetary

Fund (IMF). With its foreign exchange reserves depleted, Thailand lacked the foreign currency needed

to finance its international trade and service debt commitments, and was in desperate need of the

capital the IMF could provide. Moreover, it desperately needed to restore international confidence in its

currency, and needed the credibility associated with gaining access to IMF funds. Without IMF loans,

it was likely that the baht would increase its free-fall against the US dollar, and the whole country

might go into default. IMF loans, however, come with tight strings attached. The IMF agreed to

provide the Thai government with $17.2 billion in loans, but the conditions were restrictive. The IMF

required the Thai government to increase taxes, cut public spending, privatize several state owned

businesses, and raise interest rates – all steps designed to cool Thailand’s overheated economy.

Furthermore, the IMF required Thailand to close illiquid financial institutions. In the event, in

December 1997 the government shut some 56 financial institutions, laying off 16,000 people in the

process, and further deepening the recession that now gripped the country.

The Domino Effect Following the devaluation of the Thai baht, wave after wave of speculation hit other Asian

currencies. One after another in a period of weeks the Malaysian ringgit, Indonesian rupiah and the

Singapore dollar were all marked sharply lower. With its foreign exchange reserves down to $28

billion, Malaysia let its currency, the ringgit, float on July 14th, 1997. Prior to the devaluation, the

ringgit was trading at $1=2.525 ringgit. Six months later it had declined to $1=4.15 ringgit. Singapore

followed on July 17th, and the Singapore dollar (S$) quickly dropped in value from $1=S$1.495 prior

to the devaluation to $1=S$2.68 a few days later. Next up was Indonesia, whose currency, the Rupiah,

was allowed to float on August 14th. For Indonesia, this was the beginning of a precipitous decline in

the value of its currency, which was to fall from $1=2,4000 Rupiah in August 1997 to $1=10,000 on

January 6th, 1998, a loss of 75%.

With the exception of Singapore, whose economy is probably the most stable in the region, these

devaluations were driven by similar factors to those that underlay the earlier devaluation of the Thai

baht. A combination of excess investment, high borrowings, much of it in dollar denominated debt, and

a deteriorating balance of payments position. The leaders of these countries, however, were not always

quick to acknowledge the home grown nature of their problems.

Malaysia. As the ringgit declined against the US dollar, the Malaysia’s Prime Minister, Dr. Mahathir

Mohammed, gave speeches asserting that the international financier, George Soros, was the arch villain

in a conspiracy to impoverish Southeast Asian nations by attacking their currencies. According to Dr.

Mahathir, foreign fund managers were selling Malaysian shares because they were racists; currency

traders were ignoring Malaysia’s sound economic fundamentals; the West was gloating over the crisis

in SE Asia; rumor mongers who "should be shot" were spreading lies and a "Jewish" agenda was at

work against the country. Unfortunately for Dr. Mahathir, every time he gave free rein to his thoughts

on the matter, the Malaysian currency and stock market declined even further. He even tried to outlaw

short selling on the Malaysian stock market, but this too had the opposite effect of that intended, and

the policy had to be pulled shortly after it was introduced.

By Autumn Malaysia’s government seems to have come around to the view that it needed to put its

own house in order, rather than blame others for its problems. In early September the government

deferred spending on several high profile infra-structure projects including its prestigious Bakun dam

project. This was followed in December 1997 by the release of plans to cut state spending by 18%. The

government also stated that it will not bail out any corporations that become insolvent as a result of

excess borrowing. Then in January 1998, IMF managing director Michel Camdessus, stated that

Malaysia was correct in asserting that it did not need an IMF rescue package to get it through the

regional financial crisis. "Malaysia is not facing a crisis in the same way as some of the other countries

in the region, " he said, noting the authorities have taken measures to deal with the difficulties,

particularly on the fiscal side. On the other hand, he did state that the government needed to raise

interest rates to slow credit growth, moderate inflationary pressures and support the weakening

currency.

Indonesia. Indonesia authorities also initially respond with something less than full commitment to

that country’s financial crisis. Following speculative selling, the Indonesia currency, the rupiah, was

uncoupled from its dollar peg and allowed to float on August 14th, 1997. The rupiah immediately

started to decline, as did the Indonesian stock market. By October the rupiah had dropped from

$1=Rp2,400 in early August to $1=Rp4,000, and the Jakarta stock market index had declined from just

over 700 to under 500. At this point the now desperate Indonesian government turned to the IMF for

financial assistance. After several weeks of intense negotiations, on October 31st the IMF announced

that in conjunction with the World Bank and the Asian Development Bank it had put together a $37

billion rescue deal for Indonesia. In return, the Indonesian government agreed to close a number of

troubled banks, to reduce public spending, balance the budget, and unravel the crony capitalism that

was so widespread in Indonesia.

The initial response to the IMF deal was favorable, with the rupiah strengthening to $1=Rp3,200.

However, the recovery was short lived. As November lengthened so the rupiah resumed its decline in

response to growing skepticism about President Suharto’s willingness to take the tough steps required

by the IMF. Moreover, currency traders wondered how Indonesia was going to be able to deal with its

dollar denominated private sector debt, which stood at $80 billion. With both the economy and

exchange rate collapsing, there was clearly no way that private sector enterprises would be able to

generate the rupiah required to purchase the dollars needed to service the debt, and so the decline feed

on itself. In December Moody’s, the US credit rating agency, feed fuel to this fire when it downgraded

Indonesia’s credit rating to junk bond status.

On January 5th 1998 President Suharto seemed to confirm the skepticism of currency traders when he

unveiled Indonesia’s 1998-99 budget. The budget immediately came in for criticism because it made

optimistic assumptions about Indonesia’s economic growth rate in 1998. It projected GDP growth at

4%, inflation contained at single digit levels (in 1997 it was around 20%), and assumed a rupiah-US

dollar exchange rate of $1=Rp4,000 (the rupiah closed 1997 at an exchange rate of $1=Rp5,005).

Moreover, no plans were announced to abolish the lucrative state licensing monopolies that had

benefited his family and friends. An "unnamed" IMF sokesman informed the Washington Post that the

Indonesia government did not seem to be following through on pledges to restructure the economy and

warned that the IMF might hold back funds. International investors and currency traders responded by

selling their rupiah holdings, or selling the rupiah short, and the exchange rate plunged through the

floor, hitting $1=Rp10,000 a few days later.

At this point IMF officials, together with US deputy Treasury Secretary Lawrence Summers, made a

second visit to Jakarta to "re-negotiate" the IMF terms of agreement. On January 15th they reached a

revised agreement which committed Indonesia to a tough budget. Among other things, this pledged

budget cuts, including cuts in sensitive energy subsidies, trade deregulation that would wipe out many

of the business privileges enjoyed by Suharto’s family and friends, and accelerated structural reform of

the banking sector.

Whether Suharto will follow through on these commitments, however, remains to be seen. On January

20th the 76 year old President announced his intention to run for a seventh term as President. The

outcome does not seem to be in doubt, since the election in undertaken by hand picked delegates, and

Suharto faces no opponent. The rupiah, meanwhile, which was trading at around $1=Rp8,5000 just

before the announcement, dropped sharply, reaching an all time low of $1=Rp14,500 on January 22nd,

1998 before clawing its way bask up to $1=Rp12,5000.

The sharp drop reflected two concerns. First, fear that Suharto’s apparent unwillingness to step down in

the face of an economic collapse may lead to social breakdown and political violence in Indonesia.

Second, growing realization that hundreds of Indonesian businesses were now technically insolvent

and would not be able to pay back the estimated $65 billion of dollar denominated debt they owed

without substantial debt restructuring and rescheduling of the debt payments. The IMF deal, for all of

its good points, had not addressed this critical issue.

South Korea. Initially South Korea seemed to be insolated from the currency turmoil sweeping

through the region. As the world’s 11th largest economy, and a member of the Organization of

Economic Cooperation and Development, Korea was clearly in a different league from Thailand,

Indonesia, and Malaysia. However, underneath the surface Korea too had serious problems

During much of the 1990s foreign banks had been eager to lend US dollars to Korean Banks and the

chaebol. A significant proportion of this was short term debt that had to be paid back within a year.

This money was used to fund investments in industrial capacity, which as suggested earlier, were

often undertaken at the encouragement of the government. By late 1996 it was clear that the debt

financed expansion was beginning to unravel. Economic growth had slowed, excess capacity was

emerging in a number of industries, prices for critical industrial products such as semi-conductors were

falling, and imports were on the rise (Korea ran a current account deficit of $23.7 billion in 1996).

The Korean debt problem started to deteriorate in January 1997 when one of the chaebol, Hanbo

collapsed under a $6 billion debt load. A 1993 decision to build the world's fifth largest steel mill

proved to be Hanbo’s undoing. Costs for the project escalated from Won 2,700bn to Won 5,700bn

while steel demand proved sluggish. Following Hanbo’s collapse there were widespread allegations in

Korea that the project had been funded only because of the government pressured Korean banks to lend

to Hanbo. Moreover, allegations soon surfaced that government officials had been bribed by Hanbo to

pressure the banks.

The situation deteriorated further in July 1997 when Kia, Korea’s third largest car company, ran out of

cash and asked for an emergency bank loan to avoid bankruptcy. At about the same time Jinaro,

Korea’s largest liquor group, filed for bankruptcy. These events prompted international credit agencies

to start downgrading the ratings of banks with heavy exposure to the chaebol. This raised the

borrowing costs of the banks, and led them to tighten credit, making it even more difficult for debt

heavy chaebol to borrow additional funds. By October 1997 it was clear that additional funds for Kia

would not be forthcoming from private banks, so the government took the company into public

ownership in order to stave off bankruptcy and job losses. This followed hard on the heels of a decision

by the Korean government to invest an equity stake in Korea First Bank, to stop that institution from

collapsing due to a its bad loans. The nationalization of Kia transformed its private sector debt into

public sector debt. Standard & Poor’s, the US credit rating agency, immediately downgraded Korea’s

debt, causing the Korean stock market to plunge 5.5%, and the currency, the Korean won, to fall to

$1=Krw929.5. According to S&P, "the downgrade of…..ratings reflects the escalating cost to the

government of supporting the country's ailing corporate and financial sectors."

The S&P downgrade was the trigger that precipitated a sharp sell-off of the Korean won. In an attempt

to protect the won, the Korean central bank raised short term interest rates to over 12%, more than

double the inflation rate. The bank also intervened in the currency exchange markets, selling dollars

and purchasing won in an attempt to keep the dollar/won exchange rate above $1=Krw1,000. The main

effect of this action, however, was to rapidly deplete its foreign exchange reserves. These stood at $30

billion on November 1st, but fell to only $15 billion two weeks later.

To make matters worse, the wave of bankruptcies continued among the chaebol. Haitai, Korea's 24th

largest business, filed for bankruptcy protection at the beginning of November, and rumors suggests

that New Core, another chaebol would soon follow. This meant that one-fifth of the country’s thirty

largest businesses had now filed for bankruptcy protection. Moreover, there was speculation that as

many as half of the top 30 chaebol might ultimately have to file for bankruptcy. International lenders,

fearing that Korea was about to become a financial black whole, refused to roll over short-term loans to

the country, an action made all the more serious by revelations that Korea had about $100 billion in

short term debt obligations that had to be paid within 12 months.

With Korea facing imminent financial meltdown, the prospect of an IMF led bailout of the country was

being openly discussed. On November 13th, the Korean government declared that it "did not need help

from the IMF", apparently believing that it would be able to arrange bilateral loans from the US and

Japan. They were not forthcoming, and on November 17th, with the nation’s foreign exchange reserves

almost exhausted, the Korean Central bank gave up its defense of the won. The won immediately fell

below the psychologically important $1=Krw1,000 exchange rate, and it kept going south. On

November 21st the now humiliated Korean government was forced to reverse course and formally

requested $20 billion in standby loans from the IMF.

The process was complicated considerably at this point by the fact that Korea was facing a presidential

election campaign on December 18th. The IMF, therefore, had to negotiate terms with a lame duck

President, Kim Young-sam, who has required to step down by the constitution, while the three main

candidates criticized the process from the sidelines. As the negotiations progressed, it soon became

apparent that Korea was going to need far more than $20 billion. Among other problems, Korea’s short

term foreign debt was found to be twice as large as previously thought at close to $100 billion, while

the country’s foreign exchange reserves were down to under $6 billion.

On December 3rd the IMF and Korean government reached a deal to lend $55 billion to the country.

The IMF had tried to insist that all three Presidential candidates promise, in writing, to obey the

agreement. However, Kim Dae-jung, the centre-left opposition leader, said he would refuse to sign any

guarantee with the IMF because "it violated national pride," although he did signal general compliance

with the measures. The agreement with the IMF called for the Koreans to open up their economy and

banking system to foreign investors. Prior to the deal foreigners could only own 7% of a Korean

company's shares. This was lifted to 50%. South Korea also pledged to restrain the chaebol by reducing

their share of bank financing and requiring them to publish consolidated financial statements and

undergo annual independent external audits. On trade liberalization, the IMF said South Korea will

comply with its commitments to the World Trade Organization to eliminate trade-related subsidies and

restrictive import licensing, and streamline its import- certification procedures, all of which should

open up the Korean economy to greater foreign competition.

Initial reaction in the stock and currency markets was very favorable, with the Korean stock marketing

registering a 7% gain, its biggest one day advance ever. However, the package started to unravel on

December 8th when the Korean government said that it would take two trouble banks into public

ownership, rather than closing them. On the same day, Daewoo, one of the chaebol, announced that it

would purchase debt laden Ssangyong Motor under a deal that forced Ssangyong’s creditor banks to

share much of the burden. Foreign investors saw these moves as an attempt to get around the harsh

measures imposed by the IMF. Further compounding matters were criticisms from presidential

candidate Kim Dae-jung. Kim argued that the IMF agreement represented a loss of national

sovereignty and he promised that, if elected, he would renegotiate the deal to avoid job losses. In

response to these developments, foreign banks refused to roll over short term loans investors sold out

of the Korean stock market and won, and both dropped like stones. The won began a precipitous fall

that was to take it down to the 2,000 level in two short weeks, a decline that effectively doubled the

amount of won Korean companies would have to earn to finance their dollar denominated debt. By mid

December foreign banks were only rolling over 20-30% of Korean short term debt as it matured,

requiring that the rest be paid in full. Despite the IMF funds, foreign currency was leaving the country

at the rate of $1 billion a day.

Following pressure from the other presidential candidates, Kim Dae-jung, reversed his position and

sent a letter to Michael Camdessus, the head of the IMF, stating that if elected, he would comply with

the IMF’s terms. On December 18th, Kim Dae-jung was elected president of South Korea by a narrow

margin. He immediately turned his attention to the debt crisis. His attention was heightened by the

uncomfortable fact that Korea was on the verge of default. His first priority was to rebuild confidence

and persuade foreign banks to roll over Korean short term debt, thereby staving off an immediate

default. The international community was also concerned by the possibility that a Korean default

would trigger a banking crisis in Japan, which held $25 billion of Korean debt, an event that would

send economic shock waves surging around the world.

In the event, a second agreement was reached between Korea, the IMF, and a number of major

American and British banks with large exposure to Korea. Singed on Christmas Eve, the agreement

called for the IMF and eight major banks to accelerate a loan of $10 billion to Korea to prevent a debt

default. For his part, Kim Dae-jung spelled out in clear language that Korean businesses and jobs could

no longer be protected from foreign competition. Korea also agreed to an accelerated timetable for

opening up its financial markets to foreign investors, permitting foreign takeovers, and allowing

foreign companies to establish subsidiaries in Korea. The government also agreed to raise interest rates

in order to attract foreign capital, force the chaebol to restructure their operations, selling-off loss

making units and demanding clearer accounting. If the government follows through with these reforms,

the effect could be to transform Korea’s economy from one in which the government plaid a major role

in regulating and directing investment activity into one of the most market-oriented economies in Asia.

In response, for now Korean stock and currency markets have stabilized, but it would be naive to

expect anything approaching a full recovery until the country has put its house in order.

The situation in South Korea improved still further on January 28th, 1998 when a consortium of 13

international banks with exposure to Korea agreed to reschedule their short term debt to Korea.

According to the Bank for International Settlements, In early 1998 South Korea was sitting on $74

billion in debt that was coming due for repayment in the next two years. This added up to a cash flow

squeeze of major proportions that the earlier IMF deal had fully come to grips with. Under the plan

South Korean banks will exchange short term debt valued at $24 billion for new loans with maturities

of one, two, and three years, bearing interest rates of 2.23, 2.50, and 2.75 percentage points higher than

the six month London Interbank rate. By effectively rescheduling so much of its short term debt, the

deal gave South Korea some breathing room in which it could begin to rebuild confidence in its

shattered economy.

Japan. As the crisis unfolded, most Japanese felt that it had little to do with them. At worst, there

was some concerns that the turmoil might harm some of the nation’s exporters. Indeed, the main issue

for debate was whether Japan should take a leadership role in handling the crisis. This sense of

insulation was always rather myopic given that Japanese banks had major exposure throughout Asia.

For example, more than half of the total foreign lending to Thailand was by Japanese Banks. The

possibility always existed, therefore, that a collapse in many of the SE Asian economies could have

serious repercussions for Japan.

The confidence of the Japanese was finally shaken on November the 3rd 1997, when Sanyo Securities,

the nation’s seventh largest stock brokerage firm, announced that it would file for bankruptcy. This was

followed on November 17th by the collapse of Hokkaido Takushoku, Japan’s 10th largest bank, and on

November 22nd, by the announcement that Yamaichi Securities, the fourth largest stock-broker in

Japan, would close its doors. The Japanese stock market fell on the news to its lowest level in years,

and for a moment it looked like the Asian financial crisis might spill over into Japan.

The closure of these three institutions dated back to events almost a decade earlier. In the late 1980s

when Japan’s stock market and property bubble was at its peak, Japan’s financial institutions went on a

lending binge. In 1989 the Nikki stock market index briefly rose to within striking distance of 40,000

before the bubble burst and the market fell to 15,000 three years later. Following the collapse of stock

and property prices in Japan, many of the loans made in the bubble years became non-performing.

They were, however, kept on the books for years as performing loans, often with the tacit support of

the Bank of Japan, in hopes that the companies involved would work their way out of financial

difficulties. Moreover, many financial institutions held a good portion of their asset in stock. With the

collapse in the value of the Japanese stock market, the value of these assets had also plummeted,

leaving the institutions with a diminished asset base and an increased portfolio of non-performing

loans. To compound matters even further, security houses such as Yamaichi frequently guaranteed

major customers a certain minimum rate of return on and investments they managed for the customer,

and would make up the difference from their own pocket if they failed to exceed that minimum. In the

years that followed the 1989 collapse, this meant that Yamaichi and its kin had to absorb losses

associated with business taken on at the height of the boom. The securities houses also indulged in the

questionable practice of tobashi in which brokerages temporarily shift investment losses from one

client to another to prevent a favored customer from having to report losses.

There is only so long that a bank or security house can continue to undertake such practices without an

improvement in their underlying fundamentals. After eight years of recession, in late 1997 that time

had arrived for Sanyo Securities, Hokkaido Takushoku, and Yamaichi Securities. All three were

sinking under the burden of excessive debt and non-performing loans. That all three had survived this

long was a testament to the willingness of Japan’s powerful Ministry of Finance (MOF) to guarantee

support for the country’s shaky financial institutions. That all three collapsed in late 1997 signaled a

clear change of course by the Ministry of Finance.

Exactly why the MOF decided to change course is not completely clear. Some speculate that the MOF

wanted a "shock" of this sort to persuade politicians and the public to use public funds to help bail out

Japan’s troubled financial sector (up until this point there had been widespread resistance to using

public funds for this purpose). Another factor in the Yamaichi case was that Fuji Bank, the traditional

ally of the securities firm, finally withdrew its support. In any event, the result was to send the Japanese

stock market into a steep fall. With investors fearing that more bankruptcies might follow, the Nikki

Index declined from 17,000 to close to 14,500. The 14,000 level is particularly significant in Japan,

where financial institutions hold assets in the form of stock. If the Nikki falls below 14,000, many

financial institutions will not have enough assets on their books to cover their liabilities, and they will

have to sell stock to reduce the ratio. Once this happens, the Japanese market could implode,

transforming the country’s long running recession into a full blown economic depression. A depression

in the world’s second largest economy would have disastrous implications for the health of the global

economic system.

It was at this point that Japanese government stepped in with the announcement that it planned to use

public funds to guarantee Yamaichi’s debts. This was followed by a commitment to use public finds to

recapitalize Japan’s troubled financial institutions. By January 1998 the amount of public funds

earmarked for this task had reached Y30,000 billion (around $230 billion). This commitment helped to

stabilize Japan’s stock market, and the country pulled back from the brink of financial meltdown. The

commitment of public funds also illustrate the difference between Japan and the other Asian countries

afflicted by financial crises. Unlike the troubled Tiger economies, Japan had amassed a huge amount of

reserves that could be used shore up its trouble financial system.

Although Japan did not suffer the fate of other Asian countries, the problems in Japan did have an

impact on the situation, for it considerably weakened Japan’s ability to step in and take a lead roll in

solving the wider Asian debacle. Instead of Japan, its was left to the IMF, in conjunction with the

United States, to step in and stop the free fall in Asian stock markets and currencies. The credibility of

Japan both as a source of stability within the region, and as the de-facto economic leader of the Asia

Pacific economies, has been severely and perhaps permanently damaged by its inability to take a

leadership role in solving the crisis.

Aftermath: Implications of the Crisis. 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.

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. 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.

However, economists have argued for some time that the Asian economic miracle had nothing to

do with cooperation between government and business. Instead, it was the result of high savings

rates, good education systems, and rapid growth in the labor force. Many warned that the Asian

proclivity for government directed investment and poorly regulated financial systems was a dangerous

mix that could lead to over investment, excessive debt, and financial crises. Despite the occurrence of

just such a crisis in Japan in 1989, advocates of the Asian Way, including many leading politicians in

Asia, steadfastly ignored the risks inherent in an interventionist economic model. Instead, they

continued to sing the praises of business-government cooperation and "Confucian values", right up to

the explosion of the debt bomb and the collapse of their stock markets and currencies in late 1997.

Now that the crash has occurred, momentum in Asia is starting to shift away from the "Asian Way"

and towards the Western economic model. Pushed in part by the IMF, but also by shifting opinion

among some politicians and business leaders within the region, Asia’s troubled economies seem to be

embarking on a long overdue restructuring. Governments are pulling back from close cooperation with

businesses, financial disclosure regulations are being tightened, troubled banks and companies have

been allowed to fail, and markets are being deregulated to allow for greater competition and foreign

direct investment. As a consequence, it seems reasonable predict that many Asian economies will come

to resemble, more closely, the free market system championed by the United States than the Asian

model exemplified by the Japan of the 1980s.

The International Monetary Fund. The Asian financial crisis has been the biggest test for the IMF

since the Latin American debt crisis of the 1980s, and perhaps the biggest test since the institution was

founded in 1944. The original charge of the IMF was to lend money to member countries that were

experiencing balance of payments problems, and could not maintain the value of their currencies. The

idea was that the IMF would provide short term financial loans to troubled countries, giving them time

to put their economies in order. IMF loans have always came with strings attached. In the past, most

recipients of IMF aid have suffered from excessive government spending, lax monetary policy and

high inflation. Consequently, conditions attached to IMF loans have normally required the borrowing

country to slash government spending and raise interest rates to slow monetary growth and inflation.

As a result of the Asian crisis, in late 1997 the IMF found itself committing over $110 billion in short

term loans to three countries; South Korea, Indonesia, and Thailand. To put this in perspective, the

largest loan prior to this was the $48 billion package that the IMF gave to Mexico in 1995 following

the collapse of the Mexican peso. As with other aid packages, the IMF loans come with conditions

attached. The IMF is insisting on a combination of tight macro-economic policies, including cuts in

public spending and higher interest rates, the deregulation of sectors formally protected from domestic

and foreign competition, and better financial reporting from the banking sector. Although politicians in

each country initially resisted these conditions, they ultimately accepted them and so far at least, seem

to be pursuing them. Despite the acquiescence of local politicians, the IMF policies towards Asian

countries have come in for unusually tough criticisms from many Western observers.

One criticism is that tight macro-economic policies are inappropriate for countries that are suffering not

from excessive government spending and inflation, but from a private sector debt crisis with

deflationary undertones. In Korea, for example, the government has been running a budget surplus for

years (it was 4% of Korea’s GDP in the 1994-1996 period) and inflation is low at around 5%. Indeed,

Korea has the second strongest financial position of any country in the Organization for Economic

Cooperation and Development. Despite this, say critics, the IMF is insisting on applying the same

policies that it applies to countries suffering from high inflation. The IMF is requiring Korea to

maintain an inflation rate of 5%. However, given the collapse in the value of its currency, and the

subsequent rise in price for imports such as oil, inflationary pressures will inevitably increase in Korea.

So to hit a 5% inflation rate, the Koreans are being forced to apply an unnecessarily tight monetary

policy. Short term interest rates in Korea jumped from 12.5% to 21% immediately after Korea signed

its initial deal with the IMF. The essential problem here is that increasing interest rates make it even

more difficult for Korean companies to service their already excessive short term debt obligations; that

is, the cure prescribed by the IMF may actually increase the probability of widespread corporate

defaults in Korea, not reduce them.

For its part, the IMF rejects this criticism. According to the IMF, the critical task is to rebuild

confidence in the Korean currency, the won. Once this has been achieved, the won will recover from its

extremely oversold levels. This will reduce the size of Korea’s dollar denominate debt burden when

expressed in won, in turn making it easier for Korean companies to service their dollar denominated

debt. The IMF also argues that by requiring Korea to remove restrictions on foreign direct investment,

foreign capital will flow into Korea to take advantage of cheap assets. This too, will increase demand

for the Korean currency, and help to improve the dollar/won exchange rate.

A second criticism of the IMF is that its rescue efforts are exacerbating a problem know to economists

as moral hazard. Moral hazard arises when people behave recklessly because they know they will be

saved if things go wrong. In the case of Asia, critics point out that many Japanese and Western banks

were far too willing to lend large amounts of capital to over-leveraged Asian companies during the

boom years of the 1990s. These critics argue that the banks should now be forced to pay the price for

their rash lending policies, even if that means some banks must shut down. Only by taking such drastic

action, so the argument goes, will banks learn the error of their ways and not engage in rash lending in

the future. By providing support to these countries, the IMF is reducing the probability of debt default,

and in effect bailing out the very banks whose loans gave rise to this situation in the first place.

The problem with this argument is that it ignores two critical points. First, if some Japanese or Western

banks with heavy exposure to the troubled Asian economies were forced to write off their loans due to

widespread debt default, this would have an impact that would be difficult to contain. The failure of

large Japanese banks, for example, could trigger a meltdown in the Japanese financial markets. In turn,

this would almost inevitably lead to a serious decline in stock markets around the world. That is the

very risk that the IMF was trying to avoid in the first place by stepping in with financial support.

Second, it is incorrect to imply that some banks have not had to pay the price for rash lending policies.

In fact, the IMF has insisted on the closure of banks in Korea, Thailand and Indonesia. Moreover,

foreign banks with short term-loans outstanding to Korean enterprises have been essentially forced by

circumstances to reschedule those loans at interest rates that do not compensate for the extension of the

loan maturity.

The final criticism of the IMF is that is has become too powerful for an institution that lacks any real

mechanism for accountability. By the end of 1997, the IMF was engaged in loan programs in 75

developing countries that collectively contain 1.4 billion people. The IMF was determining macro-

economic policies in those countries, yet according to critics such as noted Harvard economist Jeffery

Sachs, with a staff of under 1,000 the IMF lacks the in-depth expertise required to do a good job.

Evidence of this, according to Sachs, can be found in the fact that the IMF was singing the praises of

the Thai and South Korean governments only months before both countries lurched into crisis. Then

the IMF put together a draconian program for Korea without having deep knowledge of the country.

Sachs solution to this problem is to reform the IMF, so that it makes greater use of outside experts, and

so that its operations are open to great outside review and scrutiny.

Implications for Exchange Rate Policy 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 However, there 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.

The experience of Hong Kong during the crisis, however, has added a new dimension to the debate.

Hong Kong was able to maintain the value of its currency against the US dollar at around $1=HK$7.8,

despite several concerted speculative attacks. How did it manage to do this? One answer that has been

offered is that Hong Kong operates with a currency board. A country that introduces a currency board

commits itself to converting its domestic currency on demand into another currency at a fixed

exchange rate. To make this commitment credible, the currency board holds reserves of foreign

currency equal at the fixed exchange rate to at least 100% of the domestic currency issued. So for

example, the system used in Hong Kong means that its currency must be fully backed by the US dollar

at the specified exchange rate. Of course, this is not a true fixed exchange rate regime, since the US

dollar, and by extension the Hong Kong dollar, floats against other currencies, but it does has some of

the features of a fixed exchange rate regime.

Under this arrangement, the currency board can only issue additional domestic notes and coins when

there are foreign exchange reserves to back it. This limits the ability of the government to print money

and, thereby, create inflationary pressures. Under a strict currency board system, interest rates adjust

automatically. If investors want to switch out of domestic currency into, for example, US dollars, the

supply of domestic currency will shrink. This will cause interest rates to rise until it eventually

becomes attractive for investors to hold the local currency again. In the case of Hong Kong, the interest

rate on 3 month depots climbed as high as 20% in late 1997, as investors switched out of Hong Kong

dollars and into US dollars. The dollar peg, however, held and interest rates declined again.

Since its establishment in 1983, the Hong Kong currency board has weathered several storms,

including the latest. This success seems to be persuading other countries in the developing world to

consider a similar system. Argentina introduced a currency board in 1991, and Bulgaria, Estonia and

Lithuania have all gone down this road in recent years. Despite growing interest in the arrangement,

however, critics are quick to point out that currency boards have their drawbacks. 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.

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.

On the negative side on the equation, the Asian crisis will undoubtedly have some painful effects on

companies with major activities and investments in the region’s troubled economies. For example,

when the Malaysian government cancelled its $5 billion Bakun hydro-electric damn project this hurt

ABB, the large European based engineering firm that was a prime contractor on the project. ABB took

a $100 million charge and the Asian slowdown helped to trigger job cuts totaling 10,000 in many of its

European facilities. Similarly, Boeing expressed concern that the Asian crisis may result in as many as

60 orders for large jet aircraft being postponed or cancelled.

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 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.

On the other hand, firms that source components from Asia have seen a steep drop in the price of those

inputs, which has a beneficial impact on profit margins. For example, Dell Computer, the large US

based manufacturer of personal computers, has seen a 50% drop in the price of certain components

such as memory chips that it buys from Asian manufacturers. Similarly, even though ABB took a hit

when it lost the Bakun Dam project, the company argues that this will be more than off-set over the

next few years by increases in exports from its own factories based in that region.

Furthermore, several firms are reportedly taking advantage of the changing circumstances in Asia to

increase their rate of investment in the region. Plunging stock markets across the region have left many

Asian companies trading at prices that are less than their break-up value, while the IMF’s rescue

packages have required Korea, Indonesia, and Thailand to relax restrictions on inward foreign direct

investment. As a result of these factors, it is reasonable to expect firms from outside of these countries

to start buying the assets of troubled companies while they can be purchased for cents on the dollar.

Indeed, there are signs that that is starting to happen. In December 1997, for example, Citicorp was

reported to be examining the books of Thailand’s seventh largest bank, First Bangkok City Bank, with

a view to making an acquisition. Citicorp was also reported to be looking for acquisitions in South

Korea

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.

Questions

1. Explain how the above excerpt on the Asian financial crisis of the 90s validates the “trilemma” of

international finance. The Impossible Trinity (also known as the Inconsistent Trinity, Triangle of

Impossibility or Unholy Trinity) is the Trilemma in international economics suggesting it is impossible

to have all three of the following at the same time:

A fixed exchange rate.

Free capital movement (absence of capital controls).

An independent monetary policy

2. Discuss, in your opinion, does the Asian financial crisis negate or support the need of an organization

such as the IMF.