The 'Asian Miracle' that became the 'Asian Crisis' 1997.

University Degree Business and Administrative studies

The case of South East Asia

The East Asian financial crisis was truly remarkable; suddenly the ‘Asian Miracle’ became the ‘Asian Crisis’. A diary of the crisis is given below: -

In September 1996, Moody’s Investors Services downgraded Thailand’s short-term debt rating, citing the country’s over reliance on short-term debt to finance persistent current-account deficits. In December, the central bank spent about 2.3 percent of its foreign exchange reserves in defense of the baht, which had been the subject of devaluation rumors. On February 14, 1997, another speculative attack temporarily dropped the value of the baht by almost 1 percent against the dollar, and the benchmark SET index fell by 4.5 percent. Both moves were in response to a suggestion that Thailand’s sovereign credit rating might be cut. In March, a run on bank deposits led to an estimated withdrawal of more than $1.2 billion from 91 finance companies. On April 10, Moody’s Investors Services did downgrade Thailand’s long-term sovereign credit rating, as well as the bond and deposit rating for five Thai banks. Finally, despite statements by the Thai government that it would “fight to the death” to defend the baht, the Bank of Thailand eliminated the baht’s official trading band on July 2 and moved to a managed float from a previously de facto US dollar-pegged Thai currency; the baht’s value plummeted. The following victims of the crisis were The Philippines and Malaysia, as Thailand had done before, tried unsuccessfully to maintain the value of their currencies. Then the crisis reached Indonesia and Singapore. In September it seemed that markets were stabilizing but by October, investors’ distrust also affected Northeast Asia. The devaluation of Singapore’s currency was a problem for Taiwan, which announced a possible devaluation of the New Taiwan Dollar (NT$). In October 20th the NT$ had already lost 5% of its value. There were also notable contagion effects to the other, more established, economies of East Asia particularly South Korea and Japan in the form of banking crises. IMF was invited to help-out these economies when the domestic policies failed to respond to negative shocks. The IMF intervened first in Thailand, then in the Philippines, later in Korea and Indonesia. Malaysia was not intervened by the IMF. The crisis caused Asian currencies to fall 50-60%, stock markets to decline 40%, banks to close, and property values to drop. Within a year, deep recessions replaced the famous double-digit growth rates that had been seen in the late 1980’s and early 1990’s.

The Asian Crisis challenged the very heart of the neo-liberalism. As Stiglitz (1998) noted, factors identified as contributors to East Asian economies' problems were strikingly similar to the explanations previously put forward for their success! Indeed, the recipe of Asian success closely followed the Washington Consensus on economic growth, a view supported by three key institutions in maintaining financial stability (IMF, World Bank and US Treasury).

The Asian crisis provided a case study for debate on the causes of financial crises with Krugman (1998), Corsetti, Pesenti and Roubini (1998) arguing that it was ultimately due to fundamentals whereas ...