What were the main causes of the East Asian financial crisis?

University Degree Business and Administrative studies

MSc Development Studies 2003/4

Module: Images of Development

What were the main causes of the East Asian financial crisis?

The East Asian financial crisis of 1997 represented a major interruption in the rapid economic and social development enjoyed by much of the region in the decades leading up to it. In less than a year, some East Asian economies went from being examples of successful development practice to a situation of economic stagnation and decline. Growth rates that had averaged 8-10 per cent per year over many years turned negative, economies that enjoyed continuous high employment and experienced labour shortages suffered from rapidly rising unemployment levels, and stock market assets lost half their value. In a region where growth was dubbed ‘miraculous’, economies became structurally unstable and needed rapid intervention by international agencies such as the IMF (UNCTAD, 1998). The crisis arose from the large scale shift of funds out of domestic financial markets in the region, starting in Thailand (IMF, 1997). The effects of the financial crisis are still having an impact not only in the region but are also reverberating around many other parts of the global economy.

This essay first attempts to define ‘East Asia’ by reviewing the different sets of countries in literature focussing on the crisis. It outlines the countries that suffered most as a result of the crisis, by examining pertinent economic and financial indicators in the region. It asserts that a discussion of the causes of the crisis is impossible without an understanding of the development process in the region before crisis, and examines the particular circumstances in the region that may have contributed to the onset financial crisis. It then looks at the context for the financial crisis and focuses on events in Thailand - the country where the crisis first took hold – in an attempt to identify the relative importance of the various underlying causes of the crisis put forward. Events in other countries in the region are examined in the context of these causes identified and conclusions are then made about these in order to identify the main causes of the crisis.

Studies of ‘East Asia’ focus on differing groups of countries. While grouping countries together is useful in providing a pattern and overview of events in order to establish broad theories, it also tends to ignore individual contexts. The selection of some countries over others as foci in literature on the East Asian financial crisis has obvious implications for the outcome of research in terms of analysing and drawing conclusions about the underlying reasons for crisis (see Table 1 below). In addition, some countries in the region are undoubtedly exceptions within the region in terms of the size of the economy, output and the stage of their development process, for instance China and Japan, the ‘giant’ economies of the region. Other countries are more ‘representative’ in that they were not only in a more precarious economic position, but also suffered to a greater extent as a result of the crisis. However, the smaller economies of the region differ widely in terms of government, economy and society. ASEAN – the Association of East Asian Nations - is one group around which some studies are based. Some literature refers to ‘Tiger Economies’ - this is quite a trivial term and often lacks definition. Other groupings refer to ‘East Asia’; ‘Newly Industrialised Countries’ or ‘High Performing Asian Economies’, without detailing which countries these definitions refer to. Still other literature focuses on ‘South East Asia’ - which ignores Korea, one country that was severely affected by the crisis, as we will see below – or to the World Bank’s ‘Developing East Asia’.

Table 1: A summary of selected literature on the East Asian financial crisis by country.

* used in the study as comparators rather than examples of crisis countries

However, while studies focus on differing sets of countries, there is little argument that the countries affected most severely by the financial crisis were Indonesia, Malaysia, the Philippines, Korea and Thailand; indeed, this tends to be reflected in many studies. If we examine various indicators of financial instability and faltering economic growth, and rank countries in the region according to their severity, a pattern is clearly evident where although many countries in the region were affected by crisis, those mentioned above suffered to a greater extent (see table 2 below).

Table 2: Indicators of financial instability and macroeconomic growth, by country (from Goldstein (1998)), with rankings compared to other countries in the region.

As stated above, and according to Setboonsarng (1998), “to understand the financial turmoil it is necessary to begin by looking at macroeconomic development in the region up to the middle of 1997”. By the mid-1990s, many economies in the region had become some of the most successful in the less developed world. They had consistently higher rates of growth than in Europe and North America – averaging 7% per year - and were delivering on human development. Particularly successful were Korea, Thailand, Indonesia, Malaysia, Singapore, Hong Kong and Taiwan.

The main features of this ‘Asian miracle’ were sharp increases in GDP per capita income – a four times increase between 1965 and 1990 - and an associated reduction of inequality levels – by 1995, poverty levels had been reduced by two thirds compared to 1975. This was achieved by following a development model during and following the post-war boom focussed on achieving economic growth through the promotion of exports. Between 1965 and 1990, Asian economies boosted their global trade share by 6%, largely by promoting manufacturing industry for foreign markets. A high level of investment in education and training, coupled with government incentives including preferential interest rates, reductions in tariffs and tax concessions, succeeded in attracting a level of foreign direct investment equal to 5-7% of GDP.

In addition, the comparative advantage enjoyed by the region in terms of lower wage costs and investment in new technology facilitated a move from agriculture towards labour-intensive manufacturing industries such as textiles, sportswear and microchips. By the mid-1990s, Thailand’s most important export product had become textiles, bringing in more revenue than more traditional commodities such as rice, rubber and shrimp. As time went by, the liberalisation of financial systems in the region enabled a move from labour- to capital- intensive industries as technology and productivity improved through the 1980s and 1990s. Between 1990 and 1996, growth rates accelerated still ...

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In addition, the comparative advantage enjoyed by the region in terms of lower wage costs and investment in new technology facilitated a move from agriculture towards labour-intensive manufacturing industries such as textiles, sportswear and microchips. By the mid-1990s, Thailand’s most important export product had become textiles, bringing in more revenue than more traditional commodities such as rice, rubber and shrimp. As time went by, the liberalisation of financial systems in the region enabled a move from labour- to capital- intensive industries as technology and productivity improved through the 1980s and 1990s. Between 1990 and 1996, growth rates accelerated still further. Indonesia, Malaysia, Thailand and Vietnam all enjoyed GDP growth rates of at least 7% each year; figures in Laos, Singapore and Mayanmar approached these rates (Setboonsarng, 1998). The region’s nine main industrialising economies’ global share of trade in the manufacturing sector rose from 12% to 17% in this period.

Those who refer to the region as the model of capitalist free markets ignore that macroeconomic policy was designed to support this model of development. Governments encouraged private domestic investment through low tax, low inflation and high real interest rates so that domestic savings and investment grew to 35-40% of national income. They recognised that developing manufacturing industry had to be accompanied by improved agricultural efficiency and support so that development occurred across urban and rural sectors.

Hardy (1998) goes so far as to say that “the fundamentals of Malaysia, Indonesia, Philippines and Korea were and are sound. These economies have high domestic savings and investment rates, high rates of output growth, strong export performance, low inflation and more egalitarian economic policies than any other region”. On the other hand, many studies point to a combination of factors that left many Asian countries vulnerable to rapid breakdown. The UNCTAD Trade and Development Report (1998) cites “the reaction of currency and equity markets to payments disequilibrium … weakened economic fundamentals… lax regulation and supervision of the financial system… together with implicit government guarantees … [and] pervasive government intervention in economic decision-making” as underlying reasons for the context for crisis. The IMF World Economic Outlook Interim Assessment (December 1997) identifies these factors as contributing to this vulnerability. However, it adds that the successful performance of most of the economies concerned, which was both a result of, and a contributing factor in, the rapid growth of net capital inflows to the region, brought with it policy challenges that were not met by the countries concerned. Radelet and Sachs (1999) put forward a theory based around four clearly defined reasons for the origins of the crisis: weaknesses in the Asian economies; over-investment in high-risk or low quality activities; financial panic and exchange rate devaluations in Thailand. What follows is an analysis of these various inter-related underlying factors and their role in the financial crisis.

Despite, or perhaps indeed because of, seemingly stable macroeconomic conditions, many countries in the region were able to build up considerable external current account deficits, especially in Malaysia and Thailand. The build-up of foreign capital flows was facilitated by increasing financial liberalisation, which not only led to new financial institutions appearing, such as the Bangkok International Banking Facility, but also allowed private banks to open and to be much more autonomous in their decision-making. Although this build-up reflected a high level of private investment rather than a shortfall in savings - it was seen as quite natural that foreign capital should support domestic investment that would lead to greater economic prosperity in the future – the very strength of the economies masked a number of structural weaknesses. This encouraged even more investment into banks and institutions while governments were not able to adequately regulate and supervise transactions. These financial liberalisation policies, then, contributed directly to the lowering of investment quality. Notably, Corsetti et al (1998) put very high importance the influence of cronyism and corruption in the development of the East Asian economies. At a corporate level, the government put pressure on successful and powerful companies to continue to maintain profitability by extending credit backed by government, and “appeared willing to intervene in favour of troubled firms”. In Thailand and Korea, this was especially the case, and contributed greatly to low quality investment, cronyism and corruption. Thai banks borrowed heavily from abroad until their liabilities rose to 28 per cent of GDP in 1995 (Radelet and Sachs, 1999).

The influx of foreign currency, especially to provide private sector credit, increased bank liquidity, and the glut of foreign capital into the region led investors, banks and financial institutions to become less discerning. Yet money continued to flow into the region because there was a perception by investors that companies would continue to be profitable based on official or unofficial guarantees by governments. In Thailand, for instance, foreign exchange reserves more than doubled between 1992 and 1996. Much of this incoming capital was accounted for by lending to the non-bank private sector. By the middle of 1997, lending by Bank for International Settlements (BIS) reported that loans to the non-bank private sector in Indonesia, Malaysia, the Philippines and Thailand accounted for at least 50 per cent of total loans. This had still further implications for the amount of regulation regarding investment and the quality of investments succeeding in accessing loans, and hence the ability of borrowers to repay their debts. This was particularly problematic in Korea, where not only was a large amount of private debt guaranteed by Korean financial situations, but companies that became unable to service their debt were kept afloat by further credit backed by the government. Indeed, when the full scale of the crisis emerged, it became clear that most of the biggest companies in the Korean stock market were essentially already bankrupt and had been before the onset of crisis. Non-performing loans constituted 34 per cent of GDP in the build-up to crisis (Goldstein, 1998, from RAMOS). However, there is evidence that points out that average non-performing loans fell between 1994 and 1996 in Malaysia and Indonesia. In addition, Radelet and Sachs (1999) assert that banks in the crisis countries were not significantly weaker than those in other emerging markets within the region and in the rest of the world. Although weaknesses were undoubtedly an important precondition in the build-up to crisis, it is clear from this that they were not entirely responsible.

Changes in the external economic environment also contributed to the buildup of conditions lending themselves to crisis. Not only was there an increased preference for emerging market investments, but “declines in asset yields in industrial countries [made] the emerging markets an increasingly attractive investment opportunity” (IMF, December 1997). This pattern emerged in the mid-1990s as the US Dollar fell sharply against the Yen and Japanese capital moved offshore to invest in the region due to a decline in comparative competitiveness in Japan’s exports (Beams, 1998). Since many economies in the region were pegged to the Dollar, the competitiveness of their exports rose, encouraging still further influx of capital into the region. In 1995 the Dollar had reached its lowest level against the Yen and in response to warnings that this could trigger sell-offs of Japanese holdings of US Treasury Bonds, the Dollar was pushed up. When the Dollar gained in strength from 1995, this favourable condition in the region was reversed, leaving economies with losses in competitiveness and a reduction in export growth. In the region as a whole, export growth rates fell from an average of 20 per cent per year in the mid-1990s to only 5 per cent in 1996. The clear correlation between the relative strengths of the Dollar and Yen and the health of East Asian economies brought into question with wisdom of maintaining pegged exchange rates between a relatively small country's currency to the world’s most powerful economy, as it exacerbated any problems the region already had. This phenomenon is discussed below.

In addition to the part played by Japan and the US, Beams (1998) points to the role of China as an external factor that contributed to the build up to the East Asian financial crisis. The 50 per cent devaluation of China’s currency in 1994 made its exports increasingly competitive: China already boasted cheaper labour than many of the East Asian economies where massive growth had fuelled rises in the costs of living and therefore wage rises. Investment began to move on from East Asia to China from 1994 onwards, putting further pressure on other East Asian economies by providing a certain amount of new competition in addition to diverting investment. As each individual country’s economic growth slowed, they were also less able to export commodities to each other. Part of the success of development of manufacturing in the region was based on the ability of countries to trade intra-regionally, often engaging in ‘work-sharing’ which meant that countries engaged in different sectors of production, so that a finished product consisted of components from multiple countries, or had undergone different processes across countries, before being sold in North America, Japan and Europe. This intra-regional trade was also boosted by the increasing wealth of the countries concerned as their export revenues grew, they were more able to import commodities for domestic consumption. Table 3 indicates the importance of intra-regional trade for the region.

Table 3: Intra-regional trade and short-term debt 1996, as a percentage of total trade and debt respectively (‘Emerging Asia’) (from Goldstein, 1998)

Over production in some areas of economies in the region led to concerns being raised that the regional economy was overheating. This particularly became the case as “perception about Asia’s growth prospects [began to shift] after export growth slowed abruptly in 1996” (Radelet and Sachs, 1999). Prices of computer chips fell by 80 per cent in 1996, and there was much evidence to suggest over capacity in the car industry in the region. As investment increased, growing external current account deficits (especially in Malaysia and Thailand) indicated that the growth of demand was pressuring on resources. The combination of currency pegging – keeping market goods a steady price on the international economy – and huge inflows of money, led investors to seek bigger returns on investments by putting money into non-tradable goods such as property, which rose sharply, thus creating overvaluation.

Perhaps one of the most important factors in the build-up to the East Asian financial crisis was exchange rate policies followed in the region, which, as mentioned earlier, exacerbated the problems of current account deficits, influxes of foreign currency, and external economic changes. The pegging of currencies against the US Dollar encouraged short-term capital investments, because investors perceived that there would be little risk of a loss due to currency fluctuations. Short-term investments tended to consist of “arbitrage funds seeking to profit from the interest rate differentials, rather than funds seeking long-term returns on productive investment” (Akyüz, 2000). Table 3 shows short-term debt in East Asian countries before the crisis as a percentage of total debt. From this, it is clear that Korea, Thailand and Malaysia could be susceptible to a rapid loss of investment should investor confidence be shattered.

If a similar set of vulnerabilities was to be found to a greater or lesser extent in many economies of East Asia by 1997, then the question still remains as to how these vulnerabilities translated so suddenly into a severe economic crisis that was not predicted at the time, even if they were identified afterwards. To answer this question it is necessary to look at the case of Thailand, the country where the crisis first took hold. Exchange rates in Thailand pegged the Thai baht to the US Dollar, and UNCTAD (1998) asserts that “the most important factor in precipitating the crisis seems to have been the sudden reversal of the dollar relative to the yen in early May 1997”. As in many countries, the high level of foreign investment resulted in capital accumulation, leading to a current account deficit. Loans - especially to favoured individuals and industries – were given public guarantees by governments and were awarded ignoring investment risks. Outstanding domestic credits had risen from baht 214.1bn in 1982 to baht 4669.8bn in 1997. While banks’ foreign liabilities increased to 24 per cent of total liabilities, property and assets markets inflated, as financial institutions – encouraged by foreign interest in the area and given more freedoms by governments - sought higher returns by diversifying away from investment in industry. When the property and share markets fell in 1996, many loans became non-performing, putting pressure on financial institutions.

More important possibly than any of these perceived weaknesses, was the change in US policy aimed to turn round the weak value of the Dollar against the Yen from 1995. As the Dollar strengthened, the baht appreciated with it; resulting in the decreased competitiveness and falling export growth discussed above. In response to this, the Thai government was forced to spend its foreign exchange reserves maintaining the pegged value of the Thai baht. Several writers point to a reversal of this trend and a fall in the US Dollar relative to the Yen in May 1997 as precipitous in the crisis. This, along with the expectation of a rise in Japanese interest rates, resulted in the movement of short-term funds from East Asia to Japan, which further exacerbated the pressure on financial institutions in the region. Banks had mounting foreign debts and many loans made to property developers and speculative ventures were already non-performing. By June 1997, figures show that short-term debt in Thailand had grown to $45bn, while reserves were only at $31bn. The Thai government announced that an IMF loan was needed to pay for imports in foreign currency, due to a shortage of reserves.

The response by investors has been defined as “creditor panic” (Radelet and Sachs, 1999). Investors became worried that the request for an IMF loan, the high number of non-performing loans and changing regional and international circumstances would cause a downturn in profits. It makes sense in this case that rational investors will pull their money out of even successful ventures if they perceive that others are going to do the same. This ‘herd-like’ tendency can be explained by the rational thinking that if there is a perception by many investors that all the other investors are intending to recall their loans, the last ones to do so will not be paid on time, if at all. In Thailand, this creditor panic manifested itself through increased interest rates for loans or the withdrawal of capital, putting the currency under further stress. This rapid change in perception and its subsequent action were only possible because of the large amount of money in the region that was short-term investment. Creditors were able to take decisions and act on them within extremely short spaces of time because of increased technology and information through the Internet.

The very policy of financial liberalisation that had encouraged economic growth through this type of investment directly contributed to what happened next. In July 1997 the mounting pressure led the government to float the baht, and the currency rapidly collapsed, going from Bht25/$1 to over Bht40/$1. Creditor panic mounted and the result was a “large, sudden reversal of capital flows” (Radelet and Sachs, 1999). Short-term credit lines by foreign investors were cut and Thai investors scrambled to invest offshore, as it became clear that the currency would not recover. The crisis was underway.

We can see then that a combination of many underlying factors and precipitous events contributed to the onset of crisis in Thailand. What, then, was responsible for the widening of the crisis to impact Korea, Malaysia, the Philippines and Indonesia? The fact remains that apart from enjoying similar influxes of foreign capital by following broadly similar development models, these countries had a limited amount in common with Thailand or with each other. Did creditor panic spread as a result of a perception that the same chain of events that had happened in Thailand would spread, thus resulting in a self-fulfilling prophecy? Was it the impact on intra-regional trade that resulted in regional downturn? Was it the impact of the removal of short-term investment capital due to the downturn in economic growth and the realization that loans had not always been based on sound principles?

Evidence suggests that it was a combination of all of these factors that widened the crisis to other countries in the region. The decrease in investor confidence that had helped to cause the collapse in Thailand triggered questions as to whether other countries in the region would be able to maintain their pegged exchange rates. If currencies were allowed to float, this would have severe consequences for the regional trade patterns and work sharing to produce export commodities in the region. On the other hand, the ‘competitive dynamics of devaluation’ (Goldstein, 1998) dictated that those countries that had not devalued experienced a quick drop in their competitive advantage as the baht plummeted. They were therefore more susceptible to speculative attacks. According to Akyüz (2000), the Philippine peso and the Malaysian ringgit came under increased pressure as soon as the baht was floated. Although governments tried to control the pegged rate by raising interest rates, the currencies were soon deprecating and necessary flotation resulted in rapid depreciation. It is no coincidence that those countries that underwent a substantial devaluing of their currency in the second half of 1997, when the crisis was at its height, were ones which were perceived to suffer most during the crisis. Table 1 shows currency depreciation in the five ‘crisis countries’ and others in the region as comparators. This depreciation precipitated similar collapses in Malaysia and the Philippines, as panicking investors pulled out of the region. This supports Goldstein’s (1998) theory that contagion is “typically greater during periods of turbulence … [and] operates more on regional than on global lines”.

According to Lane (1999), there is a “growing consensus that the main ingredient [in the crisis] was financial fragility”. Foreign currency borrowing without adequate hedging meant that economies were vulnerable to currency depreciation. For banks, debt was short-term while assets were long-term: this raised the possibility of liquidity attacks, an indication of a badly run finance system. Real estate prices had risen sharply: this increased the likelihood of deflation. In addition, credit was poorly allocated while there was an assumption that the government would secure loans. Ineffective financial supervision, the encouragement of short-term borrowing and exchange rate inflexibility led borrowers to underestimate the exchange risk, and domestic credit grew quickly. However, while emphasising the role of government monetary policy in bringing about the possibility of crisis, Lane concedes that “if banks… borrowed imprudently, foreign lenders also lent imprudently”.

This assertion, though, fails to explain why the crisis spread from one country to another so quickly. More likely, contagion, together with the fact that so much investment in the region could be moved out so quickly, more completely explains the situation in the second half of 1997. Indeed, Dr. Mahathir Mohammed, the Malaysian Prime Minister, blamed short-term currency trading and speculation as the culprit for the fall in the ringgit and stock flight that blighted Malaysia. At the annual IMF and World Bank conference on 20th Sept 1997, he pronounced speculation to be “unnecessary, unproductive and immoral” and added that it should be illegal. As a result, on 22nd Sept, Malaysian markets fell further a 3.5%, and the currency was devalued further. Mahathir had engineered these latest falls by damaging speculators’ confidence. The Finance minister - Anwar Ibrahim - tried to minimise the damage by playing down Mahathir’s pronouncements but was arrested on sodomy charges and Mahathir took over. He imposed controls on short-term capital flow and declared that “the free market system has failed”. This series of events must have damaged investor confidence even further.

Corsetti et al (1998) deals with both these theories. He argues that shifts in market expectations and confidence caused panic by domestic and foreign investors; these were reinforced by the inadequate IMF response to the crisis. However, he maintains that this was not entirely responsible and that the crisis reflected structural and policy distortions. He goes on to say that “weak economic conditions” such as those discussed above, coupled with imbalances in trade, triggered the currency crisis, which was exacerbated by market overreaction.

However, all of these theories ignore that this was far from an isolated case of financial crisis. Although what happened in Thailand and then many other parts of East Asia was perhaps unique in terms of the speed of the onset of crisis and its contagion, it was by no means unique in other respects. Some economists, such as Beams (1998), asserted that the theories outlined above merely describe the symptoms of an over-expansion and subsequent contraction of the market – the so called ‘boom and bust’ cycles that are an intrinsic part of the capitalist economy – rather than explaining the causes of the crisis. In saying this Beams seems to blame the international capitalist economy itself rather than any of the factors discussed above that were pertinent to the East Asian crisis. It is certainly true that the crisis in East Asia exhibited many of the same characteristics as other crises in Mexico, Brazil and Russia. They were all emerging markets that enjoyed an influx of foreign capital previous to crisis, enabled through financial liberalisation. The crises were precipitated by currency instability coupled with a loss of investor confidence and contagion. But while the relevance of this assertion is undeniable, it fails to explain the particular set of circumstances and the nature of the pattern of events that was particular to East Asia.

It is clear from this analysis that the East Asian financial crisis was caused by a combination of inter-relating factors. These were both underlying conditions – leaving economies in a fragile situation even if growth was strong – and chains of events that actually brought about the crisis. The most important underlying factors were financial fragility due to the large percentage of short-term investments; mismanagement of incoming funds by domestic financial institutions that were unprepared for the scale of investment and tended to give loans to low quality enterprises; external change that undermined comparative advantages and altered the inter-regional balances; and currency inflexibility that caused pressure of local currencies when the Dollar and Yen appreciated or depreciated. Although these were the underlying causes setting the right conditions to crisis, it is evident that the most important factors in actually bringing about and spreading the crisis were currency depreciation and contagion.

References

Akyüz, Y, “Causes and sources of the Asian Financial crisis”, UNCTAD paper, 2000

Beams, N, “The Asian Meltdown: A Crisis of Global Capitalism” (a speech to eight Australian Universities), April 1998

Corsetti, G et al, “What caused the Asian currency and financial crisis?”, NBER IFM Program Meeting, March 1998

Goldstein, M, “The Asian Fincnail Crisis: Causes, Cures and Systemis Implications”, Policy Analyses in International Economics No. 55, 1998

Hardy, C, “Asia’s Financial Crisis”, from Third World Network

Henderson, C, “Asia Falling: Making sense of the Asian crisis and its aftermath”, McGraw Hill 1998

Hoekman, B and Martin, B, “Trade and the East Asian Crisis”, Prem Notes, World Bank, April 1998

“The IMF in 1997/8: The Asian Crisis”, Chapter 3, IMF Annual Report of the Executive Board for the Financial Year Ended April 30, 1998

Inoguchi, M, “How did the Bank of Thailand Respond to Capital Inflows before a Crisis? Sterilization and Base Money in the 1990’s”, The Singapore Economic Review, 2003, Vol. 48, No. 1

Lane, T, “The Asian Financial Crisis: What have we learned?” Finance and Development, September 1999, Vol. 36, No. 3

Mallet, V, “The Trouble with Tigers: The rise and fall of South-East Asia”, Harper Collins, 1999

Mulhearn, C and Vane, H, “Economics” Macmillan Press Ltd, 1999

Radelet, S and Sachs, J, “What Have We Learned, So Far, From the Asian Financial Crisis?” January 1999

Roberts, M, “Tiger Economies in Crisis”, Socialist Appeal, 30th October 1997

Trade and Development Report 1998, UNCTAD

UNCTAD Secretariat “The Financial Crisis in East Asia”, A Background Note, from Third World Network

Member countries are Brunei, Mayanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

This set of countries is defined as China, Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.

This assertion by the IMF in the wake of the crisis regarding the region’s macroeconomic shortcomings, does, however, lead to the question of why the IMF continued to predict such huge GDP growths through to 1997. This is even more surprising given that the 1996 Trade and Development Report signaled that the region was over-relying on foreign capital and sounded clear warnings.