Interpreting the Asian Financial Crisis

Abstract

The collapse of the Thai baht in July 1997 marked the begin¬ning of Asia's financial crisis. It began modestly enough. After a series of speculative attacks, Thailand was forced to let its currency float on 2 July, but within weeks what had been a local financial crisis became a regional problem. Equity markets and currencies throughout Southeast Asia were under pressure as con¬tagion raged and foreign capital fled. Within months Indonesia, the fourth most populous country in the world, and the Republic of Korea (henceforth referred to as Korea), the world's 11th largest economy, were engulfed in crisis. Financial turmoil spread with a ferocity that none foresaw. Asia's once vibrant economies, used to decades of rapid growth, were plunged into deep recession. For many countries the economic hardship has been similar to that suf¬fered during the Great Depression of the 1930s. Given that Indonesia, Korea, Malaysia, Philippines, and Thailand suffered the most severe adverse impacts as a result of the crisis, the analysis in this note largely focuses on these countries, collectively referred to as the crisis-affected countries. While other countries in the region also suffered in varying degrees because of the spillover effects of the crisis, terms such as Asian crisis and Asian policies refer to this former group of countries. After an account of the crisis in 1998, the note critically examines competing explana¬tions of what caused Asia's turmoil, and points out that no simple interpretation suffices. The causes of Asia's problems were complex, and understanding them fully will require a new generation of ana¬lytical models.