East Asian Financial Crisis - An Agenda for Economic Recovery

Abstract

Initially, there was a difference of views on the causes of the East Asian financial crisis. Now, however, a consensus has emerged on the crisis of confidence/structural weaknesses view. This view argues that the initial rescue programs, while appropriate for crises that are due to inappropriate macroeconomic fundamentals (e.g., Latin America in the 1980s and the early 1990s), were not appro¬priate in the East Asian case. Several of the recommended policies, specifically the orthodox demand management policies, were mis¬guided and had perverse impacts. Inappropriate policies have protracted the East Asian crisis. The view goes on to add that a ste¬reotypical one-size-fits-all approach has to be abandoned and that a proper diagnosis is important before a cure can be prescribed. While subscribing to the crisis confidence/structural weak-nesses view of the East Asian crisis, the IMF disagrees with this assessment. It argues that its initial programs have had the intended impacts on currency markets and capital flows. It adds that although monetary tightening has had a cost on the real economy, the alter¬native would have been worse. Both camps agree, however, on the need for a more balanced path to recovery comprising both exports and Keynesian-type expansionary macroeconomic policies to boost domestic demand in the affected countries. While the details of the necessary policy mix will vary across countries, many of the East Asian countries are gradually switching to this path.