Eleven years after the Asian crisis, what policy lessons ?

Résumé du document

Year 2008 is remembered, in History books, as the year of a major economic crisis throughout the world. As most papers put it mentioning as, "The worst since the great depression". But as the world suddenly pays attention to its economic system and its (present) prominent imperfections, it may shed some light on another major economic crisis: The Asian crisis of 1997. The crisis affected the majority of Asia, the countries suffering the most being Thailand, South Korea, Indonesia, Malaysia, Singapore and the Philippines. Of course, it wasn't as discussed as it is in today's situation, probably because it only affected the developing countries and it was blamed on its uncontrolled development. In this way people didn't have to question the system. Eleven years have passed by, and it is now possible for economists to gather policymaking lessons about what happened in 1997 in Asia and what was done to deal with it.

But before we go any further with this study, it is absolutely crucial to bring up the facts about the above-mentioned Asian crisis, without going too much in detail. In the early nineties, the world was in admiration at what was commonly called the "Asian economic miracle", and the spectacular growths of the Asian "tigers" or "dragons" (which was around 10% GDP on average) were recommended as the models to be followed for all developing countries. This growth was sustained (only for certain countries) since the sixties, who were following the footsteps of ultra-dynamic post-war Japan. They set a textbook pattern of export-driven growth, where exterior demand was a motor of fast growth (taking advantage of cheap labor in these countries), and investments were made to improve education, and thus improving the population's productivity

Extraits

[...] The second set of arguments around the lessons to be learned from the Asian crisis is close, ideologically, to what was done at the time, even though the ideas have been moderated by (tough) facts. There are a number of specialists who considered that the Asian crisis was, for the most part, specific to the region and the conditions existing in these countries at the time. The problem was that the concerned countries grew too fast, and their financial structure and their control institutions didn't have the time to adapt. A lot of policies could be efficient in the correction of these imperfections, and we will try to take a look at them here. [...]

[...] With this kind of regulations, the Asian crisis would have been as impossible as it was unlikely in the early nineties. Moreover, the philosophy of the system in general and of its guard in particular (the IMF) was put into question. During the crisis, the action of the IMF was ideological rather than pragmatic and rational. IMF's aid, which was vital for the crashing countries at that point, was submitted to severe conditions, basically that rescued countries would adopt strict neoliberal policies: the point was to the structure of the economy by creating strong financial institutions and imposing transparency in governance and management of firms to restore trust in the economy, authorizing failures (to get rid of insolvent companies) and drastically raise interest rates (to favor savings and refunding of the economy). [...]

[...] But before we go any further with this study, it is absolutely crucial to bring up the facts about the above-mentioned Asian crisis, without going in to too much detail. In the early nineties, the world was in awe at what was commonly called the “Asian economic miracle”, and the spectacular growths of the Asian or “dragons” (around 10% GDP on average) were hailed as the models to follow for all developing countries. This growth was sustained (for certain countries) since the sixties, following the footsteps of ultra-dynamic post-war Japan. [...]

[...] The policies put into place under IMF control were supposed to devaluate local currencies and therefore facilitate exports. The problem is that all it did was creating defiance towards these currencies and bring them further down. But these countries had contracted (and were contracting) serious debts and had to pay them back in US Dollars, that were getting harder and harder to buy. These difficulties in debt services were at the basis of downward spiral, putting together failed reimbursements and bankruptcies. [...]

[...] The first point that has dragged a lot of attention consists in governance and evaluation issues. In these markets, and despite their financial attraction power and the amounts of foreign investment drained, capitals were not always allocated correctly, and there were serious flaws in the governance system. In certain countries in particular (such as Thailand and Korea), governance was disturbed by a political and financial elite who rules the capitalist system, and may not take the best decisions at all times. [...]