Session 3

Gregory W. Noble and John Ravenhill, Cause and Consequences of the sian !inancial
Crisis," in Gregory W. Noble and John Ravenhill, eds., #he sian !inancial Crisis and the
rchitecture of Global !inance, ed., Ca$bridge, %&&&, ''. ()3*
Summary: The Asian financial crisis resulted from the sudden flight of large amounts of capital from Asian countries
that lacked adequate systems of prudential regulation, and whose foreign exchange rate proved disastrously brittle.
The crisis was unique in its unprecedented severity of corporate distress and banking sector problems, and its
quickness in recovery from the crisis. hile technical improvements in the financial system were institutionali!ed,
the crisis did not bring fundamental structural revisions, in both political and economic arena. "oughty resistance
from entrenched ideologies and interests in the #.S, the #.$, and the %&' prevented the reforms and
rearrangements in the international financial system from happening.
The (ast Asian crisis)))the severest *olt to the world economy since the +il Shock in early ,-./s.
Asian 0risis )))spread from Thailand to %ndonesia, the 1hilippines, &alaysia and $orea.
Sequences)))(xport decline loss of investors2 confidence 0urrency devaluation due to lack of foreign
reserve %&' emergency fund requiring tight budget and monetary policy increase in non)performing loans
and damage in domestic industries
"rastic increase in international private capital inflow in the 3-/s was key to understand this crisis.
+iberali,ation -ithin a fla-ed 'olicy fra$e-or.
%nadequate regulation to cope with capital inflow)))lack of experience and expertise, the predominance of
short)term debt 4which made economies vulnerable to speculative attack5, newly)licensed banks 4with risky
lending practices, and unproductive, speculative investments.
'ixed exchange rages exacerbated vulnerability of economies to crisis)))uncontrolled capital inflow invited
over)money)supply and inflation. 0urrency appreciation harmed export competitiveness. %t also created moral
ha!ard to domestic borrower with no risk of exchange rate.
/istinguishing crisis and non)crisis econo$ies
0hina and Taiwan were not affected as much as Thailand, %ndonesia and $orea.4see Table ,., p6/67p85 The
combination of capital account liberali!ation and an inflexible exchange rate were the common characteristics
of heavily affected countries. 9ess)affected countries held prudential regulation.
0ausality: Two opposing view)))fundamentalists vs panic)striken.
'or fundamentalists, root causes of crisis lay in misguided economic policies, e.g. ;0rony capitalism<, and
analy!e that liberali!ation of their financial system was not enough.
The panic)striken argue, in contrast, that fundamentals of the Asian economies were sound and that hasty
liberali!ation of their financial system, followed by the asset bubbles, was root cause. 4=agcish >hagwati,
=oseph Stiglit! together with =apan, some (uropean and Australian governments expressed skepticism about
the benefits of liberali!ing short)term capital inflows.5
#he 'olitics of financial 'olicy0 1ehind the funda$entals
hy reform in financial sector difficult:
%nfluences on financial arrangements in Asia))) 4i5 ?elative strength of social coalitions and economic sectors.
4eg. %n $orea, ma*or conglomerates2 presser on the government for preferential loans5, 4ii5 The degree of
concentration of the financial sector 4e.g. Thailand5, 4iii5The particular links between individual financial
institutions and state organs. 4e.g. %ndonesia5, 4iv5 The degree of foreign participation in the financial sector.
Supply)side approach ))) 4i5 &+' and the central bank are powerful and insulated from social and political
forces. 4ii5 %ntervention of parties and elections into financial sector. 9iberali!ation of financial sector is
politically difficult, creating few opportunities for political entrepreneurship.
@ow this crisis effected on political systems: ))) mixed results. &ore stable in $orea, the 1hilippines and
Thailand, while %ndonesia saw more corruption and cronyism. %nappropriate policy responses by governments
succeeded in turning severe challenges into a crisis.
/o$estic Res'onses
'inancial liberali!ation carries substantial risks as well as benefits.
0apital controls 4e.g. exit controls and entry taxes5 would decrease the speculative money, but opposition to
capital control grew, e.g. %&'. ?eintroduction of capital control would be difficult in its implementation and
discourages investment and growth. 4e.g. 0hile2 case with tax on investment and &alaysia2s case with control
on short)term capital inflow.5
Selective actions to limit trading currencies and derivatives 4Taiwan, the 1hilippines, and @$5
&easures to improve prudential regulation, e.g. increase in the ratio of banks2 capital relative to risk)ad*usted
assets to .A or higher, increase in stronger assessment of non)performing loans, increase in independence
and unity of oversight agencies.
The extent of financial and corporate restructuring in the most severely affected economies remained limited.
Refor$ing the Global !inancial rchitecture
Asian crisis led to bring various proposals of global financial reforms. The panic)striken called for the need for
restrictions on speculative capital and cooperation on monetary affairs at the regional revel 4=apan, Austria, and
some (uropean countries5. >ut some argues that floating rates were not risk)free.
"ivision between twin ashington)based institution)))%&' and > was deepened.
Reforming IMF
0alls for abolition of %&')))%&' is institutionali!ing the moral ha!ard, and encourages speculators to
undertake dubious investments.
Beed for greater transparency of %&'
0riticism against conditionality by %&' during the Asian 4tight fiscal policy during crisis, increase in
interest rate and ill)times closure of financial institutions aggravated economic recession.5 @uge
debate over conditionality.
Building the private sector in
0riticism against private actors for not bearing the cost of crisis
Regional Res'onses
1roposal for establishing A&' 4Asian &onetary 'und5 by =apan and Taiwan, which was killed by the #S
opposition. This idea is unlikely to come true
>ilateral programs by =apan 4Bew &iya!awa 1lan by the (xport)%mport >ank of =apan
,
5
The crisis has drawn (ast Asian economies together, reali!ing that they do not have an effective voice in the
governance of the monetary system. This led to the effort to establish a representational organi!ation or
regime, the outcome remains to be seen.
1
This is the organization I work for!!! (I did not have to include the Miyazawa Plan in this summary since this is too detailed
info, but I wanted!