IPS WORKING PAPERS 1

Almost all existing studies on the causes, consequences and policy implications of the economic and financial crisis faced by East Asia have provided only a cursory discussion of broad data at best, or have fallen into the trap of merely stating the weaknesses in the economies as a ‘matter of fact’ at worst. Ex-post facto analysis is of little value. In this paper, limiting our focus to the Southeast Asian economies (viz. Indonesia, Malaysia, Thailand and the Philippines), we carefully scrutinise the available economic data in a systematic manner, with a view to determining whether there were possible indications of discernible deterioration in economic ‘fundamentals’ that might have been indicative of an impending crisis. In other words, we aim to determine whether the crisis was a ‘death foretold’ (i.e. ‘an accident waiting to happen’) as most observers seem to assume, or a quick and ‘sudden death’ as Sachs et al. (1996b) have suggested of the Mexican crisis of 1994-95. We take pains to focus solely on the policies/factors that seemed to have a direct impact on the crisis. To get a sense of proper prospective, we consider both trends in the various indicators of the Southeast Asian economies from 1990 to 1996 (just prior to the onset of the crisis in mid-1997), as well as compare their performance to the Latin American economies of Argentina, Brazil and Mexico. While such inter-regional comparisons and generalisations are conceptually useful, intra-regional differences are highlighted where deemed necessary. After the determination and clarification of the analytical issues, we move on to discuss important lessons for economic policy. Focus is both on policy lessons (at national, regional and international levels) for recovery as well as for reform, so as to reduce the possibility of such a crisis surfacing in the future (or at least to mitigate the adverse fallout if or when it does occur).

        2.1 Current Account Deficits

        2.2 Investment-to-GDP Ratios

        2.3 Investment Allocations

                2.3.1 Sources of Microeconomic Distortions and Other Weaknesses

        2.4 External Indebtedness

        2.5 Exchange Rate Policies

        2.6 Foreign Capital Flows and Intermediation

        2.7 Thailand

        2.8 Malaysia

        2.9 Indonesia

        2.10 The Philippines

        2.11 Summary of Country Fundamentals

        5.1 Insights from Multiple Equilibra Models

        5.2 Regional Contagion: From Tequila to Tom-Yam

        5.3 The Importance of Financial Sector Reforms and Prudential Regulations

        5.4 The Role of IMF Revisited

        5.5 Moral Hazard Problems

        5.6 Stability versus Growth: Solving the External Private Sector Debt Overhang

                5.6.1 Insolvent versus Illiquid Firms

                5.6.2 A Note on Problem-Banks

                5.6.3 Time for an Asian Bond Market

        5.7 Negative Externality of Foreign Borrowing

        5.8 Sand in the Wheels of International Finance

        5.9 Creation of a World Financial Organisation/Extension of Role and Mandate of the BIS

        5.10 The Current Account Deficit and Indicators of Financial Crises

        5.11 Transparency and Quality of Economic Data and Analyses

        5.12 Sterilisation and Choice of Exchange Rate Regime

6. Concluding Observations 78

Ramkishen Rajan (1998) The Currency and Financial Crisis in Southeast Asia: A Case of 'Sudden Death' or Death Foretold'?, Singapore: IPS, 109 pages.