Diagnosis of Financial Crisis in Asia: From Miracle to Debacle

A.J.W. van de Gevel

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This paper discusses the causes, cures and consequences of the Asian financial crisis.Since mid-1997 a number of Southeast Asian economies have been in the grip of a severe financial crisis that has thrown the region into a deep recession.On the basis of expected diminishing returns this has raised doubts about the durability of the region's rapid growth rates which were realized since the 1980's.Its very success made it attractive to private capital inflows which were borrowed in dollars on short terms but lent out domestically for long periods and intermediated through poorly regulated domestic financial systems. Large current account deficits due to overvalued currencies and overinvestment in the nontradable sector created an asset bubble which had to burst.The crisis started in Thailand in July 1997 but has not been predicted and alarm bells did not ring although the ratio of short-term debt to foreign reserves had increased to unsustainable heights and falling stock prices gave some indication of growing concern.A key feature of the crisis has been the contagion and spillover to other countries in the region.After six months of currency and stockmarket turmoil the process of cleaning up shattered financial systems did start, but some obstacles obstruct a rapid clean up.On the basis of IMF projections world output growth in 1998 has been estimated at 2% (down from 4% in 1997) and global growth is to recover only moderately in 1999.There are reasons to believe that the IMF rescue packages added rather than ameliorated the panic.Now financial and economic conditions in Asia are improving and the period of economic and financial meltdown is largely over.Real activity has reached a bottom and much of this reflects the improvement in current account balances.Incipient signs of recovery are emerging but the path to recovery remains rocky with significant head wind.While the symptoms of the crisis have abated and the underlying malaise is better understood, the treatment is only just beginning.
Original languageEnglish
Place of PublicationTilburg
PublisherDepartment of Economics
Number of pages36
Publication statusPublished - 1998

Publication series

NameFEW Research Memorandum


  • financial crisis
  • Asia


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