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Dilfraz Singh, Lovely Professional University Unit 26 : East Asian Crisis and Lessons for Developing Countries

Unit 26 : East Asian Crisis and Lessons Notes
for Developing Countries

CONTENTS
Objectives
Introduction
26.1 The Asian Financial Crisis
26.2 Lessons of Developing Country Crises
26.3 Summary
26.4 Key-Words
26.5 Review Questions
26.6 Further Readings

Objectives

After reading this Unit students will be able to:
• Describe the Asian Financial Crisis.
• Explain the Lessons of Developing Country.
Introduction

As it turned out, in 1997 Asian economies did indeed experience a severe financial crisis. And with
the benefit of hindsight, several weaknesses in their economic structures—some shared by Latin
American countries that had gone through crises—became apparent. Three issues in particular stood
out :
1. Productivity : Although the rapid growth of East Asian economies was not in any sense an
illusion, even before the crisis a number of studies had suggested that some limits to expansion
were appearing. The most surprising result of several studies was that the bulk of Asian output
growth could be explained simply by the rapid growth of production inputs—capital and labor—
and that there had been relatively little increase in productivity, that is, in output per unit of
input. Thus in South Korea, for example, the convergence toward advanced-country output
per capita appeared to be mainly due to a rapid shift of workers from agriculture to industry, a
rise in educational levels, and a massive increase in the capital-labor ratio within the
nonagricultural sector. Evidence for a narrowing of the technological gap with the West was
unexpectedly hard to find. The implication of these studies’ conclusions was that continuing
high rates of capital accumulation would eventually produce diminishing returns, and, possibly,
that the large financial inflows taking place were not justified by future profitability after all.
2. Banking regulation : Of more immediate relevance to the crisis was the poor state of banking
regulation in most Asian economies. Domestic depositors and foreign investors regarded Asian
banks as safe, not only because of the strength of the economies, but because they believed that
governments would stand behind the banks in case of any difficulties. But banks and other
financial institutions were not subject to effective government supervision over the kinds of
risks they were undertaking. As the experience in Latin America should have made clear, moral
hazard was present in spades. Despite this, several of the East Asian countries had eased private
access to financial inflows in the 1990s, and foreign money was readily available both to East
Asian banks and directly to East Asian corporate borrowers. Because of original sin, foreign
debts were fixed in foreign-currency terms.

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