The Asian Financial Crisis: Hindsight, Insight, Foresight

Abstract

For a while, in the darkest moments of the Asian financial crisis in 1998, it was widely predicted that East Asia would continue to be deathly sick for the next two to four years. While it is fortunate that the news of the (near) death of the East Asian miracle was greatly exaggerated, this economic earthquake remains a tragic disaster in human terms. The tremendous destruction of wealth and the pushing of a significant proportion of the population in the poorer countries to below the poverty line caused political volcanoes to erupt in several countries. New governments have emerged in Indonesia, South Korea and Thailand; and the political leadership is split in Malaysia. The social after-shocks of this economic earthquake are still being felt in April 2000. Economist, Dr Manuel Montes (then Senior Fellow at ISEAS) led the academic world with the publication of The Currency Crisis in Southeast Asia in October 1997. This book has become a classic because its penetrating analysis about the causes of the crisis and the prescient predictions of its consequences have stood the test of time.(1) The abrupt ending of the crisis in the first quarter of 1999 prompted Dr Manuel Montes (who had returned to the East-West Center) to organize a workshop in Honolulu, Hawaii, from 30 September to 1 October 1999 to take a fresh look at the crisis. The workshop papers sparked much lively discussion, and pointed to novel directions for research on financial crises in general and reform of the international financial architecture in particular. A subset of these papers is published in this special issue of ASEAN Economic Bulletin. The Crisis in Hindsight For the economics profession, the Asian financial crisis has been divisive and, for some economists, humbling. The International Monetary Fund (IMF), the financial firefighter of the world, under-predicted the severity of the output collapse in every one of its programme countries,(2) and then went on to under-predict the pace and strength of the economic recovery.(3) This systematic failure in prediction by the IMF of output behaviour in the crisis countries certainly suggests an institution that neither understood the cause of the region-wide crisis nor knew what the optimal rescue package for these countries should have been. It was in support of this impression of an incompetent IMF that Joseph Stiglitz, the Chief Economist at the World Bank during the crisis, wrote in April 2000: IMF experts believe that they are brighter, more educated, and less politically motivated than the economists in the countries they visit. In fact.... the IMF staff ... frequently consists of third-rank students from first-rate universities ... Quite frankly, a student who turned in the IMF's answer to the test questions What should be the fiscal stance of Thailand, facing an economic downturn? would have gotten an F.(4) The economics profession is certainly divided over the IMF's performance but not in a clear-cut fashion. For example, as will be clear from the papers in this volume that, although most of the authors agree with Stiglitz that the first IMF programmes for Indonesia, South Korea and Thailand were badly flawed, they differ with regard to his reasons for the IMF mistakes and his negative assessment about the analytical capability of the IMF. The economics profession has shown uncharacteristic humility over its initial judgement of the Asian financial crisis. The well-known economist, Paul Krugman, has conveniently posted on his website a well-documented record of his stream of consciousness about the crisis, so we may use his intellectual odyssey to capture an important evolution of the views of the economics profession towards the Asian financial crisis. In March 1998, Paul Krugman opined that: Broadly speaking, I would say that there are two approaches to the Asian crisis. …