The financial crisis in Southeast Asia and South Korea: Issues of political economy

Abstract

Foreign capital began a mass exodus from East Asia in the summer of 1997. A run on currencies and stock markets started in Thailand and spread throughout Southeast Asia, then on to South Korea before year‐end. Thailand, Indonesia and South Korea had high ratios of foreign debt to local GDP and lacked sufficient reserves to meet short‐term foreign exchange obligations. All required assistance from the International Monetary Fund which imposed a long list of reforms. However, there is a perception that the IMF has not been effective in the Asian Crisis so far. Pinpointing and effecting some control over the actual forces at work, including politics and other non‐market factors that contributed substantially to the crisis, will not be easy. Obviously, South Korea and Southeast Asian countries need to restore confidence through reform of their financial institutions and practices, but all Asians still tend to do things in their own characteristic manner. “Asian capitalism” has not been entirely discredited and should be seen as part of the solution rather than the problem in bringing about financial development and change.