Janet Yellen, President, San Frasisco Fed, has given an excellent speech on whys and hows of Asian Financial Crisis. It was given on Feb 6, 07.
She says there has been huge literasture since the crisis and it can be broadly divided into 2 types:
According to one view, this situation is best characterized as a “liquidity” crisis—much like a banking panic, where depositors’ fears about insolvency, well-grounded or not, become a self-fulfilling prophecy as their withdrawals en masse bring the bank to ruin.
The second view focuses more on the vulnerabilities that existed in these nations’ economic fundamentals, which threatened to lead to solvency difficulties.
Between 1999 and 2005, these nations enjoyed average per capita income growth of 8.2 percent and investment growth averaging nearly 9 percent, with foreign direct investment booming at an average annual rate of 17.5 percent. Moreover, all of the loans associated with the International Monetary Fund’s assistance programs during the crisis have been paid back and the terms of those programs have been fulfilled.
What have been the policy changes:
One such policy change has been an increasing shift away from targeting exchange rates and toward targeting an explicit desired inflation rate. Korea moved in this direction in 1998, followed by Thailand in 2000 and Indonesia in 2005.
Korea, Malaysia, Thailand, and Indonesia have also moved to improve banking supervision and regulation and to introduce more market discipline since the crisis. Korea’s progress in strengthening its supervision of financial institutions is especially significant.
Another step towards decreasing the extent of bank-centered finance and the scope of implicit government guarantees on investment has been the development of local currency bond markets.
However, these countries still control exchange rates despite inflation targeting.
Now, it should be admitted that these countries still manage their exchange rates to some extent. In fact, recent moves by the Thai government indicate an increased emphasis on this issue.
I pointed this issue earlier as well.
She then discusses the lessons learnt from the crisis – strong fin system is important, every country is different (a point made by Krozner in his recent speech), transparency in accounting and macro policies.
She discusses the role of China and how it can play a role in stabilising the region as well.
A nice summary. Give it a quick read.