LESSONS OF THE ASIAN CRISIS

Abstract

Two alternative interpretations dominate the debate on the theories of the Asian crisis. One blames the poor economic fundamentals and policy conflicts, and the other argues that Asia fell victim to a financial panic. Although some macroeconomic and other fundamentals may have worsened in the mid-90s, the root cause of the Asian currency and economic crisis was the way that Asian economies were associated in the minds of investors. The market`s loss of confidence started a vicious circle of financial and economic collapse

The Asian crisis reinforces the belief that countries will benefit most from globalization when they have transparent, robust and well-regulated financial markets. Countries have to prepare carefully for the liberalization of capital markets to enjoy the benefits of access to global markets.

In the future, policies need to be designed which will both inhibit the flow of volatile short-term capital and, at the same time, encourage long-term capital, especially foreign direct investment. Strengthening the financial sector is essential. There is also need for better policies on corporate borrowing abroad.

Furthermore, greater efficiency of public spending, management of exchange rates so as to maintain a margin of flexibility appropriate to the size and openness of the country and regional coordination to enhance both financial stability and sustain the growth of trade, are all important targets for East Asian countries as well as other economies that have suffered from crisis during the recent decades.