The collapse of the Asian economies was one of the great economic surprises of the last half-century. Countries recently celebrated as “economic tigers” are now recipients of a $121 billion bailout from the International Monetary Fund (IMF) and are seen as the source of financial contagion or global deflation.
In Southeast Asia, where the Gross National Product of most countries grew between 6 percent and 10 percent annually from 1985 to 1995, the crisis stemmed from a development process sustained in recent years by huge infusions of foreign capital. Encouraged by the IMF, Western governments, and banks, the Asian governments facilitated the flow of foreign capital by removing or loosening controls on companies’ foreign borrowings. This deregulation was not accompanied by a strengthening of bank supervision.
Asian businesses discovered that they could borrow abroad twice as cheaply as they could at home. Foreign debt escalated, most of it private and short term. And while the liberalized capital markets were the conduit for huge capital inflows when there was confidence in the country, they were also the means by which capital could flee at the slightest sign of trouble. In 1996, total private capital inflows to Indonesia, Malaysia, South Korea, Thailand, and the Philippines were ninety-three billion dollars, up from forty-one billion dollars in 1994. In 1997 that suddenly changed to an outflow of twelve billion dollars, bringing down currencies and whole economies in the process....
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