When Thailand devalued its currency in July 1997 it started a world financial crisis that continues to spin out of control. After a year of turbulence, what can we say about the crisis?
Beware of experts. Before the crisis, money managers with supposed expertise in Asia saw free-market liberalization, fiscal balances, strong savings and investment rates, solid growth, low inflation, and, most important to them, very positive rates of return. After the crisis they saw only weak and poorly regulated financial systems, corruption, current account deficits and external debts, excess capacity and looming bankruptcies, bursting real estate and other asset bubbles—in short, a system of crony capitalism. (See a fascinating paper by Christopher Rude: “The 1997-98 East Asian Financial Crisis: A New York Market-informed View.” United Nations: Department of Economic and Social Affairs, 1998.
The crisis was more severe than many initially claimed or hoped. The amount of capital withdrawn from Thailand, Malaysia, the Philippines, Indonesia, and Korea was remarkable. Following a net private inflow of $93 billion in 1996, the net private outflow from these five countries was $12.1 billion in 1997, a swing of $105 billion. That swing was equal to 11 percent of the combined Gross Domestic Products of the countries involved. The financial systems in Thailand, Indonesia, Korea, and, to some extent, Malaysia have been shattered and the economies of these countries continue to deteriorate. Unemployment is on the rise everywhere; wages have been slashed by as much as 40 percent; Indonesia’s economy (which is in the worst shape) will contract an astounding 20 percent this year; and the number of Indonesians living on less than $360 per year will increase by more than twenty million over the next two years....
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