13 - The East Asia crisis

Summary

The East Asia crisis has provided a wonderful – yet unfortunate – opportunity for testing many of the ideas presented here. The crisis demonstrated powerfully the dangers of misguided monetary theories; the alternative paradigm presented here, while it clearly could not have forestalled the downturn, might have led to policies that would have resulted in recessions that were less deep and less prolonged. The basic story of that crisis is now well known. During the 1970s and 1980s, the countries of East Asia experienced rapid economic growth – by most accounts the most rapid development any region of the world had experienced. The growth brought with it improvements in social indicators (health, education) and marked reductions in poverty. While there was some controversy over the “model” that they had pursued, it combined a strong role for government with market oriented policies. Governments had helped create financial institutions, and they were highly regulated. In the early 1990s, largely under the influence of outsiders (the US Treasury and the IMF), policies of financial and capital market liberalization were put into place. This resulted in a flood of capital coming into the countries in the region – and then a sudden reversal, a huge outflow. The magnitude of these changes in flows was enormous. In the case of Thailand, the change in flows amounted to 14 percent of GDP and in the case of South Korea 9 percent of GDP