RDP 9805: The Origin of the Asian Financial Turmoil 4. Conclusions

Asian financial turmoil arose primarily from three interrelated sets of factors. The first factor was shortcomings in the financial sector, including deficiencies in the supervision of banks which allowed a degree of exuberance to translate into an excessively rapid expansion of credit. This was compounded by a second factor, a reassessment by markets of the longer term export potential of some Asian economies. These concerns were initially manifest in Thailand but then quickly spread across the other economies in the region. The major channel for this contagion appears to have been the sudden realisation by the market that a number of other Asian economies had vulnerabilities similar to those in Thailand.

Just as the crisis did not arise from a single source, there is not a single response that will fix it. Resolution of the current problems in Asia is likely to require, inter alia, recapitalisation of banks, structural reforms in the financial sector and to corporate governance, greater transparency, and some debt rescheduling that involves appropriate burden-sharing on the part of private sector creditors. These issues are beyond the scope of this paper but are taken up in Goldstein (1998).

The better we can understand the origins of the Asian financial crisis, the more likely are policy-makers to learn from it rather than to repeat the mistakes in another context.