The Asian crisis: what did we learn and when did we learn it?

Abstract

This paper steps back from the detail of the Asian crisis, to ask whether the 1997 crisis advanced our broad understanding of the age-old problem of economic crises. Some immediate lessons were learned from the failures of the crisis-response in Indonesia, which was the worstaffected economy. It is notable, however, how little changed to address the ongoing systemic weaknesses. Three areas of unresolved vulnerability can be identified. First, the sudden stops and reversals of international capital flows. Second, the intrinsic fragility of a financial system that borrows short and lends long. Third, unanchored exchange rates, where the market's price-discovery can take the rate to levels far from equilibrium, for sustained periods. For more than a decade after the Asian crisis, international capital flows continued to be seen as unambiguously beneficial, with any attempts at capital flow management rejected. At a global level, it was not until the 2008 financial crisis that widespread financial fragility was addressed through tighter regulation and higher capital requirements. On exchange rates, misleading advocacy of corner solutions-either pure floating exchange rates or immutable fixed rates-continued in the face of the real-world experience that sometimes intervention is needed to maintain an exchange rate close to equilibrium. ). A version of this paper is published in the Lowy Analysis series. 30