An assessment of the East Asian debacle

Abstract

This paper evaluates the policy choices and factors that have contributed to the Asian crisis. It is argued that the interaction between relatively closed and weak banking systems and liberalized financial flows played a major role in the crisis. The prospect of an IMF bailout is also likely to have induced risky capital inflows to Asia, as data on Taiwan suggests. The appropriate policy response is not to impose sweeping controls, as is often being recommended, but to partially restrict capital inflows while simultaneously freeing up limited outflows by domestic residents, and also exposing the banking and financial services sector to more external competition.