THE Asian financial crisis was not caused by macroeconomic imbalances. The fundamentals of Malaysia, Indonesia, Philippines and Korea were and are sound. These economies have high domestic savings and investment rates, high rates of output growth, strong export performance, low inflation and more egalitarian economic policies than any other region.
Many knowledgeable commentators can be cited who have said that the size and the pace of capital outflows from the fast growing economies of East Asia had nothing to do with fundamentals.
The Director of the World Bank's office in Indonesia went so far to say, as he watched the decline in the value of the currency caused by the rapid pace of capital outflows, that 'This has nothing to do with economics.'
The President of the World Bank characterised the crisis as a 'hic-cup' in September, and the head of the International Monetary Fund (IMF) said in May that the government of Thailand was taking courageous steps to address the problems of the financial sector, and doing exactly what is needed to be done to prevent a Mexican-type crisis, and that he 'did not see any particular reason for this crisis to develop further.'
A real estate bubble burst in Thailand. The bubble had been created by huge inflows of external capital. Private capital flows into Thailand between 1988 and 1995 totalled 52% of GDP. The government took all the recommended measures to control the impact of these large inflows on the economy. The most commonly used measures were designed to reduce the expansion of the domestic money supply through sterilised intervention. However, these measures did not reduce the scale of capital inflows which continued throughout 1996. Investment rates jumped to over 40% of GDP.
But no country can productively absorb such large inflows in such a short period.
