Bulletin

The Asian Crisis Four Years On

Scott Roger

It is now nearly four years since the Asian financial crisis began. Initially, the crisis involved a run on regional currencies closely linked to the U.S. dollar, beginning with the Thai baht in mid-1997. The loss of confidence spread to other financial and asset markets throughout the region. Exchange rates fell sharply in Thailand, Indonesia, Malaysia, the Philippines, and Korea, while regional stock and property markets also suffered large losses.

The impact of the financial crisis on economic activity proved to be considerably more severe than expected, both reflecting and revealing weaknesses in domestic financial and corporate sector institutions and practices. Output in the most affected economies-those of Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, and Thailand-fell by more than 6 percent in 1998. At the same time, the steep falls in domestic demand reduced imports and allowed current account balances to strengthen rapidly (see chart).

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

The recovery

Although economic activity and financial market sentiment in the region showed signs of bottoming out by late 1998, a strong rebound in activity was not generally expected in view of continuing distress in the financial and corporate sectors. Nonetheless, the economic recovery that followed was remarkable. In the most affected economies, the average increase in real GDP was more than 5 percent in 1999 and 6¹/2 percent in 2000. A number of factors contributed to the rebound:

* strong growth of exports reflecting both the impact of substantial currency depreciations on external competitiveness and the surge in global demand for electronic equipment produced in the region;

* restoration of more orderly financial market conditions, partly in response to current account improvements and external financing support;

* fiscal stimulus to support domestic demand; and

* significant recoveries in regional stock markets, mainly in the information technology and communications (ITC) sectors.

The pace of recovery, however, has varied considerably from one country to another. Over the past two years, Korea's real GDP growth has been particularly impressive, averaging 10 percent a year, and average growth has also been rapid in Singapore, Malaysia, Hong Kong SAR, and Taiwan Province of China. In contrast, recoveries in Thailand, the Philippines, and Indonesia have been less robust, with annual rates of GDP growth averaging less than 5 percent. Some explanations for these differences in economic growth rates are the following:

* recovery has been most rapid in economies where financial sectors were sound prior to the crisis, such as Hong Kong SAR and Singapore, or in those that have made the most progress with financial and corporate sector restructuring and reform in the...