Krueger says “delinking” future financial crises from payments crises could reduce costs

• Author: Jeremy Mark
• Position: IMF External Relations Department
• Pages: 139-141

Page 139

The Asian crisis of 1997–98 presented the international community with a volatile mixture of economic problems that defied traditional policy prescriptions. The combination and seriousness of balance of payments crises and financial system crises forced international organizations and governments to come up quickly with responses.

Even as the Asian economies return to the growth path, the debate over the response to the crisis continues. A leading figure in the academic community of economists has added her voice to the discussion of the causes of the crisis—and the policy response. Anne O. Krueger, professor of economics at Stanford University and director of the Stanford Institute for Economic Policy Research, presented her findings at an IMF Institute seminar on March 31. Her presentation, “Cronyism, Financial Fragility, and Exchange Rate Regimes: Lessons from Asia,” offered a wide-ranging view of the crisis, as well as a set of policy prescriptions potentially relevant to future emerging market crises.

Krueger, who is also a senior fellow at the Hoover Institution and a former World Bank vice president of economics and research, supported her presentation with two papers. The first, “Why Cronyism Is Bad for Economic Growth,” demonstrates that state-ownedPage 140 enterprises and cronyism have a similar impact on an economy and shows how “the role of domestic credit expansion in an environment of cronyism can play much the same role as a fiscal deficit in countries where state-owned enterprises predominate.” The second paper, “Conflicting Demands on the International Monetary Fund,” analyzes the difficulties presented by the confluence of factors during the Asian crisis.

Krueger blended these themes, but focused mainly on the policy response to the conflicting challenges of the external crisis represented by the collapse of Asia’s system of fixed exchange rates and the internal crises in financial systems. Complicating the Asian crisis— in contrast to what Krueger termed the “traditional” balance of payments crisis—was the underdeveloped state of the region’s financial systems.

The huge increase in domestic credit throughout Asia in the mid-1990s brought about a corresponding sharp rise in foreign borrowing, Krueger said. These developments were exacerbated by cronyism and the assumption by borrowers that they were not facing a foreign exchange risk because of the region’s...