Roubini argues weak financial, banking sectors, compounded by panic, brought on Asian crisis

• Author: Gunnar Jonsson
• Position: IMF Asia and Pacific Department
• Pages: 192-193

Page 192

Traditionally, analysts have viewed currency crises as the result of either fundamental macroeconomic and policy weaknesses or self-fulfilling panic and liquidity runs.With the Asian crisis, however, two seemingly contradictory views no longer seemed so incompatible.

In an April 13 seminar at the IMF Institute, Nouriel Roubini, Professor of Economics at New York University argued that while fundamental weaknesses in the financial and corporate sectors created serious precrisis vulnerabilities in many Asian economies, panic and liquidity runs compounded these problems. He also weighed the appropriateness of the IMF's policy advice and discussed the lessons learned from the Asian crisis.

Causes of the Asian crisis

Several earlier currency crises, notably those in Latin America in the 1980s, occurred in the context of modest growth and large fiscal deficits, which then led to growing external debt and high inflation. By contrast, most Asian economies enjoyed strong macroeconomic fundamentals before the crisis.

Gross domestic product and investment grew at high rates, and inflation, fiscal deficits, and government debt were low by international standards.

In Asia, Roubini suggested, the key weaknesses were in the private sector.He cited poor corporate structures (in which the focus too often was on increasing scale and market share rather than on economic returns), weak supervision and regulation of the financial system, connected and directed lending, and implicit and explicit guarantees of financial institution liabilities that created a degree of moral hazard.

Weaknesses in the private sector contributed to a lending boom and an overinvestment in risky projects, such as real estate, with low profitability.

Domestic and international capital liberalization may have aggravated existing distortions.Domestic capital liberalization permitted increased borrowing for speculative purposes,which, in turn, led to asset price bubbles. International capital liberalization allowed domestic banks and firms to rapidly increase their borrowing in international markets at low interest rates.

Korea's experience, Roubini said, illustrated his arguments. Excessive investment by the chaebols (the large conglomerates that dominate the Korean economy) had been facilitated by the chaebols' control of financial institutions and the government's policy of...