The Asian Crisis: Lessons for Crisis Management and Prevention

The succession of financial crises that swept through Asia, Russia and Latin America in 1997 and 1998 led to considerable debate about both the role of the IMF and possible actions to limit further crises. Some have argued that international financial markets do not function well and are subject to periodic contagious panics that can be stemmed by an international lender of last resort. This paper argues that the IMF has neither the resources nor the superior information needed to fulfil such a role. However, there may be a need for an international financial institution that can use its leverage to secure policy changes in the affected countries. The paper also takes issue with the view that the IMF is simply bailing out imprudent international banks and that measures are needed to bail them back in again. The source of the Asian crisis lay in the real economy, but the effect of the crisis was greatly exacerbated by the financial structure of the affected countries. In particular, much of the risk was borne by domestic banks which borrowed dollars in the short‐term interbank market and made longer‐term loans in the local currency. Public policy needs to be directed to ensuring that the risks in emerging markets are distributed efficiently across both foreign and domestic investors. That involves greater use of equity finance and structured debt.