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Crisis Vulnerability

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  • Peter Warr

Abstract

Earlier attempts to explain the East Asian crisis of 1997 have overemphasised the importance of contagion, missing the central role of vulnerability. According to conventional accounts, Thailand experienced a financial panic due to such factors as corrupt government and corporate practices, inadequately supervised banks and venal currency speculators. Confidence in the Thai currency and banking system collapsed, provoking capital flight, a float of the Thai currency and a drastic decline in its value. This undermined confidence in the prospects of other East Asian countries, also provoking crises there. This article clarifies the concept of vulnerability and demonstrates its relevance by showing the long-term development of vulnerability in each of the three 'IMF bail-out' countries: Thailand, Indonesia and Korea. By 1996 all three were vulnerable to a currency crisis. Contagion provided the short-term trigger for the crisis but was not its underlying cause. The policy lesson is to avoid vulnerability, not to attempt to avoid contagion. Copyright © Asia Pacific School of Economics and Management, The Australian National University and Blackwell Publishers Ltd (a Blackwell Publishing Company), 2002.

Suggested Citation

  • Peter Warr, 2002. "Crisis Vulnerability," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 16(1), pages 36-47, May.
  • Handle: RePEc:bla:apacel:v:16:y:2002:i:1:p:36-47
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