Asian Crisis: Distilling Critical Lessons

The virulent crisis that struck five Asian economies in mid-1997 and 1998 raised concern about the stability of the global financial system. The financial crisis and market turbulence caused a steep fall in output, and thus had high economic and social costs. The crisis-stricken economies made concerted endeavours to restructure, and by early 2000 we could justly say that these economies were on the recovery path. This development is well captured in the quarterly GDP movements of the five crisis-affected economies: Indonesia, Malaysia, the Philippines, the Republic of Korea and Thailand. One of the silver linings of adversity is that it teaches valuable lessons. In this Discussion Paper we take stock of the policy lessons of the Asian crisis. These lessons could help policy makers, inter alia, to cope with the increasingly integrated capital markets and heightened capital movements. Indeed, the lessons enumerated in this paper will not prevent future crises from occurring, but may reduce their probability and limit their effects when they do. The lessons that the Asian crisis has provided cover several policy areas including macroeconomics, microeconomics, banking and finance, prudential regulations, and global financial architecture. An attempt has been made to cover a wide canvas and focus on several, certainly not all, important areas.