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the asian financial crises a comparative study

The Asian Financial Crises: A Comparative Study

Thailand, South Korea, and Japan


I will begin with a real story. Oct 17th 1997, on a golf course in Taipei, a group of businessmen were playing a round of golf. Among them, were the governor of Taiwan’s Central Bank, Mr. Hsu, and the governor of Korea’s Central Bank, Mr. Lee. During the game, Lee, the Korean banker, noticed Hsu, the Taiwanese banker, were frequently interrupted by his cell phone. When he answered, he spoke in hash and agitated tone in Chinese. Lee instinctively felt something was going on. Something big. But what is it?


He found it out the next day: Taiwan just devalued its currency while they golfed. This move not only lowered Taiwan’s export price and made the Korean export more expensive, but left the Korean currency, the won, exposed to speculative attacks. At that moment, Lee felt like the last gazelle in the herd with a cheetah on their tails.

Class, welcome to the Asian Financial Crisis!

  • About This Presentation
    • Abbreviations/acronyms: AFC, Korea
    • Presenters
    • Countries Selected for Comparison and Why
      • Thailand: the first to fall (Dan)
      • South Korea: why me? (Johnny)
      • Japan: the alpha goose (Shin)

This is presentation is a comparative study of 3 Asian countries during the crisis.

First of all, let me clarify some abbreviations and acronyms we are to use during the presentation:

AFC stands for Asian Financial Crisis

We may use Korea and South Korea interchangeably during the presentation.


Here are the presenters: My name is Bing, and this is Dan, Shin and Johnny.

For this presentation we picked 3 Asian countries. They are: Thailand, South Korea and Japan.

Thailand was the first to fall during AFC. So its symptoms and fate is somewhat indicative of the crisis in general.


South Korea had been an understudy of Japan’s success. It had consecutive, fast growing economy until the eve of AFC. After AFC it recovered quickly and repaid the massive IMF loan in less than 4 years. So what is a healthy economy like the Korea’s doing in AFC?

Japan is selected because it was one of the economies survived the AFC. So it is interesting for us to find out why.

  • When
    • July 1997 to Feb 1998
    • What happened around us?
      • Chicago Bulls, FL Marlins, Denver Broncos, Titanic, Backstreet Boys
  • Which Countries
    • Almost all Asia-Pacific countries, minus Japan, Mainland China, Taiwan

AFC lasted only about 8 month. However, during that 8-month, more than 20 million people lost their jobs. Those still had their jobs took a double-digit pay cut on average. Imaging yourself graduating that year!


As sudden as AFC was, and as traumatic as it was, it did not happen in vacuum, here is some historical perspective:

  • Historical Context
    • Prior Crisis: Mexico peso 1994-5, European Monetary System 1992
    • “The East Asia Miracle”
    • In relation to Globalization

Prior to AFC, there had been a few other recent financial crisis. All were very destructive to the economies affected.

Asia-Pacific economies had been enjoying decade long sustained growth, which led to remarkable improvement of general welfare. This sense of achievement played a significant role in the events leading to, during and after AFC.

For example, as early as 1995, critics have highlighted some structural deficiencies in South Korea’s economy. But nobody paid attention, because, as one IMF official conceded, “it is hard to argue with success.”


Compared to other regions in the world, Asia-Pacific was, and still is, an exemplary model of embracing globalization. It is considered the trophy of open economy and global integration. However, after the AFC, particularly after seeing the devastation it left in its wake, opinions shifted. Eventually, AFC became one of the rallying cries for the anti-globalization movement. As many of us witnessed during the 1999 WTO protests couple of exits down I-5


Before we move on, I feel it is important to tell you this. AFC is a very complicated topic. In the short time we have, we will only focus on some of the issues that are related to this class but we strong encourage you to learn more about this event outside of the class. With this being said, we will start our country studies.

what we have learned
What We Have Learned
  • In the Wake of AFC
    • National Economy
    • National Finance
    • General Welfare
    • Socio-Political
    • World Economy

Now we have heard the stories from the 3 different countries, let’s try to summarize what we have learned.

Obviously, any financial crisis is destructive. AFC is no different. Here are some charts to show macroeconomic measurement changes, grouped by internal and external balances:


Other than those tangible numbers, let’s not forget there are many intangible losses:

For example, the social effect of high unemployment rate, public healthcare and education suffered tremendously. Social groups that are perpetually on the margin of economic activities: seniors, the poor, the unskilled faired the worst.

In addition, the overall decline of aggregate demand caused commodity price to drop. It is like a virus that spread around the globe. Economies that relies heavily on exporting natural resources were all hurt, e.g. Russia and later, Argentina.

what we have learned23
What We Have Learned
  • The Complexity and Diversity of AFC:
    • Do not believe “That is why”s
      • Liquidity
      • Over-spending/borrowing
      • Poor Management
      • IMF and the Washington Consensus
      • Political Factors

I like to stress again that AFC is an complicated topic. Although the symptoms were similar among countries affected, the causes varied a great deal. Unless you are a politician, do not simply say, “That is why” about AFC.

Just like we are exposed to all kinds of viruses very day but we don’t get sick unless everything turned out against us: someone who is very close to you pass on to you a virus that you never had before on a day that you were really tired.


In the AFC case, we have identified some factors but cannot say AFC was caused by just one of them.

For example, is liquidity or reserve the cause? We would argue it is the symptom, but not the cause.

So what caused the liquidity problem? Was is overspending? Not exactly, in the case of Thailand and Korea, government deficit were well within 5% limit when they did occur. Most of the Asian nations had high savings rate too.


If not over-spending, could be unwise spending? For example, borrowed too much short term loans?

In Korea’s case, that appears to be the case, given how fast the country repaid its IMF loan. However, in Thailand, Indonesia and Malaysia, the recoveries were slow and painful. This cannot be explained by “short-of-cash” only.


So were the economies affected by AFC poorly managed? There is certainly a lot truth to that. For example, it is commonly accepted that AFC economies rely too heavily on banks alone. Financial market lacks transparency and independence. And so on.

But there are exceptions to this generalization. For example, Japanese economy has similar deficiencies, but it was not as much affected. The U.S., the supposedly model economy of the world, almost had a FC of its own a year after AFC.


You may also hear the term “Washington Consensus” during AFC discussions. The term implies that the U.S. used IMF to take advantage of the FC in Asia for its own benefit.

There is no reason to believe that the U.S. acted outside of its stated intentions. It does have tremendous leverage but not direct control over IMF. What IMF failed to do during AFC is indicative of the limitations of macroeconomics as a science.

Regardless what political factors may be involved, we have to accept the premise that AFC was in its core an economic affair.

what we have learned29
What We Have Learned
  • How to Prevent Future FC:
    • Is it possible?
    • Some tips from AFC:
      • Listen to the Devil
      • Too Many Banks?
      • Is Japan the Model to Follow?

So what can we do to prevent the next Financial Crisis? Or is that even possible?

We should not stop trying. Some specific lessons we have learned from AFC are,

Listen to the Devil. The Devil here are the currency speculators. There is a nicer term for them: macro hedge fund. They are like computer hackers: they improve our lives in a perverse way.


The other thing to watch out for is the healthiness of domestic capital market.

For emerging economies, fragmented financial market poses an acute problem. In the case of South Korea, most of the short term loans were borrowed by banks themselves. So was the case in Thailand. As a result, many banks failed during AFC.

Japan’s banking system had similar deficiencies. Thanks to its large economy and substantial foreign reserves, it survived AFC while smaller economies did not.

what we have learned32
What We Have Learned
  • The Tools We Have:
    • Monetary Policy
    • FOREX
    • Administrative
    • Signaling

Financial crisis, especially those caused by predatory attacks, are difficult to stop once it started. During AFC, Hong Kong was able to defend its currency. Thailand almost succeeded but the levee broke at the last minute.

Among the type of tools listed, we are surprised to find the empirical evidence suggests currency control is an effective tool to combat attacks. However, it is questionable as a long term solution.

opinion poll
Opinion Poll
  • China: the Next FC Victim?
    • Opportunity and Crisis:
      • Large economy
      • Internal and external balances
      • FOREX control
      • Banking system, financial market in general
opinion poll36
Opinion Poll
  • Financial Crisis to Happen in China?
    • Not likely
    • Very likely: in 5 years
    • Probably: in 10 years