Two Different Policy Responses to the Asian Financial Crisis During the1990s, Asian businesses in developing nations acquired short-term funds in global markets. Much of this dollar denominated debt was unhedged. Over time, the quality of the investments made with these funds deteriorated. For example, short-term borrowing was used to acquire assets with a long-term payoff, thereby creating a mismatch between loan maturities and asset maturities. The lack of adequate financial oversight and objective financial data obscured what was happening. Thailand’s economy was the first to falter. By mid-1997, doubts emerged about the ability of Thai borrowers to repay their loans and lenders started to withdraw capital from the country. With insufficient dollar reserves to defend its currency, the baht, the Thai government cut it loose from the dollar and allowed it to depreciate. In the wake of the Thai currency crisis, the value of the Philippine peso, the Malaysian ringgit, and the Indonesian rupiah also depreciated as those currencies were converted into dollars for safety (Stiglitz, 1998). Greene (2002) notes that capital flight from the region caused developing countries like Indonesia, Malaysia, the Philippines and Thailand, each of which had experienced real growth exceeding 5 percent annually for much of the 1990s, to experience real declines in GDP during 1998.

By Pearl M. Kamer, the Adelphi University, New York. [Download]