Financial Crisis in East Asia: A Macroeconomic Perspective

The East Asian crisis occurred despite highly impressive macroeconomic performance and prudent fiscal policies pursued by the severely affected countries which enjoyed excellent international credit rating till June 1997. The crisis came as a rude shock to the international financial community and the policy-makers on account of its unprecedented magnitude and global impact. In this paper, Bakul Dholakia argues that the crisis resulted from a strong combination of mutually reinforcing factors such as appreciation of real exchange rates, high levels of current account deficit, extremely high growth of short-term external debt⁄ and highly fragile financial sector. According to Dholakia⁄ the overall impact of East Asian financial crisis on the Indian economy can be described as moderate. The slow-down of India's industrial growth and exports and fall in the stock market since the last quarter of 1997 can be attributed more to the climate of political uncertainty than the East Asian crisis. Given the favourable macroeconomic fundamentals⁄ Indian economy currently does not face any threat arising from the Asian virus.