Comment on “Asian Currency Crisis and the International Monetary Fund, 10 Years Later: Overview”

Ito (2007) seems too ready to concede that the rapid recovery of the crisis-hit Asian economies lends support to the view that the crises were attributable largely to external forces and much less to domestic factors. The speed of recovery may have as much to do with the size of the problem as with the nature of the problem. In the East Asian case, it is true that macroeconomic fundamentals were fairly strong when the crises began to unfold. However, the key macroeconomic indicators cannot reflect the deep fault lines in the microeconomic setting. Some banks in the region had overstretched themselves with too many questionable loans, whereas many corporate entities had gone overboard on borrowed capital. Although the details vary from country to country, the pattern seems strikingly similar. It is not an exaggeration to say that the roots of the 1997–1998 financial crisis were in corporate excesses. This does not mean that governments are absolved of any blame. The policy environment, for which the governments were solely responsible, that had encouraged corporate entities to do what they did cannot be ignored. Although fiscal management had been fairly prudent in all countries, as Ito points out, there have been serious government policy missteps. Unsustainable input-driven gross domestic product growth with huge current account imbalances financed by footloose short-term capital inflows, not to mention the unholy alliance, the government–corporate–banking trinity, were a recipe for disaster. Seen in these terms, the Asian financial crisis was essentially homegrown, with external factors playing no more than a secondary role. The 1997–1998 Asian crisis was the result of a backlash by market forces. No open economy can escape from the wrath of international discipline when things go seriously wrong. There is no denying, however, that the Asian economies were hurt more than they deserved, simply because market forces tend to overshoot. The role played by the International Monetary Fund (IMF) in the Asian crisis management has been the subject of much controversy. The contention that the IMF program made the crisis worse is valid only insofar as the IMF’s macroeconomic prescriptions are concerned. One-size-fits-all measures with fiscal austerity and monetary tightening caused much pain when the opposite was in order. It is noteworthy that IMF has subsequently backtracked on this. It is not difficult to surmise that the crisis would have been prolonged in the absence of IMF’s help. No one would deny that liquidity injections by the IMF were