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LEIF RODERICK ROSENBERGER
The currency crisis in Southeast Asia in 1997 primarily reflects homegrown shortcomings in the national economic strategies of Thailand, Malaysia and Indonesia. While international factors (such as the devaluations of the Japanese and Chinese currencies and NAFTA) all contributed to large and destabilizing current account deficits, crony capitalism and an economic model that favoured runaway economic growth over financial stability have been largely responsible for the financial turmoil. So far, the policy response of the "Asian tigers" has been piecemeal and inadequate. Until this policy paralysis changes, investors will remain jittery about the region and financial. turbulence will frustrate economic recovery and political stability.
Introduction
"It was the best of times, it was the worst of times". These words were used by Charles Dickens in his book A Tale of Two Cities. But these same words could just as easily be used today to describe the rise and fall of the economies in Southeast Asia. Just a few years ago, the World Bank singled out the economies of the "Asian tigers" as models for long-term economic development. It seemed like "the best of times".
Not anymore. Nineteen ninety-seven was a nightmare for the region. In July this year currency traders savagely attacked the Thai baht. Before long, the currency crisis spread across Southeast Asia. After forcing an 18 per cent depreciation of the Thai baht on 2 July, currency speculators quickly turned on other neighbouring countries. The Philippines was next in the firing line. Manila tried to resist the currency onslaught by spending hundreds of millions of dollars defending the peso before finally giving in and floating the peso on 11 July. Then came Malaysia, where the central bank jacked up interest rates to 50 per cent and spent billions of dollars before surrendering on 14 July. The ringgit promptly plunged to a 33-month low.
Indonesia's currency band helped it weather the storm for awhile. But in the end, Jakarta's more flexible foreign exchange policy only delayed the onslaught. Before long, Indonesia's chaotic microeconomic conditions also made it a ripe target for a currency attack. Even a well-run economy like Singapore was soon caught up in the regional contagion. By the middle of the summer, some observers naively thought that...