2. Features of the Recent CurrencyCrises
As discussed above, a review of the Asiancurrency crises reveals that conditions leading up to the criseswere not necessarily identical among the various affected countries.In particular, very significant differences in background conditionsexisted among the three most seriously affected countries of Thailand,Indonesia, and the South Korea, which were forced to seek assistancefrom the IMF and the international community. It is notable thatthe Latin American debt crisis of the 1980s and the Mexican currencycrisis of 1994 and 1995 (and its so-called "Tequila effect")had a minimal impact on the Asian economies. By contrast, therecent crises spread very rapidly throughout Asia once the initialflame was ignited in Thailand. This fact points to the variouscharacteristics which are identified below as the defining featuresof the Asian currency crises.
(1) Rigidity of the Foreign ExchangeRegime
Many of the Asian countries, and in particularthe countries of Southeast Asia, which were affected by the recentturmoil in the foreign exchange and financial markets had to varyingdegrees opted to achieve foreign exchange stability by virtuallylinking their currencies to the US dollar. The recent crises canbe said to have revealed the risks of maintaining a dollar-pegwithout regard to the closeness of each economy's trade ties withother economies. Specifically, the upward trend in the value ofthe US dollar which began in 1995 threatened to erode substantiallythe export competitiveness of dollar-pegged countries as theirreal effective exchange rates began to climb. The risks of remainingvirtually linked to the dollar were not limited to internationaltrade but spilled over to the area of finance where the economicsystems of these countries gradually became excessively dependenton the dollar (through dollar-denominated liabilities). Consequently,the collapse of the dollar-peg and the ensuing devaluation ofdomestic currencies would have a dramatic negative impact on thereal economies of these countries.
(2) Rapid Outflows of Short-Term Capital
As in the case of the Mexican currency crisisof 1994, one of the salient features of the recent Asian currencycrises was the rapid outflows of short-term capital. However,the role of capital outflows differed somewhat from one countryto another. In the case of Thailand where the crises originallystarted, current account deficits had reached unsustainable levels.On the other hand, the crises affecting the neighboring countrieswhich later caught the "contagion" were not of the conventionalcurrent account deficit-induced type. Rather, what occurred inthese countries can be characterized as crises in the capitalaccounts engendered by the collapse of confidence and the foreigncapital outflows (particularly short-term capital outflows). Inthis sense, the Asian currency crises can be labeled the "21stcentury-type" crises.
According to the estimates of the Instituteof International Finance (IIF), the net import of foreign privatecapital by four ASEAN countries and South Korea amounted to $93.0billion in 1996 (including $74.0 billion in loans). However, inthe following year, these five countries experienced a net outflowof $12.1 billion (including $7.6 billion in loans). Thus, between1996 and 1997, these countries experienced a reversal in the capitalflows exceeding $100 billion (of which loans accounted for about$80 billion).
Against the background of continued capitalliberalization and globalization, changing market perceptionscan trigger massive reversals in the direction of capital flows.The problem in Asia was that it had become highly dependent onshort-term foreign capital so that currency devaluations had animmediate and dramatic impact on liquidity in the currency market,resulting in large changes in the exchange rate. Then it in turnaffects the real economy by increasing burdens of foreign-currencydenominated debt. From that point on, the worsening currency crisescould take the form of a self-fulfilling prophecy, namely, manysold currencies in the belief that the exchange rate would depreciate,so that the exchange rate in fact depreciated. One of factorswhich gave such virulence to the "contagion" was thatwhen market perceptions shift, they tended to do so for a bunchof currencies in the region.
(3) Private-Sector Debt as a CentralProblem
One of the salient features of the Asiancrises has been that the crises have been centered on short-termforeign liabilities of the private sector(see Appendix 10). InSouth Korea, the rolling over of the foreign liabilities of SouthKorean banks was the central issue, while in the case of Indonesia,the most serious problem involved the increased debt-servicingburdens of domestic corporations due to the steep increase inthe value of the dollar. When the problem is in the private sectorand involves foreign investments made with full knowledge of highrisks and high returns, the settlement of claims should, in principle,be undertaken through the mutual efforts of the private partiesinvolved. However, when currencies rapidly lose their values througha "band-wagon effect" and when the capital flows becomeone-directional, the problem begins to transcend individual corporatedebt to become an issue of national confidence. This is particularlytrue when the foreign liabilities are held against banks, as thisexposes the country to serious systemic risks. Hence, althoughthe problem had grown out of private-sector debts, there was apressing need for government intervention.
(4) Weaknesses in the Private FinancialSector
A review of the countries where the currencycrises were most serious reveals that weaknesses in the financialsector had generally contributed to investment misallocation,including excess real estate investments which did not necessarilycontribute to higher productivity and excess plant and equipmentinvestments which had been made in disregard of demand or underconditions of questionable viability. In the course of their economicdevelopment, the affected countries had liberalized capital movements.Thus, since the 1990s, in addition to the continued inflow offoreign direct investments, they came to be heavily dependenton short-term foreign funds in the form of bank loans(see Appendix11), with loans from European banks in particular increasing rapidlyrecently(see Appendix 12). Unfortunately, capital liberalizationhad preceded advanced development in the banking system and financialand capital markets of these countries. Consequently, the financialsystems were not yet equipped to cope with and effectively absorbserious external shocks.
Other aspects of weakness in the financialsector include a general lack of human resources, the absenceof transparency and problems related to political corruption.
(5) Contents of the Adjustment Programsand Providing a Social Safety Net
Those countries which have accepted an IMFadjustment program following the currency crises and those whichhave not been forced to turn to the IMF but nevertheless mustrespond to the downward pressures on their currencies have beenforced to adopt tight fiscal policies, as a result of which creditis contracting. Consequently, both groups can be expected to experienceslower economic growth.
This precipitous downturn in economic growthhas triggered an increasing number of bankruptcies, has worsenedthe problem of non-performing assets and is generating massiveunemployment. In Thailand and Indonesia, unemployment has hada disproportionately large impact on low-wage female workers inexport-oriented light industries. Subsequently, the agriculturalsectors of these countries have been forced to absorb unemployedreturnees from the cities. In another development, the risingcost of imported fertilizers, insecticides and farming equipmenton which the agricultural sectors have come to rely is underminingthe viability of farming businesses.