The Asian Financial Crisis is arguably the most widely debated, extensively studied economic episode since the Great Depression. The most controversial diatribe raged between the supporters of the MIFF and the US treasury (headed by then Treasury Secretary Robert Rubin) on the one hand and Joseph Stilling, former World Bank Chief Economists and 2001 Nobel Prize Winner In Economics, on the other. What was the debate all about?
This case analysis will go Into the substance of the two sides In Section II but the following Invectives of Gestalts against the MIFF, enunciated In various peaking engagements, articles and extensively discussed In his book “Globalization and Its Discontents”, outline the core of the Issue: Hasty capital liberalizing: “the single most Important factor leading to the crawls”?the recklessness with which the MIFF encouraged liberalizing of capital In developing countries whose economies were too small and whose financial sectors are Ill-equipped to regulate and absorb huge amount of short-term capital led to the crawls.
This so called “hot Monet which came in droves generated market bubbles that exploded like bombs as soon as signs f trouble became apparent. The casualty of the explosion was extensive: hundreds of companies and financial institutions left bankrupt, millions rendered jobless and countless substantially bereft with real disposable income to spend.
Excessive austerity measures – IMPs response to push for both fiscal and monetary contraction measures in the affected economies Jacked-up interest rates creating a beggar-thyself and beggar thy-neighbor policy that pushed these economies into a tailspin, pulling down the rest of the world along with them. There’s a host of corollary issues cited in Stilling’ book. Some are directly connected to the two items above; others merit separate discussions altogether.
But lest we get carried away and put together a book that will rival Stilling’ bestseller, we shall focus this case analysis in trying to understand (1) the two main points raised by Stilling above and (2) the MIFF rejoinder as emphasized by Rubin in his book “In an uncertain World”. This includes: (1) issue on fixed exchange rate under an environment where capital is mobile and (2) weak institutional set-up that breeds moral hazard problems.
Some of these issues shall be analyzed using basic tools in agronomic analysis (ala Blanchard). While we might not step Into the shoes of policy makers in our lifetime, the goal Is to at least be able to comprehend economic policies being implemented by the government. Apteral, understanding these policies Is tantamount to understanding how It would Impact on the overall business environment we face which would, In turn, allow us to formulate appropriate strategies that will protect our companies’ bottom line .