Perspectives on the Asian crisis

by Shahabi-Azad, Shahrokh.

In the afterrnath of the Asian financial crisis of 1997, a plethora of theories and propositions have emerged indicating the reason(s) and nature of the crisis. The literature is now full of old and new ideas as to why the Asian financial markets suffered a rapid and unforeseen collapse. Some of the old and well-established theories that have resurfaced include moral hazard in lending, political corruption, incompatibility of monetary and fiscal policies, unsustainable fixed exchange rate regimes, and unsustainable trade deficits. Of the new theories and buzz-words perhaps contagion, the cross border propagation of the crisis, is the one that has received the most attention dong with the notion of crony capitalism. This paper presents a survey of the literature and perspectives on the collapse of the Asian financial markets. A close look at these models and theories highlights the fact that the Asian cnsis, if represented by these theones and models, should have been foreseen. The fact that the turrnoil in the Asian market had gone unnoticed is an indication that much of the current reasoning and theones have overly triviaiized the events in Asia. This paper suggests that despite downward trends in the macroeconomic fundamentais of these countries, it is herding behavior and financial conservatism which became significant factors in decision making, particularly since unilateraily withdrawing from the financial markets of Asia may have meant the loss of market share to competitors. The two models developed in this paper pay particular attention to these two factors and the role of conservatism in bringing about the collapse of the Asian financial markets. 1 have to thank a nurnber of people for their guidance and support as 1 worked to complete my thesis. Firstiy, 1 owe a great deal of thanks to Professor James Dean for reading through several manuscripts of this work and for his guidance in better developing the final draft. Professor Dean's interest in the Asian Crisis was what motivated me to pursue and conduct research on this matter. 1 am also greatly indebted to Professor Steeve Mongrain for his part in helping me develop the rnodets. Had it not been for his help, 1would have had to endure many more months of frustration. 1 would like to thank the administrative staff in the department of economics for not only the work they do but aiso their friendship over the dmost six years that 1 have spent here as an undergraduate and graduate student. Specialiy, 1 would like to thank Sherrill King, Gisela Seifert, and Professor Robert Jones. To my friends and colleagues in the department, thank you for your support dong the way but specifically, I must acknowledge the encouragement of Chona Itturalde and the helpful suggestions of Debbie Draker and Ruth Forsdyke. Finally, a very special and heartfelt thanks goes to my best friend and greatest source of encouragement and motivation, Eden Thompson. It was her bright smile and cheerfulness during some of the most difficult times that helped me pull through and for that 1 will always be grateful.