Economics Essays on The East Asia Financial Crisis of 1997-1998


The Financial Crisis of East Asia began in 1997 in Thailand which is described by Stiglitz as the Great Depression. According to his book, the desire of the state to control the finances was the primary cause of the crisis. Stiglitz argues that the crisis was both a result of bank and currency failure. Before the crisis, the countries experienced high growth rates which resulted in both short-term and long-term foreign capital investment. Overinvestment in real estate and other hypothetical and unnecessary ventures also resulted in the majority of the investors moving after the perceived financial meltdown became apparent. However, the investors began reducing their short-term capital to Asia economies in preference of the western financial markets. Consequently, the reduction of foreign currency investment led to banking crises in East Asia.

Investment in the developing countries in most instances depend on loans from the banks. With the reduced capital inflow, the structural problems within the banking sector worsened causing them to borrow a more short-term in the form of foreign currency while lending domestically for long terms. This move resulted in deterioration of the East-Asian currency leading to a much higher value of accumulated foreign debt. The government and IMF involvement in trying to solve the crisis in one way or another according to Stiglitz worsened the situation. He suggests that the policy formulation and implementation were significantly responsible for the catastrophe.

The South Korean government also played a role in directing the economic activities of the East Asia countries most of the times not involving the market in the decision-making process.  The regulation of foreign trade, currency exchange, and direct investment are some of the various ways it contributed towards the great depression. The regulation of prices that led to a monopolistic market structure also led to the financial fall of the economies (Amsden, 9). Restricted market entry by the government to preserve own competitiveness and the control over importation are also significant ways through which the crises began.


It treated the crisis by providing finances like in any other instance of developing countries that could not afford to pay their borrowed obligations. The fund organized for the countries to get loans to help them pay off their foreign debts primarily to the private banks from whom they had lent money.  The offer, however, was only applicable when the country agreed to adopt certain adjustments in their policy structures (Khatkhate, 964). The reforms were intended to address the weaknesses in the financial sector while others were intended to ease the impact of the crisis and set the platform for resuming economic growth.

The IMF is partially responsible for the 1997 – 1998 crisis that affected East Asia due to the policies it formulated and their implementation. It profoundly believed that their macroeconomic policies were the only right ones and thus had to be implemented to help the country through the crisis. Contrary to the usual financial crisis, the East Asian one differed in that the Asian government was not typically running deficits yet the Fund insisted that they reduce their expenditure. This policy in itself resulted in further deterioration of the situation and a reduced pace in the recovery. In an example cited by Stiglitz, the Thailand government was running a budgetary surplus, but due to the policy, there was less spending on essential infrastructural development and investment in sectors such as education.

Further, IMF failed to control an organized rollover of short-term loans to long-term and instead forced the East Asia countries to guarantee private money borrowed from private foreign firms. Given the high reliance on foreign loans, private enterprises in the Asian countries could not afford to pay their debts off when their currency began losing value. As an intervention, the Fund insisted that countries take up loans to pay off their debts which worsened the crisis. In managing the situation, IMF failed to encourage capital control which would have done away with speculative currency trading which would have redeemed the value of the Asian currency. IMF POLICIES IMPACT ON THE PROBLEMS

The economic recovery of Asia forms the financial crisis is a combination of the implementation policy by the countries involved and the continued support by international bodies. The IMF programs in Korea, Indonesia, and Thailand are among the numerous channels used to solve the problem although initially, some of the IMF policies could have worsened the situation in East Asia at the time.

The success of the program was slow at the beginning owing to specific factors in the countries affected. Firstly, there was hesitation by the governments to adopt new policies, the distinct drift in the reserves and maturity period of loans and the hovering uncertainty over their initial financial offers. At that point, the countries continued to experience a recession, but with quick adjustment and corrections of their strategies, the region regained the financial stability and experienced steady economic growth.

Works Cited

Amsden, Alice H. “South Korea and late industrialization.” Asia’s Next Giant: South Korea and Late Industrialization, Oxford UP, 2004, pp. 1-11.

Khatkhate, Deena. “IMF and the Asian Financial Crisis.” Economic and political weekly, vol. 33, no. 17, 25 Apr. 1998, pp. 963 – 969,

Stiglitz, Joseph E. “4. Policy implementation: State Regulation of international economic activity.” Globalization and Its Discontents, W W Norton, 2017.