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Lessons from Asian Financial Experience

work, Entrepreneurship, and finance

After a spectacular growth performance over a period of decades, some major East Asian economies – Japan, South Korea, Indonesia, and Thailand experienced devastating balance of payments crises. This shocked the entire world as their continuing success had seemed entrenched. This paper examines the factors contributing to the difficulties in these economies in the l990s and analyzes the policies that were adopted to address them. The focus is on Japan and South Korea. Japan’s differed fro the other countries in that it was an industrial country and its problems were domestic and did not require international support. But despite Japan’s ample foreign exchange reserves and current account surpluses, the collapse of an asset bubble resulted in difficulties in the banking sector that retarded growth and led to stagnation for well over a decade. For the other crisis countries,mismatches in the foreign currency composition of assets and liabilities in the financial system were major contributors to the crises. A well-functioning financial system is essential for growth, but cannot be achieved without consistent monetary and exchange rate policies and avoiding mismatches between the asset and liability sides of financial institutions’ balance sheets. For both Japan and Korea, the crises took place in significant part because of failures of the financial and real sectors of the economies to develop at consistent rates. Issues of crisis and post-crisis management are also addressed.

444wp.pdf (1.21 MB)
Anne O. Krueger
Publication Date
May, 2011