Lessons learned

The East Asian Crisis took the world by shock even decades after, today still no real
consensus exists on the cause of the crisis despite this overwhelming view, serious analyst
agree this crisis started out as a currency crisis of a new type. They also agree this soon
turned into a general financial crisis before affecting the real economy. Reduced financial
liquidity, inappropriate official policy responses and ill-informed market responses then
exacerbated the chain of events.
People have come up with different takeaways from the crisis. Major reason for the crisis
were misguided financial policies and the pulling of foreign investors. The crisis showed that
at time of great capital inflow certain vulnerabilities can emerge in at least 4 areas:

 currency and maturity mismatches in private balance sheets

 reliance on IMF assistance and policy advice rather than self-insurance against
sudden stops and reversals of capital flows
 domestic credit, asset and spending bubbles
 unsustainable currency appreciations and external deficits
Governments in developing countries have taken measures to minimize some of these
vulnerabilities. They have also liberalized further capital accounts of residents and
nonresidents leading to a deeper integration in the international financial system and
creating new channels of transmission of external financial shock which build upon the ones
already there.
One of the first steps taken was to move towards more flexible exchange rate regimes. Most
east Asian economies avoided significant currency appreciation despite strong inflow of
capital. They did this not only through interventions in foreign exchange markets but by
using disincentives for certain types of capital inflow such as taxes on interest income, taxes
on banks ‘short positions, and higher reserve requirements for non-resident local currency
deposits.
Countries who were hit by the 1997 crisis have since then have made significant progress in
the management f their current accounts by running large surplus and lower deficits. They
alsovstrengthen regional cooperation in contingency financing by multilateralizing the
Chiang Mai Initiative.
Moreover, in order to reduce their exposure to external debt crisis have started to move
from debt finance to equity finance since equity liabilities are more stable.
Since the currency mismatches in the balance sheets played a central role in the crises
governments in developing countries look to reduce their exposure to exchange rate risks
by opening local bond markets to nonresidents and barrowing in local currencies.
Lessons for economist
A number of lessons can be learned by todays economist looking at the crisis first one being
the importance of having foreign exchange reserves readily available, secondly the
composition of capital inflow matters, exchange rate regimes are hard to maintain, IMF
programs should consist of both macroeconomic and structural reforms.