Emmanuelle Moors de Giorgio outlines the genesis of the Asian financial crisis and asks how Africa can avoid the sort of mistakes that turned the Asian tiger into a paper monster.
The financial and economic storms raging over SE Asia now seem to have subsided a little. African countries, which on the whole have been spared this devastating economic and financial hurricane, may now feel inclined to relax, fix a few things here and there, and go back to business as usual. They should not. Instead they should make every effort to understand the roots and dynamics of the crisis, and apply what is learned without delay.
The problems of SE Asia first began with the attack, last July, on Thailand's baht. Within a few months, the currencies of virtually all countries in the region had steeply depreciated (the Indonesian rupiah, for instance, fell by over 80% against the US dollar between end-July 1997 and January 1998). The economic crisis was further evidenced by the collapse in asset prices (mainly property and stock markets) and financial and corporate insolvency. Years of rapid economic growth had come to a brutal halt.
Trying to understand why this happened has kept both economists and bankers awake at night. The IMF had quite a lot of pondering to do as it had to ascertain that its enormous rescue packages ($17.2bn for Thailand alone), were indeed going to halt the crisis. What had caused the slump and what could be done about it? Both issues raised heated debates and discussions, However, now a large consensus has emerged, and fingers are being pointed in specific directions.
The about-turn has not been an easy pill to swallow. SE Asia had grown used to constant praise for its strong economic growth, high domestic savings, low inflation, large foreign exchange reserves and, with a few exceptions, reasonable budget deficits. In short, the region had a lot of economic fundamentals right and, far more than Africa, the means to finance sustainable economic growth.
It was clear that whatever had happened was not a typical currency crisis. In all the afflicted countries, the common denominator was that banks had lent recklessly. As bad loans slowly piled up and it became clear that governments would not be able to rescue everyone, asset prices collapsed and insolvencies mounted.
At the heart of the crisis lay a rotten banking system which had artificially sustained the fast growth of companies by lending at overly attractive interest rates to...