Miracle to meltdown: A pathology of the East Asian financial crisis

The financial crisis in East Asia was made more dramatic by the fact that the region's performance in terms of economic growth over the preceding decade had been widely perceived as a 'miracle'. What was it that transformed the region's fortunes, and what are the chances for a speedy economic recovery? Systematic analysis reveals that, while there is no unicausal explanation, and while few if any commentators anticipated the crisis before the event, the fundamental difference from previous international financial crises is the extreme indebtedness of the corporate sector of the crisis countries. Private sector repayment difficulties and the associated banking crises triggered the sudden withdrawal of capital and the collapse of exchange rates. Failure to address the underlying private sector debt overhang, and reliance instead on conventional macroeconomic policy solutions, have led to a decline in output and a depreciation in exchange rates which have been far greater than need have been the case.