The obligatory, the Asian crisis a little history (cover)
Fifteen years ago already, the world was in shock of what has been called the “Asian crisis”. Panic seized while foreign investors, urging them to get their money out of a whole country of South East Asia, hitherto full economic boost. Four years earlier, yet the experts spoke of the “Asian miracle”.

A version of the story, widely shared, argues that the crisis officially began July 2, 1997, when the Thai authorities decided to float the baht, which resulted in his fall the Indonesian rupiah, the Malaysian ringgit and Philippine peso. Within a few months, the crisis spread to Korea, Taiwan, Singapore and Hong Kong.


According to this version, the financial position of banks and local companies, which were highly leveraged short-term dollar and yen, deteriorated when the panic seized investors, anxious to convert their money into hard currency. Affected countries have not even had time to realize the benefits of international competitiveness might have to provide them the currency depreciation. Capital flight was so rapid that it cut short any possibility of credit, causing an economic crisis that spread to the entire planet.

At the height of the crisis in early 1998, the depreciation of local currencies against the dollar reached almost 75% and 35% in Indonesia, Thailand, Malaysia and the Philippines. There was a significant fall in stock prices of around 50% in Korea, from 45% in Malaysia and Indonesia, and 30% in Thailand, the Philippines, Hong Kong and Singapore. Economic activity fell back by more than 20% in Indonesia, 15 to 20% in Thailand, 10 to 15% in Malaysia, Korea and Hong Kong, and just under 5% in the Philippines.

According to Martin Wolf, chief economist at the Financial Times of London, the most surprising in this event is not the crisis itself, but rather the efficiency and speed with which the countries directly affected have resumed their growth there where they left off (Martin Wolf, Why Globalization Works, New Haven, Yale University Press, 2005). Not only their balance of payments is adjusted very quickly, but the GDP growth climbed to 7% in 1999 and 7.3% in 2000. In 2001, GDP of the five countries most directly affected by the crisis (Indonesia, Malaysia, Philippine, South Korea and Thailand) increased on average by 13% over 1996. The GDP of South Korea, the champion of the group, recorded an increase of 22%. Only Indonesia soon to return to the level of wealth that it had reached five years earlier.

The normal course of history

Financial crises have been the rule rather than the exception since the acceleration of international trade and globalization in the late 1970s. According to data from the World Bank, 93 countries experienced a total of 112 systemic banking crises in some 20 years. Another study (B. Eichengreen, Capital Flows and Crises, Cambridge, MIT Press, 2003) recorded between 1973 and 1997, a total of 95 financial crises in emerging markets alone, and nearly 44 other crises in rich countries . Seventeen of crises in emerging markets were banking crises, 57 were of a monetary crisis, and 21 were mixed (banking and currency at a time), the most formidable and most damaging of all. As for rich countries, they had nine banking crises, currency crises and 29 mixed six crises.

In short, the era of liberalization of trade that we know 30 years is a financial crises, rendered almost necessary to encourage governments, namely those of developing countries, to clean the their financial systems. Even before the crisis erupted in East Asia, an estimated one in five emerging market would, in one form or another, facing a banking crisis.

When we do not observe that emerging markets, it must be admitted that we know little about the role of foreign capital inflows in the economic system of these countries. According to some observers, excessive intake of foreign capital could lead to the formation of speculative bubbles because international fund managers are mandated to invest in these markets and seek high returns, given the risks involved. However, it is difficult to overstate their role in these crises, when we know that the assets of pension funds from industrialized countries account for only 2% of 11% of total world capitalization attributable to emerging markets.

To understand the root causes of financial crises affecting emerging markets, researchers prefer to watch the organization of their financial sectors and stages of development to reach one day international standards.

One school of thought somewhat outdated, we can establish a good financial system by following a well-established order: 1. creation of commercial banks; 2. development of money market operations; 3. corporate finance activities in the long term 4. establishment of a securities market; 5. establishment of an industry of mutual funds, insurance companies and pension funds, etc.. The way to achieve such a result is much more sinuous than that provided by this theory. In fact, many roads lead to Rome.

In some countries like South Africa, insurance companies have developed very early, well before the securities markets. In others, like Russia, the securities markets appeared when banking systems are still rudimentary.

In some African countries like Zimbabwe and Ghana, the private investment banks have become significant competitors of commercial banks controlled by the state. In others, like India, the emergence of corporate venture capital has helped to erode the dominance of state-sector investment companies, paving the way for the modernization of this sector and to emergence of a more competitive environment. In other words, there are as many ways to get to an efficient financial system, fair and competitive as there are countries in the world.

State control of banks

However, one thing is certain: the control of state banks had generally negative effects. Indeed, most financial crises in emerging economies often reflect the recklessness shown by some banks, encouraged by an overly expansionary monetary policy and a regulatory framework obsolete.

It’s a shame to say, but several financial crises, especially banking, experienced by developing countries are like choke points to encourage them to clean up and modernize their financial systems.

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