The East Asian financial crisis: the China's and India's examples

Thailand, Indonesia, South Korea, Malaysia and Philippines are countries, which, from the early 1990’s till 1996-1997, experienced high GDP growth accompanied by an increasing degree of openness, foreign direct and portfolio investments, accumulation of cheapest external debt and a general worsening of the external position. This situation became progressively unsustainable, ending up in the exacerbation of one of the most powerful financial crisis in the recent history. The major causes identified point the finger to structural weaknesses of the Asian economies, moral hazard behaviour, creditors’ panic, exchange rate devaluation or balance sheet problems of Asian banks and firms. The analysis of the crisis based on primary macroeconomic data shows several issues existing in the five Asian countries took into consideration. They are subdivided into external position, debt position, competitiveness, investment, and political and policy issues. The outcome of this analysis shows that there were effectively several reasons that could justify the financial turmoil. The same framework is then applied to China and India. These two countries experienced just a slow down in growth, far from a financial disaster. The analysis shows that there were motivations, especially linked to internal policies and a more prudent attitude to debt management and foreign trade that allowed the two countries to avoid the worst consequences of the crisis. The Chinese and Indian examples show how, in a transition from financial repression to financial liberalization, policies avoiding large current account deficits, financed through short term and uncontrolled capital inflows, should be put in place. Moreover they underline how a comprehensive regulation is needed at a corporate and banking level as well as a wise debt management. China and India are now playing a leading role in the world economy having a huge amount of resources and exploiting them to sustain high growth rates. The entire Asian continent can benefit from this situation, shifting the world economic power towards that region.