1. The causes of the Asian crisis of 1997

A. What Happened?
The Asian countries have been the victims of their own success. Until the 90’s, their economic performances were so high that it was hard to believe that it could collapse in only few years. When the problems started, they refused to admit them. They thought that they were under cover of the same economic crisis than the Latin American one because they were not face to large budget deficits, or to the burden public debt or to the rapid monetary expansion. And Asian countries have started to seriously take care of their problems too late.
The causes of the Asian crisis have been clearly identified.
First, substantial amounts of foreigners’ funds found themselves available to interest rates relatively low when investors looking for new opportunities have shifted massively capital of Asia.
As in any phase expansion, stock prices and real estate from Asia soared, attracting more funds. But the interior allocation of these borrowed foreign resources was inefficient because of the fragile banking systems, of the Government and Business and because of the lack of transparency in the financial sector. The limited absorptive capacity of these countries also contributed to the inefficient allocation of foreign capital.
Second, countries pursued a fixed exchange rate who gave a false sense of security to borrowers, encouraging them to incur debts in dollars.
Third, in countries affected by the crisis, exports were low in the mid 90s for some number of reasons, including the U.S. dollar against the yen, the devaluation of the yuan by China in 1994 and the lost of some markets with the entry into force of the North American Free Trade Agreement (NAFTA). The large capital inflows and the weakening of exports have resulted in an increase deficits current account. To worsen the situation, a substantial share of capital inflows was form of short-term debt, exposing the country to external shocks. Clearly, in