From East Asian Miracle to Debacle: Bad Banking and Moral Hazard

Abstract

This paper by Vivek Moorthy evaluates the policy choices and factors that have contributed to the Asian crisis. It is argued that the interaction between rela - tively closed and weak banking systems and liberalized financial flows played a major role in the crisis. Data on capital flows to Taiwan suggest that the prospect of an IMF bailout is likely to have induced risky private capital flows to East Asia. The appropriate policy response is not to impose sweeping controls⁄ as is often being recommended, but to partially restrict capital inflows while simultaneously free up limited outflows, and also expose the banking and financial services sector to more external competition.