The Asian Crisis: The Challenge to Conventional Wisdom

Abstract

The gap between what conventional wisdom had to say about Asian economic prospects on the dawn of the Asian Crisis and what actually transpired is enormous. After the fact, analysis has focused on the build-up of short-term, unhedged foreign currency debt, which left the region vulnerable to a crisis of confidence that only awaited a trigger, such as an economic slowdown or weakening of exports, or indeed contagion from other economies, to be set in motion. Once underway, various factors that contribute to market volatility, such as herd behaviour of investors, are adduced to explain the actual course of the crisis, including the overshooting in financial markets. The macroeconomic event of the decade is generally seen and discussed as reflecting idiosyncrasies of Asian business culture, as a crisis of confidence, as a failure of institutional controls or as some combination of the above - factors that do not even appear as arguments in generally accepted "core" macroeconomic models. Metaphors for the crisis have been drawn from the weather ("storms"), nuclear physics ("meltdown"), biology ("flu", "contagion", "virulence"), and mass psychology ("panic" and "herd behaviour"), all of which are described by non-linear dynamical systems. The paper compares various statements about the Asian Crisis to descriptions of behaviour of non-linear dynamical systems. Preliminary conclusions about the utility of this line of research are drawn.

Keywords: Asian Crisis, non-linear dynamics, complexity theory, catastrophe theory, dissipative systems

JEL Classification: E00, E65, G01