The Asian Crisis: An Economic Analysis of the Causes

Prevailing views suggest that short-term, unhedged foreign borrowing and crony capitalism, in combination with a weak financial system and lack of transparency may lie at the heart of the Asian financial crisis of 1997. Although the crisis first began in Thailand, it quickly spread to the rest of the region. While it is important to know the causes of the crisis, perhaps it is no less important to understand the process by which it spreads to other countries. From theoretical considerations trade links should be seen as a relevant and important channel in explaining the propagation of the Asian crisis. This paper empirically examines and analyzes the historical trade pattern among the seven South and East Asian countries to demonstrate how intraregional trade evolved over time. In addition it also provides a formal test of contagion through co-movement in real exchange rates during the pre-crisis and crisis period.