The Asian Financial Melt-Down and the IMF Rescue Package

This paper reviews stylised facts on the Asian growth miracle generated using the growth accounting framework. It reviews rival models that purport to explain an economic crisis in terms of deteriorating macroeconomic fundamentals, time-inconsistent policies and rational self-fulfilling panic models. The versions of the panic models focusing on illiquidity- insolvency and moral-hazard asset price bubbles - are shown to fit the stylised facts in Asia-5 economies better than rival models. These models identify that the sudden loss of confidence amongst foreign creditors was the prime cause of the dramatic reversal of capital flows that ultimately caused the collapse of the Asian growth miracle. The channels that facilitated the regional spillover, namely the crisis-contagion in Thailand are identified. The role of the IMF bailout which rescued member nations from their crisis predicament and prevented systemic risks from threatening the stability of the world financial system is also examined. The failure of the IMF bailout package to restore investor confidence and reverse capital outflows in the first instance are analysed. The need to reform the IMF and establish a robust global financial architecture that could prevent the recurrence of severe financial crises is also highlighted.