Asian financial crises are due to two main challenges in terms of policies, short term and the long

term.
Basically short-run policy is to maintain macroeconomic stability to restore growth, and long-run policies
need to be implemented to save the country from economic crises.

Short-run policies
Short run policies include

1) Financial Flows
In order to restore growth domestic and international financial flows needs to be stabilized. This means
to have high ratios of short term debt to foreign reserve resources. This is a real challenge for Asian
countries like in Thailand short term debts are continuously rolled over while in Indonesia creditors are
almost insolvent. It also includes investing in sound projects like in Thailand and Indonesia. Focus is on
the private sector and to acquire weak institution to make them stronger through investment. This is
done to ensure that government spending is reduced and which in turn supports financial sector
recovery.
According to Paul Krugman (1998) if there is risky lending which is visible due to early price inflation,
reason of which is government guarantees, the later deflation is justified then. And selling to foreigners
is the best possible alternative because they can use the assets best. Cost of repairing the financial crises
can very high like in Mexico financial crises in 1994, it costs 15% of the GDP. According to two other
economists Laprio and Klinegeil (1996) it can be 25% or more of the GDP, so government spending may
be needed.
Obstacles:

Absence of effective bankruptcy provision

True value of assets cant be determined

Financial structure of company is not clear and transparent

Restriction of ownership of real property

2) Macroeconomic policies
Two main objectives in macroeconomic policies include restoring growth to support financial sector and
stabilizing exchange rate to reduce inflation. For instance, in short-run if a country wants to overcome
financial crises, it has to use more flexible instrument to make the market stable. Monetary policy

should be used to stabilize exchange rate situation which will reduce inflation and expansionary fiscal
policy should be used to support growth and financial sector.
Expansionary fiscal policy ---- Taxation ----- Government spending ---- Growth
If we monetary policy is used to help growth and financial sector, inflation will rise because money
supply will increase and so will be the prices. Spending and domestic investment will rise due to this.
Expansionary monetary policy ---- Interest rate ---- Money Supply ----- Prices ---- Inflation

Long-run policies
Long-run policies are in the form of financial reforms, supervision and regulation.

1) Financial reforms
Lack of financial reforms in Asia is the reason of continuous failure of financial sector. Although financial
reforms is a long run problem but the insinuation is short-run. Asian countries have offered relatively
large assistance package to restore reliability and finances but there has been lack of reform to support
their claims and offering. Even if there is good growth in Asia, financial market upsets can reduce the
financial wealth.
What Asian financial reforms should include is allocate credit on business criteria and control lack of
transparency. To do so they should supervise banks and other financial institutions.

2) Supervision and regulations

Supervision and regulations is the core of good financial sector. A supervisory authority in East Asia is
included in banking sector. ADBI and IF&MP presented one in Tokyo workshop in 1998. Few important
points include

Limiting lending related to companies and individuals

Allocation of sufficient capital

Management of market risk (to banks entire balance sheet)

Before the financial crisis in Asia, countries in the region had not implemented G-10 risk based capital
standards which were presented in Basle accord (1988). Two main issues in Asian banks were Garden
variety asset quality problem which was due to lending to real estate and rules violation of lending, and

plain-vanilla market risk exposures which lead to currency risks because loans were received in US
dollars and lent in local currency.
Reasons:

Lack of resources

Pressure from higher authorities

In Bangkok bank of commerce there was delay in problem resolution and depositors were exposed to
risk, while on the other hand in UKs bank of England, senior authorities took all the risk and depositors
were saved. In America, bank has to explain the reasons of the failure to the regulatory authorities. But
the situation in Asia is not like the west.

Exchange rate policies

In this we discuss the exchange rate pegging. Peg is an implicit guarantee against the exchange rate risk.
According to Mckinnan and Pill (1977), government guarantees encourage capital inflow rushes and also
risk taking. If exchange rate floats, government guarantees will have no advantage and exposing firms to
currency risk will encourage hedging. If there is no alternate to fix inflation, floating exchange rates are
possible problem. But according to Glick and Moreno, in East Asia where currency moves freely, there is
low inflation

Policies towards capital flow

Issue of capital control has been a topic of discussion in ADBIs workshop on financial development in
East Asia. But capital control is not the basis of long-run solution and issue is not of capital flow but
distorted encouragement. Open economies perform well, even with open capital accounts. Like in
Singapore, there are open capital accounts, although Singapore doesnt allow loans in Singapore dollars
to non-resident, their financial market is highly integrated with international financial market where the
main reason being good supervision and regulation in financial sector. Also in New Zealand, there is
liberalized capital flow and floating exchange rate as well. This is because of transparency and
managerial accountability. There are institutionalized arrangements to limit risk taking in these
countries.

Conclusion
Although it is not clear that after 1997 financial crises in Asia if there was change in policies to stabilize
economy and financial sector but it is evident that some countries in the region were able to overcome

the financial issues to some extent by taking hard steps. And now after the crises the view of economists
and policy makers in Asia has changed drastically.