THE ASIAN FINANCIAL CRISIS AND PHILIPPINE RESPONSES: LONG-RUN CONSIDERATIONS

INTRODUCTION

MORE than a year after the outbreak of the Asian financial crisis, there still does not seem to be a consensus as to its proximate causes and therefore what measures ought to be attended to avert its recurrence. Despite the numerous papers (scholarly as well as popular), conferences, publications, and official meetings that have proliferated, there is no convergence on its explanation—its unpredicted occurrence, its severity, and its wide spread across Asia and the rest of the world. At one extreme is a school of thought that the crisis was caused by fundamental weaknesses in the economies of the affected countries manifested by macroeconomic imbalances, excessive borrowings, overvalued currencies, and poor investments, among others (Moreno, Pasadilla, and Remolona 1998; Glick 1998). At the other extreme is an argument that the crisis was triggered by speculators and their panic behavior of fleeing emerging markets in fear of losses (Moreno 1998; Montes 1998). Between these two extremes are various shades of explanation. There is the notion of lack of governance in both public and private transactions especially in terms of close relationships between financial institutions and regulators.1 There is the notion that corruption weakens the system of invest- ment decision making in emerging markets. There is the notion that "Asian values" had dictated the manner of financial exchanges. There is the notion that the crisis is essentially a bubble crisis (Nomura 1999). While the truth may lie somewhere between these two extremes, these have different policy implications. If the crisis was caused by fundamental weaknesses of the economy, the crisis-hit countries should carry out reforms to improve the foundation for sustainable development. On the other hand, if the crisis was caused by the sudden loss of confidence among short- term investors and speculators not directly related to country fundamentals, then the essential task is not really reforms nor would they be necessary. Restoring confidence where the basic fundamentals are "correct" may require other measures.

THE DEVELOPING ECONOMIES

that would bring back investors.2 Without a clear specification which of these ex- planations jibes with the actual experience among the affected Asian countries it would be difficult to prescribe policy options. There have been many attempts at quantitatively measuring the degree of importance of these factors in the evolution of the Asian crisis but events are still unfolding and until there is a definite "bottoming out" and a return to the growth experiences of the past these attempts remain incomplete. What seems evident however is a finding that weaknesses in the financial systems in Asia were stronger explanations of the crisis than of basic fundamental flaws in the economy (McKinnon and Pill 1998). The unusually large flows of short-term capital in these countries exposed them to reversals eventually draining reserves and squeezing liquidity. Moreover one particular reason for the quick transmission of the crisis from Thailand in July of 1997 into the other Southeast and East Asian countries was the high degree of financial and trade integration among them (Glick and Rose 1998). The vulnerability of the financial sector to external shocks was not a product of the economic fundamentals but of more micro aspects of the sector such as "less-than-arm's- length" transactions and poor risk management, which led to unusual credit booms. Indeed there is an argument that none of these explanations suffice since the Asian crisis is a bubble crisis, had its beginnings much earlier than the explosion in Thailand, and runs across most of Southeast and East Asia (Ichimura, James, and Ramstetter 1997) download