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Crisis Vulnerability

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  • Peter Warr

Abstract

Earlier attempts to explain the East Asian crisis of 1997 have overemphasised the importance of contagion, missing the central role of vulnerability. According to conventional accounts, Thailand experienced a financial panic due to such factors as corrupt government and corporate practices, inadequately supervised banks and venal currency speculators. Confidence in the Thai currency and banking system collapsed, provoking capital flight, a float of the Thai currency and a drastic decline in its value. This undermined confidence in the prospects of other East Asian countries, also provoking crises there. This article clarifies the concept of vulnerability and demonstrates its relevance by showing the long‐term development of vulnerability in each of the three ‘IMF bail‐out’ countries: Thailand, Indonesia and Korea. By 1996 all three were vulnerable to a currency crisis. Contagion provided the short‐term trigger for the crisis but was not its underlying cause. The policy lesson is to avoid vulnerability, not to attempt to avoid contagion.

Suggested Citation

  • Peter Warr, 2002. "Crisis Vulnerability," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 16(1), pages 36-47, May.
    • Handle: RePEc:bla:apacel:v:16:y:2002:i:1:p:36-47
    DOI: 10.1111/1467-8411.t01-1-00003
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    1. Jeffrey D. Sachs & Aaron Tornell & Andrés Velasco, 1996. "Financial Crises in Emerging Markets: The Lessons from 1995," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 147-216.
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    4. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
    5. Ronald I. McKinnon, 1999. "Exchange rate co-ordination for surmounting the East Asian currency crises," Journal of International Development, John Wiley & Sons, Ltd., vol. 11(1), pages 95-106.
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