After the Asian financial crisis: can rapid credit expansion sustain growth?

In the years following the Asian financial crisis of 1997-1998, the governments of South Korea and Thailand each have sought to generate economic recovery by expanding domestic credit. The rapid credit expansion in both countries has created concerns about the extent to which their economies can channel these funds efficiently and sustain economic growth. In particular, if banks are unable to supervise the allocation of resources effectively, there is a risk of widespread bankruptcies and a financial system crisis. Previous experience shows that these Asian economies indeed may be at risk of a credit boom and bust cycle. ; This Letter discusses the sustainability of the credit-led economic expansions in South Korea and Thailand. First, it discusses the experiences of South Korea and Thailand as they attempted to recover from the 1997-1998 crisis and boost domestic demand through credit expansion. Then, it assesses the risks that these two countries may face if their credit-led expansions collapse and discusses steps they are taking to reduce exposure to these risks.