Assessing the recent Asian economic crises: the role of virtuous and vicious cycles

This is an analysis of the causes of the late 1997 economic crises in the (until then) strong Asian economies. This paper shows that, although the two proximate causes of this crises seem to be stronger inter-national competition and poorly developed domestic financial systems in Asia, the underlying causes were related more to the virtuous economic and financial cycles in Asia that turned into vicious cycles in 1997. The key determinant of Asian recovery is the reduction in the importance of these positive feedback cycles by reforming Asian domestic financial systems so they are no longer characterized by low disclosure levels, high debt ratios, and high political influence in credit decisions.