Dynamic welfare costs of the 1997 Asian crisis

This paper measures and investigates the welfare costs, other effects and recovery process of the 1997 Asian crisis, and evaluates the impact of the policy program supported by the International Monetary Fund (IMF). The main findings are as follows. First, the ratio of ‘whole cost’ to the level of consumption in a hypothetical economy is high: 50% for Indonesia, 39% for Hong Kong, 36% for Korea, 30% for Thailand and 18% for Malaysia. Second, the dynamic process of ‘cost at period t’ quickly converges to 40% immediately after the crisis, though the costs for Indonesia and Hong Kong gradually increase toward 100%. Third, the IMF-supported programs in Thailand, Indonesia and Korea were implemented straight after the peak cost. Finally, the cost of the IMF-supported program was relatively inexpensive compared with the welfare cost of the crisis. The authors would like to thank Kenneth S. Chan, Makoto Saito, Yum K. Kwan, Yong Wang, Eiji Ogawa, Yoshiro Tsutsui, Yuzo Honda, Shinsuke Ikeda, Soyoung Kim, Joshua Aizenman and an anonymous referee for helpful comments and useful suggestions. Earlier versions of this paper were presented in 2003 at Osaka University and Hitotsubashi University, in 2004 at the City University of Hong Kong, Tokyo University and the Western Regional Science Association Conference (Hawaii), Western Economic Association Conference (Vancouver) and East Asian Economic Association Conference (Hong Kong). Funding from a Grant-in-Aid 16530204 from the Ministry of Education, Culture, Sport, Science, Technology of Japan, the Nomura Foundation for Social Science 2005 and Kanpo Foundation 2002 supported the first-named author’s research.