sia, budgets were more or less stable. Also, there was not substantial unemployment, and the different governments were not engaged in irresponsible credit creation or runaway monetary expansion.. So, although tradition would dictate that a currency crisis is a cause for a financial crisis, in the East Asia case, according to Krugman it was more of a symptom (Krugman, 1998, 2).
So if a currency crisis did not cause the financial crisis in East Asia, what were the underlying reasons? First we should look to what these economies had in common. One thing these diverse economies shared is a boom/bust cycle in asset prices (i.e. land and capital) and investment levels (i.e. stocks) prior to the currency crisis. Stock and land prices soared, then plunged, then plunged further after the crash (Krugman, 1998, 2). Another thing these economies shared were lending institutions which played a central role in the market crash by investing in overly risky prospects while assuming to operate under government guarantees. This practice will be discussed in more detail at a later point in this paper.
Furthermore, these countries were competing to sell many of the same export goods. All of them had maintained trade surpluses until China started to focus its resources export-led growth. Once that happened, China got most of the market share for these products and the economies in the smaller East Asian countries suffered. One analyst notes that "the Asian countries whose economies have recently been collapsing were all running large trade deficits -- $8 billion in Indonesia, $4 billion in Malaysia, $10 billion in Thailand, $4 billion in the Philippines, and $19 billion in Korea" (Thurow, 1998, 22).
In terms of percentage of GDP, another analyst has estimated that in December of 1996 South Korea's current account deficit was 7% of GDP; it was 9& of GDP in Indonesia in Dec. of 1995; 7% of Thailand's GDP in December of 1995; near 7% ...