Lessons from economic history — the Asian crisis of 1997 and the need to develop financing in local currency from residents

Abstract

The Asian crisis of 1997 is a valuable source of experience for emerging economies regarding the role of the financial system in the phase of rapid economic growth. This study analyzes the Asian crisis of 1997 in the context of directions of development of the desired financial system. The research indicates that an important characteristic of debt financing in Asian economies before 1997 was the so-called double mismatch dilemma, i.e. regarding maturity and currency of the financing obtained. Economic growth was based on foreign short-term financing denominated in foreign currencies, which proved to be the wrong strategy. Studies on the Asian crisis indicate that properly developed domestic financial markets should compete with foreign ones, especially in emerging economies. Furthermore, diversifying the financing of the economy regarding the origin of funds (domestic or foreign) can be a tool for extending loans maturities and reducing currency mismatch and, as a consequence, increasing the economy’s resistance to external shocks.