One of the theories established by Corsetti et al (1999) attribute the contagion effect in the Asian economies implying that the economies geographically located adjacent to each other normally follow the other countries in the region for the rise and fall in their economies. Alon and Kellerman (1999) substantiate this theory in that they state that the crisis was a reminiscent of the ‘Domino Theory’ of 1960’s. There are other view points attributing different reasons for the financial crisis in Asian economies. This paper analyzes the competing theories that examine the causes of the Asian financial crisis in the light of several theoretical models established by research studies on the crisis and its causes.
Before discussing the causes and effects of the Asian financial crisis, it is important to study the background for the evolution of the financial crisis in the Asian economies. The default of a large amount of debts by Hanob Steel Corporation of South Korea started off the financial crisis in the region. This default by the steel major was followed by many business failures in the country. (Amitava Chatterji 2003)
Following this there was an uneasy feeling for the speculators about the economic and political developments in the region. Hence in May 1997 they initiated heavy capital outflows from Thailand putting the baht – the currency of Thailand under pressure. Though there were assurances from the Thai government that there would be no devaluation of baht, Bank of Thailand in July 1997 announced the free float of baht which virtually devalued the currency by 20 percent. (Amitava Chatterji 2003)
This had triggered the suspicion in the minds of the investors on the Asian regional capital and currency markets and the investor confidence suffered a marked deterioration. Following the act of Thailand, countries like Philippines, Malaysia, and Singapore allowed free float of their respective currencies and the values of all