The East Asian Currency Crisis is an excellent book looking at the causes and implications of the East Asian currency crisis of the late 1990’s, specifically the years 1997 to 1999. The author, Mihir Rakshit, begins with a very nice commentary piece examining the crisis and the events as they unfolded, then moves into a collection of five excellent pieces examining the policy implications as well as the theoretical implications of the crisis and its aftermath.
The book itself seems unassuming at first, but it is a first class look at the East Asian currency crisis using some of the most thoughtful and well written essays and examinations that came out of the situation. While it is not a current look at the foreign currency exchange market by any means, there are certainly lessons to be drawn from careful examination and understanding of what occurred. We strongly recommend The East Asian Currency Crisis as an excellent resource for doing just that.
What was the East Asian currency crisis?
The book begins with an outstanding discussion of what the East Asian currency crisis was all about, from the conditions leading up to it all the way through to the results and difficulties that emerged as the crisis was underway. The East Asian Currency Crisis makes some key points about the East Asian currency crisis, such as:
Missing the early signs – Many observers and participants in the foreign currency exchange market completely missed the early signs and indications that a problem was brewing. Even those with the most expertise and strongest records of success were caught unaware (and in most cases totally blindsided) by the events and happenings as the crisis unfolded.
In fact, most observers and participants in the foreign currency exchange market were convinced of the underlying soundness and strength of East Asian economies and currency. They looked at the record of high growth levels in exports and gross domestic product over the previous twenty years or so and interpreted this as a sign of continuing strength and growth. Even the very large institutions, such as the Asian Development Bank, were making predictions in the early parts of 1997 that most of the economies in the region would continue demonstrating strong performance throughout the rest of 1997 and even through 1998 as well.
Why economists got it wrong – There are a number of reasons why the vast majority of economists and participants in the foreign currency exchange market got it wrong when it came to the underlying strength and ongoing performance of East Asian economies. Many experts and academics put forth a variety of theories in the aftermath, but the one most agreed upon as being closest to the truth was that existing models and theories of economic health were simply not capable of capturing the reality of what was happening in a way that observers could understand.
Why was this the case? In The East Asian Currency Crisis the case is made that the existing theories at the time were based on assumptions that were no longer valid. Their tenets and calculations all pointed to East Asian economies that were still healthy, sound, and in a strong growth mode. The author also makes the point that even as the crisis was unfolding, these same theories and models were incapable of clearly pointing out what was going on so that participants in the foreign currency exchange market could understand the reasons for the crisis and take appropriate action.
A closer look at insufficient models and theories
The East Asian Currency Crisis does a very good job of outlining the broad strokes of the models and theories that proved to be insufficient in the time leading up to and during the East Asian currency crisis. While it of course does not devote huge amounts of space to detailed formulas and the like, it does describe how they worked and the effects they had.
An out of date model – At the time of the East Asian currency crisis, the primary foreign currency exchange market models were built to explain systems of currency exchange based on fixed exchange rates. While these were perfectly useful for many years, they were completely unable to capture the key information and patterns that emerged as the market became more speculative in nature. Even as the models were revised and adjusted in the mid 1990’s, they were still not changed enough to be accurate in the East Asian currency crisis. Because that crisis was unlike anything that had occurred in the past and did not match with existing experience and expectations, it caught nearly everyone by surprise.
The post crisis Krugman model – Even after the crisis had passed and various economists and observers tried to explain what had happened, the dominant model that emerged still did not adequately profile and explain what had occurred. In The East Asian Currency Crisis the author points to the Krugman model which described the crisis as being caused by disconnect and poor financial intermediation between banks and governmental guarantees of deposits. This situation led to significant investments in choices that had the potential to produce high returns but only in the most ideal of economic and investment circumstances.
The author weighs in – Rakshit has some strong opinions about the Krugman model and he shares them very clearly in The East Asian Currency Crisis. His position is that the Krugman model is insufficient and even flawed because it assumes the vast majority of investment in the economies of East Asia was routed through banks, but this was definitely not the case. A large amount of such investment was accomplished through other means, such as portfolio investment and FDI.
More about this book
It is far too easy for a book on any aspect of the foreign currency exchange market, let alone one dissecting complex currency crises, to become bogged down in complex explanations and minute details that make it extremely difficult for the reader to comprehend the information, let alone make it all the way through the book. The East Asian Currency Crisis avoids this all too common problem largely by employing a very engaging style of writing, following a pleasant and easy to digest narrative format. It is extremely readable for both the casual observer of foreign currency exchange markets and the more experienced and informed participants in this huge international marketplace.
An especially helpful touch is the handling of illustrations, diagrams, equations, and formulas related to the foreign currency exchange markets. These often complex and confusing components are definitely required for comprehensive examination of the East Asian currency crisis, but the author has chosen to include these items as appendices and footnotes to the main content. This creates an excellent balance between providing critical theoretical information and doing so in a way that does not distract from or in any way take away from the main content and its readability. The casual reader will have no problem following the discussions and information in the book, while the more academic and experienced currency trading experts will easily find the very useful theoretical proof of what the content discusses.
This is a particularly ingenious approach to a very complex subject, and one that makes The East Asian Currency Crisis accessible and understandable for all levels of readers with varying levels of expertise and experience.
Final thoughts
The East Asian currency crisis of 1997 to 1998 was a watershed event for the foreign currency exchange markets. It was a time of tremendous upheaval and shattering of previously held theories and beliefs. After the crisis came to an end there were many, many volumes written on the subject, each attempting to explain one or more aspects of the crisis.
What sets The East Asian Currency Crisis apart from all of these other works is the comprehensive yet straightforward approach it takes to this discussion. The author has collected together five previously published articles from Money and Finance Magazine, added in his own introduction, and woven together an excellent look at the events leading up to, during, and immediately following the East Asian currency crisis.
His approach is well balanced and specifically designed to meet the informational and educational needs of readers from all backgrounds and disciplines. Rakshit does an excellent job of producing very readable and understandable content, delivered in a compelling narrative style, supported and enhanced by complex theoretical formula, illustrations, and charts. By putting these more complex components into footnotes and appendices, he is able to keep the text content interesting and flowing without interruption. This makes it easy for the casual reader to understand the information while also providing those with more expertise in the foreign currency exchange markets the demonstrated proof to support claims made in the narrative.
All things considered, The East Asian Currency Crisis is a useful resource to have in your library if you have any interest in the foreign currency exchange markets. Although it does not address current conditions, theories, models, or expectations, there is a great deal of benefit to thoroughly knowing and understanding the historic significance of the East Asian currency crisis. We highly recommend this book for all levels of expertise and interest in the foreign currency exchange markets.