The Mexican crisis of 1994–5 proved to be the first of a wave of financial catastrophes in emerging market countries that took place during the rest of the decade and continued into the next. Their occurrence effectively marked the emerging markets as the “weaker links” in the global financial markets. This chapter provides an account of the East Asian crisis of 1997–8 and an appraisal of the IMF’s response, which was tested by the collapses of currency pegs and domestic financial systems.

The East Asian crisis had several distinguishing characteristics. First, it was a crisis of the private sector, not sovereign borrowing. Private capital flows, which contributed to asset booms across the region, left domestic financial sectors with large foreign exposures. Second, the crisis spread rapidly across the region, allowing it to be characterized as one “crisis” rather than a series of “crises,” although the details differed from country to country. Third, there were substantial capital outflows from the crisis countries, and the IMF had to rewrite its own rules on access limits in order to lend very large amounts to the countries that accepted assistance.

The first section offers a précis of the background and outbreak of the crisis. The East Asian countries had enjoyed rapid growth in the years preceding the crises, in part because of stable macroeconomic policies. But inflows of short-term capital coupled with fixed exchange rate regimes had let them vulnerable to reversals of capital movements. The crisis originated in Thailand, where capital outflows overwhelmed the efforts of the central bank to maintain the pegged exchange rate. Similar flows of capital took place in other East Asian countries, reflecting a pattern of contagion. The IMF extended financial support to Thailand, Indonesia, and South Korea, and other multilateral institutions and national governments gave additional assistance.