BIS Review 93/1999  6  Upgrading corporate governance means raising the quality and influence of boards of directors, protecting shareholder rights and raising and enforcing accounting and audit standards. All these preconditions are necessary before market discipline can work properly. It is encouraging that most of the crisis Asia countries have declared their intention to work towards international best practices in corporate governance. But business environments cannot be changed overnight. It involves changing entrenched social relationships and norms that vary from country to country. This will take time. The best hope for individual countries to restore long-term growth in the global village lies in their succeeding in this transformation. Conclusion There is no escaping the process of globalisation. In theory, countries can opt out, but in practice the price is prohibitive. While the globalisation of trade flows undoubtedly benefits all countries, the globalisation of capital flows carries much greater risks. Ideally, capital markets should be self-stabilising and should promote economic efficiency by directing capital to its best uses on a global basis. But whether this always happens in reality is an open question. The frequent crises, of which this is just the most recent, give us reason for doubt. The Asian crisis has wrought grievous harm on many countries. But one positive consequence is that it has provided a fresh impetus for reconsidering and strengthening the global financial system. Countries will not want to dismantle the existing structure and start from scratch, as happened in Bretton Woods after World War II.

The stock market and exchange rate crashed. Unlike other countries, Malaysia did not have excessive external borrowing. However, domestic borrowing was very high as banks had lent large sums, often against share collateral and to large property projects. The crash exposed these weaknesses in the private sector. On 1 September 1998, Malaysia decided to impose capital controls. Indonesia Indonesia was also believed to be fundamentally sound, even well after the initial outbreak of the regional currency turmoil. In late 1997, analysts continued to be upbeat on Indonesia’s economic prospects, expecting, on average, a strong 6-7% GDP growth in 1998. But as regional problems stacked up, Indonesia too could not escape the progressive erosion of confidence. The Indonesian economy had two domestic weaknesses: unsound banks and companies that had borrowed excessively abroad in short-term loans unbeknown to the government. These companies started hedging their exposures, sending the rupiah into a downward spiral. The companies became insolvent, badly affecting the banking system. Policy errors by the Suharto government compounded this. Grave social and political difficulties eventually led to a political crisis and a political transition that is still not completed. Korea Korea’s dynamic economy had certain weaknesses, but these were long-standing and well known: chaebols were very highly leveraged and banks often made lending decisions on government direction instead of commercial viability. Like Indonesia, Korea’s short-term foreign debt was high. When the crisis broke, foreign creditors refused to roll-over credit lines. Korean banks which had borrowed heavily overseas came under severe pressure.