Lessons from the Asian crisis Five years have passed since the Asian financial crisis began, prompting a major re-think of policies held to be obvious and valid before the crisis. In particular, the crisis has highlighted three major issues in Asian economic and financial systems. First, some analysts have questioned East Asia’s growth model, with its emphasis on high savings, reliance on foreign investment, and export growth. East Asian economies, it is argued, should instead lower savings rates, in order to stimulate domestic demand, develop indigenous enterprise, and insulate themselves from volatile external conditions. Second, the crisis highlighted the dangers of liberalising capital markets too rapidly and without adequate safeguards. Before the crisis, capital account liberalization was the vogue. Conventional wisdom emphasized benefits rather than costs of free capital flows. The crisis demolished this complacent confidence. Undoubtedly, structural flaws and policy errors, especially in the financial and corporate sectors, contributed to the crisis. However, the financial markets’ reaction to these weaknesses was out of proportion to the severity of the crime. Markets proved highly susceptible to contagion and herd behaviour. Crashes and panics shook seemingly sound economies to their roots. Third, the crisis demonstrated the dangers of over-reliance on bank-based financing. In many Asian countries prior to the crisis, capital markets were underdeveloped. Bond markets, in particular, were illiquid or nonexistent. So Asian firms relied on bank loans for working capital and to fund capital expenditure. When banks ran into trouble, firms were left without alternative sources of capital.

But perhaps equally important is the fact that it has been possible to adjust workforces and wage growth at a local level. First, companies can adapt the use of labour to production by using overtime, part-time positions or contract labour. Moreover, the supply of labour is highly flexible. When demand rises, the number of job-seekers increases. Those who are already employed work more. During upturns, we have in particular observed an increase in labour force participation among young people. Along the same lines, the number of persons in education tends to rise when unemployment is rising. When labour demand increases, we see an influx of job-seekers from our neighbouring countries. In addition, close to 30 000 persons had some form of employment in Norway throughout or during parts of 2001, but resided in Sweden. With the enlargement of the EU, Norway has become part of an extended labour market. Enlargement also provides scope for increased trade in services. This increases the production capacity of the Norwegian economy. For example, it seems that capacity in  1  See Kydland, F.E. and E.C. Prescott (1977): “Rules rather than discretion: The inconsistency of optimal plan”, Journal of Political Economy 85, pp. 473-490. 2  See Akram, Farooq Q. (2003): “Reell likevektsvalutakurs for Norge” (Real equilibrium exchange rate for Norway), Norsk Økonomisk Tidskrift 118, pp. 89-112. 4  BIS Review 21/2005  the construction industry has increased. The activity level is now very high, and there are still no signs of rising wage growth.