Depth of Asian crisis due to panic more than economics

From Mr Steven Radelet and Professor Jeffrey D. Sachs.

Sir, We were pleased to see Paul Krugman's recognition ("Start taking the Prozac", April 9) that Asia is suffering from a financial panic, and not simply the bursting of an unwarranted financial bubble, as he had earlier suggested. The difference is important: in a panic, as is now under way, the extreme contraction of economic activity is a serious social loss, not simply the end of unwarranted speculation as with the bursting of a bubble. For several months we have been making the argument that Asia was hit by panic, and that while Asia economies had flaws that needed mending, those weaknesses didn't come close to accounting for the depth of the crisis.

The central role of financial panic in the crisis has two key implications. One, not discussed by Krugman, is that the remedies of the International Monetary Fund should have been attuned to the realities of market panic. The IMF's policies of immediate bank closures in Indonesia in early November merely fanned the flames of panic, and ultimately led to the melt down of the Indonesian banking system. Second, as discussed by Krugman, and as we ourselves have suggested in two recent studies, there is a case for slowing down the flows of hot money in the international economy.

Steven Radelet, Jeffrey D. Sachs, Harvard Institute for International Development, 14 Story St., Cambridge, Massachusetts 01238, US Copyright Financial Times Limited 1998. All Rights Reserved.