Different experiences of Asian emerging-market economies in the two major financial crises

This paper studies 10 Asian economies' experiences during two episodes of financial crises in 1997-08 and 2007-09. Our analysis of five crisis-hit Asian countries shows that overinvestment via credit expansion and foreign financing has an adverse effect on banking sectors while income inequality contributes significantly to financial distress. With five no-crisis emerging markets included in our Asia analysis, we find that export-oriented growth backed up by domestic savings is financially less risky than investment-led growth facilitated by capital inflows. Since such different strategies of output growth to deal with falling demand are related ultimately to the same factor-rising inequality, this distributional problem must be overcome effectively to enhance financial stability and ensure growth sustainability.