Financial Deregulation and the East Asian Financial Crisis
Boom and Bust: Financial Deregulation and the East Asian Financial Crisis of 1997/1998
East Asia's attraction to foreign savers was a direct result of genuine growth in that region. This required productive investment in the construction of physical and human capital to increase the future productivity of workers. In turn, workers engaged in capital construction required food, clothing and shelter etc. (consumption), which was generally provided by the savings of other people. Because human capital are qualities such as education and knowledge, only physical capital contributes to the genuine growth of GDP per capita also seen as living standards.
To understand why there is so much attraction to foreign savers, we need to see what the region in question can offer investors. Investors have a choice of how to finance their investment: using their own saving from wages/salaries, from business profit, or by borrowing or 'drawing' on the saving of other persons. Although using personal saving or business profit for investment may be simpler, it is not always the most cost-effective since the priority of nearly all firms is to profit maximize. In order to do so, drawing on the savings of others allows access to a greater pool of saving and rate of investment, despite the downside regulations to protect the interests of savers and dependence on a continued flow of other persons' savings.
In the case of East Asian economies, decades of uninterrupted growth in living standards were partly based on high domestic saving (what is left after consumption spending on living expenses). In comparison, foreign investors' living standards were higher and so an investing economy (such as the US) would likely choose to supplement its domestic saving with foreign saving. Foreign saving is made through the current account of the balance of international payments; when this account is in deficit, the country is drawing on foreign saving each year by the extent of the deficit. This therefore provides a surplus for the East Asian economies.
Allocation of savings is rationally decided by a person's expectations of return and risk and hence a greater risk of loss requires a greater expected future return. However since the future is unknown and therefore inherently risky, the assessment of return and risk are mostly affected by the emotional state of the decision maker. When prices accelerate or plunge to unsustainable heights or depths respectively, it could be said that greed and fear are dominating rational...