Quick questions on The Asian Financial Crisis of 1997 explained: H2 History

The crisis broke when confidence turned. As doubts grew about the sustainability of the booms and the soundness of the currencies, foreign capital began to flee, and the flight rapidly became a panic. Currencies that had been pegged or managed came under overwhelming pressure and collapsed when they could no longer be defended. The collapse of the currencies multiplied the burden of foreign-currency debts, triggered failures of banks and firms, and plunged the affected economies into deep recession with rising unemployment and hardship.

A striking feature of the crisis was contagion: the way panic spread from one economy to another. As investors took fright at the first affected economies, they grew wary of others with similar features, withdrawing capital and putting their currencies under pressure too. The crisis thus spread across the region and beyond, even to economies whose fundamentals were sounder, because financial integration had linked them and because investor sentiment moved in herds. Contagion is a defining feature of financially integrated crises and the clearest evidence of how globalisation could transmit instability rapidly across borders.

Explain what is meant by contagion in a financial crisis. [4 marks]

Explain why liberalised capital accounts made the affected economies vulnerable. [12 marks]

"The Asian Financial Crisis proved that financial liberalisation does more harm than good." How far do you agree? [20 marks]