Introduction

The unprecedented improvement in living standards and poverty reduction experienced by many countries of the East Asia and Pacific (EAP) region during the past two decades was brought to a halt by the economic and financial crisis in fiscal 1998. Massive currency depreciation, liquidity shortage, the compression of investment and consumption, and the industrial and financial restructuring necessary to respond to the crisis curtailed the short-term growth prospects of all countries, though with varying degrees of magnitude. Many of the region's people, who were brought above the poverty line over the last several decades as a result of successful development, again fell below it.

The East Asian crisis was triggered by large-scale movement of funds out of domestic financial markets, beginning in Thailand and quickly spreading to neighboring countries as investor sentiment deteriorated. While the chief factors contributing to the crisis differed from country to country, there were common characteristics:

• failure to contain demand and a boom in lending resulted in large current account deficits and property and stock market bubbles;

• the rigid nature of currency regimes encouraged foreign borrowing (to take advantage of lower interest rates) leading to imprudent exposure to foreign exchange risk by banks and corporations; and

• lax prudential rules and supervision of financial sectors led to sharp deterioration in the quality of banks' loan portfolios.

These factors were compounded by shortcomings in the way countries allocated their resources, including state-directed lending, nepotism, skewed industrial structures, and limits on foreign participation and competition.