UPSC Prelims 1999 · General Studies

Question 46: Economy and Social Development

The economic crisis in the latter half of 1990s most seriously affected Indonesia, Thailand, Malaysia and South Korea. The cause of the crisis was

amismanagement of the financial resources and financial sector, in general

bthe prolonged over-valuation of local currencies vis-à-vis the western currencies

cthe downswing and recession in the western economies which earlier provided export market to these export-oriented countries

dNone of the above

AnswerThe answer is (a).

The 1997 East Asian crisis grew out of weak financial systems. Banks and firms had borrowed heavily in dollars on short terms, often to fund property and risky projects, with poor supervision and cronyism. When confidence broke, foreign money left, currencies collapsed, and the crisis spread through Thailand, Indonesia, Malaysia and South Korea. Dollar-pegged currencies were overvalued, but that was a trigger, not the root cause. Remember: financial mismanagement, short-term foreign debt and weak banks.

Why each option is right or wrong

(a) Right. Poorly managed finance and weak financial sectors lay at the root.
(b) Wrong. Overvalued currencies were a trigger but not the main cause.
(c) Wrong. Western demand was not collapsing in 1997; the crisis was home-grown.
(d) Wrong. Option (a) names the cause.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 1999, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.