The global financial system evolved over the years in a manner in which private capital flows took precedence over institutionalised flows  fiom the Bretton Woods system. One of the main recipients of such attraction from the global capital market was the Asian region. One of  the reasons of such an attention was the economic dynamism displayed by  the Asian countires whose achievement was broadly acclaimed  by economic institutions including the IMF and World Bank,  and was known as part of the Asian economic miracle. This economic dynamism was reflected in countries such as Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea that experienced high GDP growth rates of 8-12%  in the late 1980s and early 1990s. However, a debate on  the success of the Asian  countries got initiated with Paul Krugman's article attacking the idea of an Asian economic  miracle in  1994 by arguing that it lacked long term sustainability. He argued that East Asia's  economic growth had  historically been  the result of capital investment,  leading  to  growth  in  productivity. However,  total  factor productivity had  increased only marginally or not at all. Krugman argued  that only growth in total factor productivity, and not capital  investment, could lead to long-term prosperity.

By 1997, Asia attracted  almost half of total capital inflow to developing countries. The economies of Southeast Asia  in particular maintained high interest rates attractive  to foreign  investors looking  for a high rate of  return. As a result the region's economies received a large inflow of hot money (short- term capital) and experienced a dramatic run-up in asset prices.

The Southeast Asian countires had  large private current account deficits and the maintenance  of  pegged exchange  rates encouraged external  borrowing and led to excessive exposure to  foreign exchange risk  in both the financial and corporate sectors.  In  the mid-1990s,  two  factors began  to  change their economic environment. As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank began to raise U.S.  interest rates to combat inflation. This made the U.S. a more attractive  investment destination relative to Southeast Asia, which had  attracted hot money flows through high short-term interest rates. This step also raised the value of the U.S. dollar, to which many Southeast Asian nations'  currencies were pegged,thus making Southeast  Asian exports less competitive. At the same  time, South- east Asia's  export growth slowed dramatically in the spring of 1996, due to a glut in the international market (more countries exporting similar products), deteriorating  their current account position. Triggered by events in Latin America, particularly afier  the Mexican  peso crisis of 1994, Western investors lost confidence  in securities  in East Asia and began to pull money out, creating a snowball  effect. The Asian crisis  started  in mid- 1997 and affected currencies, stock markets, and other asset prices of several Southeast Asian economies.Further, the financial crisis  led to an economy-wide crisis and in some  coutries even led to social and political problems.