The financial crisis that erupted in Thailand had strikingly differing effects on Taiwan and the Republic of Korea, two countries previously hailed for their outstanding economic performance. In South Korea the press of investors seeking to withdraw their capital created unsustainable pressure on foreign exchange reserves, forcing the Korean government to allow a drastic devaluation of the won and to seek the support of the International Monetary Fund (IMF). In contrast, Taiwan initially appeared to have escaped the East Asian contagion largely unscathed. Its currency underwent a modest and orderly decline of about 17 per cent from the end of 1996 to the end of 1998. No major Taiwanese banks or manufacturing companies collapsed. And although the growth of Taiwan's economy slowed in 1998, it recorded a gain of just under 5 per cent, second only to China in East Asia and still one of the world's stellar growth performances.

This contrasting vulnerability to the financial shocks emanating from South-East Asia is especially striking because, by most measures, Korea's economic performance in the previous decade remained outstanding and indeed in many respects even surpassed that of Taiwan. Prices of traded goods were stable. Unemployment was low and the government's budget balanced. Over the 1990s, rates of savings, investment, productivity growth and expenditures on research and development surpassed those of Taiwan to rank near the top in the world (Table 4.1).