Technology shocks and the Asian crisis: Financial flows, technological innovation and the business cycle

The literature on business cycles, be it on short cycles or the so-called long wave, attributes economic fluctuations to two dominant impulses or shocks. These are monetary shocks, which operate on the demand side, and technological shocks which are supply-driven. In the case of the recent Asian crisis, the second approach, i.e., the impact of technological shocks has received limited attention. Economists have not agreed on the real causes of the crisis itself with two opposing views focusing on fundamentals versus contagion as the culprits behind Asia’s fall. Yet, these two views are still monetarist in nature by their attribution of the crisis to capital flows, exchange rates, and financial fragility as its leading triggers. The research problem posed by the study is to investigate if a technological shock in line with what came to be known as real business cycle school, and later the endogenous growth theory, had a role to play. The theoretical underpinnings of how a technology shock could cause economic fluctuations will be discussed and tested in the cases of the five most affected economies of the Asian crisis. The hypothesis we put forward is that a technological shock such as the introduction of a general purpose technology like information technology in many industries and sectors of the economy produced real sector effects that dislocated labour and affected productivity. The employment and productivity consequences arising from the information revolution in turn set the tone for an inevitable crisis that was aggravated and pre-empted by the very monetary disturbances that are now blamed to have triggered the crisis.